Section 1(6) of ESI Act Not Applicable Where Coverage Is Sought for First Time: Andhra Pradesh High Court

The Andhra Pradesh High Court has held that Section 1(6) of the Employees’ State Insurance Act, 1948, which allows continued applicability of the Act despite a subsequent reduction in workforce, does not apply where the Act is being invoked for the first time.

The Court ruled that for initial coverage under the ESI Act, the threshold of employing at least ten persons as mandated under Section 2(12) remains essential.

The Division Bench of Justice Ravi Nath Tilhari and Justice Challa Gunaranjan held, "We are of the considered view that Section 1(6) of ESI Act is not attracted to the present case. The number of employed person, if there is reduction below the specified number, with respect to a ‘factory’ as covered under Section 2(12) of the Act, after the amendment of 1989, then only the number of employed persons would not have the effect of bringing out the factory out of the purview of the ESI Act which Act would continue to apply. But, as in the present case, the ESI Act was previously not applicable at all and for the first time it was being brought under ESI Act, the number of employed person would be relevant. As it is below 10, the ESI Act could not apply. We accordingly answer the point framed by us."

The Divison Bench dismissed an appeal filed by the Employees’ State Insurance (ESI) Corporation challenging an order of the Principal Senior Civil Judge, Nellore, which had declared that M/s. Sri Ramakrishna Rice Mill was not liable for coverage under the ESI Act, 1948, due to employing less than ten workers.

The Appeal was filed under Section 82 of the Employees’ State Insurance Act, 1948, by the Regional Director of the ESI Corporation against the judgment dated March 30, 2007, in ESI O.P. No. 75 of 2005. The case was argued by Sri Venna Kalyan Chakravarthi, learned counsel appearing on behalf of Sri U.R.P. Srinivas, the Standing Counsel for the appellant-ESI Corporation.

The rice mill, a registered partnership firm established in 1980, had approached the ESI Court under Section 75 of the Act seeking a declaration that it was not covered by the ESI Act. It also sought the quashing of orders dated January 2, 2003 (under Section 45A), January 6, 2003, and March 24, 2005 (under Section 45G), and a refund of Rs. 88,657 illegally recovered by the ESI Corporation.

The rice mill contended that it never employed more than nine persons, including casual labourers and coolies, at any point in time. The workers were neither permanent employees nor engaged on a regular basis. The rice mill emphasized that it was routinely inspected by various labour authorities, including the ESI Inspector, and it maintained all statutory registers. Despite this, it was subjected to recovery action based on the ESI Inspector's visit on April 25, 1998, leading to the issuance of the impugned orders and recovery of the disputed amount.

The ESI Corporation, in its counter, argued that on the date of inspection in 1998, the rice mill employed 12 workers and carried on manufacturing activity with the aid of power, thereby bringing it within the definition of a "factory" under Section 2(12) of the Act. It relied heavily on the amendment to Section 1(6) of the Act introduced in 1989, arguing that the number of employees was no longer relevant to determine applicability.

Court's Findings

The Court, however, rejected this argument. After perusing the records and hearing the submissions, it noted that the finding of the Civil Judge that the rice mill employed fewer than ten persons was unchallenged in the appeal. Thus, the key legal issue before the Court was whether the 1989 amendment, specifically Section 1(6) of the Act, rendered the employee strength immaterial for ESI coverage.

Interpreting the law, the Court held that Section 1(6) applied only to factories or establishments already governed by the ESI Act. It clarified that this provision ensures continuity of ESI coverage even if the number of employees subsequently falls below the statutory threshold. However, it does not apply to a case where the ESI Act is sought to be made applicable for the first time. In such a scenario, the factory must meet the criteria under Section 2(12), which mandates employment of ten or more persons to fall within the definition of a “factory”.

“In our view, for the applicability of ESI Act for the first time, what is relevant is that it should be a ‘factory’ as defined under Section 2(12). If the number of persons employed is less than 10, it would not be a ‘factory’... Sub-section (6) of Section 1 is not relevant at all in the present case,” the Court observed.

The Bench concluded that the rice mill could not be brought within the ambit of the ESI Act in the absence of proof that it had employed ten or more persons. Since the ESI Corporation failed to establish the threshold requirement, the Civil Judge’s decision setting aside the impugned orders and directing refund was legally sound. “There is no illegality in the order under challenge. The appeal does not involve any substantial question of law and is dismissed,” the Court ruled, also directing closure of all pending miscellaneous petitions.

Cause Title: The Regional Director, ESI Corporation v. M/s. Sri Ramakrishna Rice Mill & 4 others [Civil Miscellaneous Appeal No: 801/2008]

Appearance:-

Petitioner: Advocates Venna Kalyan Chakravarhi, U.R.P. Srinivas

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