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.


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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2 responses to “When the E.I. Courts grant stay…

  1. Abdul Hameed

    The position of law is well explained. Recovery action is independent and distinct from ESI Act under which EI court function. Once a recovery is started under IT rule adopted in ESI act, then remedy is under those rule. This is my view too. But in law there is always a contra view. The IT rules are applicable by adoption in ESI act and not a separate enactment and therefore they being a disputed recovery EI court can intervene though that is facile argument.

    I feel ESI authorities should challenge such stay order by seperate IA and if not successful move High court under Art 227. Now that appellate tribunal is there undet ESI act, petitioners should be asked to first go before those tribunals.

  2. B.P.B

    This is an eye opener … Thank you !!!

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