Section 1(6) of the Employees State Insurance Act Can’t Be Used to Rope In New Establishments with Less Than 10 Workers: Andhra Pradesh High Court Quashes ESI Demand
Safiya Malik
The High Court of Andhra Pradesh Division Bench of Justice Ravi Nath Tilhari and Justice Challa Gunaranjan has held that the provisions of the Employees’ State Insurance Act, 1948 do not apply to an establishment that was never previously covered under the Act and that employed fewer than ten persons at any point in time. The Court dismissed the appeal filed by the ESI Corporation challenging the trial court’s direction to refund the amount recovered from the establishment and found no illegality in the lower court’s order.
The present matter arose from a civil miscellaneous appeal filed under Section 82 of the Employees’ State Insurance Act, 1948 by the Regional Director of the Employees’ State Insurance Corporation. The appeal challenged the order dated 30.03.2007 passed by the Principal Senior Civil Judge, Nellore, in ESI O.P. No. 75 of 2005. The respondent before the High Court was M/s. Sri Ramakrishna Rice Mill, a partnership firm engaged in milling paddy into rice and related by-products.
The rice mill, through its petition before the trial court, sought a declaration that it was not liable to be covered under the ESI Act and requested that certain orders passed under Sections 45A and 45G of the Act be set aside. It also sought a refund of amounts already recovered by the ESI Corporation.
According to the rice mill, it had commenced operations in 1980 and, since inception, never employed more than nine persons at any given time. This included daily wage labourers and contract workers. The workers were not engaged on a permanent basis. The rice mill stated that it maintained requisite statutory registers which had been periodically inspected by labour authorities, including the Labour Officer, Inspector of Factories, Assistant Labour Officer, and ESI Inspector. The complainant argued that the establishment did not fall within the scope of the ESI Act, which requires ten or more employees for coverage.
Despite this, on 25.04.1998, the ESI Insurance Inspector conducted an inspection and subsequently issued orders dated 06.01.2003, directing the transfer of ₹75,381 to the ESI Corporation. The rice mill alleged that this amount was recovered without giving it a proper opportunity to be heard. The amount was transferred by the District Manager of the Food Corporation of India on 31.03.2003 at the request of ESI authorities.
In the counter affidavit, the ESI Corporation contended that during the inspection, it was found that the rice mill was employing at least twelve persons and was using power for manufacturing, thereby fulfilling the conditions under Section 2(12) of the ESI Act. It argued that the establishment was liable to pay contributions and the orders issued were legally valid.
The District Manager of the Food Corporation of India also filed a counter, stating that he acted only on the request of ESI authorities and had no independent involvement in the dispute.
The trial court examined both oral and documentary evidence. On behalf of the rice mill, one witness was examined and documents were filed. The ESI Corporation presented a witness and filed its evidence. The court framed the point for determination as whether the rice mill was entitled to the relief sought.
After evaluation, the trial court found that the number of employees in the rice mill never exceeded nine. Accordingly, the court held that the rice mill was not covered under the ESI Act and directed the ESI Corporation to refund the amount of ₹88,657 without interest.
Aggrieved by this decision, the ESI Corporation filed the present appeal.
The Court noted: “The finding of the learned Court that, there were less than 10 employed persons and that at any point of time the number of such persons did not exceed 9, was not challenged before us and no argument contrary to the said finding was advanced on that aspect.”
The Court stated: “The main point for consideration therefore is whether in view of the amendment vide Act No. 29 of 1989, i.e., Section 1(6) of ESI Act, the number of employed persons is not relevant to determine the applicability of the ESI Act.”
After reproducing the relevant statutory provisions, the Court recorded: “Section 2(12) provides that the ‘factory’ means any premises… whereon ten or more persons are employed or were employed on any day of preceding twelve months… Consequently, if at present or on any date preceding 12 months, 10 or more persons are/were employed… it would be a ‘factory’ and covered by the ESI Act.”
The Court further stated: “The submission of the appellant’s counsel that under Sub section (6) of Section 1, the number of the persons employed becomes irrelevant and therefore even if the number is less than 10, ESI Act will be applicable, is misconceived.”
It clarified the interpretation of Section 1(6): “So, it provides for continuation of the applicability of ESI Act i.e., if the Act was already applicable, then even after the reduction of number of persons employed it is reduced below 10, the Act shall continue to apply.”
The Court added: “It is not the case of the appellant that the respondent NO.1 was previously covered by ESI Act. It was for the first time, respondent No.1 was sought to be covered under the ESI Act… Sub-section (6) applies to a ‘factory’ which was under the purview of the ESI Act and there was reduction in the number of the persons employed below 10, which is not the case at hand.”
The Court examined the precedent cited by the appellant, M/s. Radhika Theatre v. ESI Corporation, and held: “The judgment clearly shows that Radhika Theatre was covered under ESI Act, even before the amendment of the year 1989.”
It concluded: “Section 1(6) makes the continuity, of the applicability of the Act, irrespective of reduction in the number of persons employed below specified limit under or by the Act.”
In support of its interpretation, the Court referenced the decision of the Punjab and Haryana High Court in ESI Corporation v. Punjab State Electricity Board, stating: “The plea raised by counsel representing the appellant invoking Section 1(6) is also misplaced. Bare reading of Section 1(6) leads to the inference that the same governs those premises which were covered under the ESI Act prior to Amending Act of 1989.”
The Court concluded its reasoning by holding: “Section 1(6) of ESI Act is not attracted to the present case… As it is below 10, the ESI Act could not apply.”
The Court held that there was no illegality in the impugned order, observed that the appeal did not involve any substantial question of law and accordingly dismissed it, further directing that any pending miscellaneous petitions shall stand disposed of.
Advocates Representing the Parties
For the Petitioner: Sri Venna Kalyan Chakravarthi, Counsel.
Case Title: The Regional Director, ESI Corporation v. M/s. Sri Ramakrishna Rice Mill & Others
Case Number: Civil Miscellaneous Appeal No. 801 of 2008
Bench: Justice Ravi Nath Tilhari, Justice Challa Gunaranjan
[Read/Download order]
