Madras High Court
Sun Pressings (P) Ltd vs The Presiding Officer on 3 June, 2024
Author: S.S.Sundar
Bench: S.S. Sundar, S.Srimathy, R.Vijayakumar
W.P.(MD)Nos.7339 of 2013 etc.
BEFORE THE MADURAI BENCH OF MADRAS HIGH COURT
Reserved on : 15.12.2022
Pronounced on : 03.06.2024
CORAM :
THE HONOURABLE MR. JUSTICE S.S. SUNDAR
THE HONOURABLE MRS.JUSTICE S.SRIMATHY
AND
THE HONOURABLE MR. JUSTICE R.VIJAYAKUMAR
W.P.(MD)Nos.7339, 9688 of 2013, 2765 & 2782 of 2014
W.P.(MD)No.7339 of 2013:
Sun Pressings (P) Ltd.,
represented by its Managing Director
Mr.D.Dhanushkodi
No.F2 & 3, SIDCO Industrial Estate
K.Pudur, Madurai 625 007 .. Petitioner
vs.
1. The Presiding Officer
Employees' Provident Fund Appellate Tribunal
Core II, 4th Floor, Laxmi Nagar District Centre
Laxmi Nagar, Delhi 110 092
2. The Assistant Provident Fund Commissioner
Employees' Provident Fund Organization
Regional Office
No.1, Lady Doak College Road
Chokkikulam, Madurai 625 002 .. Respondents
Writ Petition is filed under Article 226 of the Constitution of
1
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India, praying for issuance of a Writ of Certiorarified Mandamus, to call for
the impugned order of the first respondent in reference A.T.A.No.651 (13)
2010 dated 04.03.2013 and quash the order of levying of 50% of the
Damages claimed by the 2nd respondent and directing the 2nd respondent not
to take any coercive recovery measures for executing the impugned order of
the 1st respondent.
For Petitioner :: Mr.G.Manivannan
For Respondents :: Mr.K.Murali Sankar for R2
Mr.M.E.Ilango
Amicus Curiae
Mr.R.Sankaranarayanan
Additional Solicitor General
for EPFO assisted by
Mr.R.Vishnu
W.P.(MD)No.9688 of 2013:
A2159 Vadugambady Primary Agriculture
Co-operative Credit Society
represented through its Secretary
Vadugambadi Post, Vedasandur Taluk
Dindigul District, Tamil Nadu .. Petitioner
-vs-
1. The Appellate Tribunal
Employees' Provident Fund Appellate Tribunal
Scope Minar, Core ll, 4th Floor
District Centre, Laxmi Nagar
New Delhi 110 092
2. The Assistant Provident Fund Commissioner
Employees Provident Fund Organization
Regional Office
Madurai 625 002 .. Respondents
2
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Writ Petition is filed under Article 226 of the Constitution of
India, praying for issuance of a Writ of Certiorari, calling for the records on
the file of the second respondent No.TN/RO/MDU/24201/RO/Circle M15/
PDC/LD/20120 dated 18.07.2012 and the order of the Appellate Tribunal
passed in ATA No.751/(13)/2012 dated 14.03.2013 and quash the same.
For Petitioner :: Mr.V.O.S.Kalaiselvam
For Respondents :: Mr.K.Murali Sankar for R2
Mr.M.E.Ilango
Amicus Curiae
Mr.R.Sankaranarayanan
Additional Solicitor General
for EPFO assisted by
Mr.R.Vishnu
W.P.(MD)No.2765 of 2014:
The Assistant Provident Fund Commissioner
Office of the Regional Provident Fund Commissioner
Lady Doak College Road, Chokkikulam
Madurai District .. Petitioner
-vs-
1. The Presiding Officer
Employees' Provident Fund Appellate Tribunal
Scope Minor, Core ll, 4th Floor
Laxmi Nagar District Centre
Lakshmi Nagar, New Delhi
2. M/s Jai Renga Mills Pvt.Ltd.,
rep by its Authorised Signatory/Manager
Post Box No.47, Tenkasi Road
Rajapalayam, Virudhunagar District .. Respondents
3
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Writ Petition is filed under Article 226 of the Constitution of
India, praying for issuance of a Writ of Certiorarified Mandamus, to call for
the records relating to the order passed by the 1st respondent in A.T.A.No.
760(13)2012 dated 02.04.2013 and quash the same as illegal and
consequently direct the 2nd respondent to pay a sum of Rs.15,82,443/- as
levied for the period April 2004 to December 2010 by an order in TN/RO/
MDU/SDC/TN/10314/2012 dated 17.08.2012 passed by the APFC,
Madurai, within a time frame as fixed by this Hon'ble Court.
For Petitioner :: Mr.K.Murali Sankar
For Respondents :: Mr.S.Karthik for R2
Mr.M.E.Ilango
Amicus Curiae
Mr.R.Sankaranarayanan
Additional Solicitor General
for EPFO assisted by
Mr.R.Vishnu
W.P.(MD)No.2782 of 2014:
The Assistant Provident Fund Commissioner
Office of the Regional Provident Fund Commissioner
Lady Doak College Road, Chokkikulam
Madurai District .. Petitioner
-vs-
1. The Presiding Officer
Employees' Provident Fund Appellate Tribunal
Scope Minor, Core ll, 4th Floor
Laxmi Nagar District Centre
Lakshmi Nagar, New Delhi
2. M/s Jai Renga Mills Pvt.Ltd.,
rep by its Authorised Signatory/Manager
Post Box No.47, Tenkasi Road
Rajapalayam, Virudhunagar District .. Respondents
4
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Writ Petition is filed under Article 226 of the Constitution of
India, praying for issuance of a Writ of Certiorarified Mandamus, to call for
the records relating to the order passed by the 1st respondent in A.T.A.No.
761(13)2012 dated 02.04.2013 and quash the same as illegal and
consequently direct the 2nd respondent to pay a sum of Rs.3,62,807/- as
levied for the period April 2003 to October 2003 by an order in TN/RO/
MDU/SDC/TN/10314/2012 dated 23.07.2012 passed by the APFC,
Madurai, within a time frame as fixed by this Hon'ble Court.
For Petitioner :: Mr.K.Murali Sankar
For Respondents :: Mr.S.Karthik for R2
Mr.M.E.Ilango
Amicus Curiae
Mr.R.Sankaranarayanan
Additional Solicitor General
for EPFO assisted by
Mr.R.Vishnu
COMMON JUDGMENT
S.S.SUNDAR, J.
In all these writ petitions, the orders passed by the Employees'
Provident Fund Appellate Tribunal as against the orders levying penalty
under Section 14-B of the Employees' Provident Funds and Miscellaneous
Provisions Act, 1952 (hereinafter referred to as “the Act”) on account of
belated payment of provident fund contributions are under challenge. While
W.P.(MD)Nos.7339 and 9688 of 2013 have been preferred by the employer
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concerned, W.P.(MD)Nos.2765 & 2782 of 2014 have been preferred by the
Assistant Provident Fund Commissioner, Employees' Provident Fund
Organisation, Madurai.
2.By the orders impugned in W.P.(MD)Nos.7339 & 9688 of
2013, the Appellate Tribunal, while examining the legality of the orders
passed by the original authority levying damages under Section 14B of the
Act for delayed payments of the provident fund contributions payable by the
employer at the rates specified under Para 32A of the Employees' Provident
Funds Scheme, 1952, reduced the quantum of damages to be paid by the
employer to fifty percent of the amount, levied even after holding that the
original authority has not rendered any finding to the effect that the
employer had wilfully or deliberately withheld the contributions or that the
employer had unlawfully diverted the funds collected from the employees'
for its business use. Aggrieved thereby, the employer concerned have
preferred the above writ petitions. However, by the orders impugned in
W.P.No.2765 and 2782 of 2014, the Appellate Tribunal, in the Appeals
preferred against similar orders of writ petitioners levying damages under
Section 14B of the Act, as against two other employers, after recording
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similar findings, held that the damages levied against the employers are not
legally sustainable, but they should pay damages at the rate of five percent
per annum with effect from the passing of impugned order by the original
authority. The said orders have been questioned by the Assistant Provident
Fund Commissioner, Madurai in W.P.(MD)Nos.2765 & 2782 of 2014.
3.When the writ petitions were listed before a learned single
Judge of this Court, it was brought to the notice of the learned Judge the
divergent views expressed by the Division Benches of this Court. A
Division Bench in DWC Employees Co-operative Canteen Limited v.
Presiding Officer, Employees' Provident Fund Appellate Tribunal in the
order dated 19.04.2018 passed in W.A.(MD)No.1494 of 2011 has taken the
view that in the absence of mens rea, there is no question of claiming
damages from the employer. Similarly, in a subsequent decision in R.D.34
Ariyakudi Primary Agricultural Co-operative Bank v. Employees' Provident
Fund Appellate Tribunal in the order dated 16.12.2019 in W.A.(MD)No.516
of 2012, it has been held that mens rea is an essential ingredient, and unless
the Assistant Provident Fund Commissioner applies his mind to the fact as
to whether the reason put forth by the employer is sufficient to waive
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payment or not, the order of the authority determining the liability for penal
damages under Section 14-B of the Act would stand vitiated. However, the
learned single Judge took note of two other judgments of the Division
Benches in Assistant Provident Fund Commissioner, Nagercoil v.
D.R.Textiles and Garments represented by its Proprietor (vide order dated
26.09.2019 in W.A.(MD)No.840 of 2019) and in Assistant Provident Fund
Commissioner, Nagercoil v. M.Girilal (vide order dated 07.11.2019 in W.A.
(MD)No.1555 of 2018), holding that if damages have been imposed under
Section 14-B of the Act, it will be only logical that “mens rea” or “actus
reus” was prevailing at the relevant point of time and hence the order
passed by the Assistant Provident Fund Commissioner levying penal
damages is valid. In all the aforesaid cases, the Division Benches have
placed reliance on the dictum of the Hon'ble Supreme Court in McLeod
Russel India Ltd., v. Regional Provident Fund Commissioner, (2014) 15
SCC 263, wherein, it is held as follows :
“11.....the presence or absence of mens rea and/or actus
reus would be a determinative factor in imposing damages
under Section 14-B, as also the quantum thereof since it is
not inflexible that 100 per cent of the arrears have to be
imposed in all the cases. Alternatively stated, if damages
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have been imposed under Section 14-B, it will be only
logical that mens rea and/or actus reus was prevailing at the
relevant time.”
Referring to another judgment of the Hon'ble Supreme Court in Assistant
Provident Fund Commissioner v. RSL Textiles (India)(P)Ltd., (2017) 3 SCC
110, wherein “mens rea” was held to be a necessary ingredient before
imposing damages under Section 14-B, the learned Judge thought it
appropriate that the matters be placed before a larger Bench of this Court for
an authoritative pronouncement on a few questions of importance. The
purpose of placing these writ petitions before a larger Bench is narrated by
the learned Judge, in the following lines:-
“5. On a perusal of the conflicting decisions of the various
Division Benches of this Court referred supra, it would
appear that the divergence of judicial opinion expressed
revolves on whom the burden of proof would lie, to wit,
whether the authority under EPF Act or the employer would
have to adduce evidence as to the presence or absence of
mens rea and actus reus in imposing damages under
Section 14-B of the EPF Act.
6. Another incidental question that would arise for
consideration is that in case where the employer has been
fastened with liability of penal damages under Section 14-B
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of the EPF Act, what would be the principles to be followed
for ascertaining the amount of damages payable in such
case.”
4.When the matter was placed before Hon'ble the Chief Justice,
this Bench was chosen to hear the reference and the matter was elaborately
heard. From the order of the learned single Judge, this Court finds that the
learned Judge has assumed that the Hon'ble Supreme Court has settled the
position that damages can be levied under Section 14-B of the Act only
when there exists mens rea. However, though the Hon'ble Supreme Court
in ESI Corporation v. HMT Ltd., case, (2008) 3 SCC 35, McLeod Russel
India Limited case, (2014) 15 SCC 262 and in RSL Textiles (India) (P)
Limited case, (2017) 3 SCC 110 held that an element of mens rea or actus
reus is essential, recently the Hon'ble Supreme Court in a few judgments,
particularly, in the case of Horticulture Experiment Station, Gonikoppal,
Coorg v. Regional Provident Fund Organization, (2022) 4 SCC 516, has
held that levy of damages is a sine quo non and the employer is liable to pay
damages irrespective of mens rea or actus reus. Following the judgments of
the Hon'ble Supreme Court in SEBI v. Shriram Mutual Fund, (2006) 5 SCC
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361 and in Union of India v. Dharamendra Textile Processors, (2008) 13
SCC 369, the Hon'ble Supreme Court observed that the judgments in ESI
Corporation, (2008) 3 SCC 35, McLeod Russel India Limited, (2014) 15
SCC 262 and in RSL Textiles (India) (P) Limited, (2017) 3 SCC 110, may
not be binding precedents, in view of the three-Judge Bench decision of the
Hon'ble Supreme Court in Union of India v. Dharamendra Textile
Processors, (2008) 13 SCC 369, wherein, the judgment of Hon'ble Supreme
Court in Dilip N.Shroff v. CIT, (2007) 6 SCC 329, which was relied upon by
the Hon'ble Supreme Court in other judgments, has been overruled.
Therefore, this Court has to necessarily consider whether “mens rea” is a
determinative factor in imposing damages under Section 14-B of the Act as
well other incidental issues. Since damages under Section 14-B of the Act
is levied, in exercise of a quasi-judicial function, there is no question
examining on whom the burden lies.
5.This Court, having regard to the scope of Section 14-B, the
relevant provisions of the Act, the EPF Scheme, and the arguments on either
side relying upon several precedents, found it appropriate to frame the
following issues for consideration :
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(a) Whether an element of mens rea or actus reus is essential for
levy of damages under Section 14-B of the Act or whether the default
or delay in payment of the EPF contributions by the employer attract
levy of damages under Section 14-B of the Act without an element of
mens rea ?
(b) Whether levy of damages is compulsory in all cases even if it is
held that mens rea is not essential ? In what cases levy of damages
should be avoided ?
(c) What are the principles to be followed while determining the
quantum of damages under Section 14-B of the Act ?
6.Before we proceed further, it is imperative for us to understand
the scope and the ambit of the Employees' Provident Funds and
Miscellaneous Provisions Act, 1952. The statement of objects and reasons
would show that the Act was enacted to provide for the institution of
Compulsory Provident Fund, Family Pension Fund and Deposit-linked
Insurance Fund for the benefit of the employees in factories and other
establishments where twenty or more persons are employed. The statement
of objects and reasons for the enactment is to create a Provident Fund with
the contribution of employee to make some provision for the function of
industrial workers or for their dependants in case of early death of workers.
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There were subsequent amendments introducing other schemes or to secure
prompt payment of contributions. Under the Act, provision is made for
setting up an independent machinery for recovery of the outstanding amount
of Provident Fund and other dues under the Act and for setting up of one or
more single-member Tribunals for hearing of appeals filed against the
orders of Provident Fund authorities in the matter of applicability of the
provisions of the Act, assessment of dues and levy of damages, etc. Under
Section 6, every employer shall pay to the Fund ten per cent of the basic
wages including dearness allowance and retaining allowance, if any, and the
employees' contribution shall be equal to the contribution payable by the
employer in respect of every individual employee. The power to recover
damages for the belated payment of contributions by the employer was
introduced later by amendment Act 40 of 1973. It is to be noted that under
Section 7-Q, the employer is liable to pay simple interest at the rate of
twelve per cent per annum or at a higher rate if it is specified in the Scheme
on any amount due from an employer under the Act from the date on which
the amount has become due till the date of actual payment. It is to be noted
that Section 14-B of the Act to levy damages was introduced when Section
7-Q was not in the statute. The power to recover damages under Section
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14-B was brought in by Act 40 of 1973, which reads as follows:-
“14-B. Power to recover damages.--Where an employer
makes default in the payment of any contribution to the
Fund, the Pension Fund or the Insurance Fund or in the
transfer of accumulations required to be transferred by him
under sub-section (2) of section 15 or sub-section (5) of
section 17 or in the payment of any charges payable under
any other provision of this Act or of any Scheme or
Insurance Scheme or under any of the conditions specified
under section 17, the Central Provident Fund
Commissioner or such other officer as may be authorised
by the Central Government, by notification in the Official
Gazette, in this behalf may recover from the employer by
way of penalty such damages, not exceeding the amount of
arrears, as may be specified in the Scheme:
Provided that before levying and recovering such
damages, the employer shall be given a reasonable
opportunity of being heard:
Provided further that the Central Board may reduce or
waive the damages levied under this section in relation to
an establishment which is a sick industrial company and in
respect of which a Scheme for rehabilitation has been
sanctioned by the Board for Industrial and Financial
Reconstruction established under section 4 of the Sick
Industrial Companies (Special Provisions) Act, 1985 (1 of
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1986), subject to such terms and conditions as may be
specified in the Scheme.”
There is statutory guidelines for imposition of damages as contemplated in
Para 32-A of the Employees' Provident Funds Scheme, 1952, which reads as
follows:-
“32-A. Recovery of damages for default in payment of any
contribution.--(1) Where a employer makes default in the
payment of any contribution to the Fund, or in the transfer of
accumulations required to be transferred by him under sub-
section (2) of section 15 or sub-section (5) of section 17 of the
Act or in the payment of any charges payable under any other
provisions of the Act or the Scheme or under any of the
conditions specified under section 17 of the Act, the Central
Provident Fund Commissioner or such officer as may be
authorised by the Central Government by notification in the
Official Gazette in this behalf, may recover from the employer
by way of penalty, damages at the rates given in the table
below:-
TABLE
Sl.No. Period of default Rate of damages
(percentage of arrears
per annum)
(a) Less than 2 months Five
(b) Two months and above but less than four Ten
months
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Sl.No. Period of default Rate of damages
(percentage of arrears
per annum)
(c) Four months and above but less than six Fifteen
months
(d) Six months and above Twenty Five
(2) The damages shall be calculated to the nearest rupees, 50
paise or more to be counted as the nearest higher rupee and
fraction of a rupee less than 50 paise to be ignored.”
Some of the provisions, namely, Paras 29, 30, 32-B, 36, 38 & 76 of the
Employees' Provident Funds Scheme, 1952 are relevant and hence they are
extracted hereunder:-
“29. Contributions. (1) The contributions payable by the
employer under the Scheme shall be at the rate of [ten per
cent] of the [basic wages, dearness allowance (including the
cash value of any food concession) and retaining allowance (if
any)] payable to each employee to whom the Scheme applies:
Provided that the above rate of contribution shall be
[twelve] per cent in respect of any establishment or class of
establishments which the Central Government may specify in
the Official Gazette from time to time under the first proviso
to sub-section (1) of section 6 of the Act.
(2) The contribution payable by the employee under the
Scheme, shall be equal to the contribution payable by the
employer in respect of such employee:
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Provided that in respect of any employee to whom
the Scheme applies, the contribution payable by him may, if he
so desires, be an amount exceeding [ten per cent] or [twelve
per cent], as the case may be, of his basic wages, dearness
allowance and retaining allowance (if any) subject to the
condition that the employer shall not be under an obligation to
pay any contribution over and above his contribution payable
under the Act;
(3) The contributions shall be calculated on the basis of [basic
wages, dearness allowance (including the cash value of any
food concession) and retaining allowance (if any)] actually
drawn during the whole month whether paid on daily, weekly,
fortnightly or monthly basis.
(4) Each contribution shall be calculated to [the nearest rupee,
50 paise or more to be counted as the next higher rupee and
fraction of a rupee less than 50 paise to be ignored.
30. Payment of contributions (1) The employer shall, in the
first instance, pay both the contribution payable by himself (in
this Scheme referred to as the employer's contribution) and
also, on behalf of the member employed by him directly or by
or through a contractor, the contribution payable by such
member (in this Scheme referred to as the member's
contribution).
(2) In respect of employees employed by or through a
contractor, the contractor shall recover the contribution
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payable by such employee (in this Scheme referred to as the
member's contribution) and shall pay to the principal employer
the amount of member's contribution so deducted together
with an equal amount of contribution (in this Scheme referred
to as the employer's contribution) and also administrative
charges.
(3) It shall be the responsibility of the principal employer to
pay both the contribution payable by himself in respect of the
employees directly employed by him and also in respect of the
employees employed by or through a contractor and also
administrative charges.
Explanation: For the purposes of this paragraph the expression
"administrative charges" means such percentage of the pay
(basic wages, dearness allowance, retaining allowance, if any,
and cash value of food concessions admissible thereon) for the
time being payable to the employees other than an excluded
employee, and in respect of which Provident Fund
Contribution are payable as the Central Government may, in
consultation with the Central Board and having regard to the
resources of the Fund for meeting its normal administrative
expenses, fix.
32-B. Terms and conditions for reduction or waiver of
damages. The Central Board may reduce or waive the damages
levied under section 14B of the Act in relation to an
establishment specified in the second proviso to section 14B,
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subject to the following terms and conditions, namely: —
(a) in case of a change of management including transfer of
the undertaking to workers' co-operative and in case of merger
or amalgamation of the sick industrial company with any other
industrial company, complete waiver of damages may be
allowed;
(b) in cases where the Board for Industrial and Financial
Reconstruction, for reasons to be recorded in its schemes, in
this behalf recommends, waiver of damages up to 100 per cent
may be allowed;
(c) in other cases, depending on merits, reduction of damages
up to 50 per cent may be allowed.
36. Duties of employers. (1) Every employer shall send to the
Commissioner, within fifteen days of the commencement of
this Scheme, a consolidated return in such form as the
Commissioner may specify of the employees required or
entitled to become members of the Fund showing the [basic
wage, retaining allowance (if any) and dearness allowance
including the cash value of any food concession] paid to each
of such employees:
Provided that if there is no employee who is
required or entitled to become a member of the Fund, the
employer shall send a 'NiL' return.
(2) Every employer shall send to the Commissioner within
fifteen days of the close of each month a return-
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(a) in Form 5, of the employees qualifying to become members
of the Fund for the first time during the preceding month
together with the declarations in Form 2 furnished by such
qualifying employees, and (b) [in such form as the
Commissioner may specify], of the employees leaving service
of the employer during the preceding month:
Provided that if there is no employee qualifying to
become a member of the Fund for the first time or there is no
employee leaving service of the employer during the
preceding month, the employer shall send a 'NIL' return.
Provided further that a copy of the forms as
mentioned in clauses (a) & (b) above shall be provided by the
employer to concerned employees immediately after joining
the service or at the time of leaving the service, as the case
may be.
(3) [Omitted]
(4) Every employer shall maintain an inspection note book in
such form as the Commissioner may specify, for an Inspector
to record his observation on his visit to the establishment.
(5) Every employer shall maintain such accounts in relation to
the amounts contributed to the Fund by him and by his
employees as the Central Board from time to time, direct, and
it shall be the duty of every employer to assist the Central
Board in making such payments from the Fund to his
employees as are sanctioned by or under the authority of the
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Central Board.
(6) Notwithstanding anything hereinbefore contained in this
paragraph, the Central Board may issue such directions to
employers generally as it may consider necessary or proper for
the purpose of implementing the Scheme, and it shall be the
duty of every employer to carry out such directions.
(7) Every employer shall send to the Commissioner such
returns in electronic format also, in such form and manner as
may be specified by the Commissioner.
38. Mode of payment of contributions. (1) The employer shall,
before paying the member his wages in respect of any period
or part of period for which contributions are payable, deduct
the employee's contribution from his wages which together
with his own contribution as well as an administrative charge
of such percentage [of the pay (basic wages, dearness
allowance, retaining allowance, if any, and cash value of food
concessions admissible thereon) for the time being payable to
the employees other than excluded employee and in respect of
which provident fund contribution payable, as the Central
Government may fix. He shall within fifteen days of the close
of every month pay the same to the fund [electronic through
internet banking of the State Bank of India or any other
Nationalized Bank] [or through PayGov platform or through
scheduled banks in India including private sector banks
authorized for collection on account of contributions and
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administrative charge:
Provided that the Central Provident Fund
Commissioner may for reasons to be recorded in writing,
allow any employer or class of employer to deposit the
contributions by any other mode other than internet banking.
(2) The employer shall forward to the Commissioner, within
twenty-five days of the close of the month, a monthly abstract
in such form as the Commissioner may specify showing the
aggregate amount of recoveries made from the wages of all the
members and the aggregate amount contributed by the
employer in respect of all such members for the month:
Provided that an employer shall send a Nil return, if no such
recoveries have been made from the employees :
Provided further that in the case of any such
employee who has become a member of the pension fund
under the Employees' Pension Scheme, 1995, the aforesaid
form shall also contain such particulars as are necessary to
comply with the requirements of that Scheme.
(3) The employer shall send to the Commissioner within one
month of the close of the period of currency, a consolidated
annual Contribution Statement in Form 6-A, showing the total
amount of recoveries made during the period of currency from
the wages of each member and the total amount contributed by
the employer in respect of each such member for the said
period. The employer shall maintain on his record duplicate
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copies of the aforesaid monthly abstract and consolidated
annual contribution statement for production at the time of
inspection by the Inspector.
[Provided that the employer shall send to the
Commissioner returns or details as required under sub-
paragraph (2) and (3) above, in electronic format also, in such
form and manner as may be specified by the Commissioner].
76. Punishment for failure to pay contribution, etc. If any
person—
(a) deducts or attempts to deduct from the wages or other
remuneration of a member the whole or any part of the
employer's contribution, or
(b) fails or refuses to submit any return, statement or other
document required by this Scheme or submits a false return,
statement or other document, or makes a false declaration, or
(c) obstructs any Inspector or other official appointed under
the Act or this Scheme in the discharge of his duties or fails to
produce any record for inspection by such Inspector or other
official, or
(d) is guilty of contravention of or non-compliance with any
other requirement of this Scheme, he shall be punishable with
imprisonment which may extend to [one year, or with fine
which may extend to four thousand rupees], or with both.”
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7.The contributions payable by the employer is therefore ten per
cent of the basic wages, dearness allowance including the cash value of food
concession and retaining allowance payable to each employee to whom the
Scheme applies. The employee is also required to pay a similar amount
equal to the contribution payable by the employer and the employee, if he so
desires, can pay more than ten per cent of his basic wages, dearness
allowance etc. The manner of payment of contributions is elicited in Para 30
of the Scheme. The employer is required to pay both contributions in the
first instance within 15 days of the end of every month to the fund and shall
deduct the employee's contribution from the salary of employees. In terms
of Para 32-A of EPF Scheme, the damages is required to be calculated at the
rates specified in the Table. Para 32-B speaks about the terms and
conditions for reduction or waiver of damages by the Central Board. While
waiver of 100% of damages can be allowed in respect of sick industries,
reduction of waiver upto 50% can be allowed in other cases, depending
upon merits. The duties of employers is elicited in Para 36 of the Scheme.
The mode of payment of contribution is elicited in Para 38 of the Scheme.
Para 76 of the Scheme speaks about the punishment for failure to pay
contribution or the refusal to submit any return as required. Section 7-Q of
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the Act was introduced long after the introduction of Section 14-B of the
Act and Section 7-Q makes the employer liable to pay interest at 12% per
annum on any amount due from him under the Act from the date on which
the amount has become due.
8.In Organo Chemical Industries and another v. Union of India
and others, (1979) 4 SCC 573, while challenging the order levying
damages, the validity of Section 14-B of the Act itself was questioned and
the following arguments were advanced before the Hon'ble Supreme Court,
namely, (i) that in view of the in-built arbitrariness in Section 14-B of the
Act, the said provision is liable to be struck down as violative of Article 14;
(ii) that the enforcement agency is vested with an unbridled power to inflict
any quantum of damages as he deems fit and this blanket authority is
instinct with discriminatory possibility, and hence violative of Article 14
and; (iii) that no reasons be given or any appellate or revisional remedy is
prescribed under the Statute and no judicial qualification is required for the
Commissioner and therefore the power to impose penalty without
guidelines, to be exercised by an authority, who has no judicial
qualification, is unconstitutional. Justice V.R.Krishna Iyer (as he then was),
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agreeing with the view expressed by Justice A.P.Sen (as he then was) in his
separate judgment, rejected all the contentions for reasons and upheld the
order passed under Section 14-B of the Act. However, Justice V.R.Krishna
Iyer held that the power vested with the authority to impose damages for the
wrong-doing is quasi-judicial in character and therefore, any order in
exercise of power under Section 14-B should be after following the
principles of natural justice and the authority should record its reasons in
support of the order he makes. Since fair play in administration is a finer
juristic facet, and it is imperative of Section 14-B of the Act, it is further
held that the authority should give reasons for his order imposing damages
on an employer and that the reasons should be rational and cannot be
capricious and any order that suffers from any irregularity can always be
interfered with in a writ petition under Article 226 of the Constitution.
Since the corrective remedy is available, the Hon'ble Supreme Court held
that the absence of appellate or revisional remedy will not render the
legislative provision illegal. Justice V.R.Krishna Iyer also observed that
when power is conferred on high and responsible officers, they are expected
to act with caution and impartiality while discharging their duties. It was
also observed that the Commissioner cannot award anything more than or
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unrelated to damages. The argument by the employer that damages should
be by way of compensation was negatived by the Supreme Court, as the
composite idea of damages includes more than pecuniary compensation.
Section 14-B of the Act, therefore, was also understood and interpreted as a
punitive measure to legitimize recovery of additional sums in the form of
penalty so as to see that non-compliance will result in paying heavy price.
Justice A.P.Sen, whose view was concurred by Justice V.R.Krishna Iyer,
observed that the authority, while fixing the amount of damages, should
take into consideration various factors, namely, the number of defaults, the
period of delay, the frequency of defaults and the amounts involved. The
imposition of damages at the flat rate of hundred per cent for all the defaults
irrespective of their duration, is held to be capricious and arbitrary. It is to
be noted that Section 7-Q of the Act making the employer liable to pay
interest at the rate of 12% was introduced long after the judgment in
Organo Chemical Industries' case, (1979) 4 SCC 573. Therefore, levy of
penalty is no more compensatory and we should take Section 14-B as purely
punitive.
9.In the light of the relevant provisions under the Act, this Court
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has to see whether the existence of mens rea is essential before imposing
penalty under Section 14-B of the Act. It is true that the Hon'ble Supreme
Court in Employees State Insurance Corporation v. HMT Limited and
another, (2008) 3 SCC 35 considered a similar provision under the
Employees State Insurance Act, namely, Section 85-B. Relying upon the
judgment of the Hon'ble Supreme Court in Dilip N.Shroff v. CIT, (2007) 6
SCC 329, (where an element of mens rea is held to be necessary before
imposing penalty under Income Tax Act), it was held that the existence of
mens rea or actus reus to contravene a statutory provision was held to be a
necessary ingredient for levy of damages under ESI Act. But there is no
independent discussion about the issue whether the liability or penalty under
Section 14-B is a criminal liability or a civil obligation for non-compliance
of a statutory provision. Similar view was expressed again by the Hon'ble
Supreme Court in the case of McLeod Russel India Ltd., v. Regional
Provident Fund Commissioner, Jalpaiguri and others, (2014) 15 SCC 263.
After referring to the provisions of the EPF Act and the judgments of the
Hon'ble Supreme Court in Organo Chemical Industries case, (1979) 4 SCC
573 and in Employees State Insurance Corporation v. HMT Limited case,
(2008) 3 SCC 35, the Hon'ble Supreme Court held as follows:-
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“In our opinion, Section 14-B is complete in itself so far as
computation of damages is concerned. It is conceivable that
the money due from an employer would have to be calculated
under Section 7-A and in the event the default or neglect of
the employer is contumacious and contains the requisite mens
rea and actus reus, yet another exercise of computation is to
be undertaken under Section 14-B of the Act.”
Again there is no independent consideration or discussion with reference
to the statute to arrive at the conclusion why mens rea or actus reus is
required to exercise the power under Section 14-B of the Act to levy
damages.
10.Again the Hon'ble Supreme Court in Assistant Provident Fund
Commissioner, EPFO and another v. The Management of RSL Textiles
India Private Limited, (2017) 3 SCC 110, followed the judgment of the
Supreme Court in McLeod Russel India Ltd., v. Regional Provident Fund
Commissioner, Jalpaiguri and others, (2014) 15 SCC 263. It is a short
judgment with five paragraphs and paragraphs 3 & 4 alone are relevant,
which read as follows:-
“3. This issue is now wholly covered against the appellants in
the decision rendered by this Court in McLeod Russel India
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Ltd., v. Regional Provident Fund Commissioner, Jalpaiguri
and others, (2014) 15 SCC 263, wherein it has been held in
paragraph 11 that ".....the presence or absence of mens rea
and/or actus reus would be a determinative factor in imposing
damages under Section 14-B, as also the quantum thereof
since it is not inflexible that 100 per cent of the arrears have
to be imposed in all the cases. Alternatively stated, if damages
have been imposed under Section 14-B, it will be only logical
that mens rea and/or actus reus was prevailing at the relevant
time."
4. In the impugned Judgment, at paragraph 23, it has been
specifically held by the High Court that "In this case, there is
no finding rendered by the original authority or the appellate
authority with regard to mens rea or actus reus, except saying
financial crises cannot be a reason to escape."
11.Following the judgments of Hon'ble Supreme Court in Dilip N.
Shroff v. CIT [Dilip N. Shroff v. CIT, (2007) 6 SCC 329] and Employees'
State Insurance Corporation v. HMT Ltd and another, (2008) 3 SCC 35, a
Division Bench of this Court in Regional Provident Fund Commissioner v.
Sree Visalam Chit Funds Ltd., Palathur, 2010 (4) L.L.N.706, held that
unless it is established that such failure to pay the contribution was
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attributable to mens rea on the part of employer, question of levying
damages under Section 14-B of the Act does not arise.
12.However, the rule of strict liability or civil liability or
obligation for blameworthy conduct in violation of a statutory obligation
have been considered in several judgments of the Hon'ble Supreme Court.
While examining the question whether in the case of a company which
owns or runs a factory, it is only the Director of the company who can be
notified as the occupier of the factory within the meaning of proviso (ii) of
Section 2(h) of the Factories Act or whether the company can nominate any
other employee to be the occupier, in response to a query how a Director of
the company, who may be wholly innocent, may be made liable for the
contributions to be remitted under the Act. Hon'ble Supreme Court in the
case of J.K.Industries Ltd. v Chief Inspector of Factories and Boilers,
(1996) 6 SCC 665, held that the offence under the Factories Act are not a
part of the general penal law, but arise from the breach of a duty provided in
a special beneficial social defence legislation, which creates an absolute or
strict liability without proof of mens rea. Hon'ble Supreme Court further
added as follows:-
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“42. The offences under the Act are not a part of general
penal law but arise from the breach of a duty provided in a
special beneficial social defence legislation, which creates
an absolute or strict liability without proof of any mens rea.
The offences are strict statutory offences for which
establishment of mens rea is not an essential ingredient. The
omission or commission of the statutory breach is itself the
offence. Similar type of offences based on the principle of
strict liability, which means liability without fault or mens
rea, exist in many statutes relating to economic crimes as
well as in laws concerning the industry, food adulteration,
prevention of pollution, etc., in India and abroad. 'Absolute
offences' are not criminal offences in any real sense but acts
which are prohibited in the interest of welfare of the public
and the prohibition is backed by sanction of penalty.”
13.A Constitution Bench of the Hon'ble Supreme Court in the
case of Pyarali K.Tejani v. Mahadeo Ramchandra Dange and others,
(1974) 1 SCC 167, considered the rule of strict liability with reference to
Section 7 of the Prevention of Food Adulteration Act, wherein it has been
held as follows:-
“15. It was next urged before us that the dealer believed in
good faith that there was no cyclamate in the substance sold
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induced by the warranty and honestly did not know that
saccharin was contraband, the Rules in this behalf having
been changed frequently and recently. It is trite law that in
food offences strict liability is the rule not merely under the
Indian Act but all the world over. The principle has been
explained in American Jurisprudence 2d. Vol. 35, p. 864)
thus
“Intent as element of offence:
The distribution of impure or adulterated food for
consumption is an act perilous to human life and health,
hence, a dangerous act, and cannot be made innocent and
harmless by the want of knowledge or by the good faith of the
seller; it is the act itself, not the intent, that determines the
guilt, and the actual harm to the public is the same in one case
as in the other. Thus, the seller of food is under the duty of
ascertaining at his peril whether the article of food conforms
to the standard fixed by statute or ordinance, unless such
statutes or ordinances, expressly or by implication, make
intent an element of the offence.”
Nothing more than the actus reus is needed where regulation
of private activity in vulnerable areas like public health is
intended. In the words of Lord Wright
in McLeod v. Buchanan [(1940) 2 All ER 179, 186 (HL)]
“intention to commit a breach of statute need not be shown.
The breach in fact is enough.” Social defence reasonably
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overpowers individual freedom to injure, in special situations
of strict liability. Section 7 casts an absolute obligation
regardless of scienter, bad faith and mens rea. If you have
sold any article of food contrary to any of the sub-sections of
Section 7, you are guilty. There is no more argument about it.
The law denies the right of a dealer to rob the health of a
supari consumer. We may merely refer to a similar plea
overruled in the case Andhra Pradesh Grain & Seed
Merchants’ Association v. Union of India [(1970) 2 SCC 71 :
(1971) 1 SCR 166] .“
14.In Gujarat Travancore Agency v. CIT, (1989) 3 SCC 52, the
Hon'ble Supreme Court has observed as follows:-
“4.....It is sufficient for us to refer to Section 271(1)(a), which
provides that a penalty may be imposed if the Income Tax
Officer is satisfied that any person has without reasonable
cause failed to furnish the return of total income, and to
Section 276-C which provides that if a person wilfully fails to
furnish in due time the return of income required under
Section 139(1), he shall be punishable with rigorous
imprisonment for a term which may extend to one year or
with fine. It is clear that in the former case what is intended is
a civil obligation while in the latter what is imposed is a
criminal sentence. There can be no dispute that having regard
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to the provisions of Section 276-C, which speaks of wilful
failure on the part of the defaulter and taking into
consideration the nature of the penalty, which is punitive, no
sentence can be imposed under that provision unless the
element of mens rea is established. In most cases of criminal
liability, the intention of the legislature is that the penalty
should serve as a deterrent. The creation of an offence by
statute proceeds on the assumption that society suffers injury
by the act or omission of the defaulter and that a deterrent
must be imposed to discourage the repetition of the offence.
In the case of a proceeding under Section 271(1)(a),
however, it seems that the intention of the legislature is to
emphasise the fact of loss of revenue and to provide a remedy
for such loss, although no doubt an element of coercion is
present in the penalty. In this connection the terms in which
the penalty falls to be measured is significant. Unless there is
something in the language of the statute indicating the need
to establish the element of mens rea it is generally sufficient
to prove that a default in complying with the statute has
occurred. In our opinion, there is nothing in Section 271(1)
(a) which requires that mens rea must be proved before
penalty can be levied under that provision.
15.In Director of Enforcement v. M.C.T.M. Corporation Pvt.Ltd.,
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(1996) 2 SCC 471, the Hon'ble Supreme Court considered the issue whether
existence of “mens rea” is a necessary ingredient for establishing
contravention of Section 10 punishable under Section 23 of FERA, 1947.
Under Section 10, no person who has a right to receive foreign exchange or
to receive from a person resident outside India a payment in rupees shall,
except with the special permission of the Reserve Bank, do or refrain from
doing anything to delay receipt or payment. As per Section 23 of FERA, a
person who contravenes the provisions of Section 10 of FERA is liable to
such penalty not exceeding three times the value of the foreign exchange as
may be adjudged by the Director of Enforcement. Under Section 23-F any
person who fails to pay penalty imposed by Director of Enforcement is
liable to be prosecuted before a Court for an offence punishable with
imprisonment for a term upto two years or with fine or with both. This
Court held that proceedings under Section 23(1)(a) are “quasi-criminal” in
nature and that “mens rea” is a necessary ingredient for the commission of
an offence under Section 10. Hon'ble Supreme Court following the
judgment of a Constitution Bench in Maqbaal Hussain v. State of Bombay,
AIR 1953 SC 325 held that mens rea (as is understood in criminal law) is
not an essential ingredient for holding a delinquent liable to pay penalty
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under Section 23(1)(a) of FERA, 1947. Para Nos.7, 8 and 13 of the
judgment are relevant and hence extracted :
“7.“Mens rea” is a state of mind. Under the criminal law,
mens rea is considered as the “guilty intention” and unless it is
found that the ‘accused’ had the guilty intention to commit the
‘crime’ he cannot be held ‘guilty’ of committing the crime. An
‘offence’ under Criminal Procedure Code and the General
Clauses Act, 1897 is defined as any act or omission “made
punishable by any law for the time being in force”. The
proceedings under Section 23(1)(a) of FERA, 1947 are
‘adjudicatory’ in nature and character and are not “criminal
proceedings”. The officers of the Enforcement Directorate and
other administrative authorities are expressly empowered by
the Act to ‘adjudicate’ only. Indeed they have to act
‘judicially’ and follow the rules of natural justice to the extent
applicable but, they are not ‘Judges’ of the “Criminal Courts”
trying an ‘accused’ for commission of an offence, as
understood in the general context. They perform quasi-judicial
functions and do not act as ‘courts’ but only as
‘administrators’ and ‘adjudicators’. In the proceedings before
them, they do not try ‘an accused’ for commission of “any
crime” (not merely an offence) but determine the liability of
the contravenor for the breach of his ‘obligations’ imposed
under the Act. They impose ‘penalty’ for the breach of the
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“civil obligations” laid down under the Act and not impose
any ‘sentence’ for the commission of an offence. The
expression ‘penalty’ is a word of wide significance.
Sometimes, it means recovery of an amount as a penal
measure even in civil proceedings. An exaction which is not
“compensatory” in character is also termed as a ‘penalty’.
When penalty is imposed by an adjudicating officer, it is done
so in “adjudicatory proceedings” and not by way of fine as a
result of ‘prosecution’ of an ‘accused’ for commission of an
‘offence’ in a criminal court. Therefore, merely because
‘penalty’ clause exists in Section 23(1)(a), the nature of the
proceedings under that section is not changed from
‘adjudicatory’ to ‘criminal’ prosecution. An order made by an
adjudicating authority under the Act is not that of conviction
but of determination of the breach of the civil obligation by
the offender.
8.It is thus the breach of a “civil obligation” which attracts
‘penalty’ under Section 23(1)(a), FERA, 1947 and a finding
that the delinquent has contravened the provisions of Section
10, FERA, 1947 that would immediately attract the levy of
‘penalty’ under Section 23, irrespective of the fact whether the
contravention was made by the defaulter with any “guilty
intention” or not. Therefore, unlike in a criminal case, where it
is essential for the ‘prosecution’ to establish that the ‘accused’
had the necessary “guilty intention” or in other words the
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requisite “mens rea” to commit the alleged offence with which
he is charged before recording his conviction, the obligation
on the part of the Directorate of Enforcement, in cases of
contravention of the provisions of Section 10 of FERA, would
be discharged where it is shown that the “blameworthy
conduct” of the delinquent had been established by wilful
contravention by him of the provisions of Section 10, FERA,
1947. It is the “delinquency”' of the “defaulter”' itself which
establishes his ‘blameworthy’ conduct, attracting the
provisions of Section 23(1)(a) of FERA, 1947 without any
further proof of the existence of “mens rea”. Even after an
adjudication by the authorities and levy of penalty under
Section 23(1)(a) of FERA, 1947, the defaulter can still be
tried and punished for the commission of an offence under the
penal law, where the act of the defaulter also amounts to an
offence under the penal law and the bar under Article 20(2) of
the Constitution of India in such a case would not be attracted.
The failure to pay the penalty by itself attracts ‘prosecution’
under Section 23-F and on conviction by the ‘court’ for the
said offence imprisonment may follow.
13.We are in agreement with the aforesaid view and in our
opinion, what applies to “tax delinquency” equally holds good
for the ‘blameworthy’ conduct for contravention of the
provisions of FERA, 1947. We, therefore, hold that mens rea
(as is understood in criminal law) is not an essential ingredient
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for holding a delinquent liable to pay penalty under Section
23(1)(a) of FERA, 1947 for contravention of the provisions of
Section 10 of FERA, 1947 and that penalty is attracted under
Section 23(1)(a) as soon as contravention of the statutory
obligation contemplated by Section 10(1)(a) is established.
The High Court apparently fell in error in treating the
“blameworthy conduct” under the Act as equivalent to the
commission of a “criminal offence”, overlooking the position
that the “blameworthy conduct” in the adjudicatory
proceedings is established by proof only of the breach of a
civil obligation under the Act, for which the defaulter is
obliged to make amends by payment of the penalty imposed
under Section 23(1)(a) of the Act irrespective of the fact
whether he committed the breach with or without any guilty
intention. Our answer to the first question formulated by us
above is, therefore in the negative.”
16.In Swedish Match AB v. SEBI, (2004) 11 SCC 641, a three-
Judge Bench of the Hon'ble Supreme Court has concluded as follows:-
“113. It is accepted that once a public offer is made the
investors would be entitled to elect to transfer their shares at a
higher price which may be offered by the acquirer with a view
to acquire control over the target company. The investors
would also be entitled to interest at such rate as the Board may
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determine. The provisions of Section 15-H of the Act mandate
that a penalty of rupees twenty-five crores may be imposed.
The Board does not have any discretion in the matter and,
thus, the adjudication proceeding is a mere formality.
Imposition of penalty upon the appellant would, thus, be a
forgone conclusion. Only in the criminal proceedings initiated
against the appellants, existence of mens rea on the part of the
appellants will come up for consideration.”
17.In SEBI v. Cabot International Capital Corporation, (2005)
123 Comp Cases 841 (Bom), the Bombay High Court had an occasion to
consider whether mens rea is an essential ingredient to be shown for
imposing penalty for committing violation of the provisions of the SEBI Act
and Regulations. While mens rea is considered to be essential or sine quo
non for criminal offence, it is held that mens rea is not an essential element
for imposing penalty for breach of civil obligations or liabilities.
18.Again in Chairman, SEBI v. Shriram Mutual Fund and
another, (2006) 5 SCC 361, the Hon'ble Supreme Court has reiterated the
principle that the breach of a statutory obligation under the provisions of the
SEBI Act and the Regulations made thereunder, would attract levy of
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penalty irrespective of the fact whether the contraventions were made by the
defaulter with any guilty intention or not. The Hon'ble Supreme Court, after
referring to the judgments referred to earlier, has categorically ruled that
mens rea is not an essential element for imposing penalty for breach of civil
obligations. The relevant paragraphs in the said judgment are extracted
below:-
“29. The Tribunal set aside the order passed by the adjudicating
officer on the ground that the penalty to be imposed for failure
to perform a statutory obligation is a matter of discretion which
has to be exercised judicially and on a consideration of all the
relevant facts and circumstances. The Tribunal also held that
the adjudicating officer has to be satisfied with the material
placed before him that the violation deserves punishment. It
was held that penalty is warranted by the quantum which has to
be decided by taking into consideration the factors stated in
Section 15-J of the SEBI Act. In our opinion, the Tribunal has
miserably failed to appreciate that by setting aside the order of
the adjudicating officer the Tribunal was setting a serious
wrong precedent whereby every offender would take shelter of
alleged hardships to violate the provisions of the Act. In our
opinion, mens rea is not an essential ingredient for
contravention of the provisions of a civil Act. In our view, the
penalty is attracted as soon as contravention of the statutory
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obligations as contemplated by the Act is established and,
therefore, the intention of the parties committing such violation
becomes immaterial. In other words, the breach of a civil
obligation which attracts penalty under the provisions of an Act
would immediately attract the levy of penalty irrespective of the
fact whether the contravention was made by the defaulter with
any guilty intention or not. This apart, unless the language of
the statute indicates the need to establish the element of mens
rea, it is generally sufficient to prove that a default in
complying with the statute has occurred. Under a close scrutiny
of Sections 15-D(b) and 15-E of the Act, there is nothing which
requires that mens rea must be proved before penalty can be
imposed under these provisions. Hence, we are of the view that
once the contravention is established, then the penalty has to
follow and only the quantum of penalty is discretionary.
Discretion has been exercised by the adjudicating officer as is
evident from imposition of lesser penalty than what could have
been imposed under the provisions. The intention of the parties
is wholly irrelevant since there has been a clear violation of the
statutory Regulations and provisions repetitively, covering a
period of 6 quarters. Hence, we hold that the respondents have
wilfully violated statutory provisions with impunity and hence
the imposition of penalty was fully justified. The Tribunal, in
this context, failed to appreciate that every mutual fund has to
redeem the units as per terms and conditions of the scheme on
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the request of the unit-holders and this cannot, in any manner,
be considered as an extraordinary circumstance or something
which was not known to the respondents. The facts and
circumstances of the present case in no way indicate the
existence of special circumstances so as to waive the penalty
imposed by the adjudicating officer. A perusal of the order
passed by the adjudicating officer would clearly go to show that
factors such as small size of the funds, low volume of
transactions, thinly traded securities, administrative and
operational exigencies were duly considered and appreciated by
the adjudicating officer while passing the order and that is why
the adjudicating officer did not impose the maximum
permissible penalty. The Tribunal failed to appreciate that the
objective behind imposing certain limit on the business that can
be conducted by mutual fund through the associate broker is to
eliminate any undue advantage to the class of brokers by virtue
of their close association with the asset management company,
sponsors, etc. In other words, the object of imposing such limits
is to ensure that there is no concentration of business only in
such entities, so that there is an indirect pecuniary advantage to
the person associated with the asset management company,
sponsors, etc. Any undue concentration on the business of the
mutual fund with its affiliated brokers by paying huge
commissions to such brokers is neither desirable nor in the
interest of the unit-holders. It is a matter of record that in the 12
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admitted instances of violation by the respondents, the
percentage of the business through the associated brokers was
as high as 91.68% and 52.2% in certain factors. This apart, the
respondent's excessive exposure to the associate brokers is not
only established from the record, but has also been admitted by
the respondents.
30. It is settled law that when a penalty is imposed by an
adjudicating officer, it is done so in adjudicatory proceedings
and not by way of fine as a result of prosecution of an accused
for commission of an offence in a criminal proceeding. In the
instant case, the Tribunal has failed to appreciate that the
respondents had given undue and unfair advantage to the
associated brokers, which is detrimental to the interest of the
unit-holders. ...
35. In our considered opinion, penalty is attracted as soon as the
contravention of the statutory obligation as contemplated by the
Act and the Regulations is established and hence the intention
of the parties committing such violation becomes wholly
irrelevant. A breach of civil obligation which attracts penalty in
the nature of fine under the provisions of the Act and the
Regulations would immediately attract the levy of penalty
irrespective of the fact whether contravention must be made by
the defaulter with guilty intention or not. We also further held
that unless the language of the statute indicates the need to
establish the presence of mens rea, it is wholly unnecessary to
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ascertain whether such a violation was intentional or not. On a
careful perusal of Section 15-D(b) and Section 15-E of the Act,
there is nothing which requires that mens rea must be proved
before penalty can be imposed under these provisions. Hence
once the contravention is established then the penalty is to
follow.
36. In our view, the impugned judgment of the Securities
Appellate Tribunal has set a serious wrong precedent and the
powers of the SEBI to impose penalty under Chapter VI-A are
severely curtailed against the plain language of the statute
which mandatorily imposes penalties on the contravention of
the Act/Regulations without any requirement of the
contravention having been deliberated or contumacious. The
impugned order sets the stage for various market players to
violate statutory regulations with impunity and subsequently
plead ignorance of law or lack of mens rea to escape the
imposition of penalty. The imputing of mens rea into the
provisions of Chapter VI-A is against the plain language of the
statute and frustrates entire purpose and object of introducing
Chapter VI-A to give teeth to the SEBI to secure strict
compliance with the Act and the Regulations.”
19.Noticing the conflicting views in Dilip N. Shroff v. CIT [Dilip
N. Shroff v. CIT, (2007) 6 SCC 329] and SEBI v. Shriram Mutual Fund,
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(2006) 5 SCC 361, the matter was referred to a larger Bench. While
approving the judgment of Hon'ble Supreme Court in SEBI v. Shriram
Mutual Fund, (2006) 5 SCC 361, a three-Judge Bench of the Hon'ble
Supreme Court in the case of Union of India v. Dharamendra Textile
Processors and others, (2008) 13 SCC 369, to the question whether Section
11-AC of the Central Excise Act, 1944 inserted by the Finance Act, 1996
with an intention of imposing mandatory penalty on persons who evaded
payment of tax should be read to contain mens rea as an essential ingredient,
answered mens rea is not an essential ingredient for imposing penalty which
is a civil liability. Interestingly, the larger Bench held that Dilip N.
Shroff v. CIT [Dilip N. Shroff v. CIT, (2007) 6 SCC 329] was not correctly
decided. The larger Bench approved and followed the judgment in SEBI
v. Shriram Mutual Fund, (2006) 5 SCC 361, the judgment of the Hon'ble
Supreme Court in Director of Enforcement v. MCTM Corporation (P) Ltd.,
(1996) 2 SCC 471 and a few other judgments to hold that penalty under
Section 11-AC of Central Excise Act, 1944, is mandatory irrespective of
mens rea and there is no scope for any discretion in view of the strict
liability under the provision.
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20.The Hon'ble Supreme Court had the occasion to consider
almost all the above judgments in Horticulture Experiment Station, Coorg
v. The Regional Provident Fund Organization, (2022) 4 SCC 516 and has
held that levy of damages is a sine quo non and upheld the order of recovery
of damages under Section 14-B of the Act. Paragraphs 15 to 19 of the said
judgment is reproduced below:-
“15. Taking note of the exposition of law on the subject, it is
well-settled that mens rea or actus reus is not an essential
element for imposing penalty or damages for breach of civil
obligations and liabilities.
16. The judgment on which the learned counsel for the
appellant(s) has placed reliance i.e. ESI Corpn. [ESI
Corpn. v. HMT Ltd., (2008) 3 SCC 35 : (2008) 1 SCC (L&S)
558] , the Division Bench in ignorance of the settled judicial
binding precedent of which a detailed reference has been
made, while examining the scope and ambit of Section 85-B
of the Employees State Insurance Corporation Act, 1948
which is in pari materia with Section 14-B of the 1952 Act
placing reliance on the judgment of Division Bench of this
Court in Dilip N. Shroff [Dilip N. Shroff v. CIT, (2007) 6 SCC
329] held that for the breach of civil obligations/liabilities,
existence of mens rea or actus reus to be a necessary
ingredient for levy of damages and/or the quantum thereof.
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17. It may be noticed that Dilip N. Shroff [Dilip N.
Shroff v. CIT, (2007) 6 SCC 329] on which reliance was
placed has been overruled by this Court in Union of
India v. Dharamendra Textile Processors (2008) 13 SCC 369.
For the aforesaid reasons, the view expressed by this Court
in ESI Corpn. [ESI Corpn. v. HMT Ltd., (2008) 3 SCC 35 :
(2008) 1 SCC (L&S) 558] may not be of binding precedent on
the subject and of no assistance to the appellant(s).
18. The learned counsel for the appellant(s) further placed
reliance on the judgment of this Court in McLeod Russel
(India) Ltd. [McLeod Russel (India) Ltd. v. Regl. Provident
Fund Commr., (2014) 15 SCC 263 : (2015) 3 SCC (L&S)
593] , wherein the question emerged for consideration was as
to whether the damages which had been charged under
Section 14-B of the 1952 Act would be recoverable jointly or
severally from the erstwhile as well as the current
managements. At the same time, the judgment relied upon
in Provident Fund Commr. [Provident Fund Commr. v. RSL
Textiles (India) (P) Ltd., (2017) 3 SCC 110 : (2017) 1 SCC
(L&S) 543] was decided placing reliance on the judgment of
this Court in McLeod Russel (India) Ltd. [McLeod Russel
(India) Ltd. v. Regl. Provident Fund Commr., (2014) 15 SCC
263 : (2015) 3 SCC (L&S) 593] , which may not be of any
assistance to the appellant(s).
19. Taking note of the three-Judge Bench judgment of this
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Court in Union of India v. Dharamendra Textile
Processors [Union of India v. Dharamendra Textile
Processors, (2008) 13 SCC 369] , which is indeed binding on
us, we are of the considered view that any default or delay in
the payment of EPF contribution by the employer under the
Act is a sine qua non for imposition of levy of damages under
Section 14-B of the 1952 Act and mens rea or actus reus is not
an essential element for imposing penalty/damages for breach
of civil obligations/liabilities.”
21.In view of the judgment of the Hon'ble Supreme Court in
Horticulture Experiment Station case, the earlier judgment of the Hon'ble
Supreme Court in Employees' State Insurance Corporation v. HMT Ltd and
another, (2008) 3 SCC 35, McLeod Russel India Ltd., v. Regional
Provident Fund Commissioner, (2014) 15 SCC 263 and Assistant Provident
Fund Commissioner v. RSL Textiles (India)(P)Ltd., (2017) 3 SCC 110,
holding otherwise relying upon the principles enunciated in Dilip N.Shroff
case, (2007) 6 SCC 329 may not be binding for the following reasons. The
difference between criminal liability and civil liability for breach of
statutory obligation has been dealt with in several judicial precedents
referred to above. The judgment of Hon'ble Supreme Court in Dilip
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N.Shroff case, (2007) 6 SCC 329 has been specifically overruled by the
larger Bench of Hon'ble Supreme Court in Dharamendra Textile Processors
case, (2008) 13 SCC 369. Therefore, the three judgments above referred to
which are on the basis of judgment in Dilip N.Shroff case, (2007) 6 SCC
329 which was subsequently overruled, cannot be relied upon as a
precedent.
22.It is also to be noted that in McLeod Russel India Ltd., v.
Regional Provident Fund Commissioner, (2014) 15 SCC 263, the Hon'ble
Supreme Court, while applying the rule that mens rea or actus reus is a
necessary ingredient for levy of penalty, has specifically noted that the
proceeding under Section 14B of the Act cannot be treated in par with
criminal prosecution. Paragraph 13 of the judgment reads as follows:-
“13. There is no gainsaying that criminal liability remains
steadfastly fastened to the actual perpetrator and cannot be
transferred by any compact between persons or even by
statute. But this incontrovertible legal principle does not
support or validate the contention of Mr Jayant Bhushan,
learned Senior Advocate for the appellants, that damages
levied in terms of Section 14-B of the EPF Act cannot be
foisted onto his clients.
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Sections 14, 14-A, 14-AA, 14-AB and 14-AC of the EPF
Act are the provisions postulating prosecution; in
contradistinction Section 14-B contemplates the power to
“recover from the employer by way of penalty such
damages, not exceeding the amount of arrears, as
may be specified in the Scheme”.
It is true that it is not a river but a mere rivulet that
segregates and distinguishes the legal concepts of damages
or compensatory damages or exemplary damages or
deterrent damages or punitive damages or retributory
damages. We shall abjure from writing a dissertation on this
compelling legal nodus; save to clarify that modern
jurisprudence recognises that the imposition of punitive
damages, quintessentially quasi-criminal in character, can
be resorted to even in civil proceedings to deter wilful
wrongdoing by making an admonished example of the
wrongdoer. This is the essential purpose, it seems to us, of
Section 14-B of the EPF Act, and an imposition within its
confines does not assume criminal prosecution so as to
stand proscribed insofar as transfer of establishment from
one management/employer to its successor is concerned.”
Therefore, levy of damages under Section 14-B of the Act is not a criminal
liability but a civil liability arising out of a statutory obligation. In view of
the principles reiterated by several judgments distinguishing the difference
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between criminal liability and the civil liability for violation of statutory
obligation and the judgment in Horticulture Experiment Station,
Gonikoppal, Coorg v. Regional Provident Fund Organization, (2022) 4
SCC 516, we are bound to hold that mens rea or actus reus is not an
essential requirement or sine quo non for levying penalty under Section 14-
B of the Act.
23.Let us now consider the following questions :
i. Whether levy of damages is compulsory in all cases ?
ii. In what cases levy of damages should be avoided ?
iii. What are the guiding principles to be followed while quantifying the
damages under Section 14-B of the Act ?
24.Even in Organo Chemical Industries and another v. Union of
India and others, (1979) 4 SCC 573, the Hon'ble Supreme Court observed
that the imposition of penalty cannot be more than or unrelated to damages.
Since Section 14-B of the Act has now become punitive, the order imposing
penalty should meet the standard required in various judgments of Hon'ble
Supreme Court. While exercising power under Section 14-B, the quasi-
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judicial authority should impose damages for the default. The Hon'ble
Supreme Court also reiterated in unambiguous terms that proceedings under
Section 14-B should be after following the principles of natural justice. It is
further held that the authority should record reasons in support of the order
imposing penalty. The reasons also should be rational and cannot be
capricious. It is also held that imposition of damages at the flat rate of
hundred percent for all the defaults is capricious and arbitrary.
25.Now, let us examine some of the precedents where the scope of
Section 14-B of the Act or similar provision under different enactments
have been examined.
26.In Regional Provident Fund Commissioner v. S.D.College,
Hoshiarpur, (1997) 11 SCC 241, the Hon'ble Supreme Court held that the
Regional Provident Fund Commissioner is given discretion to waive penalty
altogether.
27.A three-Judge Bench of the Hon'ble Supreme Court in
Hindustan Steel Limited v. The State of Orissa, AIR 1970 SC 253 had an
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occasion to consider the penal provision under the Orissa Sales Tax Act.
The appellant before the Hon'ble Supreme Court is a Government of India
undertaking. Between 1954 and 1959, the company was erecting factory
buildings for the steel plant. The company was supplying building materials
for consideration and adjusted the value of goods supplied at the rates
specified in the tender. Between 1954 and 1959, the company failed to
register as a dealer. Under Section 9(a) read with Section 25(1)(a) of the
Orissa Sales Tax Act, penalty was imposed and the Hon'ble Supreme Court
while concluding that no penalty can be imposed, has held as follows:-
“7. Under the Act penalty may be imposed for failure to
register as a dealer: Section 9(1) read with Section 25(1)(a) of
the Act. But the liability to pay penalty does not arise merely
upon proof of default in registering as a dealer. An order
imposing penalty for failure to carry out a statutory obligation
is the result of a quasicriminal proceeding, and penalty will not
ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct
contumacious or dishonest, or acted in conscious disregard of
its obligation. Penalty will not also be imposed merely because
it is lawful to do so. Whether penalty should be imposed for
failure to perform a statutory obligation is a matter of
discretion of the authority to be exercised judicially and on a
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consideration of all the relevant circumstances. Even if a
minimum penalty is prescribed, the authority competent to
impose the penalty will be justified in refusing to impose
penalty, when there is a technical or venial breach of the
provisions of the Act or where the breach flows from a bona
fide belief that the offender is not liable to act in the manner
prescribed by the statute. Those in charge of the affairs of the
Company in failing to register the Company as a dealer acted
in the honest and genuine belief that the Company was not a
dealer. Granting that they erred, no case for imposing penalty
was made out.”
28.A Division Bench of the Orissa High Court in Bhubaneswar
City Distribution Division v. Union of India and another, (1998) 2 LLJ
1044, considered an application filed by the appellant challenging the order
of Regional Provident Fund Commissioner levying damages under Section
14-B of the Act for delayed payment of dues. One of the grounds raised
was that the delayed payment of statutory dues ipso facto does not invite
levy of damages under Section 14-B of the Act and no specific reason is
given for levy of damages and that damages have been levied arbitrarily
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without following any principle. The Division Bench of Orissa High Court
held as follows:-
“Contention No.(iii)6: Section 14B of the Act clearly provides
that where an employer makes default in the payment of any
contribution required under the Act, the Commissioner may
recover from the employer by way of penalty of such damages
provided that before levying and recovering of such damages,
the employer shall the given a reasonable opportunity offering
heard. A bare reading of the provision would indicate that
delayed payment of the statutory dues as it had occurred in the
present case, does not ipso-facto invite levy of damages. If the
employer furnishes sufficient cause for the delay, the
designated authority in a given case may not levy damages. In
the impugned order, the Commissioner in paragraph-5 has
observed " that the establishment had defaulted in payment of
statutory dues without any valid reasons."
Shri Nayak, learned counsel for the petitioner submits that
earlier different divisions were depositing the employees and
employers' share with the Commissioner within the time
stipulated but subsequently when the centralised payment
scheme was introduced, the divisions could not deposit the
share and as such, delay in deposit was unavoidable and was
not intentional. This plea taken by the petitioner does not seem
to have been considered by the Commissioner as is evident
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from the impugned order.
Contention No. (iv):- The break-up of damages levied on the
petitioner (vide enclosure to Annexure-5 series) would show
that for the period of delay ranging from six days to 562 days
(from March, 1986 to March, 1990), 25% of arrears per annum
has been imposed as penal damages. It is evidently arbitrary.
May it be stated that previously damages were being imposed
at a rate basing on circulars issued by the Commissioner under
which damages up-to 100% was impossible. Such imposition
being arbitrary, as there was no clear guideline paragraph 32-
A has been inserted vide C.S.R. No. 521 dated August 16,
1991 (with effect from September 1, 1991) clearly indicating
that damages may be recovered from the employer at the rates
given below:
"Period of default Rate of damages (percentage of
arrears per annum)
(a) Less than two months Seventeen
(b) Two months and above
but less than four months. Twenty-two
(c) Four months and above
but less than six months Twenty-seven
(d) Six months and above Thirty-seven".
The aforesaid provision though is not strictly applicable to the
case at hand, it indicates the mind of the Government that the
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rate of damages should not be arbitrary. On the facts and
circumstances of this case and keeping in view that the Act is
a beneficial legislation for the employees in factories and
establishments covered under the Act and to avoid further
litigation between the parties, we are inclined to -hold that the
petitioner is liable to pay damages at the rate of 17% per
annum on the percentage of arrears.”
29.In Cable Corporation of India Ltd., and another v. Union of
India and another, 2006 SCC OnLine Bom 765, a writ petition was filed
before the Bombay High Court challenging the order directing the writ
petitioner to deposit a sum of Rs.31,01,050/- towards interest under Section
7-Q and a sum of Rs.94,17,882/- towards damages under Section 14-B of
the Act. Though the company admitted its liability to pay interest on the
defaulted amount, made a request that damages/penalty may be condoned
and waived in view of the financial losses suffered by it. Referring to the
judgment of the Hon'ble Supreme Court in Hindustan Times Limited case,
(1998) 2 SCC 242, it is held as follows:-
“9. The power to impose damages under section 14-B is a
judicial power. As has already been noticed, section 14-B
does not mandate that an order for damages must follow in
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the event of every default. Section 14-B confers a discretion
upon the Provident Fund Commissioner to impose damages
not exceeding the amount of arrears. Within the ceiling that is
imposed by the statute the Provident Fund Commissioner has
a discretion. The nature of the power being quasi judicial, the
exercise of the discretion must be for sound and objective
considerations. Regulation 32-A under which a graded scale
for imposition of damages has been provided cannot be
regarded as a rigid or inflexible prescription. The Regulations
cannot fetter the exercise of the power which is conferred
upon the Provident Fund Commissioner by the provisions of
the enactment, but guide and channelize the exercise of
discretion. Similarly, Regulation 32-B structures the exercise
of the discretion to reduce or waive the imposition of
damages. Neither Regulation 32-A nor Regulation 32-B can
be regarded as inflexible.
10. In the present case, there has been unquestionably a
default on the part of the petitioners. However, there is merit
in the submission which has been urged on behalf of the
petitioners that the order of the Regional Provident Fund
Commissioner is lacking in essential particulars in so far as
the quantification of damages is concerned. The order in fact
contains no elaboration of the manner in which damages have
been computed. On behalf of the Second respondent it has
been submitted that damages have been imposed on a sliding
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scale and that the memo of appeal submitted by the
petitioners before the Appellate Tribunal would reflect a
consciousness of this position. Consequently, Counsel
appearing on behalf of the Second respondent submitted that
the damages have been quantified in accordance with the
schedule indicated in Regulation 32-A and the maximum rate
at which damages have been levied is 37% per annum on the
arrears, for a delay in excess of six months. Unfortunately,
nothing that is stated at the Bar on behalf of the Second
respondent would appear ex facie from a reading of the
impugned order. The Supreme Court has held in its decision
in Organo Chemical Industries that the power under section
14-B is quasi-judicial in nature and one of the safeguards
against an arbitrary exercise of powers is the recording of
reasons which would establish the basis or foundation of the
determination. That unfortunately is not readily apparent from
a perusal of the manner in which damages have been
computed in the present case under section 14-B of the Act.
The order passed by the Regional Provident Fund
Commissioner in the companion Writ Petition (Writ Petition
910 of 2004) on 10th December, 2003 in fact postulates that
the statutory provisions do not permit the Regional Provident
Fund Commissioner to waive, reduce or condone the levy of
interest and penal damages under sections 7-Q and 14-B
respectively of the Act. This statement of law, in so far as
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section 7-Q is concerned is unexceptionable. But the
Regional Provident Fund Commissioner has misapplied
himself in holding that he had no power to reduce or condone
the damages imposed under section 14-B. The power under
section 14-B is coupled with a discretion and that discretion
itself indicates that the power has to be exercised in an
appropriate case.”
30.A learned Judge of the Kerala High Court in Indian Telephone
Industries Ltd v. Assistant Provident Fund Commissioner, 2006 SCC
OnLine Ker 726, had an occasion to consider the writ petition filed by the
petitioner company challenging the imposition of damages under Section
14-B. The facts of the case would show that the petitioner company was
making profits till 1995, but started accumulating losses and hence the
company made a reference to Board of Industrial and Financial
Reconstruction (BIFR) under Section 15 of the Sick Industrial Companies
(Special Provisions) Act, 1985. Due to financial crisis faced by company,
there was delay in payment of contributions. An amount of Rs.3,85,485/-
was imposed as damages for delayed payment of employees' provident fund
contributions. After taking note of the provision of Section 7-Q for
collecting interest for any delayed payment and the judgment of the Hon'ble
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Supreme Court in Organo Chemical case, the learned Judge came to the
conclusion that Section 14-B of the Act is purely punitive in nature and
hence damages under Section 14-B of the Act should be strictly in
accordance with the principles for imposing penalty which is quasi-criminal
proceedings. The learned single Judge made the following observations:-
“23. In this connection, I have to dispose of the contention of
the counsel for the 1 st respondent that in view of the words
“as may be specified in the Scheme” now occurring in Section
14-B and the new clause 32-A of the Employees Provident
Funds Scheme, the 1 st respondent has no discretion in the
matter except to apply the formula in clause 32-A for
quantification of damages also. I think that this is a myopic
view of the said provisions. If, while deciding the quantum of
damages under Section 14-B the reasons for the delay has to
be taken into account, then the damages cannot be as per any
strait-jacketed formula. At the best, clause 32-A would only
serve as a guideline. In fact, the words used in clause 32-A is
that “may recover from the employer by way of penalty
damages at the rates given below”, which would also suggest
that the same is intended as a guideline. Here, it may work the
other way also. The clause takes into account only the period
of delay, but does not take into account the number of delays,
which also may be a factor in favour of imposition of higher
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damages. Further, when Section 14-B envisages a maximum
damages equal to the amount of arrears, the maximum
envisaged by clause 32-A is only 37%. Therefore, Clause 37-
A is purely in the nature of guidelines and not a structured
formula of invariable application in all circumstances without
reference to the reasons for delay.
24. I am of opinion that merely because there is belated
payment of contributions, liability to pay damages does not
automatically arise, but the same shall be decided by applying
mind to the merits of each case and not by resorting to mere
arithmetic calculation of damages. Even though liability to pay
contributions is statutory, to hold that delay automatically
attracts damages would be too rigid a way of construing the
Section, especially since the imposition of damages is punitive
in nature. There must be application of mind taking into
account the reasons for delay and whether the delay could
have been avoided by ordinary diligence by the employer. For
this, one cannot with any amount of certainty say what are the
circumstances which would mitigate the damages and which
would not. The same would differ from case to case, which
requires exercise of judicial discretion by the authority
imposing damages by application of mind to the circumstances
pleaded and proved by the defaulting employer.”
While remitting the matter, the following directions were issued:
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“32. For the foregoing reasons, I set aside the impugned orders
and issue the following directions:
The 1st respondent shall reconsider the question of imposition
of damages on the petitioner-Company for delay in payment of
contributions for the period from September, 2003 to October,
2004 afresh in accordance with the observations and findings
contained in this judgment, after affording an opportunity of
being heard to the petitioner and taking into account, inter
alia, the facts that the wages of the employees were not paid in
time, contributions were paid when wages were actually paid
and the petitioner-Company was registered as a sick industry
by BIFR and not merely adopting the structured formula in
clause 32-A of the Employees Provident Funds Scheme. If the
petitioner is still aggrieved by the fresh orders to be passed by
the 1 st respondent in the matter of imposition of damages
under Section 14-B, it would be open to the petitioner to file
an application under the second proviso to Section 14-B of the
Act before the Board of Trustees, in which event, the 5th
respondent shall place the same before the Board of Trustees
who shall consider the same in accordance with law and the
observations contained in this judgment. I make it clear that
this would be without prejudice to the right of the petitioner to
file appeal before the Appellate Tribunal, if the petitioner so
wishes. The writ petition is disposed of as above.”
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31.In Employees' State Insurance Corporation v. HMT Ltd and
another, (2008) 3 SCC 35, it has been held, in paragraph 21, as follows:-
“21. A penal provision should be construed strictly. Only
because a provision has been made for levy of penalty, the
same by itself would not lead to the conclusion that penalty
must be levied in all situations. Such an intention on the part
of the legislature is not decipherable from Section 85-B of the
Act. When a discretionary jurisdiction has been conferred on a
statutory authority to levy penal damages by reason of an
enabling provision, the same cannot be construed as
imperative. Even otherwise, an endeavour should be made to
construe such penal provisions as discretionary, unless the
statute is held to be mandatory in character.”
In Prestolite (India) Ltd., v. Regional Director, 1994 Supp (3) SCC 690, the
Hon'ble Supreme Cout has held as follows:-
“5.....Even if the regulations have prescribed general guidelines
and the upper limits at which the imposition of damages can be
made, it cannot be contended that in no case, the mitigating
circumstances can be taken into consideration by the
adjudicating authority in finally deciding the matter and it is
bound to act mechanically in applying the uppermost limit of
the table. In the instant case, it appears to us that the order has
been passed without indicating any reason whatsoever as to why
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grounds for delayed payment were not to be accepted. There is
no indication as to why the imposition of damages at the rate
specified in the order was required to be made. Simply because
the appellant did not appear in person and produce materials to
support the objections, the employee's case could not be
discarded in limine. On the contrary, the objection ought to have
been considered on merits. We, therefore, allow this appeal and
set aside the impugned orders. The Regional Director is directed
to dispose of the representation of the appellant by indicating
reasons after taking into consideration the grounds for delayed
payment. Since the matter is going to be reheard, the appellant
is permitted to make personal representation at the hearing of
the show-cause proceeding....”
32.In State of Himachal Pradesh v. Paras Ram and others, (2008)
3 SCC 655, the Hon'ble Supreme Court has considered the importance to
give reasons while passing orders as a quasi-judicial authority, in the
following lines:-
“6. Even in respect of administrative orders, Lord Denning,
M.R. in Breen v. Amalgamated Engg. Union [(1971) 2 QB 175
: (1971) 2 WLR 742 : (1971) 1 All ER 1148 (CA)] observed :
(All ER p. 1154h) ‘The giving of reasons is one of the
fundamentals of good administration.’ In Alexander
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Machinery (Dudley) Ltd. v. Crabtree [1974 ICR 120] it was
observed:‘Failure to give reasons amounts to denial of justice.
Reasons are live links between the mind of the decision-taker
to the controversy in question and the decision or conclusion
arrived at.’ Reasons substitute subjectivity by objectivity. The
emphasis on recording reasons is that if the decision reveals
the ‘inscrutable face of the sphinx’, it can, by its silence,
render it virtually impossible for the courts to perform their
appellate function or exercise the power of judicial review in
adjudging the validity of the decision. Right to reasons is an
indispensable part of a sound judicial system, reasons at least
sufficient to indicate an application of mind to the matter
before court. Another rationale is that the affected party can
know why the decision has gone against him. One of the
salutary requirements of natural justice is spelling out reasons
for the order made, in other words, a speaking-out. The
‘inscrutable face of a sphinx’ is ordinarily incongruous with a
judicial or quasi-judicial performance.”
33.In the case of Assistant Provident Fund Commissioner v. Hi-
tech Vocational Training Centre, in the order dated 21.09.2015 passed in
LPA No.629 of 2011, a Division Bench of the Delhi High Court interpreted
Section 14-B of the Act in a similar context with reference to the relevant
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regulations. It has been categorically held that Section 14-B read with Para
32A of the Employees' Provident Funds Scheme would show that the power
to impose penalty is discretionary and that the damages indicated in the
table in Para 32A fix only the upper limit and leave it to the discretion of
the authority to determine in each case whether or not damages have to be
levied and the quantum thereof. It is also held that the Commissioner has
power to waive or reduce penalty as per Para 32A of the Scheme. It is also
held as follows:-
“11......There is an element of a stick in the Section, but the
same must be yielded with care and caution. The stick
would be to penalize the employer so that he learns by
example and does not willfully default in future or adopt a
casual attitude. Persistent and repeat defaulters should be
dealt with sternly and visited with the maximum penalty.
First time defaulters deserve sympathy. These are some of
the indicative factors, not exhaustive, which must be kept in
mind while exercising the discretion.
13.It is trite that where a default by a party confers a
right upon another, it would be open to the said other
party to waive the breach. This would be when the
relationship is interpersonal and stems from either a
contract or a law. But where the power to levy
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damages are on account of a default in making the
contribution to a fund which is for the benefit of the
employees, the Commissioner would be nobody to
waive the default. Further, as we have noted
hereinabove what triggers Section 14B is the default
in the payment of the contribution to the fund, and
the default would be not making the contribution to
the fund by the 15th day of the ensuing wage month.
The statute nowhere contemplates that the default
must be in existence on the day when proceedings
under Section 14B are initiated. Thus, if there is a
default in making contribution to the fund,
notwithstanding belated contribution being made to
the fund, since the default has already taken place the
Commissioner would be within his power to initiate
proceedings under Section 14B....”
34.A Division Bench of this Court in Regional Provident Fund
Commissioner v. Sree Visalam Chit Funds Ltd., Palathur, 2010 (4) L.L.N.
706, following the judgment in Employee's State Insurance Corporation v.
HMT Ltd., (2008) 3 SCC 35, held as follows:-
“30. In our considered opinion, as we have already
concluded, unless it is established that such failure to pay the
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contribution was attributable to the mens rea or actus reus
on the part of the employer, question of levying damages
under S.14B of the Act does not arise. It has been repeatedly
held by the Hon'ble Supreme Court that simply because the
statutory provision enables an authority to impose penalty, it
does not mean that such penalty should be imposed in a
mechanical manner without looking into the attending
circumstances and the facts as to whether there was any
mens rea or actus reus on the part of the employer.”
35.This Court has already extracted the relevant portion of the
judgment of the Hon'ble Supreme Court in Hindustan Times Limited v.
Union of India and others, (1998) 2 SCC 242, where the Hon'ble Supreme
Court has summarised certain principles as to how the authority under
Section14-B of the Act has to apply his mind and to pass a reasoned order
after following the principles of natural justice. In every precedent where
Section 14-B is considered, this Court and the Hon'ble Supreme Court have
directed the authorities to apply their mind as to why the employer has
defaulted and to consider all mitigating circumstances.
36.In Radhanath Cooperative Press v. Regional Provident Fund
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Commissioner, (1998) III LLJ 1160 Orissa, a Division Bench of the Orissa
High Court held that the default in payment of contributions may not be
seriously viewed when the employer is a cooperative society and the
cooperative society was continuously in financial difficulty. There are
several precedents emphasising that the provident fund authority should
consider all the submissions made by the employer when there is an attempt
to make out a case that the default was not intentional or deliberate and that
the reasons should be assigned why the explanation offered by the employer
cannot be accepted. The authorities are expected to pass reasoned orders
and not an order in a mechanical fashion. Since the authority in exercise of
power under Section 14-B is not bound to impose penalty on every default,
he is required to consider all relevant facts to decide whether the employer
has committed willful default, even though it is obligatory upon every
employer to pay in the first instance both the employer and employee
contributions. Unless there is an element of willful negligence or the
employer is found guilty of diverting funds for investment in other business,
there cannot be a levy of penalty at the highest percentage as given in the
table under Para 32A of the Scheme.
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37.Again in the case of Hindustan Times Limited v. Union of
India and others, (1998) 2 SCC 242, the Hon'ble Supreme Court has held as
follows:-
“29. From the aforesaid decisions, the following principles can
be summarised:
The authority under Section 14-B has to apply his mind to the
facts of the case and the reply to the show-cause notice and pass
a reasoned order after following principles of natural justice and
giving a reasonable opportunity of being heard; the Regional
Provident Fund Commissioner usually takes into consideration
the number of defaults, the period of delay, the frequency of
default and the amounts involved; default on the part of the
employer based on plea of power-cut, financial problems
relating to other indebtedness or the delay in realisation of
amounts paid by the cheques or drafts, cannot be justifiable
grounds for the employer to escape liability; there is no period
of limitation prescribed by the legislature for initiating action
for recovery of damages under Section 14-B. The fact that
proceedings are initiated or demand for damages is made after
several years cannot by itself be a ground for drawing an
inference of waiver or that the employer was lulled into a belief
that no proceedings under Section 14-B would be taken; mere
delay in initiating action under Section 14-B cannot amount to
prejudice inasmuch as the delay on the part of the Department,
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would have only allowed the employer to use the monies for his
own purposes or for his business especially when there is no
additional provision for charging interest. However, the
employer can claim prejudice if there is proof that between the
period of default and the date of initiation of action under
Section 14-B, he has changed his position to his detriment to
such an extent that if the recovery is made after a large number
of years, the prejudice to him is of an “irretrievable” nature; he
might also claim prejudice upon proof of loss of all the relevant
records and/or non-availability of the personnel who were,
several years back in charge of these payments and provided he
further establishes that there is no other way he can reconstruct
the record or produce evidence; or there are other similar
grounds which could lead to “irretrievable” prejudice; further,
in such cases of “irretrievable” prejudice, the defaulter must
take the necessary pleas in defence in the reply to the show-
cause notice and must satisfy the authority concerned with
acceptable material; if those pleas are rejected, he cannot raise
them in the High Court unless there is a clear pleading in the
writ petition to that effect.”
38.In Para 32-B of the Employee's Provident Funds Scheme,
1952, the Central Board has authorised to reduce or waive damages. In
respect of sick companies, 100% of the damages can be waived. Similarly,
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waiver of damages upto 100% can be allowed as per the recommendations
of the Board of Industrial and Financial Reconstruction (BIFR). There may
be situations and variety of reasons which would justify the non-payment of
contribution within the prescribed time by the employer. There cannot be a
discrimination between a sick company and sick industry which does not
fall under SICA. After the SARFAESI Act, to save the industry, an
employer may be forced to pay huge amounts by accepting OTS proposals.
There may be similar circumstances where the employer has no option but
to borrow money from private financiers. A decision of a private employer
to save the industry will instantly save the employment of seizable number
of employees. For variety of reasons, there may be default, despite an
employer has always been honest but unable to pay the Provident Fund
dues. There may be cases where the industrial operation is suspended
temporarily or permanently due to power cut or labour strike or other valid
reasons. In the absence of surplus funds available with the employer, it is
quite possible that an employer is put to helpless situations. Therefore,
there cannot be a straight jacket formula or a table which should be
prescribed for levying damages under Section 14-B of the Act.
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39.Therefore, following the principles reiterated by the Hon'ble
Supreme Court and different High Courts including our High Court in
similar circumstances, this Court hold that Section 14-B of the Act is an
enabling provision and it does not envisage any compulsion to levy
damages in all cases, and is inclined to frame the following guidelines:-
(i) Before levying damages in terms of Section 14-B of the Act, every
authority is required to follow principles of natural justice. The
particulars of the default, period, etc., and every adverse information
that may be relied upon for levying damages should be indicated or
furnished to the employer and a fair opportunity should be given to
the employer to put forth his case in defence to the proposed action.
(ii)The authority, while exercising power under Section 14-B, shall keep
in mind that the liability as per the table given in Para 32A of the
Scheme, should be treated as upper limit within which damages can
be levied for the delay in making contributions by the employer.
(iii) In appropriate cases where the employer is able to provide sufficient
reasons or cause justifying the delay with verifiable materials, the
authority is competent to waive or fix the quantum of damages less
than what is shown in the table under Para 32A of the Scheme.
(iv)When an employer is not in a position to make payment in order to
save the industry from closure or on account of protecting the
industry or establishment from being put to face proceedings under
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the SARFAESI Act or other inevitable circumstances which compels
the employer to divert the funds only to save the industry and the
employees, there cannot be a levy of damages.
(v) The authority under the Act has to consider all the mitigating
circumstances including financial difficulties projected by the
employer and pass a reasoned order.
(vi)When the employer is able to produce all the documents or verifiable
material within his reach to substantiate any mitigating circumstance,
the authority exercising power under Section 14-B has to pass orders
giving reasons, if he is unable to find truth or bona fides in the claim
of the employer.
(vii)There shall be proper application of mind objectively on the merits
of each case and in any case, the authority cannot resort to the
arithmetical calculation or for levying damages as per Para 32A of the
Scheme without considering the mitigating circumstances.
(viii)While assessing the quantum of damages, the past and present
conduct of the employer also should be taken note of. For example,
there can be levy of damages as per Para 32-A of EPF Scheme in
every case when the employer is a chronic defaulter despite having
surplus funds or found to have diverted funds.
(ix) There may be variety of circumstances to which the employer is put
to while managing an industrial establishment or a factory within the
purview of the Act. The proviso to Section 14-B gives a special
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power to the Board to waive damages when a rehabilitation scheme is
pending before the BIFR. There may be similar circumstances for the
employer of any industry to save the industry from the clutches of
private/public financial institutions and the employer might be facing
proceedings under the SARFAESI Act. Whenever the employer is
forced to make huge amounts by mobilizing funds from other
resources to save the industry from closure or to avoid similar
situations, such payment need not be considered as an act to avoid
payment of provident fund dues.
(x) The delay in payments by profit making establishments has to be
seriously viewed and every profit making employer is bound to pay
the provident fund contributions promptly, unless there are strong
reasons or circumstances that prevent the employer from making the
payment on the due dates. If there is an element of willful negligence
in payment of Provident Fund dues, the Assistant Provident Fund
Commissioner or the competent authority can levy damages
exercising his discretion.
(xi)Though mens rea is not an essential ingredient, there cannot be levy
of damages at the maximum limit merely because there is a default.
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Before levying damages, there must be definite finding or reason,
after considering the explanation or reasons given by the employer
for the delay in payment of dues and other mitigating circumstances.
The discretion vested with the Assistant Provident Fund
Commissioner or the competent authority shall be exercised
judiciously in tune with the settled principles of law and keeping in
mind the interest of the employees concerned.
40.Before deciding the individual cases, we would like to record
our appreciation for the valuable assistance rendered by Mr.M.E.Elango,
learned Advocate, who was appointed as Amicus Curiae to assist this Court.
W.P.(MD) No.7339 of 2013 :
41.W.P.(MD) No.7339 of 2013 has been filed by the employer,
challenging the order of the Appellate Tribunal/1 st respondent, reducing the
penalty levied by the 2nd respondent by 50%.
42.A sum of Rs.2,33,247/- has been levied as penalty by
calculating the amount at the rates specified under Para 32-A of the EPF
Scheme, 1952. The order of the 2nd respondent proceeds on the basis that
the writ petitioner has admitted the delay. The 2nd respondent, by impugned
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order dated 24.09.2010, has observed that the organization has lost heavily
by not getting the amount on due dates by way of unearned interest while
statutorily bound to pay interest to the poor workers from the due date itself.
It is not the case of the petitioner that he is not liable to pay interest for the
delay in payment and it is not the proceeding demanding interest for the
delayed payment that is challenged. There is total non-application of mind
while levying penalty as against the writ petitioner.
43.Though the petitioner has produced before this Court some
materials and has given the mitigating circumstances, this Court is not
inclined to deal with the same, as it would be appropriate to remit the matter
to the 2nd respondent for considering the issue afresh in the light of the
guidelines given by this Court in this order. The 1st respondent/Appellate
Tribunal, though observed that there is no finding by the 2nd respondent that
the petitioner had willfully and deliberately withheld the provident fund
contributions or that the petitioner had unlawfully diverted the funds
collected from the employees for his business use, reduced the quantum
only by 50% of the actual amount of damages levied by the 2nd respondent.
Though the order of the 2nd respondent cannot be sustained for non-
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application of mind, the Appellate Tribunal has reduced the amount by 50%
without assigning proper reasons.
44.In such circumstances, this Court is of the view that the matter
has to be remitted to the 2nd respondent for considering the matter afresh.
The petitioner is directed to submit his detailed objections and explanation
for the delay in payment of dues. It is open to the petitioner to produce all
the materials which have been filed before this Court in the typed set of
papers, to show that the petitioner was incurring heavy loss due to
continuous power cut for a long time and other mitigating circumstances.
45.The impugned order passed by the 1st respondent in A.T.A.No.
651 (13) 2010, dated 04.03.2013, and the order of the 2 nd respondent in
No.TN/RO/MDU/57204/RO/circle 4/PDC/LD/2010, dated 24.09.2010, are
set aside and the matter is remitted to the 2nd respondent for passing
orders afresh in the light of the guidelines issued by this Court in this
order. The 2nd respondent shall pass fresh orders after considering the
explanation offered by the petitioner within a period of 12 weeks from the
date of receipt of the representation/explanation to be submitted by the
petitioner within a period of two weeks from the date of receipt of a copy of
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this order. Accordingly, W.P.(MD) No.7339 of 2013 is allowed.
W.P.(MD) No.9688 of 2013 :
46.W.P.(MD) No.9688 of 2013 has been filed by the employer,
challenging the order of the Appellate Tribunal/1 st respondent, reducing the
penalty levied by the 2nd respondent by 50%, as well as the order of the 2nd
respondent, levying penalty.
47.The petitioner is a Cooperative Society. In response to the
show cause notice, the petitioner has given a reply indicating the loss
incurred by the Society over the years due to which the net worth of the
Society got eroded over a period of years. Several other reasons were also
given by the petitioner. However, the 2nd respondent has passed orders
mechanically imposing penalty. The 1st respondent, the Appellate Tribunal,
though recorded a finding that there is no enquiry nor finding of fact by the
2nd respondent before levying the maximum amount by way of damages, has
not considered the reasons or mitigating circumstances. Even before this
Court, it is not contended by the 2nd respondent that the explanation or the
mitigating circumstances pointed out by the writ petitioner are not proved.
This Court is of the view that the 2nd respondent ought not to have levied
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damages. There is no willful negligence or careless indifference in payment
of provident fund dues. However, the 1st respondent, after rendering a
finding in favour of the writ petitioner that the petitioner had not willfully
and deliberately withheld the provident fund contributions, has reduced the
damages only by 50% of the actual amount of damages levied by the 2nd
respondent. Though the appeal before the 1st respondent was allowed, relief
was partial and this Court finds that the petitioner is entitled to seek waiver.
Even though this Court can remit the matter once again to the 2nd respondent
for passing appropriate orders in the light of the directions of this Court,
having regard to the peculiar facts and circumstances and the petitioner
being a Cooperative Society in financial trouble, this Court is inclined to
allow this writ petition, holding that the petitioner is not a chronic defaulter
nor it had shown any willful negligence or indifference in paying the
provident fund dues. For the reasons stated by the petitioner in the
explanation offered to the show cause notice, this Court finds that the
liability in terms of Para 32-A of the Employees' Provident Funds Scheme,
1952, cannot be saddled on the petitioner.
48.Therefore, W.P.(MD) No.9688 of 2013 is allowed and the
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order of the 1st respondent/Appellate Tribunal in ATA No.751/(13)/2012,
dated 14.03.2013, and the order of the 2nd respondent in
No.TN/RO/MDU/24201/ RO/Circle M15/PDC/LD/20120, dated
18.07.2012, are hereby quashed.
W.P.(MD) Nos.2765 and 2782 of 2014 :
49.W.P.(MD) Nos.2765 and 2782 of 2014 have been filed by the
Assistant Provident Fund Commissioner, challenging the order passed by
the 1st respondent, namely the Appellate Tribunal, modifying the order of
the petitioner by reducing the quantum by way of damages at 5% p.a. with
effect from the passing of the impugned order.
50.Though several grounds are raised by the writ petitioner, the
Appellate Tribunal has given proper reasons in tune with the principles we
have reiterated earlier in this writ petition, placing reliance on the judgment
of the Hon'ble Supreme Court in Prestolite (India) Ltd., v. Regional
Director, 1994 Supp (3) SCC 690. The 1st respondent has categorically
given a finding that delayed payment of contribution in every case does not
invite levy of damages and that the writ petitioner, who is vested with the
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discretion under Section 14-B, has not considered and followed the
principles reiterated by Courts. Even though the Appellate Tribunal has
also relied upon various judgments including the judgment of the Hon'ble
Supreme Court in ESI Corporation v. HMT Ltd., case, (2008) 3 SCC 35,
this Court finds that the impugned order cannot be interfered with, as the
Appellate Tribunal has given reasons approved by this Court in this
judgment.
51.Therefore, this Court finds no merit in these two writ petitions.
Accordingly, W.P.(MD) Nos.2765 and 2782 of 2014 are dismissed. There
shall be no order as to cost in all the writ petitions.
[SSSRJ] [SSYJ] [RVJ]
03.06.2024
ss/mkn
Index : Yes / No
Neutral Citation : Yes / No
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W.P.(MD)Nos.7339 of 2013 etc.
To
1.The Presiding Officer
Employees' Provident Fund Appellate Tribunal
Core II, 4th Floor, Laxmi Nagar District Centre
Laxmi Nagar, Delhi 110 092.
2.The Assistant Provident Fund Commissioner
Employees' Provident Fund Organization
Regional Office
No.1, Lady Doak College Road
Chokkikulam, Madurai 625 002.
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S.S. SUNDAR, J.
S.SRIMATHY,J.
and
R.VIJAYAKUMAR, J.
ss/mkn
Judgment in
W.P.(MD) Nos.7339 of 2013 etc.
03.06.2024
https://www.mhc.tn.gov.in/judis
