judgement:
Appeal No. 572 & 591 of 1980.
From the Judgment and Order dated 7.11.79 of the Orissa High Court in Misc.
92 of 1979.
G.L. Sanghi, Harish N. Salve, section Khaitan and Darshan Singh for the Appellant in CA.
No. 572/80 and Respondent in CA.
No. 571/80.
B.M. Patnaik, R.K. Mehta and Ms. Mona Chakraborty for the Respondent in CA.
No. 572/80 and for the Appellant in CA.
No. 571/80.
The Judgment of the Court was delivered by BHARUCHA, J.
These are cross appeals and they can be disposed of by a common judgment.
The Industrial Development Corporation of Orissa Ltd. (IDCO)) is the appellant in Civil Appeal No. 571 of 1980 and Jajodia (Overseas) Private Ltd. (JOPL) is the appellant in Civil Appeal No. 572 of 1980.
232 IDCO and JOPL entered into an agreement whereunder IDCO agreed to supply to JOPL 5000 tons of M.S. Rounds for export on the terms and conditions mentioned therein.
The goods were not supplied.
By a letter dated 12th September, 1969, IDCO cancelled the agreement and intimated to JOPL that its offer, which had culminated in the agreement, should be treated as withdrawn.
There was some correspondence between the parties.
Thereafter the claim against IDCO for damages for breach of contract made by JOPL was referred to the Chief Secretary to the Government of Orissa, the arbitrator named in the agreement, for 'adjudication.
The Chief Secretary declined to act as arbitrator '.
Thereupon JOPL filed a suit under Section 20 of the , in the Calcutta High Court praying that the agreement be taken on file and the dispute between JOPL and IDCO be referred to an arbitrator to be nominated by the court.
That plaint was returned to JOPL to be presented before the proper court.
It was presented in the court of the Subordinate judge, Bhubaneswar.
On 4th April, 1973, the learned Subordinate Judge appointed Mr. B. Mohapatra, a retired Judge of the Patna High Court "to act as the arbitrator to give his award on the disputes between the parties as enumerated in their respective pleadings and the order of this court.
Reference he made to him requesting him to make the award by 30th June, 1974.
Copy of the plaint, written statement and the order of this court be sent to the arbitrator.
" The arbitrator entered upon the reference and, after hearing parties and considering the material placed upon the record before him, gave an award on 24th September, 1985.
In the Preamble to the award the arbitrator set out briefly some of the facts aforementioned.
The arbitrator stated that issues had been settled for adjudication and that the parties produced a large number of documents, examined witnesses and advanced elaborate arguments.
The arbitrator, having given careful consideration to all the written statements, documents and evidence and the arguments, set out the conclusions to which he had come upon the issues raised.
He concluded: " In the result, my award is that Jajodia Overseas Pvt. Ltd. is entitled to recover from the Industrial Development Corporation of Orissa Rs. 11,00,344 only (eleven lakhs three hundred forty four) with pendente lite interest at the rate of 6 per cent per annum from 28th April, 1974 to the date of award (24th September, 1975)".
233 The award was challenged by IDCO before the Subordinate Judge, Bhubaneshwar.
JOPL supported the award and prayed that it be made a rule of the court with future interest.
The learned Subordinate Judge dismissed IDCO 's petition and made the award a rule of the court ordering that JOPL was entitled to future interest at the rate of 6 per cent per annum.
The judgment and order, of the learned Subordinate Judge was impugned before the Orissa High Court.
The learned Single Judge who heard the appeal rejected all contentions raised on behalf of IDCO except one: be found that in answering three issues the arbitrator had arrived at inconsistent conclusions which had a bearing on the question whether or not damages should be awarded.
The inconsistency was not a trifling or inconsequential matter and, being apparent on the face of the award, the learned Judge held that the arbitrator had been guilty of legal misconduct so that the award was set aside.
The learned Judge directed that the records pertaining to the arbitration proceeding be sent back to the arbitrator, who was directed to give a fresh award, after giving an opportunity of hearning to both parties, keeping in view the findings and observations made in the judgment.
Against the judgment and order of the Orissa High Court, both JOPL and IDCO are in appeal.
JOPL contends that there is no inconsistency upon the face of the award which vitiates it.
On behalf of IDCO it is contended that the award is bad and that, in any event the High Court was in error in sending the matter back to the arbitrator for making a fresh award.
It was submitted by Mr. B.M. Patnaik, learned counsel for IDCO, that (i) No disputes which were referred to the Chief Secretary by JOPL and which were contained in the plaint and the written statement before the Subordinate Judge, Bhubaneshwar, and were referred by the said Subordinate Judge to the arbitrator were considered by the arbitrator because these documents were not mentioned in the award.
Consequently, the arbitrator had acted without jurisdiction.
(ii) That the award of damages was based on no evidence or material.
234 (iii) The answer by the arbitrator to issue No. 2, set out in the award, showed that the arbitrator had construed the agreement between the parties.
As such, the agreement was incorporated in the award and it was, therefore, open to the court to see if the arbitrator had in any wise misconstrued the agreement.
(iv) The arbitrator had referred to the statement of claim and the counter filed before him and had given findings.
As suck the statement of claim and the counter was incorporated in the award so that the whole matter was open before the court.
(v) The award was a speaking award inasmuch as the answers to the issues were the reasons for the award.
(vi)There were inconsistencies in the answers to the issues and the arbitrator had, therefore, misconducted the proceedings.
(vii)In any event, if at all the matter had to go back, it should not go back to the arbitrator but to the arbitral tribunal now constituted in the State of Orissa.
It is, we think, necessary, first, to clear some cobwebs.
A speaking or reasoned award is one which discusses or sets out the reasons which led the arbitrator to make the award.
Setting out the conclusions upon the question or issues that arise in the arbitration proceedings without discussing the reasons for coming to these conclusions does not make an award a reasoned or speaking award.
The arbitrator has in the award before us only answered the issues that were framed.
He has not discussed or set out the reasons for the answers.
The award is, therefore, not a speaking or reasoned award.
That the arbitrator merely referred to the pleadings filed before him does not mean that the pleadings are incorporated in the award.
As was aid in the context of a contract in a passage, quoted by this Court with approval in Allen Berry and Co. vs Union of India ; , from he judgment of Diplock, LJ.
in Ciacomo Costa Fu Andrea vs British Italian Co. Ltd., : "It seems to me, therefore, that, on the cases, there is none which compels us to hold that a mere reference to the contract in the award entitles us to look at the contract.
It may be that 235 in particular cases a specific reference to a particular clause of a contract may incorporate the contract, or that clause of it, in the award.
I think that we are driven back to first principles in this matter, namely, that an award can only be set aside for error which is on its face.
It is true that an award can incorporate another document so as to entitle one to read that document as part of the award and, by the reading them together, find an error on the face of the award." "9.
The question whether a contract or a clause of it is incorporated in the award is a question of construction of the award.
The test is, does the arbitrator come to a finding on the wording of the contract.
If he does, he can be said to have impliedly incorporated the contract or a clause in it whichever be the case.
But a mere general reference to the contract in the award is not to be held as incorporating it.
" The arbitrator merely referred to the fact that parties had "filed their statements" before him and that he had given "careful consideration to all the written statements, documents and evidence and the arguments".
This is not such a reference as can be said to incorporate the pleadings before him in the award.
Reference was made to issue No.2 and its answer and it was contended that the arbitrator had thereby made a specific reference to the agreement and it must, therefore, be held that the agreement was incorporated in the award.
Issue No. 2 and the answer to it read thus: "Issue Was the said agreement a commission agency or export agency agreement.
Answer The agreement was not a commission agency or export agreement.
" In the first place, the pleadings before the Subordinate Judge, Bhubaneshwar and the order of reference made by him are not placed by IDCO before us.
If it was IDCO 's case that no issue of law had specifically been referred to the arbitrator, it was its obligation so to show.
But we shall proceed on the basis that a specific question of law was not referred.
The submission on IDCO 's behalf was that the arbitrator misconstrued the 236 agreement and, therefore, the court was entitled to look into the agreement and determine whether the award was correct.
We do not think that this broad submission is correct.
It would appear that the arbitrator construed only such clause of the agreement as was relevant to decide whether the agreement was, as contended by IDCO, a commission or export agency agreement.
Such clause alone would be incorporated in the award and could be looked at by the court to determine whether the arbitrator misconstrued it.
We cannot accede to the submission that, by reason of the answer to issue No. 2, the entire agreement became incorporated in the award and that it was, therefore, open to the court to look into the entirety of the dispute in the arbitration proceedings and determine whether the award was correct.
Even assuming the incorporation of the agreement, an error apparent upon the face of the award had to be shown.
We may refer with advantage to this court 's judgment in Bungo Steel Furniture Pvt. Ltd. vs Union of India, ; The court quoted the well known passage from the judgment of Lord Dunedin in Champasey Bhara and Company vs Jivraj Balloo Spinning and Weaving Company Ltd., 50 I.A. 324, thus: "An error in law on the face of the award means, in their Lordships ' view, that you can find in the award or a document actually incorporated thereto, a:; for instance a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.
It does not mean that in narrative a reference is made to a contention of one party, that opens the door to seeing first what that contention is, and then going to the contract on which the parties ' rights depend to see if that contention is sound.
" It went on to observe: 'An award may be set aside by the court on the ground of an error of law apparent on the face of the award but an award is not invalid merely because by a process of inference and argument it may be demonstrated that the arbitrator has committed some mistake in arriving at his conclusion.
" 237 It was argued on behalf of IDCO before the High Court that the pleadings before the Subordinate Judge, Bhubneshwar and the order of reference to the arbitrator made by him were not before the arbitrator and that, therefore, the arbitrator had acted without jurisdiction.
The High Court rejected that contention and made reference to the order of the Subordinate Judge, which we have quoted above, which showed that if directed that the copy of the pleadings and of itself should be sent by,.
the Court to the arbitrator.
Before us it was submitted that these pleadings and order had not been considered by the arbitrator, because he had not mentioned them in the award.
Issues were framed by the arbitrator, obviously in consultation with the parties and arising upon the pleadings.
There were several hearings.
It is, in these circumstances, inconceivable that the issues would not have reflected the referred dispute between the parties.
It is also significant that the pleadings before the Subordinate Judge, Bhubaneshwar, and the statement of claim and the counter filed before the arbitrator were not produced before us by IDCO so that we could determine whether the statement of claim filed by JOPL before the arbitrator raised claims different from those contained in the pleadings before the Subordinate Judge, Bhubaneshwar.
It was submitted that the award of damages was based on no evidence or material.
The submission was based on the finding that the originals of the foreign sale contracts entered into by JOPL in respect of the goods under the agreement had not been sent to IDCO.
That these original agreements had not been sent does not ipso facto lead to the conclusion that the arbitrator had no material before him upon which he could find that JOPL had suffered damage and assess the same in monetary terms.
This brings us to the question of the inconsistencies found by the High Court upon the face of the award.
The issues and the answers to which the High Court referred are issue Nos. 6, 7(b) and 9(a).
In our view, it is necessary to reproduce the issue nos.
6, 7, 9, and 10 and their answers in extenso.
"Issues 6.
Did the claimant fulfil their obligations under the terms and conditions of the agreement.
Answers JOPL fulfilled their obligations under the agreement in question.
38 7.(a) Did the respondent ac IDC accepted or affirmed or affirm the claimant 's the JOPL 's order for supply order for supply of 4000 ton of 4000 tonnes.
as mentioned nnes as mentioned in para 4 of the statement of the claim ? (b) Did the claimant send JOPL did not send the original the foreign sale contracts foreign sale contracts to originalnal foreign sale I.D.C. contractsto the respondent.
9.(a) Were the acts mentioned The agreement provided inpara 10 of the counter state for JOPL sending the orig ment covered by the agreement nal foreign sale contracts to the respondent at a certain stage.
Reference to para 10 of the counter statement IDC.
(b) Were the acts mentioned in The agreement provided para 11 of the counter state that JOPL would arrange ment covered by the agree for export license, (Refer ment.
ence to para 11 of the counter statement of IDC.
(c) Were the acts mentioned The agreement provided that in para 12 of the counter JOPL would procure orders statement covered by the for export of 5000 metric agreeement?(JOPL) tonnes of MS rounds within 3 months from the date of acceptance of the IDC 's offer and they would follow up th indents placed by the respondent(IDC) for supply of billets and arrange for export licences, letter of authorisation from the Iron the Iron and Steel Controller in time (Ref.
to para 12 of counter statement of IDC).
239 (d) Were the acts mentioned in The 'acts ' mentioned in para 13 of the counter state para 13 of the counter ment covered by the statement by IDC are cov agreement.
red by the previous three paragraphs(10, 11 and 12) of that statement and they have been already dealt/with under sub issues.
(a),(b) above.
If so, did the party concer The party concerned that ned perform such Acts? is the JOPL performed their part of the work as was necessary under the agreement at relevant stage.
Was the respondent jus IDC was not justified in tified in cancelling the cancelling the agreement".
agreement? It will be seen that the award says that the agreement provided for JOPL sending the original foreign sale contracts to the respondent at a certain stage.
" It also says that "JOPL fulfilled their obligations under the agreement in question" and that "JOPL performed their part of the work as was necessary under the Agreement at relevant Stage" On the other hand, it says that 'JOPL did not send the original foreign sale contracts to I.D.C. ' The award then finds that "IDC was not justified in cancelling the agreement".
(Emphasis supplied).
Reading these issues and answers together and harmoniously, it is apparent that the agreement provided that JOPL should send to IDCO the original foreign sale contracts at a certain point of time and that it is found that JOPL had not sent the original foreign sale contracts to IDCO.
It is also apparent that it is found that at the point of time at which IDCO purported to cancel the agreement, JOPL had performed all its obligations under the agreement.
The conclusion is, there fore, that upto that point of time JOPL had not been obliged to send the foreign sale contracts to IDCO.
So read, in our view, there are no inconsistencies upon the face of the award as can be characterised as errors that vitiate the award.
An award has to be read as a whole and harmoniously.
The grounds upon which an award can be set aside are limited.
The court 240 should be very circumspect about setting aside an award reached by an arbitrator for parties have agreed that the disputes that may arise or have arisen between them should be resolved not by a court of law but by arbitration.
Mr. Patnaik pointed out that the Orissa High Court had recognised that 'the malady of the racket of arbitration" affected its State of Orissa vs Gangaram ahapolia, and that this had been taken note of by this court in State of Orissa vs Dandasi Sahu ; The court said: "In our opinion, the evidence of such state of affairs should make this court scrutinise the award carefully in each particular case but that does not make the court declare that all high amounts of awards would be bad per se.
" We are in respectful agreement.
We do not, having bestowed due care upon the award and the arguments advanced to assail it, find the award to be bad in law.
Having regard to the view that we take, the question of setting aside the award and sending the arbitration proceedings back to the arbitrator or to the arbitral tribunal now created in the State of Orissa does not arise.
In the result, Civil Appeal No. 571 of 1980 (filed by IDCO) is dismissed.
Civil Appeal No. 572 of 1980 (filed by JOPL) is allowed and the judgment and order of the Subordinate Judge, Bhubaneshwar dated 9th March, 1979 is restored.
There shall be no order as to costs.
U.R. CA No. 571/80 dismissed.
No. 572/80 allowed.

summary:
IDCO and JOPL entered Into an agreement whereunder IDCO agreed to supply to JOPL 5000 tens of MS rounds for export on terms and conditions mentioned therein.
The goods were not supplied.
By a letter dated September 12, 1969, IDCO cancelled the agreement and intimated to JOPL that its offer which had culminated in the agreement, should be treated as withdrawn.
Some correspondence followed.
Thereafter JOPL 's claim for damages against IDCO for breach of contract was referred to the Chief Secretary, who was named in the agreement, for arbitration.
He declined to act as arbitrator.
An arbitrator was thereafter appointed by the Subordinate Judge, Bhubaneswar under S.20 of the .
He gave his award on September 24, 1985.
In the award the arbitrator briefly stated the facts, the issues settled for adjudication and that the parties had produced a large number of documents, examined witnesses and advanced elaborate arguments.
Having carefully considered them, he set out the conclusions and awarded JOPL Rs. 11,00,344 with pendente lite interest @ 6%.
IDCO challenged the award before the Subordinate Judge, Bhubaneswar who dismissed the petition and made the award a rule of the Court In appeal before the Orissa High Court, the learned Judge rejected all contentions of IDCO except one namely that In answering three issues the arbitrator had arrived at Inconsistent conclusions apparent on the face of the award, which had a bearing on the question of awarding of damages.
He therefore directed that the records be sent back to the 229 230 arbitrator for making a fresh award.
Cross appeals were filed in the Supreme Court.
JOPL contended that there was no inconsistency on the face ' of the award which vitiated it.
For IDCO, it was contended that the award was bad in law, and in any event the High Court was in error in sending the matter back to the arbitrator for making a fresh award.
Dismissing the appeal of IODC, this Court, HELD: 1.
A speaking or reasoned award is one which discusses or sets out the reasons which led the arbitrator to make the award.
Setting out the conclusions upon the questions or issues that arise in arbitration proceedings without discussing the reasons for coming to these con clusions does not make an award a reasoned or speaking award.
The arbitrator has in the award only answered the issues that were framed.
He had not discussed or set out the reasons for the answers.
The award is, therefore, not a speaking or reasoned award.
[234E F] 2.
That the arbitrator merely referred to the pleadings does not mean that the pleadings are incorporated in the award.
[234F] Allen Berry and Co. vs Union of India, AIR 1971 SC 6% and Ciacomo Costa Fu Andrea vs British Italian Trading Co. Ltd, , followed.
In answering issue no.2, the arbitrator construed only such clause of the agreement as was relevant to decide the issue.
Such clause alone would be incorporated in the award and could be looked at by the court to determine if the arbitrator had misconstrued it.
(pp.9 10) [236B] 4.
Even assuming the incorporation of the agreement, an error apparent on the face of the award had to be shown.
(p.10) [236D] Bungo Steel Furniture Pvt. Ltd. vs Union of India, ; , relied on.
In the circumstances of the case, merely because the arbitrator had not mentioned the pleadings and order of reference does not mean that the issues framed did not reflect the referred disputes.
(pp.11 and 12) [237B] 231 6.
That the original foreign sale contracts had not been sent to IDCO does not ipso facto lead to the conclusion that the arbitrator had no material before him upon which he could find in monetary terms the damages suffered by JOPL.
[237E] 7.
In the facts of the case, there are no inconsistencies upon the face of the award as can be characterised as errors that vitiate the award.
An award has to be read as a whole and harmoniously.
The grounds upon which an award can be set aside are limited.
The court should be very circumspect about setting aside an award reached by an arbitrator for parties have agreed that the disputes that may arise or have arisen between them should be resolved not by a court of law but by arbitration.
[239H, 240A] 8.
Evidence of a "malady of the racket of arbitration ' should make the court scrutinies the award carefully in each case, but would not make the court declare all high amounts of awards would be bad per se.
(p.17) [240B C] State of Orissa vs Gangaram Chhapolia, and State of Orissa vs Dandasi Sahu, ;


judgement:
Appeal No. 1854 of 1992.
From the Judgment and Order dated 18.12.1990 of the Kerala High Court in M.F.A. No. 800 of 1990.
M.L. Verma, V.J. Francis, V. Subramanian and Padmakumar for the Appellant.
P.S. Poti and R. Sasiprabhu for the Respondent.
The Judgment of the Court was delivered by MOHAN, J.
This appeal by special leave is directed against i.e. judgment of the High Court of Kerala in M.F.A. No. 800/90 dated 18.12.90.
The short facts leading to this appeal are as under: The respondent Hotel is situated in Kaloor, Cochin 17.
It is a commercial establishment.
In July, 1985 this establishment obtained a Bar licence whereupon a Bar was started.
After running the business for some time it was closed down with effect from 31.3.88.
The Insurance Inspectors of the appellant verified the records of the respondent establishment on 29.9.87, 9.10.87 and 19.10 87.
It was reported that the employment strength of the respondent establishment including Chembaka Restaurant and Mayuri Bar was more than 19 as on 17.7.85.
Therefore, it was treated as covered under the (hereinafter referred to as the Act) with effect from 11.7.85 provisionally.
The fact of coverage was intimated to the respondent by notice dated 21.3.88.
Since the final date of coverage could be decided only after verifying all the records pertaining to the date of functioning of the establishment, the respondent was requested to produce all the records such as attendance register, wage register, ledgers etc.
from the date of starting of the establishment.
The respondent was also called upon to start 222 compliance under the Act with effect from 11.7.85.
But there was no compliance.
Hence, a notice was issued in Form C 18 dated 26.3.88 along with a draft order for contribution amount of Rs. 49,399.75 which was assessed under section 45 A of the Act for the period 11.7.85 to 313.88.
Though the respondent was afforded an opportunity to appear before the officer, it was not availed of However, a letter dated 13.7.88 was received but the explanations were not acceptable to the appellant.
Subsequently, a detailed order dated 3.8.88 under section 45 A of the Act was passed calling upon the respondent to pay a contribution of Rs. 49,399.75 together with interest at 6 per cent, failing which it would be covered as an arrears of land revenue.
Again, reminder was sent on 22.9.88.
No reply was received.
Hence, in order to recover the contribution under section 45 A of the Act, a claim in Form 19 was sent to the District Collector, Ernakulam on 31.10.88 requesting to recover the contribution for the period from 11.7.85 to 31.3.88.
Challenging these proceedings the respondent filed an application under section 75 of the Act before the Employees ' Insurance Court, Alleppey.
Inter alia it was contended that the applicant (respondent in this appeal) at no time employed 20 or more persons during the relevant time.
The order was illegal because under section 45 A of the Act the respondent was entitled to a reasonable opportunity of being heard.
That was not afforded.
These contentions were refuted by the appellant.
It was incorrect to state that on no occasion the respondent employed 20 or more workmen since the inspection report dated 8.12.86 clearly established to the contrary.
The contention that no opportunity had been afforded before initiating the revenue recovery proceedings, was also denied in view of Form C 18 dated 23.6.88, show cause notice dated 3.8.88 and reminder dated 22.9.88.
By its order dated 6th June, 1990 the Employees ' Insurance Court, Alleppey came to the following conclusion: "In the result, I can only uphold the assessment made by the ESI Corporation.
But when the question of recovery is considered, certain other aspects cannot be ignored.
The adhoc assessment itself was made by the opposite party after the 223 closure of the entire establishment.
All the employees working in the establishment had left by that time after accepting the termination of their services.
In respect of those employees who had already left, the ESI Corporation is now trying to recover contribution.
Now the position emerges is that despite the collection of contribution it will be impossible to bring under coverage those employees, because, they are not at all available for coverage and for enjoying the benefits under the scheme.
Therefore, even if the proceedings initiated earlier were sus tainable, so long as the employees are not available for the purpose of coverage, there is no meaning in collecting contribution alone.
In these circumstances, I can only hold that the applicant had failed to comply with provisions of the ESI Act at the appropriate time.
Therefore, according to me, after the closing of the establishment such recovery steps are not justified but only the prosecution as contemplated under sec.
85 of the ESI Act is attracted.
Therefore, it is upto the ESI Corporation to decide whether any prosecution should be launched against the applicant for the contravention or noncompliance of the requirements of the ESI Act and Rules. ' Aggrieved by the same the appellant Corporation preferred an appeal in M.F.A. No. 800 of 1990.
A Division Bench of the Kerala High Court by its order dated 18th December, 1990 posed the question for determination as to whether the appellant could proceed against respondent for realisation of contribution under the ESI scheme, after the closure of establishment.
The High Court upheld the finding of Insurance Court that the respondent had failed to comply with the provisions of the Act at the appropriate time.
However, it proceeded to hold that the respondent establishment was closed on 31.3.88.
P3 notice calling upon the respondent to pay the contribution was only on 23.6.88.
Since the scheme was made after the closure of the establishment, the appellant was not justified in proceeding against the respondent.
In this view, it dismissed the appeal.
It is under these circumstances, the ESI Corporation has come up by way of special leave to appeal.
Mr; M.L. Verma, learned senior counsel for the appellant urges the 224 following: 1.
The closure of the respondent establishment was on 31.3.88 but the liability with reference to contribution arose earlier.
The demand is for the period 11.7.85 to 31.3.88.
So long as the establishment is covered by the provisions of the Act it is not open to the respondent to circumvent its liability by contending that before actual recovery proceedings it had closed down.
If the finding of the High Court is accepted it would be the easiest way to evade the provisions of the Act.
In R.M. Lakshmanamurthy vs The Employees ' State Insurance Corporation, Bangalore, This Court has held that it is a beneficial piece of social security legislation in the interest of labour.
Further, the provisions of the Act will have to be construed with that end in view in order to promote the scheme and avoid the mischief.
Under section 26 of the Act all contributions are paid into a common fund.
Such a fund will have to be administered for the purposes of the Act as indicated under section 28.
Therefore, the employer cannot contend that he did not collect the employees ' contribution and hence, he cannot be called upon to pay.
Thus the impugned judgment is wrong and is liable to be set aside.
Per contra, Mr. P. Surbramanian Poti, learned senior counsel for the respondent would argue that the contention of the respondent throughout was that at no time it engaged 20 or more employees.
Therefore, it was under the belief that the Act would not be applicable.
In that belief the employer did not recover from the employees any contribution.
Nor was the employer called upon during that relevant time to comply with the provisions of the Act.
It was entirely due to the fault of the Officers of the appellant, the respondent did not make the contribution.
In any event, the establishment had been closed down on 31.3.88.
It will be unjust to enforce the provisions of the Act and to seek to recover contribution after the closure, more so, when the employees have settled their claims and have gone away.
Certainly, such a situation is not con templated under the Act.
From this point of view the judgment of the High Court is right and does not call for any interference.
In order to appreciate the rival contentions, it would be useful to set 225 out the necessary legal background.
The is an act for certain benefits to employees in cases of sickness, maternity and employment injury and to make provision for certain other matters in relation thereto.
Section 1(4) makes it applicable to all factories, in the first instance ' Under sub section (5) of the said section, the Government may, by a Notification, extend the provisions of the Act to any other establishment or class of establishment; industrial, commercial, agricultural or otherwise.
Admittedly, in this case, the hotel industry like that of the respondent has been notified under the Act.
Under section 26, a fund called Employees ' State Insurance Fund is created by all the contributions paid under this Act, the purposes, for which it may be expended, are cataloged under section 28.
Section 38 requires all employees in factories or establishments shall be insured.
Section 39 talks of contribution.
In respect of an employee it shall comprise of contribution payable by the employer (employer 's con tribution) and contribution payable by the employee.
It is this contribution which has to be paid to the Corporation.
Section 40 imposes the liability to pay contributions, in the first instance, on the principal employer.
After such contribution the employee 's contribution could be deducted from his wages.
Sub section (4) of section 40 is important.
That says as follows: "(4) Any sum deducted by the principal employer from wages under this Act shall be deemed to have been entrusted to him by the employee for the purpose of paying the contribution in respect of which it was deducted." (Emphasis supplied) Therefore, this sub section puts the matter beyond doubt that there is an entrustment.
In other words, the employer is a trustee.
Under section 44 there is an obligation on the employer to furnish returns and maintain registers.
The benefits available to the insured persons are stated in section 46: 1.
Sickness 2.
Maternity 3.
Disablement 226 4.
Injury 5.
Medical treatment for and attendance on insured persons.
Lastly, there is power to prosecute under section 85 which includes punishment for failure to pay contributions as well as for contravention of or non compliance with any of the requirements of the Act.
In the above legal background we may analyse the factual situation.
Two facts stare at us.
The liability to contribution of the respondent employer relates to a period between 11.7.85 to 31.3.88. 2.
The respondent establishment was closed on 31.3.88.
The contention of the respondent that at no time there were 20 or more employees in his establishment has to be rejected because at no point of time the respondent sought an adjudication on this aspect.
On the contrary, the inspections made by the officials of the appellant on 8.12.86, September 87 and October 87 state to the contrary.
Therefore, we have to proceed on the basis that the provisions of the Act are applicable to the respondent establishment, since (i) it is a notified industry, (ii) in the establishment more than 20 employees were working at the relevant time.
From the above provisions it is clear that from the date of his commencement of business, namely, 11.7.85, there was a liability to contribute.
It has already been seen under section 40 the primary liability is his, to pay, not only the employer 's contribution but also the employee 's contribution.
Therefore, he cannot be heard to contend that since he had not deducted the employee 's contribution on the wages of the employees, he could not be made liable for the same.
The object of making a deeming entrustment sub section (4) of section 40 will be altogether rendered nugatory if such a contention were to be accepted.
After all, when he makes employee 's contribution he is entitled to deduct from the wages.
Therefore, by force of the application of the statutory provisions, the liability to contribute, during this relevant period, namely, 11.7.85 to 31.3.88, arose.
There is no gain saying in that.
Hence, we reject the arguments of Mr. Subramanian Poti, learned senior counsel for the respondent.
From the above statutory provisions, it would be clear that from out 227 of the common fund maintained under section 26, the employees derive various benefits like sickness, maternity, disablement, injury, medical treatment for and attendance on insured persons.
Therefore, it is a beneficial piece of social security legislation.
As a matter of fact, this Court had occasion to consider the same in B.M. Lakshmanamurthy 's case (supra).
At page 370, paragraph 16 it was held : "The Act is thus a beneficial piece of social security legislation in the interest of labour in factories at the first instance and with power to extend to other establishments.
Provisions of the Act will have to be construed with that end in view to promote the scheme and avoid the mischief." Mr. M.L. Verma, learned senior counsel for the appellant is right in his submissions in this regard.
The Insurance Court as well as the High Court have correctly upheld the demand for contribution.
But it is rather strange to conclude that the demand could not be enforced against a closed business.
If this finding were to be accepted it would not promote the scheme and avoid the mischief.
On the contrary, it would perpetrate the mischief.
Any employer can easily avoid his statutory liability and deny the beneficial piece of social security legislation to the employees, by closing down the business before recovery.
That certainly is not the indentment of the Act.
To hold, as the High Court has done, would set at naught all these beneficial provisions.
It is equally fallacious to conclude that because the employees had gone away there is no liability to contribute.
It has to be carefully remembered that the liability to contribute arose from the date of commencement of the establishment and is a continuing liability till the closure.
The very object of establishing a common fund under section 26 for the benefit of all the employees will again be thwarted if such a construction is put.
We cannot also accept the finding of the High Court that because Ext.
P3 notice was issued on 23.6.88 after the closure of the respondent establishment on 31.3.88, the appellant was not justified in proceeding against the respondent.
The proceeding for the recovery is of the dues of contribution which arose prior to the closure on 31.3 88.
Therefore, it matters little when notice was issued, calling upon to pay the contribution.
228 In our considered view, such a notice is only a reminder to the employer to discharge his statutory obligation.
For all these reasons, we have little hesitation in setting aside the impugned judgment of the High Court which in turn upholds the order of Employees ' State Insurance Court.
The appellant will be entitled to proceed with the recovery proceedings in accordance with law.
Accordingly, the appeal will stand allowed with costs.
G.N. Appeal allowed.

dataset_name: IN-Abs

summary:
The Respondent Hotel which was also running a Bar for sometime, closed down its business after several years.
Th Inspectors of the appellant Corporation verified the records of the establishment and reported that at certain point of time the employment strength of the establishment including the bar was more than 19.
Therefore, the establishment was treated as covered provisionally under the Employees State Insurance (ESI) Act, 1948.
Since the final date of coverage could be decided only after verifying all the records, the Respondent was asked to produce them.
The Respondent did not avail the opportunity afforded to it Though the Respondent sent Its explanation, It was not acceptable to the appellant Corporation and so it passed a detailed order under S.45 A calling upon the Respondent to pay the contribution with interest at 6% failing which It would be recovered as arrears of land revenue.
Since this order and the reminder thereto, did not evoke any response from the Respondent, the appellant sent a claim in Form 19 to the District Collector requesting him to recover the said amount The Respondent challenged the proceedings by filling an application under S.75 of the Act before the ESI Court, which upheld the assessment made by the appellant Corporation, but stated that recovery steps were not justified after the closure of the establishment, and only prosecution as contemplated section 85 of the Act was attracted.
The appellant Corporation preferred an appeal against the said decision of ESI Court The High Court dismissed the appeal and held that since the scheme was made after the closure of the establishment, the 219 220 appellant was not justified in proceeding against the Respondent Being aggrieved by the judgment of the High Court, the appellant Corporation preferred the present appeal contending that so long as the establishment was covered by the provisions of the Act, the Respondent could not circumvent its liability by claiming that before actual recovery proceedings, it had closed down the establishment.
Allowing the appeal, this Court, HELD: 1.1.
Admittedly the hotel industry like that of the respondent has been notified by the Government thus extending the provisions of the to hotel industry.
Therefore, on the date of commencement of its business, namely, 11.7.85, there was a liability on the Respondent to contribute to the ESI fund.
Under section 40 the primary liability is on the employer to pay, not only his contribution but also the employees contribution.
As such the employer can not plead that since he had not deducted the employees ' contribution from their wages, he could not be made liable for the same.
After all when he makes employees ' contribution he is entitled to deduct from the wages.
Thus by force of the application of the statutory provisions, the liability to contribute during the relevant period, namely, 11.7.85 to 31.3.88, arose.
[226E G] 1.2.
The Insurance Court as well as the High Court have correctly upheld the demand for contribution.
But it is rather strange to conclude that the demand could not be enforced against a closed business.
If this finding were to be accepted it would not promote the scheme and avoid the mischief.
On the contrary, it would perpetrate the mischief.
Any employer can easily avoid his statutory liability and deny the beneficial piece of social security legislation to the employees, by closing down the business before recovery.
That certainly is not the indentment of the Act.
It is equally fallacious to conclude that because the employees had gone away there is no liability to contribute.
It has to be carefully remembered that the liability to contribute arose from the date of commencement of the establishment and is a continuing liability till the closure.
The very object of establishing a common fund under section 26 for the benefit of all the employees will again be thwarted if such a construction is put.
[227D F] R.M.
Lakshmanamurthy vs The Employees ' State Insurance Corporation, Bangalore, , relied on.
221 2.
The proceeding for the recovery is in respect of the dues of contribution which arose prior to the closure on 31.3.88.
Therefore, it matters little when notice was issued calling upon the establishment to pay the contribution.
Such a notice is only a reminder to the employer to discharge his statutory obligation.
The appellant corporation is thus entitled to proceed with the recovery proceedings in accordance with law.
[227H, 228A]