Explained: When Can ESIC Invoke Section 45A to Determine Employer Contributions?

The Supreme Court recently held that the Employees’ State Insurance Corporation cannot invoke its summary powers to raise old contribution demands against employers who have produced records and cooperated with inspections, even if the authorities consider those records inadequate, setting aside a recovery order dating back to the late 1990s against Carborundum Universal Ltd.

Court set aside the contribution demand raised against the manufacturing company for the period between 1988 and 1992. It held that the Corporation had wrongly invoked its exceptional powers under the Employees’ State Insurance Act (the Act) to bypass regular adjudication and limitation requirements.

The bench of Justices Manoj Misra and Ujjal Bhuyan said that mere inadequacy of records does not give jurisdiction to the Corporation to invoke Section 45A of the Act, which empowers the Corporation to determine contributions only when an employer fails to submit records or obstructs inspection.

Court said that the very foundation for exercising power under Section 45A lies in either non-production of records, lack of cooperation, or obstruction during inspection.

The bench explained that Section 45A is meant to be a “best judgment” assessment, similar to provisions found in taxing statutes. However, where records are produced and cooperation is extended, the assessment must be carried out under Section 75(2)(a) and not under Section 45A.

The bench made it clear that dissatisfaction with the quality or completeness of documents does not amount to non-production of records. Such dissatisfaction, it said, cannot be used to invoke a power meant only for exceptional situations. If the Corporation, after examining the records, believes that the employer’s computation is incorrect or that further evidence is required to determine the nature of certain entries, the proper course would be to raise a dispute under Section 75.

Moreover, court cautioned that expanding the scope of Section 45A to cover cases of partial dissatisfaction or perceived inadequacy of records would amount to rewriting the statute, which would be contrary to its text and structure. It further observed that the statutory scheme does not permit the Corporation to bypass Section 75 merely because verification is inconvenient or time-consuming.

Court was dealing with a civil appeal filed by Carborandum Universal Ltd against a Madras High Court judgment dated October 12, 2023, which had declined to interfere with a 2015 order of the ESI court.

The ESI court had upheld an order passed in 2000 by the Regional Office of the Employees’ State Insurance Corporation (Tamil Nadu), holding that an amount of Rs 5,42,575.53 was due as arrears of contribution from the employer for the period between August 1, 1988 and March 31, 1992. The appellant was directed to pay the amount with interest at 12 percent per annum up to August 31, 1994, and at 15 percent per annum thereafter. The order was passed under Section 45A of the Act.

While acknowledging that the Employees’ State Insurance Act, 1948 is a beneficial legislation enacted to provide social security benefits to employees, the Supreme Court noted that the High Court itself had recorded that the appellant had appeared before the Corporation through authorised representatives and had produced relevant records during personal hearings.

Court observed that once records were produced and the appellant participated in the hearings, there was no non-cooperation or obstruction. As a result, the basic conditions required for invoking Section 45A were absent.

It also took note of the fact that the appellant had produced ledgers, cash books, journal vouchers, contractor records and contribution returns for the relevant period. Multiple personal hearings were granted and attended by authorised representatives. The Corporation itself had recorded that while records were produced, certain supporting bills were not furnished for some expenditure heads.

Even assuming this finding to be correct, court said it did not bring the case within the scope of Section 45A.

The bench concluded that both the Employees’ Insurance Court and the High Court committed a grave error by affirming the order passed under Section 45A without examining this jurisdictional defect.

Holding that the invocation of Section 45A was unsustainable in the facts of the case, the Supreme Court set aside the orders passed by the corporation, the ESI court and the High Court.

Case Title: M/s Carborandum Universal Ltd Vs ESI Corporation  

Bench: Justices Manoj Misra and Ujjal Bhuyan