Monthly Archives: August 2015

August 23, 2015 · 3:32 pm

Amending Sec. 44 : Agenda – The Open and the Hidden !

The following was the Agenda Item No. 3 placed before the meeting of the apex body of the ESI Corporation on 07.04.2015, proposing to amend Sec. 44 of the ESI Act, 1948:

The Agenda

DSC00255

 

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The opening paragraph of the Agenda item says that the proposal to amend Art. 44 was born out of the need to fulfil the commitment made by the Hon’ble Finance Minister in Para 62 of his budget speech on 28.02.2015.

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Paragraphs 61 and  62 of the Budget speech are re-produced here for easy reference of the readers:

61. Madam Speaker,  the situation with regard to the dormant Employees Provident Fund (EPF) accounts and the claim ratios of ESIs is too well known to be repeated here. It has been remarked that both EPF and ESI have hostages, rather than clients. Further, the low paid worker suffers deductions greater than the better paid workers, in percentage terms. 

62. With respect to the Employees Provident Fund (EPF), the employee needs to be provided two options. Firstly, the employee may opt for EPF or the New Pension Scheme (NPS). Secondly, for employees below a certain threshold of monthly income, contribution to EPF should be optional, without affecting or reducing the employer’s contribution. With respect to ESI, the employee should have the option of choosing either ESI or a Health Insurance product, recognized by the Insurance Regulatory Development Authority (IRDA). We intend to bring amending legislation in this regard, afterstakeholder consultation.”

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Fortunately for the insured population, the members of the ESI Corporation spoke very well during the meeting on 07.04.2015 against the Agenda Item that proposed to amend Sec. 44 of the Act that the Government had deferred the issue. The observations of the members of the ESIC as found recored in the Minutes of the meeting dated 07.04.2015 are given hereunder:

The Minutes

Page 5 of the Minutes

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Dear Readers,

The ‘power’ of the middlemen of the rich to manipulate the politicians in power to amend an important social security enactment, just through personal contacts, becomes evident from the insertion of the word ‘hostages’ in the Budget Speech of the Government of India.

The alertness of the Members of the ESI Corporation on 07.04.2015 saved the nation that day.

But, grapevine has it that the proposal placed from the above on 07.04.2015 for amending Sec. 44 has not been dropped but is being pursued by various vested interests which are after big money.

Let the representative of the employees who are members of the ESI Corporation continue to exercise the same vigil !

The ESIC would work wonders, when run corruption-free. It has worked wonders in every pocket that had been run corruption-free. Let it not be run down by the politicians and power-brokers who do not care for the future of the nation but only about their present and go with their hidden agenda.

Let us prove that Robert Owen, Sir William Beveridge and Prof. B.P. Adharkar have not toiled in vain!

 

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N.B:

The following additional information is given for easy reference to recall the facts which are relevant to this issue:

The fact that the ESIC was not holding anyone as hostage had been brought out in the following post:

https://flourishingesic.info/2015/03/15/sorry-no-hostages-there-mr-finance-minister/

The fact is that the ESIC is the best bet to provide security net to the people and the details in this regard with reference to international experience and national level instances were brought out in the following post:

https://flourishingesic.info/2015/03/07/run-the-esic-corruption-free-do-not-run-down-the-esic/

Inviting private players to meddle with social security network was nothing but abdication of responsibility of the government, and the facts in this regard had been brought out in the following post:

https://flourishingesic.info/2015/02/28/making-esi-medical-facilities-optional-abdication-of-responsibility/

The sustained campaign by some middlemen to dilute the ESI Scheme so that the private players could enter the field and loot the people had been highlighted in the following posts:

https://flourishingesic.info/2015/04/05/kind-attention-esi-corporation-members-please-ask-these-questions-on-07-04-2015/

https://flourishingesic.info/2015/04/18/the-extent-of-confiscation-around-the-world/

It was, thereafter, decided to trace the origin of the term ‘hostages’ used by the Finance Minister in his Budget Speech to use it as an alibi to run down the ESI Scheme and to amend the  ESI Act to allow the private money-bags to enter the field of social security to make money for themselves and share a portion of it with the politicians who would help them.

https://flourishingesic.info/2015/07/08/healthcare-mr-jaitely-leads-the-nation-to-peril/

The fact that the word ‘hostages’ had been used by the Finance Minister in his budget speech, in a mysterious manner, without any supporting documents had been brought to the notice of the readers in the following post;

https://flourishingesic.info/2015/06/10/hostages-accusation-against-esic-epfo-without-documents/

 

 

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August 15, 2015 · 9:47 am

When the E.I. Courts grant stay…

(1) The E I Court is not the appropriate forum to challenge the action taken for recovery under the Second Schedule to the Income Tax Act, 1961. If a defaulter is aggrieved over the action of the Recovery Officer, he must, first of all, seek remedy as per the provisions contained in the Second Schedule to the Income Tax Act, 1961 and not resort to Chapter VI of the ESI Act, 1948.

(2) The employers who did not approach the E.I. Courts, in time, to challenge the decisions of the Insurance Branch officers should not be allowed to cite the recovery action as the cause of action for the purposes of Sec. 77 of the ESI Act, 1948.

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One finds that the Employees’ Insurance Courts are approached by the employers not only against the decision regarding coverage, assessment of contribution or levy of damages but also against the action taken by the Recovery Officer under the Second Schedule to the Income Tax Act, 1961.

There are employers who cite the recovery action as the cause of action to challenge the assessment under Sec.45-A of the said Act although they had failed to appeal, in time, to the E.I. Courts as per Sec. 77 of the ESI Act, 1948. There is a vital difference between the “appeal against assessment” and the “appeal against recovery action”. Any mix- up of the two would result in misrepresentation of facts and misinterpretation of law. But, such misrepresentations are entertained in the E.I. Courts and, consequently, the orders of the Insurance Branch Officer could not be enforced in time and action taken by the Recovery Officer gets affected.

The powers of the Recovery Officer to recover arrears from the defaulters and the procedure for recovery are codified in (1) the Second Schedule to the Income Tax Act, 1961 and (2) the Income Tax (Certificate Proceedings) Rules, 1962. The Recovery Officer of the ESI Corporation is able to enforce these provisions by virtue of Section 45- H of the E. S. I. Act, 1948.

The Recovery Team spends a lot of man- days collecting information regarding the source of income of the defaulter, details of property, etc., by taking various actions like measuring the land and building, contacting the revenue authorities for information regarding survey numbers, patta details , etc., approaching the police authorities more than once for each and every case of attachment, attaching the business by sealing the premises for appointment of Receiver, freezing the bank accounts under Rule 26(1) of the Second Schedule to the Income Tax Act, 1961 and Section 45-G of the ESI Act, 1948, etc.,

It is only when the employers ultimately realise that they cannot escape the coercive process anymore, they go to court and obtain stay. There are many cases in which stay orders had been served on the Recovery Officer exactly on the day notified for public auction. Thus, the sustained efforts taken by the Recovery Team to recover the dues are brought to naught at the last moment, by the stay orders issued by the Courts.

The Supreme Court has observed that “normally, the High Court should not, as a rule, in proceeding under Article 226, grant stay of recovery of tax, save under very exceptional circumstances. The grant of stay in such matters should be an exception and not the rule [Siliguri Municipality Vs. Amalendu Das – 1984 – 146 – ITR – 624-626 (SC) ]. Also, R. Laxmichand & Co. Vs. Union of India [1990 – ITR – 376 – (Guj.)].

The Chennai High Court is also of the view that the jurisdiction of the High Court under Article 226 of the Constitution cannot be invoked for the sole purpose of obtaining an interlocutory order to stay the sale of properties in proceedings for realisation of Income Tax. {S. Km. Sathappa Chettiar Vs. ITO {1960 – 40 – ITR – 338 (Madras)}.

Thus, the Supreme Court and the High Courts have been averse to interfere with the acts and actions of the statutory authorities unless their actions are beyond jurisdiction or in excess of jurisdiction. But, even while the Supreme Court and the High Courts have, thus, been and are wary of staying the actions of the Recovery Officer except for some specific reasons as mentioned earlier, many of the E.I Courts are not found to exercise any such restraint in granting stay.

E I courts and Recovery Officers

Under Rule 83, the Recovery officer has all the powers of the Civil Court while trying a suit, for the purpose of

(1) receiving evidence,
(2) administering oaths,
(3) enforcing attendance of witnesses and

(4) compelling production of documents.

The Recovery Officer, in the discharge of his functions under the aforesaid provisions, is deemed to be “acting judicially” within the meaning of the Judicial Officers Protection Act, 1850 (18 of 1850), as specifically mentioned in Rule 82 of the Second Schedule to the Income Tax Act, 1961. The Judicial Officers Protection Act seeks to confer protection to persons performing judicial functions. “By a layman, it may be taken as denoting only persons belonging to the lower judicial cadre of the State, but the Act is not confined to them. It extends to all persons who act judicially – broadly speaking ‘Judges”. (Para 4.1 – 104th Report of the Law Commission of India). The term “Judge” has been defined in Sec. 19 of the Indian Penal Code. The concept of “acting judicially” has been expressed more comprehensively under Sec. 77 of the Indian Penal Code.

Sec. 82 of the Second Schedule to the Income Tax Act, 1961 is a special provision intended to provide statutory protection to Recovery Officers. All the elements, which are essential for a judicial tribunal to adjudicate on a subject matter which is brought before it, are present in a proceeding before the Recovery Officer.

“The tribunal as distinguished from the court, exercises judicial power and decides matters brought before it judicially or quasi-judicially, but does not constitute a court in the technical sense.”( Engineering Mazdoor Sabha Vs. Hind Cycles Ltd. -AIR 1963 SC 874, 978 ). Tribunals can, thus, be quasi- judicial ones too.

“According to the doctrines of constitutional and administrative law, these (quasi-judicial) authorities are regarded as bound by the rules of natural justice” (Para 5. 5 – 104th Report of the Law Commission of India -1984). “Natural justice is based upon the innate moral feeling of mankind”. “Particular form of legal procedure may not be necessary”. But, the “decision must be in accordance with the principles of substantial justice”. (Rulings under Sec. 10 (1), Industrial Disputes Act, 1947). The Recovery Officer must ensure that his action falls within these parameters.

The recovery procedure enunciated in (a) the Second Schedule to the Income Tax Act, 1961 and (b) the Income Tax (Certificate Proceedings) Rules, 1962 is complete enough and comprehensive in itself. These provisions clearly specify the fora for the defaulters to seek remedy against the actions taken by the Recovery Officer. The Rule 9, Rule 11 (6) and Rule 16 (1) are relevant in the context.

Specific appellate provisions to seek remedy against the actions taken by the Recovery Officers under the Second Schedule to the Income Tax Act, 1961 are incorporated in the same Schedule under Rule 86 read with Rule 55-A and 55-B of the Income Tax (Certificate Proceedings) Rules, 1962. “When a statute gives a special and particular remedy to the aggrieved party, the remedy provided by that statute must be followed”. (Page 709 – Employees’ State Insurance Act, 1948 – K.D. Srivastava – Fifth Edition) These appellate provisions can neither be ignored nor be made redundant by projecting only Sec. 74 – 83 of the ESI Act, 1948.

The issue whether the E.I. Courts, which are “domestic Tribunals” (ESIC Vs. Ram Lakhan, AIR 1960 Punjab 559) constituted under Section 74 of the E.S.I. Act, can stay the action taken by the Recovery Officer is not dealt with here. Nor is the fact that the E I Courts are not civil courts but have only a trapping of civil courts elaborated here. But, the E.I. Courts are not made aware of these appellate provisions. Nor are they informed that the jurisdiction of even the Civil Courts must be

deemed to have been excluded to the extent indicated in Rule 9, Rule 11(6), Rule 16(1) of the Second Schedule to the Income Tax Act, 1961 and also in Rule 47 of the I.T. (Certificate proceedings) Rules, 1962. [Malabar Produce and Rubber Co. Ltd. Vs. TRO [1990 – 184 – ITR – 275, 282, (Ker.)].

Bar on civil courts

Rule 9 of the Second Schedule to the I.T. Act makes it very clear that every question arising between the Recovery Officer and the defaulter relating to

(a)  theexecutionofacertificate;

(b)  thedischargeofacertificate;

©  the satisfaction of a certificate;

(d)  the confirmation of a sale held in the execution of such certificates; and

(e)  setting aside a sale held in the execution of such certificates

shall be determined not by suit, but by order of the Recovery officer before whom such question arises.

The provision, does not, however, preclude a Civil Court in respect of any such question upon the ground of fraud. It implies that the Civil Court is not expected to interfere in the recovery of ESI dues, when there is no allegation of fraud. A suit can be filed in a Civil Court only if fraud is alleged. [Hari Prasad Vs. TRO (1984) 145-ITR-48, 54 (All.); Ayesha Khatoon Vs. Union of India (1980) 126 – ITR 489 (Cal.); Shamboo Prasad Bajraria Vs. Union of India (1979) 120 ITR 782 (Cal.); Milan Kumar Mukherjee Vs. Union of India (1984) 149 ITR 730 (Cal.)]. The word ‘suit’ means a proceeding instituted in a civil court by the presentation of a plaint.

In Radha Kishan Vs. Ludhiana Municipal Council, the Supreme Court observed: “Under Sec. 9 of the Code of Civil Procedure, the court shall have jurisdiction to try all suits of civil nature excepting suits of which cognizance is expressly or impliedly barred” (AIR – 1963 –SC- 1547). “Where there is an express bar of jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy of the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of civil court” (Dhulabhai Vs. State – AIR-1969-SC -78)

In spite of the existence of the bar under Rule 9 in the Second Schedule to the Income Tax Act, 1961 and in spite of the abovementioned rulings by the higher Courts, the E.I. Courts grant ex-parte stay in an indiscriminate manner. As a result the recovery process gets scuttled.

Stay orders for the mere asking

The Supreme Court has, in Assistant Collector of Central Excise Vs. Dunlop India Ltd., and others (SLP (Civil) No.s – 12312-13, dated 30.11.1984) observed thus: “It is indeed a great pity and, we wish we did not have to say it but we are afraid we will be signally failing in our duty if we do not do so. Some courts, of late, appear to have developed an unwarranted tendency to grant interim orders – interim orders with a great potential for public mischief – for mere asking. We feel greatly disturbed. We find it more distressing that such interim orders, often ex-parte and non-speaking, are made even by the High Courts while entertaining writ petitions under Art. 226 of the Constitution and in the Calcutta High Court, on oral application too. In several cases, Siliguri Municipalilty Vs. Amalendu Dass, Paper Mills Co. Ltd. Vs. State of Orissa, Union of India Vs. Oswal Woollen Mills Ltd., Union of India Vs. Jain Shudh Vanaspathi Ltd., this Court was forced to point out how wrong it was to make interim orders as soon as an application was presented……. We have come across cases where the collection of public revenue has been seriously jeopardised and budgets of Governments, and Local Authorities affirmatively prejudiced to the point of precariousness consequent upon interim orders made by Courts”.

In this case, the learned single judge of the High Court had taken the view that a prima facie case had been made out in favour of the company and, therefore, by an interim order, allowed the benefit of the exemption and directed the goods to be released on the Bank Guarantee being furnished. The Division Bench of the Calcutta High Court had also confirmed the order of the learned single judge. But, the Supreme Court allowed the appeal with costs saying, “ We do not have the slightest doubt that the orders of the learned single judge as well as Division Bench are wholly unsustainable and should never have been made”.

Take these facts to the notice of the courts

These facts must be brought to the notice of the relevant courts, in an appropriate manner, by the Recovery Officers or the Insurance Branch Officers, as the case may be, whenever the defaulters seek the intercession of the Courts, especially the E. I. Courts and obtain stay.

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August 7, 2015 · 7:53 am

Mr. O. Abdul Hameed, former AC on ‘Clubbing different units together’ !

Mr. O. Abdul Hameed, former Additional Commissioner of the ESI Corporation, has written the following with reference to the post https://flourishingesic.info/2015/08/06/clubbing-different-units-together/  Considering the depth of the comment, the write-up is hosted here as a separate post:

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At a time when the service of the scheme was poor or less known, the misuse was also less. As the medical service, particularly the superficiality facilities from non-ESI hospital became available and got publicity, misuse also started. I know of a case of a medium size hotel whose owner added his wife to the muster as a clerk to get herself operated in AIIMS within one month and MD of a company who got his domestic cook into muster when he needed a major operation. There is lots of potential for misuse.

Coming to the issue of clubbing the principle is “Geographical proximity is not essential but functional integrity should be established”. Was the peanut an item of the menu, was it sold inside the restaurant and billed among other items?

If you see section 2 (12), the emphasis is on” Premise” and it is the premises that is covered and include its precincts. There is no reference to ownership or unity of ownership., and manufacturing process need not be in all part of this premises or precinct but in any part of it. Thus the premise or precinct need not be under a particular ownership or singular ownership.

Those who drafted this very long back had brain, and clarity of purpose to be achieved and not, regret to say, those who drafted some of the recent amendment.

Coming to the example of power looms mentioned above there was practice of several loom in one big shed and one or more loom owned by single person. This was not always a ploy to avoid factory act and other legislation but at times, for genuine reasons as a commune like operation.. The ESI act would apply to the entire shed but Government of India, following industry pressure asked the ESIC not to cover them, a direction which the Government had no power to give but ESIC was perforce compelled to comply.

Two illustration that I dealt-

1. Three different manufacturing units within a city, each with distance of around 10 km from one another, one making the wooden part of sewing machine, another the metal and other parts and third where all these were brought together, assembled, packed and distributed, all three belonging to belonging to one family being brothers of a Hindu undivided family.. Though all had separate sheds, electric/water connection, etc I found that no single unit can exist alone and do not produce a marketable product and they essentialy complement one another and transaction among them were not sale but good transfer.

2. Two unit within a compound, both separate sheds nearbyd by with separate electric connection, both same owner. One is printing Unit and another a binding Unity. All the printed material were bound by the second unit. I did not club them because binding Unit was charging the printing unit in the book and its income were treated to tax separately and they were also taking up binding for others and charging and printing unit was also taking up printing work without binding, though where binding was needed it was done only in the binding unit. I felt there is no functional integrity and dependence though owner is same and premises (in its broader literal sense, having been not defined) was same. Held not covered.

There can be several examples. One of the factories that I worked as GGM, we had set up a sophisticated machine shop with latest imported machine three of which can be supervised by one person. The machine shop was some distance away in separate premises and had just eight person which included two helpers. I insisted on covering them though my GM in charge f Administration felt it need not be covered, though only two helpers were to to be covered. This was because our foundry products are sold and exported after machining only.

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August 6, 2015 · 3:00 pm

Clubbing different units together !

In the days of yore, inspections in the ESIC were programmed and conducted in such a manner that they would, really, detect concealed employment and be  beneficial to the insured persons. At that time the upper limit of wages for coverage was Rs. 1000 pm. If a factory employed 20 or more persons for wages, it became coverable under the ESI Act, even if the 19 persons received wages more than Rs. 1000. The remaining one person whose wages were 1000 or less became coverable. The intention was to ensure wider reach of the scheme.

There were many instances in which the middlemen worked hard to ‘help’ employers evade coverage. They followed variety of techniques for such evasion. One such technique that benefitted those employees was an ingenuous one that helped them evade not only the ESI Scheme but also the income tax and many other statutory provisions. That was the technique of splitting the unit and showing the single unit as various independent units owned by different persons. Usually, those ‘different’ persons happened to be  father, mother, wife, son, daughter, or other close relatives.

There would be a single premises in which 24 powerlooms would be functioning. It requires 6 persons for a single shift. There would, therefore, be 18 persons for three shifts. Besides, there would be two ‘khaandi’ machines to prepare shuttles. It required 2 persons per shift. In all there would have to be 6 persons for three shifts. In addition, the Folders, Clerks and others would carry the figure of total number of employees to 30. But, the employers would get the blue prints prepared showing that the 24 powerlooms belonged to four different owners. They would get factory licence also that way.

When the ESI Inspector visits the factory, they would claim that there were four different factories. There would also be four set of account books. But, when the account books are closely verified, one could see that the division was fake and the management and functioning of all the four units are integrated and there, really, is one one single homogenous  unit. The khaandi machines which would remain located in the area allotted only for one unit, as per the blueprint,  would supply shuttles to all the powerlooms. The motive power would be shown differently for different units, but electricity for lights for the entire factory would be supplied from only one unit. There cannot be reimbursement from other units, as it would provide clear evidence to the unlawful nature of such sharing. Finished products would be stored in a combined manner only in one room. The employees do not know the names of the other owners except the one who manages them every day and pays wages. In such cases, when the units showed functional, financial and managerial integrality, they would be clubbed together and covered under the ESI Act as a single unit.

There were lodges and restaurants in the same premises and the owners claimed that they were independent legal entities. But, the records would show that the employees of the lodge and restaurant were interchangeable and were paid the same wages that included the cash and food components. The restaurant was providing food to all the employees of the lodge but there was no reciprocal arrangement to reimburse the cost of food by the lodge. These instances would show more than the normal B2B relationship between the owner of the lodge and the owner of the hotel, who were just father and son, in real life. In such cases, the ESI Act was enforced against both of them, by clubbing both the lodge and hotel together.

There was a textile shop with a single brand name but,the premises of the establishment would show that it was a three-storey building housing three different units, one for mens wear, another for women and yet another for kids. The employers were not allowed to evade coverage under the ESI Act in such cases. All the three were clubbed together and covered as a single entity.

On the other hand, there were some major employers who opted for combined compliance in respect of ESI provisions, to facilitate their maintenance of records, in spite of the fact that each unit was employing more than 100 persons and were coverable independently.

While the present method, invented by the bureaucrats at the Centre, make the entire inspection procedure a tragicomedy leaving the inspectors (SSOs) to verify, at best, only the current compliance, it would be worth pondering over the manner in which surveys were conducted with adequate depth and different units were clubbed together to extend the security-net to the insured persons / employees of all those units.

Those employers who want to make right compliance under the ESI Act, may find it helpful to verify for themselves whether they meet the following parameters. That will help them to provide ESI Coverage to their employees by clubbing various units together under Reg. 38 of the ESI (General) Regulations, 1950. For more on this issue, please click on the following link:

Clubbing of units

There was a peanuts vendor who was employing three persons in his shop. His small shop was adjacent to that of a hotel. The hotel had, at that time, been covered as a factory and it had been complying with the provisions of the ESI Act. When the ESI Inspector visited the hotel for the purpose of inspection, he found that there were only 22 employees in the Attendance Register but the hotel owner was paying contribution for 25 persons every month. When asked, the hotel owner, the employer, clarified that the owner of the neighbouring peanut shop was paying money to him and he, in turn, was paying contribution in respect of three of his employees in the pea-nut shop. On investigation, the employees of the pea-nut shop were delinked.

That pea-nut vendor said that he had, earlier, been working in a textile mill in Maharashtra and that he knew the importance of and the benefits provided by the ESI Scheme.

 

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August 5, 2015 · 5:52 pm