Mahesh Chemicals, Mangalore vs The Regional Director, Employees'' State Insurance Corporation, Bangalore

Mohamed Anwar, J.-The appellant concern M/s. Mahesh Chemicals at Mangalore has filed this appeal under Section 82(2) of the Employees'' State Insurance Act, 1948 (the ''Act'' for short) challenging the legality and correctness of the order dated 13-7-1992 of the E.S.I. Court, Mangalore sitting at Bangalore made in E.S.I. Application No. 16 of 1991 rejecting the appellant''s application filed before it under Section 75(1)(g) of the Act and confirming the respondent''s order passed under Section 45-A of the Act produced at Exhibit ''A'', dated 4-11-1988 calling upon the appellant to pay a contribution of Rs. 5,104/- assessed for a period from 1987-88 as payable by the principal employers of the appellant-concern under the 11th provision of the Act.

Heard.

The facts giving rise to this appeal may briefly stated as under.

The appellant is a industry located at Dakshina Kannada. It is engaged in manufacturing Sodium Silicate since 1986. It was not a registered factory under the Act. On 19-2-1988 R.W. 1-T. Divakara Murthy, who was working as E.S.I. Inspector at Mangalore visited the appellant''s establishment and was stated to have carried out his inspection and prepared inspection report detailing therein that during the months of August and September 1987 the number of employees found working in the said establishments was 10 and 11, respectively, and therefore the establishment was required to be registered under the relevant provisions of the Act, since it was a "Factory" within the definition contained under Section 2(12)(a) of the Act. On the basis of that inspection report Ex. R. 1, the respondent, the Regional Director, E.S.I. Corporation, Bangalore (''Director'' for short), sent the letter marked at Ex. A. 1 dated 2-6-1988 to the appellant stating that as per the opinion contained in Ex. R. 1 inspection report, the appellant-Establishment is covered by the E.S.I. Act and therefore it was requested to pay contribution and submit the relevant returns in time to the E.S.I. Corporation, failing which action would be taken as per law. The appellant-responded to the respondent''s letter Ex. A. 1 by sending its reply at Ex. A. 2, dated 24-6-1988, denying that it had ever employed more than 9 employees and on the other hand it asserted in its said letter that the number of employees working in the said establishment was always less than 10.

Thereafter the Director issued Ex. A. 3, dated 26-7-1988 notice to the appellant to show cause within 15 days as to why assessment of the contribution made therein should not be made and collected from the appellant on the ground that it is a factory within the meaning of Section 2(12)(a) of the Act. Ex. A. 4, dated 18-8-1988 reply of appellant to Ex. A. 3 was sent reiterating that the strength of employees in the appellant''s concern never exceed 10. It was further stated therein that the "Ghoorka" and the Accountant were working on part-time basis and they were not the employees of the appellant''s concern.

Pursuant to Ex. A. 3, show-cause notice, the Director conducted his enquiry under Section 45-A of the Act and passed his order at Ex. A. 5 bearing No. KAR.INS.VI/53-7453-34, dated 4-11-1988 holding that the appellant was covered under the provisions of Employees'' State Insurance Act, 1948 and it was liable to pay a contribution totalling Rs. 5,104.00 assessed for the period from August 1987 to March 1988. Thereupon certain correspondence were carried on between the parties which are marked at Exs. A. 6 to A. 9. Subsequently, the Director proceeded to pass another order under Section 45-A of the Act, assessing further contribution at Rs. 3,828/- as payable by the appellant for the period from October 1988 to March 1989.

Aggrieved by the said orders of the Director passed at Ex. A. 3 to Ex. A. 8, the appellant made his application under Section 75(a) and (g) of the Act before the Court below, to set aside the same as they were arbitrarily passed and to declare the appellant''s establishment as not covered under E.S.I. Act since the number of employees working therein were always less than 10.

In the Court below the Managing Partner of the appellant, named A. Nagesh Kamath (A.W. 1) has given his evidence as A.W. 1. Besides, the said Accountant named U.N. Bhat was also examined as A.W. 2. Documents Ex. A. 1 to Ex. A. 11 were also produced for the appellant in support of his case.

The said Inspector T.D. Murthy was examined as R.W. 1 on 9-6-1992 and the xerox copy of the said report was marked at Ex. R. 1 and Ex. R. 2 in evidence on record before the Trial Court.

It was contended for the appellant before the Court below that the action initiated by the respondent-Director against the appellant is not sustainable and his order at Exs. A. 5 and A. 10 are vitiated and illegal inasmuch as neither the said inspection report nor the copy thereof of R.W. 1 was furnished to the appellant affording him sufficient opportunity to meet the charge of his having employed more than 10 employees on the said establishment so as to attract the applicability of the E.S.I. Act to that Establishment. It was further maintained for the appellant before the Court below that the "Ghoorka"/Watchman and the Accountant who were taken as regular employee of the appellant''s Establishment for the filing of returns were not the regular employees but they were merely working on part-time basis. It was also submitted before the Trial Judge on behalf of appellant that the Accountant was attending to the work of writing accounts of the appellant-concern on payment of charges on ad hoc basis.

On consideration of the evidence placed before it, the learned Trial Judge negatived the contention raised for the appellant who was the applicant before him and dismissed his application confirming the impugned orders of the respondent.

Reiterating the same contentions the learned Counsel for the appellant Sri Mallya submitted that the impugned order of the Court below is unsustainable and is liable to be set aside. He vehemently contended that a copy of inspection report of R.W. 1 at Ex. R. 1 on the basis of which the respondent-Director proceeded against the appellant under Section 45-A of the Act, was not furnished to him though it was his bounden duty by virtue of regulation under Regulation 102-A of the Employees'' State Insurance (General) Regulations, 1950 to furnish a copy thereof to the appellant providing sufficient opportunity to him to meet the allegations against him, of he having employed more than 10 employees in the said Establishment at any time. Non-supply of that inspection report to the appellant, it was argued by Sri Mallya, vitiated the action taken under Section 45-A of the Act by respondent against appellant. In support of his contention he relied on a decision of this Court rendered in E.S.I. Corporation v Karnataka Asbestos Cement Products (sic). Elaborating his arguments, he further submitted that though right from the beginning the appellant had been contesting the legal action initiated by the Establishment on the ground that copy of the said inspection report was not furnished to him, the respondent has not cared to produce the same even at an appropriate stage of the proceeding before the Court below that is before first hearing as required under Rule 14 of the Employees'' State Insurance (Central) Rules, 1950 which deals with the manner of production of documents in the proceeding under Section 75 of the Act before the E.S.I Court. On the other hand, the said fundamental document, that is Ex. R. 1, was for the first time produced by the respondent in course of the trial before the Court below at the time of R.W. 1''s examination on 9-6-1992 and that too after the evidence for the appellant was closed, and thereby the appellant was effectively prevented from successfully meeting the contents of Ex. R. 1 on the basis of which action under Section 45-A of the Act was initiated against him by the respondent. Sri Mallya, therefore, assailed the observation of the learned Trial Judge that the production of Ex. R. 1 by the respondent at a belated stage did not jeopardise the interest of the appellant, is mis-conceived and untenable. As such it was contended by him that on that sole ground the appellant is entitled to succeed.

Another objection against the validity of the impugned order canvassed by Sri Mallya was that the Trial Court has erred in holding that the watchman and Accountant were also the employees on the appellant''s Establishment for the purpose of determination of the total number of employees working therein. He argued that the evidence of P.W. 2, the said Accountant, makes is abundantly clear that he was rendering his professional service in writing accounts for the appellant Establishment for which he was collecting his charges as a professional and therefore the appellant cannot be stated to be on "employee" within the meaning of Section 11 of the Act. It was further submitted by him that indisputably there was only one driver named Biddappa employed for appellant''s concern, whereas in Ex. R. 1 one more person named Yadav is also shown as a driver who worked on 17-9-1987 on payment of Rs. 120/- and that the same is not borne out by any admissible material on record. He, therefore, contended that if the said Accountant and the said person Yadav are excluded as being the Employees of the appellant, then it clearly transpires that the number of employees on the Establishment of the appellant during the material period shown at Ex. R. 1 was always less than 10 and never exceeded 9. He, therefor, maintained that on this ground also the appeal deserves to be allowed.

Mr. M. Papanna, learned Counsel for respondent, on the other hand, argued otherwise in support of the impugned order of the Court below. Countering the first contention of Sri Mallya, he submitted that the supply of the copy of inspection report of R. 1 to the appellant was not a mandatory requirement of the Act or under its regulations and, as such, non-supply thereof cannot be stated to have vitiated the legal action taken against the appellant. Inviting my attention to the material portion contained in the Regulation 102-A(ii) read with Section 45-A, he submitted that the purpose of inspection and report is merely to enable the employer to make a record in the inspection book contemplated thereunder of all irregularities and illegalities discovered at the time of inspection of the concern officer, indicating therein the action, if any, proposed to be taken against the principal employer together with the orders for their remedy or removal passed by that officer, and that what is required by the proviso of Section 45-A(1) is to give a reasonable opportunity of hearing to the appellant by the respondent during his enquiry under Section 45 of the Act, which has been given in the instant case, as could be seen from Exs. A. 1 to A. 3 and other correspondence exchanged between the parties. Repelling the next objection of Sri Mallya concerning the nature of employment of said watchman and Accountant, Sri Papanna further contended that the nature and scope of the definition of an employee contained in Section 2(2) of the Act. Section 2(12)(a) of the Act read with Section 1(6) thereon, it becomes clear that those two persons also become the employees of the Appellant''s Establishment, although they might have been working thereon part-time basis. He stretched his argument that the inclusive definition of Section 2(9) of the Act in support of his contention reliance was placed by him on a Full Bench decision of this Court in Regional Director, Employees'' State Insurance Corporation v Suvarna Saw Mills, 1979(2) Kar. L.J. 158 (FB), and Hyderabad Asbestos Cement Products Limited v Employees'' Insurance Court and Another, AIR 1978 SC 356.

Therefore, the material point that calls for decision is whether the impugned order of the Court below is sustainable in law?

@BODY-LSP = 16. The undisputed legal position is that for applicability of E.S.I. Act to an establishment or a concern it has to fall within the purview of definition of the term "factory" contained in Section 2(12) of the Act. Sub-clause (a) of Section 2(12) is the material portion of the definition for the purpose of this case, which reads:

"(a) Wherein ten or more persons are employed or were employed for wages on any day of the preceding 12 months, and in any part of which a manufacturing process is being carried on with the aid of power or is ordinarily so carried on".

The plain reading of this definition makes it clear that for applicability of the Act to any Establishment or Concern the condition is that the minimum number of employees employed therein must be 10.

The appellant-concern was not paying any contribution under the Act. In exercise of power under Section 44(2) of the Act, R.W. 1 visited the appellant''s premises on 19-2-1988 and carried out his inspection to find out the number of employees working there.

According to him he found the position of employees as stated in his inspection report at Ex. R. 1. Pertaining to the period from January 1987 to February 1988 he found the number of employees for all the months during this period nine only excepting for the months of August and September when the numbers was 10 and 11 respectively. Thereafter Ex. R. 1 was submitted by him to respondent-Director who initiated the legal action contemplated under Section 45-A of the Act and consequently the impugned orders at Ex. A. 5 and Ex. A. 10 came to be passed.

It is an undisputed fact that at no time the copy of the said inspection report at Ex. R. 1 of R.W. 1 was furnished to the appellant enabling him to make his representation before the respondent effectively during his enquiry. The material question which, therefore, calls for consideration is whether the action initiated by the respondent under Section 45-A of the Act without furnishing him the copy of the said inspection report was illegal and untenable as contended by the appellant''s learned Counsel. This legal aspect of the matter could be better appreciated in the light of the relevant provisions contained in Regulation 102-A of the Employees'' State Insurance (General) Regulations, 1950 and Section 45-A of the Act. Regulation 102-A reads:

(i) Every principal employer shall maintain a bound inspection book and shall be responsible for its production, on demand by an Inspector or any other officer of the Corporation duly authorised to exercise the powers of an Inspector irrespective of the fact whether the principal employer is present in the factory or establishment or not during the inspection.

(ii) A note of all irregularities and illegalities discovered at the time of inspection indicating therein the action, if any, proposed to be taken against the principal employer together with the orders for their remedy or removal passed by an Inspector or any other Officer of the Corporation duly authorised to exercise the powers of an Inspector, shall be sent to the Principal employer who shall enter the note and orders in the inspection book.

(iii) x x x x

Section 45-A(1)

"Where in respect of a factory or establishment no returns, particulars registers or records are submitted, furnished or maintained in accordance with the provisions of Section 44 or any Inspector or other official of the Corporation referred to in sub-section (2) of Section 45 is prevented in any manner by the principal or immediate employer or any other person, in exercising his functions or discharging his duties under Section 45, the Corporation may, on the basis of information available to it, by order determine the amount of contributions payable in respect of the employees of that factory or establishment.

Undisputedly, the note if irregularities and illegalities discovered by Inspector on inspection of any Establishment premises in exercise of powers under the Act, is called "inspection report" of that Inspector.

The Division Bench of this Hon''ble Court in Karnataka Asbestos Cement Products case, had an occasion to observe concerning the requirements of such an inspection report of Inspector and how it is required to be prepared on his inspection of any unregistered establishment for needful action under the Act. That pertinent observation is as follows.-

"In determining whether an establishment employees the number of persons required by the Employees'' State Insurance Act, 1948, to attract the provisions of the Act, a list of employees prepared by the E.S.I. Inspector, in the course of his visit to the establishment, must contain the name, father''s name, place from which the employees hails, the designation, the length of service and the signature or thumb impression of the employee, of service and the signature or thumb impression of the employee, as the case may be, if at that time persons other than the employee are present, the names and addresses of at least two of them with their signatures and also the signatures of the proprietor or manager or the person-in-charge of the establishment should be obtained at the end of the list and a copy of the list should be furnished to the establishment".

The above observation of this Court makes the legal position under the Regulation 102-A is crystal-clear as to the contents of the inspection report as also that it is imperative upon the concerned authority under the Act, to furnish a copy of inspection report to the concerned establishment. No doubt the immediate purpose of supplying the inspection report to the concerned establishment, as contended by Sri M. Papanna, learned Counsel for respondent is to rectify and set right all the irregularities and illegalities discovered by the Inspector at the time of inspection in connection with the employees of the concern, as also to give effect to the directions or orders of the Inspector. However, the proviso to Section 45-A of the Act makes it obligatory for the authority holding an enquiry under Section 45-A to offer a reasonable opportunity to the concerned establishment before an order determining the amount of contributions payable by it is passed. In other words, evidently, if any such order is passed without affording the appellant a reasonable opportunity of being heard that order would be vitiated by this material illegality and it will not at all, be an order in the eye of law. It is needless to state that in the context of the relevant provisions, the foundation to initiate an enquiry against any establishment under Section 45-A of the Act is the very inspection report containing the material information, which warranted in the opinion of the concerned authority initiation of legal action against the establishment. Thus, the legal position which clearly emerges is that the supply of the copy of the said inspection report to the establishment against which the legal action under Section 45-A is proposed to be taken by concerned authority is a must, because without the same being made available to the establishment it will not be in a position to effectively defend itself against such action. Therefore, there is sufficient weight and force in the submission of the learned Counsel for appellant that thereon-supply of the said inspection report of R.W. 1 to the appellant Establishment is a vital legal infirmity which vitiated the action under Section 45-A of the Act, against him. As such, I hold the impugned orders marked at Ex. P. 5(a) and Ex. P. 10(a) are a nullity in the eye of law.

On the same analogy it follow that non-production of Ex. R. 1 inspection report before the Trial Court till examination of R.W. 1 has certainly jeopardised the right of the appellant to put forth his case before it. Ex. R. 1 was the basis for action against the appellant. As such the observation of learned Trial Judge made to the contrary in the impugned judgment is obviously untenable and erroneous. At para 9 of his impugned judgment he has observed:

"Merely because the respondent did not produce the inspection report at the commencement of the enquiry before this Court it cannot be said that the insurance report is unreliable. The applicant has not disputed the fact that the persons mentioned therein were not employees or the amount shown as having been paid as wages for the month of August and September 1987".

The observation of the learned Trial Judge that the appellant did not dispute the facts mentioned in Ex. R. 1 is patently wrong since right from the initiation of legal action against him by the Director it was the consistent stand of the appellant that the number of employees working in the establishment was always less than 9 and that he had absolutely no knowledge whatsoever of the opinion contained in Ex. R. 1 since the copy thereof was never served on him or made available to him prior to its production in evidence of R.W. 1. For the very same reason Ex. R. 1 becomes a suspect document on which no implicit reliance could have been placed by the learned Trial Judge, as also because the appellant was deliberately prevented by respondent from acquainting himself with the contents thereof enabling him to prepare himself to present his case effectively before the authorities below.

Another such untenable observation made by the Court below in para 13 of its judgment is as under:

"When it is proved from the records of the applicant that it had employed 10 and more than 10 employees and using power stands covered".

This is obviously an erroneous observation made by the learned Judge as regards the number of employees on the establishment of appellant because the same does not transpire from any records of the appellant.

Another similar erroneous observation made by the learned Trial Judge reads as follows.-

"It is true that as per Regulation 102-A the inspector has to note all the irregularities found or noticed in the inspection book. It is not known whether the applicant had maintained inspection book nor the applicant produced the inspection book before the insurance inspector for noting down the irregularities".

The above observation indicates that the learned Judge has misconstrued the relevant provisions in Regulation 102-A and has mis-read the evidence on record. Regulation 102-A does not require the Inspector Inspecting the premises of an establishment to note all the irregularities found or noticed by him in the inspection book of that establishment. On the other hand, as has been indicated elsewhere hereinabove, the relevant provision under Regulation 102-A imposes on the principal employer of the establishment the duty to note down in the inspection book of establishment all the irregularities and illegalities noticed by the Inspector at the time of his inspection and which had been communicated to the employer by the Inspector or the concerned authority in the form of his inspection report.

The further observation of the learned Trial Judge that "it is not known whether the applicant had maintained inspection book nor the applicant produced the inspection book before the insurance inspector for noting down the irregularities" is evidently wrong because admittedly it was the case of R.W. 1 that all the relevant books were produced before him and he inspected them - when he visited the appellant''s establishment on 19-2-1988. In his cross-examination he has stated:

"I verified the ledgers, vouchers and day book for the period from July 1987 to February 1988".

Again at another place he states:

"I visited the applicant establishment on 19-2-1988, and verified the records for the period from January 1987 to February 1988".

Moreover, it is nobody''s case that the relevant records including inspection book was not produced when R.W. 1 was visited the appellant''s premises. Therefore, the said observation made by the learned Trial Judge in the impugned judgment are uncalled for and unwarranted in the facts and circumstances of the case.

Mr. M. Papanna, learned Counsel for respondent submitted in course of his argument that bearing Ex. R. 1 the respondent does not have any proof of his case against appellant except the admission of appellant himself of A.W. 1 in his evidence. A.W. 1 has stated that he was the Managing Partner of the appellant-establishment. In his cross-examination he has stated that "During August 1987 six workers were working in the appellant''s factory". Further he has deposed that there was one driver by name Biddappa also working and there was one Gurkha/Watchman who is paid monthly Rs. 564.50 ps. + Rs. 50.40 ps. per month. There was one Manager also by name M.S. Giridhar and we are paying him Rs. 750/- per month. There was one Accountant also.

It was argued by Mr. Papanna that this evidence of A.W. 1 goes to show that in addition to his workers, one Gurkha/Watchman, one driver by name Biddappa, one Manager by name Giridhar and one Accountant also were working in appellant''s establishment at the material time, thus, taking the total number of employees to 10. Meeting - the contention of appellant that the Gurkha-Watchman and Accountant were working on part-time basis and they cannot be taken as employees of appellant''s for the purposes of the Act he invited the Court''s attention to the definition clause of the factory contained in Section 2(12)(a) and Section 1(6) of the Act, and submitted any person found employed in a factory or an establishment for wages even for a single day would be an employee within the meaning of the term ''employee'' as defined under Section 2(9) of the Act. He further submitted that such a person employed on temporary basis, even for a day, falls in the inclusive definition of the term "employee" under Section 2(9) of the Act. For this proposition reliance was placed by him on a decision of the Supreme Court in Hyderabad Asbestos Cement Products Limited''s case, at para 13 of its judgment reads as follows.-

"We are unable to accept the contention for on a reading of the relevant sections it is clear that the word "employee" would include not only persons employed in the factory but also persons connected with the work of the factory. The employee may be working within the factory or outside the factory or may be employed for administrative purposes or for purchase of raw materials or for sale of the finished goods all such employees are included within the definition of employee".

On temporary nature of employment of any person in any establishment or factory, in the Full Bench decision of this Hon''ble Court in Suvarna Saw Mills case, it is held:

"The definition of the word ''employee'', contained in Section 2(9) of the Act does not make any difference between a casual or temporary or permanent employee. It is wide enough to include even a casual employee employed for a day for wages".

xxx xxx xxx

Therefore, having regard to the wording of Section 38 of the Act, all employees engaged on wages by the employers, whether casual or otherwise, are required to be insured in the manner provided in the Act".

33-A. In the light of above pronouncements of Supreme Court and this Court, the said Gurkha Watchman employed in the appellant''s establishment on a certain monthly salary does happen to be an employee for the purpose of the Act. The same is the legal position in case of the Manager M.S. Giridhar also.

As regards A.W. 2-Accountant, his position is distinguishable. Himself has deposed before the Court below as to the nature of service which he was rendering for appellant. It is the case of appellant that A.W. 2 is not at all an employed person of the establishment in the sense of an employee, but he was being paid his charges for writing the accounts of the establishment. A.W. 2-Accountant has testified to the fact that he was not working as an employee under the appellant establishment and was neither getting the salary or any wage from the appellant for writing letter''s accounts. On the other hand, he has stated that he was writing the accounts for appellant on payment of his charges. It clearly transpires from evidence of A.W. 2 that he was charging his fees for having rendered his professional services in writing the said accounts. As such it cannot be said that he was either receiving any salary or wages from appellant. In fact even the noting made in Ex. R. 1 by R.W. 2 concerning this Accountant discloses that at the time of his inspection itself A.W. 2''s position as an employee in appellant''s concern was disputed by the latter. However, by no canon of construction could it be stated that any professional such as a Medical Practitioner, Advocate, Accountant, Consultant who is engaged by any individual/establishment or a concern to render their professional services on payment of their charges or fee are the employees of their clients establishments for the purposes of the Act. It would be fallacious to treat them as such. In that view of the matter A.W. 2-Accountant cannot be considered and treated as an employee in the appellant''s Establishment. Then the resultant position which follows from A.W. 1''s said admission is that there were nine employees working in the appellant''s establishment at the material time, and this admission will not support the respondent''s case that appellant establishment was covered under the E.S.I. Act. As such, when Ex. R. 1 is excluded from consideration as a suspect document, nothing remains on records to support the conclusion that the appellant establishment was a factory within the definition of Section 2(12)(a) of the Act and it was therefore covered by the Act. Evidently both impugned orders of the respondent and the Court below are based on no evidence and, therefore, they are liable to be set aside. Hence, the appeal is entitled to succeed.

For the foregoing reasons the appeal is allowed. The impugned orders of the Court below and of the respondent marked at Ex. A. 4 and Ex. A. 10 are set aside. The parties to bear their own costs.