ESI – The definition of ‘principal employer’ under Section 2(17) is wide and includes not only the owner or occupier of a factory (or head of department in government establishments) but also the managing agent or any person responsible for the supervision and control of the establishment — Designation is immaterial if the person functions as a managing agent or supervises/controls the establishment

2025 INSC 500

SUPREME COURT OF INDIA

DIVISION BENCH

AJAY RAJ SHETTY

Vs.

DIRECTOR AND ANOTHER

( Before : Sudhanshu Dhulia and Ahsanuddin Amanullah, JJ. )

Criminal Appeal No. ….of 2025 [@ Special Leave Petition (Criminal) No. 3743 of 2024]

Decided on : 17-04-2025

A. Employees’ State Insurance Act, 1948 — Section 2(17) — ‘Principal Employer’ — Scope and Determination — The definition of ‘principal employer’ under Section 2(17) is wide and includes not only the owner or occupier of a factory (or head of department in government establishments) but also the managing agent or any person responsible for the supervision and control of the establishment — Designation is immaterial if the person functions as a managing agent or supervises/controls the establishment — Where concurrent findings of fact by the Trial Court, First Appellate Court, and High Court, based on company records (which were not controverted by the appellant with evidence like appointment letter/payslips), established that the appellant was functioning as General Manager/Principal Employer/Managing Agent, he falls within the ambit of S. 2(17) and is liable for offences under the Act. [Paras 6, 10, 18, 19, 20] (Distinguished: Employees’ State Insurance Corpn., Chandigarh v Gurdial Singh, AIR 1991 SC 1741; J K Industries Limited v Chief Inspector of Factories and Boilers, (1996) 6 SCC 665)

B. Employees’ State Insurance Act, 1948 — Sections 85(a) & 85(i) — Offence of Non-Remittance of Contributions — Sentence — Non-remittance of ESI contributions deducted from employees’ salaries constitutes an offence under S. 85(a) — The punishment for such failure, specifically regarding employees’ contributions, falls under S. 85(i)(a), which prescribes a minimum imprisonment of one year and a fine of Rs. 10,000 — Where the Trial Court imposed a lesser sentence (six months imprisonment and Rs. 5000 fine) presumably under S. 85(i)(b) (which applies to ‘any other case’ of non-payment), the High Court’s decision not to interfere with this lesser sentence does not vitiate the conviction itself, especially when the fact of deduction and non-remittance is established. [Paras 4, 5, 6, 23]

C. Employees’ State Insurance Act, 1948 — Section 85(i) Proviso — Discretion in Sentencing — Scope Limited to Imprisonment Term — The proviso to Section 85(i) grants discretion to the court, for adequate and special reasons, to impose a sentence of imprisonment for a term lesser than the minimum prescribed (one year under clause (a) or six months under clause (b)) — However, this discretion is confined only to the term of imprisonment and does not extend to reducing the mandatory minimum fine (Rs. 10,000 under clause (a) or Rs. 5,000 under clause (b)). Once the offence is established, the minimum fine prescribed must be imposed. [Paras 12, 24, 25] (Relied on: ESI Corpn. v A K Abdul Samad, (2016) 4 SCC 785)

D. Employees’ State Insurance Act, 1948 — Section 85 — Prosecution vs. Recovery of Damages — Effect of Company Sickness (SICA) — While Regulation 31C of the Employees’ State Insurance (General) Regulations, 1950 provides for recovery of damages for delayed payment and grants discretion to ESIC to waive/reduce damages, especially for sick companies (under the then-applicable SICA, 1986 framework), this pertains to civil liability for damages — It does not bar criminal prosecution under Section 85 of the Act for the distinct offence of failing to pay contributions, even if the company was declared sick. [Paras 3, 4, 11, 14, 15] (Relied on implicitly: Pentafour Products Ltd. v. Union of India, 2005 SCC Online Mad 841)

Counsel for Appearing Parties

Mr. Shankar Divate, Advocate, for the Appellant; Mr. Manish Kumar Saran, Advocate, Mr. Vipin Kumar, Advocate, Mr. Bharat Lal Soni, Advocate and Mr. Jitendra Kumar, Advocate, for the Respondent.

JUDGMENT

Ahsanuddin Amanullah, J. – Leave granted.

2. This appeal has been preferred by the Appellant against the Final Judgment and Order dated 08.12.2023 (hereinafter referred to as the ‘Impugned Order’) passed by the High Court of Karnataka at Bengaluru (hereinafter referred to as the ‘High Court’), by which Criminal Revision Petition No.164 of 2015 filed by the Appellant and Respondent No.2 has been dismissed.

BRIEF FACTS:

3. M/s Electriex (India) Limited (hereinafter referred to as ‘Respondent No.2’ or ‘Company’) was declared as a sick industry by the Board for Industrial and Financial Reconstruction (hereinafter referred to as the ‘BIFR’) on 31.10.2001 in Case No.49/2000. On 24.09.2002, the BIFR ordered for a change in the management of Respondent No.2. Aggrieved by this Order, Respondent No.2 preferred Appeal No.340/2002 before the Appellate Authority for Industrial and Financial Reconstruction (hereinafter to referred to as the ‘AAIFR’). Such appeal was dismissed vide AAIFR’s Order dated 15.01.2003. Following this, Respondent No.2 filed Writ Petition No.20033/2003 before the High Court and it is relevant to note that the Employees’ State Insurance Corporation (hereinafter referred to as ‘ESIC’) was also a party to the said writ petition, wherein the High Court on 03.03.2008 remanded the matter back to the BIFR to consider the matter expeditiously keeping in view the interest of all the parties concerned and quashed the Orders of BIFR and AAIFR dated 24.09.2002 and 15.01.2003, respectively.

4. On 01.07.2010, BIFR directed the Company to negotiate with the secured creditors for settlement of their dues. On 01.02.2011, ESIC officials visited the factory premises of Respondent No.2 to ascertain and verify about its deductions towards the Employees’ State Insurance (hereinafter to referred to as ‘ESI’) contribution for the period from 01.02.2010 to 31.12.2010. Pursuant thereto, a Report was prepared which disclosed that even though deductions of Rs.8,26,696/- (Rupees Eight Lakhs Twenty-Six Thousand Six Hundred and Ninety-Six) from the wages of Respondent No.2’s employees were made for the above-mentioned period, the same was not deposited with the ESIC. In the Report, the authorized signatory of Respondent No.2 had mentioned the Appellant’s name as the ‘General Manager’ and ‘Principal Employer’ of the Company. On the basis of the Report, a private complaint was filed by the Respondent No.1 for offence(s) under Section 85(a)[1] of the Employees’ State Insurance Act, 1948 (hereinafter to referred to as the ‘Act’) against the Appellant and Respondent No.2 before the Special Court for Economic Offences, Bangalore (hereinafter referred to as the “Trial Court”) namely, CC No.326/2011 on 11.10.2011.

5. The Trial Court on 28.09.2013 convicted the Appellant under Section 85(i)(b) of the Act and sentenced him to undergo imprisonment for six months along with a fine of Rs.5000/- (Rupees Five Thousand). Aggrieved, the Appellant and Respondent No.2 filed Criminal Appeal No.553/2013, before the Principal City Civil and Sessions Judge, Bangalore which was subsequently transferred to the Fast Track Court VI, Bangalore (hereinafter referred to as the ‘First Appellate Court’). The First Appellate Court on 14.11.2014 upheld the order of conviction and sentence passed by the Trial Court and dismissed Criminal Appeal No.553/2013. Aggrieved by such Order of the First Appellate Court, the Appellant and Respondent No.2 filed Criminal Revision Petition No.164 of 2015 before the High Court.

6. The High Court by the Impugned Order dated 08.12.2023 dismissed the Revision Petition of the Appellant and Respondent No.2 on the ground that the evidence on record clearly established that the Appellant was General Manager and Principal Employer of Respondent No.2 and it was also established that a contribution of Rs.8,26,696/- (Rupees Eight Lakhs Twenty-Six Thousand Six Hundred and Ninety-Six) was deducted during the period 01.02.2010 to 31.12.2010 from the employees of Respondent No.2, but not remitted to the ESIC.

APPELLANT’S SUBMISSIONS:

7. The learned senior counsel for the Appellant submitted that the appointment of the appellant was in July, 2009, to the post of Technical Coordinator in Respondent No.2. This Court’s attention was also drawn to the fact that proceedings before the BIFR was instituted in 2001, long before the Appellant’s appointment and further that appointment order was not given as the Company was sick and salary was also not paid. It was also contended that the burden is on the prosecution to show that the Appellant was appointed as General Manager, which they have only done by referring to the Report produced by the ESIC. The Report also cannot be relied upon as the official who prepared it was not brought before the Court for the Appellant to cross-examine him.

8. It was further submitted that the prosecution lodging case against the Appellant for contravening Section 85(a) of the Act is erroneous as there is no such averment, either in the complaint or in the evidence that it was the Appellant who had deducted the contribution from the wages of the employees and had failed to deposit the same with Respondent No.1. The other fact pointed out by the Appellant was that under Regulation 10-C[2] of the Employees’ State Insurance (General) Regulations, 1950 (hereinafter referred to as the ‘Regulations’), the Principal Employer is required to submit Form 01(A) to the ESIC, but the same was not produced.

9. Learned senior counsel submitted that the Appellant paid the entire dues to the Respondent No.1 after the Impugned Order and at the time of filing Petition for Special Leave to Appeal before this Court, hence prayed for his acquittal.

10. With regard to his designation, it is pointed out that in the counter-affidavit of the Respondent No.2 filed before this Court, Paragraph 5 explicitly provides that the Appellant was working only as a ‘Technical Coordinator’ in the Company and one Mr. Ajit Hegde was the Principal Employer of Respondent No.2 at the relevant time.

11. The Appellant raised another leg of argument by contending that the guilt of the accused has to be kept in mind while imposing liability under the Act. It was submitted that the Act essentially criminalizes a civil wrong. This is evident by perusing Regulation 31C[3] of the Regulations, wherein it is provided that the ESIC has the power to recover unpaid contributions from the defaulting employer by way of a penalty and it is at the discretion of the ESIC to either waive off such damages or to reduce the same by up to 50%. This is contingent on the Company being declared as a ‘sick company’, which Respondent No.2 was in this case. Therefore, ESIC ought to have adopted a more liberal approach instead of pressing for criminal prosecution.

12. Learned senior counsel summed up his argument stating that, if at all the appellant is to be convicted, it can be for a day till the rising of the Court. He relied on the judgment of this Court in ESI Corpn. v A K Abdul Samad, (2016) 4 SCC 785.

SUBMISSIONS BY RESPONDENT NO.1:

13. Learned counsel for Respondent No.1 submitted that the Appellant had a chance to produce documents to show that he was only a ‘Technical Coordinator’. Furthermore, the High Court made an observation that the Appellant also had an opportunity to produce wage-slips or pay-slips to show his status, and the same was not done. The Appellant also made no efforts to summon any relevant documents from Respondent No.2.

14. The learned counsel for ESIC also drew the Court’s attention to a judgment of the Madras High Court in Pentafour Products Ltd. v. Union of India, 2005 SCC Online Mad 841, wherein the issue pertained to the applicability of Section 138 of the Negotiable Instruments Act, 1881 vis-a-vis Sections 22(1)[4] and 22A[5] of the Sick Industrial Companies (Special Provisions) Act, 1986. The Madras High Court ruled that an order declaring a company sick under the Sick Industrial Companies (Special Provisions) Act, 1986 did not prohibit criminal proceedings against such company, under Sections 22(1) or 22A thereof.

15. It was submitted by learned counsel that the High Court observed that despite there being sufficient evidence against the Appellant, he was convicted under Section 85(i)(b) of the Act and not under Section 85(i)(a) of the Act, thereby giving him a lesser sentence. In this backdrop, he sought dismissal of the appeal.

SUBMISSIONS BY RESPONDENT NO.2:

16. Learned counsel for Respondent No.2 submitted that the Appellant after completing Engineering course without any industrial experience joined as ‘Technical Coordinator’ in the Company in July, 2009. He worked from July, 2009 to April, 2011 with the Company. He was only a Technical Coordinator and never acted as Principal Employer nor as General Manager.

17. Learned counsel also submitted that one of the promoters of the Company is the Principal Employer, namely Mr. Ajit Hegde. It was further submitted that the Appellant cleared the balance amount of Rs. 6,86,696/- (Rupees Six Lakhs Eighty-Six Thousand Six Hundred and Ninety-Six) of ESIC dues on 22.12.2023, though he was not the Principal Employer or General Manager of Respondent No.2 and counsel submitted that after the BIFR was dissolved by the Central Government (in 2016), the Company cleared the Provident Fund Account dues and made a one-time full and final settlement with all its employees.

ANALYSIS, REASONING AND CONCLUSION:

18. The basic point canvassed by the Appellant is that he neither held the post of General Manager nor was he the ‘Principal Employer’ during the relevant period. The submission urged was that the liability was on the Company for making payments to the ESIC, therefore, he could not be charged, much less convicted, for an offence under the Act.

19. The Trial Court, the First Appellate Court as well as the High Court have returned concurrent findings of fact that the Appellant was liable, as in the record of Respondent No.2/Company he was described as General Manager, which could not be controverted by him. Further, there is also a finding that except for a stand taken before the authorities/Court, the Appellant was not able to show that he was not holding such a post or was not designated as General Manager, on the basis of his appointment letter, pay-slips etc. Moreover, the Appellant who, be it noted, does not deny that he was under the employment of Respondent No.2/Company has not disclosed as to who was/were the person(s) holding such positions during the relevant period of time, about which he could not have been ignorant. Section 2(17) of the Act, which defines ‘principal employer’, reads as under:

20. From the above, it is clear that the definition also includes a ‘managing agent’ of the Owner/Occupier in the case of a factory or ‘named as the manager of the factory under the Factories Act, 1948’ (hereinafter referred to as the “Factories Act”) and for ‘any other establishment’, ‘principal employer’ would include ‘any person responsible for the supervision and control of the establishment’. Therefore, designation of a person can be immaterial if such person otherwise is an agent of the Owner/Occupier or supervises and controls the establishment in question. From the materials available on record, we find that the Appellant falls within the ambit of Section 2(17) of the Act, being a ‘managing agent’.

21. Before the High Court, two decisions were relied upon by the Appellant viz. Employees’ State Insurance Corpn., Chandigarh v Gurdial Singh, AIR 1991 SC 1741 and J K Industries Limited v Chief Inspector of Factories and Boilers, (1996) 6 SCC 665. In our view, these are clearly distinguishable. In Gurdial Singh (supra), it was held that when a factory had an Occupier, who would fall within Section 2(17)(i) of the Act, the Directors of the company concerned could not be roped in by resorting to Section 2(17)(iii) of the Act, which was in the nature of a residuary clause. It was laid down that in the absence of factual proof and of actual position, Directors could not be treated as owners ipso facto. While holding that the High Court therein was right in affixing liability on the company, in the event of an ‘occupier’, the occupier was liable to meet the demand, despite some other person being named as a ‘manager’. To our mind, J K Industries Limited (supra) operates in a different field i.e., in the context of liability under the Factories Act and the interpretation accorded to, on whom liability falls on under the Factories Act, cannot be simpliciter accorded also to liability under the Act, as the Act has specific provisions thereon. Ultimately, the Court concluded:

22. Therefore, J K Industries Limited (supra) dealt only with the Factories Act and do not aid the Appellant in the instant context.

23. Further, the High Court rightly indicated that non-remittance of the contribution deducted from the salary of an employee to the ESIC is a offence under Section 85(a) of the Act and punishable under Section 85(i)(a) of the Act but the Trial Court had imposed a lesser sentence as provided under Section 85(i)(b) of the Act. This is clearly borne out by Section 85(i)(a) of the Act which provides for a sentence of not less than one year imprisonment and fine of Rs.10,000/- (Rupees Ten Thousand), since the amount had been deducted from the salaries of the employees and not paid, which is the fact in the present case, whereas under Section 85(i)(b) of the Act, sentence of imprisonment is not less than six months and with fine of Rs.5,000/- (Rupees Five Thousand) in other cases. Of course, the Trial Court could have given a lesser sentence even for an offence under Section 85(i)(a) of the Act under the proviso to Section 85(i) of the Act. Overall, the High Court did not feel the necessity to interfere in the lesser sentence awarded by the Trial Court. Thus, we find that the conviction and the sentence does not require any interference, much less in the present case, where despite contributions having been deducted from the employees’ salaries, they were not deposited with the ESIC.

24. In A K Abdul Samad (supra), the question before the Court was as to whether discretion had been granted only to reduce the sentence of imprisonment for a term lesser than six months or whether it encompassed discretion to levy no fine or a fine of less than five thousand rupees. Answering the said question, the Court held:

25. The decision in A K Abdul Samad (supra), thus, is of no help to the Appellant. While the fine awarded and affirmed by the Courts below is upheld, we are not convinced to substitute the term of imprisonment to be operative only for a day till the rising of the Court

26. Accordingly, the appeal, being devoid of merit, stands dismissed. The Appellant is directed to undergo the sentence after setting off the period already undergone, if any and pay the fine, if not already paid, as awarded by the Trial Court. The exemption from surrendering granted by order dated 18.03.2024 stands withdrawn. The appellant shall surrender before the Trial Court within two weeks from today.

27. Registry is directed to send a copy of this order to the Trial Court.

28. No order as to costs.

29. I.A. No.20317/2024 is allowed.

30. I.A. No.20329/2024 is disposed of.