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Judgment
P. Shanmugam, J.—The writ-petitioner viz., Madathupatti Weavers Co- operative Production and Safes Society Ltd., is the appellant. In
the writ petition reported in 1999 (2) L.L.N. 203 the challenge was against the order of the second respondent, dated August 13, 1996,
determining the amount due u/s 7A of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter referred as the Act)
and directing the appellant to remit the amounts so determined. The appellant was unsuccessful before the learned single Judge and the appeal is
against the said order.
The facts of the case are as follows:
The petitioner society, viz. Madathupatti Weavers Co- operative Production and Sales Society Ltd. is a registered society under the Tamil Nadu
Co-operative Societies Act. The object of the said society is to uplift the weaver community in and around the Madathupatti area. According to
them, they have engaged eight office staff to maintain records and to do the work relating to it. They have 355 members as weavers of which only
238 members are effectively carrying on their work. The society does not own any looms. The society provides yarn to their members and they
take them to their homes where they have got their own looms and they weave the cloth by themselves or with the assistance of their family
members and supply the finished cloth to the society. It is further averred that there is no master-servant relationship between the members of the
appellant society and the weavers and the Act will not apply to the society.
According to the appellant, a show-cause notice was issued for appearing before the Regional Provident Fund Commissioner on June 14, 1994
and to represent their case u/s 7-A of the Act. One Sri Sivaprakasam, Assistant Secretary, appeared before the Regional Provident Fund
Commissioner on June 14, 1994 and he is said to have submitted charge statement for 1993-94. On that basis, by proceedings, dated June 14,
1994, the Regional Provident Fund Commissioner decided to regularise the coverage u/s 1(4) of the Act and a direction was issued to assess the
dues to the enforcement officer. However, it is not clear whether this proceeding has been communicated to the appellant-society. In the year
1996, yet another order, dated August 13, 1996, which is impugned in the writ petition, came to be passed by the Assistant Provident Fund
Commissioner wherein he refers to the earlier order and says that the issue involved already examined by the Regional Provident Fund
Commissioner and issued orders on June 14, 1994; that the appellant had not produced any documentary evidence; and that the dues have been
assessed on the basis of the Enforcement Officer''s report and in exercise of the powers u/s 7-A of the Act, directed the appellant to remit the
amount determined. Consequent on the final proceedings initiated, the appellant moved this Court under Article 226 of the Constitution against the
impugned order.
The contentions of the learned counsel for the petitioner before the learned single Judge were that they did not have sufficient opportunity and
that the establishment is not covered under the said Act, were not accepted and the writ petition was dismissed. The appeal is against this order.
Sri P. Sam, learned counsel appearing for the appellant had made a detailed submission on the following points: According to him,
(i) no proper procedure has been followed as required before determining the amounts due u/s 7-A of the Act;
(ii) The authorities did not consider the applicability of the Act and the final determination after giving sufficient opportunity to the appellant.
On merits, he submits that the appellant society will not come under the purview of the Act inasmuch as there is no employer and employee
relationship between the members and the society. He referred to number of decisions in support of his submissions.
Ms. Radha Srinivasan, learned counsel appearing on behalf of the respondents, submitted that the learned single Judge fully considered the issue
and according to her, sufficient opportunity was given to the appellant and that the requirements have been fully complied with before determining
the amounts due. She further submitted that the appellant-society is covered by the provisions of the Act as per the definition of the employer.
According to her, if really the contention that no proper opportunity was given, they should have raised it before the authority concerned; but they
have not objected for the determination in the year 1994. They have submitted their statement in the enquiry and only on that basis, the order came
to be passed. She also referred to number of decisions in support of her case.
We have heard the learned counsel for both parties and considered the matter carefully.
As far as the determination u/s 7-A of the Act is concerned, it is seen that the provision comprises two parts. Firstly, the authority has to decide
whether the Act applies to the establishment and secondly, he has to determine the amount due from the employer. For the purpose of this
determination, the officer has to conduct such inquiry as deemed necessary. A reading of Sub-section (2) of Section 7-A of the Act shows that the
officer conducting the inquiry has to decide the issue as if he is trying a suit in a civil Court with powers under the Code of Civil Procedure. The
inquiry shall be deemed to be judicial proceedings. Sub-section (3) shows that no order shall be made under Sub-section (I), unless the employer
concerned is given a reasonable opportunity of representing his case. Sub-section (3) empowers the officer to compel the attendance of the person
concerned or the production of documents to decide the applicability of the Act or determination of the amount due from the employer. From the
reading of these provisions, it is clear that no order u/s 7-A of the Act can be passed without conducting a full-fledged inquiry as if the matter is
decided in a suit and that the officer determining the question has to decide both the coverability as well as the determination of the amount.
The Supreme Court in Food Corporation of India Vs. Provident Fund Commissioner and Others, :has held as follows at p. 1137 of LLJ:
....... The Commissioner conducting an inquiry u/s 7-A of the Act has the same powers as are vested in a Court under the CPC for trying a suit.
......The power given u/s 7-A of the Act to the Commissioner is to decide not abstract questions of law, but only to determine in actual concrete
differences in payment of contribution and other dues by identifying the workmen. The Commissioner should exercise all his powers to collect all
evidence and collect all materials before coming to proper conclusion. That is the legal duty of the Commissioner. Though the employer and the
contractors are both liable to maintain registers in respect of the workers employed but the question is not whether one has failed to process
evidence. The question is whether the Commissioner who is the statutory authority has exercised powers vested in him to collect the relevant
evidence before determining the amount payable under the said Act
In our view, the Commissioner has failed to exercise his jurisdiction conferred u/s 7-A of the Act before determining the question, but has
simply ordered on the basis of ""available materials"", which is referred earlier.
A learned single Judge of this Court in T.R. Raghava Iyengar and Co. Vs. The Regional Provident Fund Commissioner, has held that a dispute
whether an establishment is governed by the Act or not cannot be settled without a proper determination of facts forming the corner-stone of the
whole statutory edifice. In that case, the learned Judge found that the Inspector functioning under the Act, visited the establishment and he was
furnished with such information as he wanted in regard to the manufacturing process involved in the production of the metalwares and the number
of employees working in the establishment. On the report furnished by the inspector, the Regional Provident Fund Commissioner informed the
petitioner establishment by his letter that the petitioner establishment comes within the ambit of the Act. That communication, which is relevant for
the purpose of our case, reads as follows:
Your factory comes under the purview of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952 and the scheme framed
thereunder from January 1, 1959 as it is engaged in electrical, mechanical and general engineering (products), one of the industries mentioned in
Sch. I to the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, has completed three years from the date of commencement of
production before January 31, 1959 and has employed fifty or more persons before January 31, 1959.
The rest of the communication is said to have instructed the petitioner as to what they should do in future towards fulfilment of the provisions and
terms of the Act and the scheme. Therefore, the procedure, which was found in the judgment, was that the Inspector under the Act first visits the
establishment and obtains particulars and on the basis of his reports, the Regional Provident Fund Commissioner informs the establishment whether
they are coming within the ambit of the Act and asking such particulars as may be necessary and then holds an enquiry as if in a civil Court for the
purpose of determining the two questions u/s 7-A of the Act, after giving sufficient opportunity. Therefore, for taking a decision u/s 7-A of the Act,
the following requirements are conditions precedent:
(i) that it should be an industry coming u/s 1(3)(a) of the Act, i. e., it should be an establishment which is a factory engaged in any industry specified
in Schedule I; and
(ii) that they should employ 20 or more persons; or
(iii) that there should be a notification of the Central Government to apply the provisions of the Act; or
(iv) that the majority of the employees should have applied for the applicability of the Act; and
(v) that there must be full-fledged enquiry by the Regional Provident Fund Commissioner preceded by an inspection report and notice of
requirement and sufficient opportunity to furnish records.
All these things are pre-conditions before issuing notices or proceedings u/s 7-A of the Act. Inasmuch as the determination takes form of a suit,
the consequence of coverability of the Act as well as determination and payment of amount follows on the basis of the determination, the Act has
provided for sufficient requirements being satisfied before the initiation of an enquiry u/s 7-A of the Act. Even after initiation u/s 7-A of the Act, the
employer should be given sufficient opportunity, as set out under Sub-section (3) of Section 7-A of the Act.
In the light of these proceedings, we are unable to find any material as to the notice or sufficient materials so as to enable the authority to come
to a decision for applicability of the Act and for the determination. Sub-section (3) of Section 7-A of the Act provides for the authority to call for
the examination of any document or report or return so that the question can be decided. In the absence of any substantial material, the orders
proceeded on the basis of a charge statement for the year 1993-94 submitted by the Assistant Secretary one Sri Sivaprakasam, hardly satisfies
even the minimum requirement. The respondent could have called for the particulars of nature of business, bye-laws, books of account, wage
register, particulars of employees and members to enable them to come to a fair and correct conclusion on the question of determination as well as
applicability of the Act, which are absolutely lacking in this case. They are empowered to collect and the employer is obliged to provide, if called
for. On the contrary, the order proceeds as if there was an agreement of coverage under Sub-section (4) of Section 1 of the Act, which provides
for the majority of the workers agreeing for coverage of provident fund. The first order, dated June 14, 1994, states that the proposal of coverage
is regularised u/s 1(3)(a) of the Act. The final order, dated August 13, 1996, proceeds that the issue involved has also been examined by the then
Regional Provident Fund Commissioner and orders were issued on June 14, 1994 and there was no consideration in this impugned order of the
Regional Provident Fund Commissioner and even according to the officer, he has stated that the employer has not produced any document. In the
counter-affidavit also, it is stated that no records were produced on the date of enquiry. Therefore, as a judicial authority deciding the question u/s
7-A of the Act, if no records are produced for the purpose of determination, they have got the power to direct the employer to produce the
documents required to enable them to pass a just order. It may not be correct on the part of the authority to assess on the basis of available
records, viz., ""the Enforcement Officer''s report and the information gathered during the inquiry.
A Division Bench of the Orissa High Court in Balasore Motor Association Vs. The Regional Provident Fund Commissioner, has taken the
view that when liability being disputed, determination of liability is condition precedent for an order. In that case, before the Division Bench,
annexures were filed along with counter-affidavit showing the employees covered under the Act and the monthly wages paid. Further, the Division
Bench has held that it is difficult to accept the contention that the requirement of Section 1(3)(a) of the Act is satisfied to confer jurisdiction on the
authorities to require the petitioner to comply with the provisions of the statute. It is further held that this is all the more so on account of the fact
that the order purporting u/s 7-A of the Act does not record any findings of liability nor does it indicate the basis which has led the Regional
Provident Fund Commissioner to hold that the petitioner is liable under the Act.
In Tech Movers Systems (India) (Private) Ltd. v. Regional Provident Fund Commissioner 1995 (2) L.L.N. 938 a learned Judge of the
Bombay High Court has held as follows:
On a bare reading of Sub-section (4) of Section 1, of the Employees'' Provident Funds and Miscellaneous Provisions Act, it is clear that the
application of the provisions of this Act under this sub-section is dependent upon the fulfilment of the following conditions:
(i) The employer and the majority of the employees in relation to any establishment have agreed that the provisions of this Act should be made
applicable to the establishment;
(ii) the Central Provident Fund Commissioner is satisfied about such an agreement between the employer and the majority of the employees either
on an application made to him on this behalf or otherwise;
(iii) a notification is made in the Official Gazette.
All these requirements are conditions precedent. These are cumulative and each one of them must be satisfied. It is only on the fulfilment of all these
conditions that the provisions of this Act become applicable to an establishment which is not covered otherwise.
From the order and pleadings, we find that the proceedings, dated June 14, 1994, is passed in a perfunctory manner concluding that the
proposal for the coverage under sub-section: (4) is regularised u/s 1(3)(a) of the Act. In this order, the Regional Provident Fund Commissioner
says that he has seen certain heads of accounts and another head dye factory workers coolie and therefore, he has directed the authorised
representatives to ensure that all the post accumulations to be transferred to the statutory fund with immediate effect and has treated 260 weavers
workers u/s 2(f) of the Act. As per the subsequent proceedings, dated August 13, 1996, which is impugned herein, it is seen that an order is
passed u/s 7-A of the Act on the basis of a show-cause notice issued for appearance on June 14, 1994 and on the basis of receipt and charge
statement of 1993-94 wherein he is said to have found wages head of account and that issue already examined by the then Regional Provident
Fund Commissioner and therefore ""the liability for payment of provident fund for weaver workers lies on the society."" The order further says that
the dues are assessed on the basis of the Enforcement Officer''s report and directs the employer to remit the said amount. This proceeding hardly
satisfied the barest minimum requirement, as set out above. The following information are noticed.
(a) There is no independent determination u/s 7-A of the Act. It is based on a prior proceedings.
(b) No enquiry contemplated preceded by inspection and notice conducted.
(c) The society was not called upon to furnish the required materials to determine the coverability.
(d) The determination of dues has not been explained.
Therefore, we have no hesitation in our mind to come to the conclusion holding that the illegality of the order is apparent on the face of the records.
On merits, it is submitted that the appellant weavers co- operative society formed on the basis of one for all and all for one as a co-operative
movement for the purpose of producing and selling the finished cloth. The members of the co-operative society cannot be construed as
employees"" and the society also in turn cannot be construed as an ""employer"" and there is no such relationship between them. In the affidavit, it is
stated that the society do not have looms of their own. The members, who are weaving through their own looms in their respective houses, are
provided with yarn and they take yarn to their houses and they weave in their looms and bring it to the society as finished cloth. According to them,
amount is paid for the cloth. According to them, amount is paid for the cloth produced by them and there is no employer and employee or master
and servant relationship between the members and the society. The society employed eight persons as their staff to maintain their records and other
connected work. All the members of the society are shareholders and they formed the Board of Management. They elect the President and Vice-
President among themselves. They share the profits, if any, among themselves. Besides, it is stated that all shareholders, who are members do not
get yarn regularly and weave the cloth, nor is there any time frame work. The society also does not exercise any supervising control over them.
The specific averments made in the affidavit are not denied in the counter-affidavit. Paragraph 4 dealing with this point states to the effect that
the society has admitted that they supplied the raw materials to the weavers, who returned the finished goods back to the society. Thus, according
to the counter, weaver workers were engaged in the business of the appellant society. They did weaving for the society and the society supplied
yarn and paid the wages after receiving the finished cloth and sold them. There is no finding with reference to the nature of transaction except
stating that the workers are doing business of the society.
Co-operation means work together. But, in law, it has a specific meaning of ""working together"". The co-operative movement has a history of
social development and weavers societies have a role in the freedom movement of our country for self reliance in the production and distribution of
the textile needs of our country. The law relating to co-operative and credit is regulated. Article 43 of the Constitution of India as one of the
Directives mandates the State of endeavour to promote cottage industries oh an individual or co-operative basis in rural areas. The respondents
have not applied the basic issues involved prior to or during the determination. There appears to be an undue haste, lack of openness in
consideration with fair opportunity and to cover the society under the Act.
The Tamil Nadu Co-operative Societies Act, 1983 for short ""Societies Act"" is a consolidated law for making provisions for organisation,
management and supervision of co-operative societies in Tamil Nadu. The object is to provide for orderly development of co-operative movement
in accordance with co-operative principle such as open membership, democratic management, ........ distribution of surplus ... self help and mutual
aid ... so as to bring about improvement in better method of production ... a weaver society has been defined u/s 1(3) of the societies Act as
follows:
Registered society which has its principle object the production of handloom cloth or fabrics or cloth through, or with the help of its members and
marketing the same and includes any registered society which has as its principal object the provision of facilities for the operation of a weavers
society.
A member means a person joining in the application and a person admitted to membership. Thus a member of co-operative weaver society joints
with the object of production and with its help to market the same. There is a marked and clear distinction between a member and a staff or
worker of the society. Section 16 empowers the Registrar to classify the societies with reference to the objects, membership, etc. Section 21 of
the Societies Act deals with the qualification of membership of society provided he/she does not suffer the disqualification u/s 23 of the Societies
Act. One of the disqualification factors is paid officer or servant of society. Chapter VIII deals with paid officers and servants of the society
including appointment, removal set. Rule 14 of the Tamil Nadu Co- operative Societies Rules, 1988 deals with conditions of service of paid
officers and servants of societies. Therefore, if the members are paid employees, they would have been (covered under the relevant provisions of
the Societies Act and procedure for employment service conditions should have been followed. In a weavers society of this nature, there is very
little (sic) scope of members becoming as workers, unless otherwise proved. Members carrying on weaving may also be doing the connected
business of the society, but that will not be sufficient to say that they are the employees of the society.
The Supreme Court in Employees State Insurance Corporation, Trichur v. Ramanuja Match Industries 1985 (1) LLN 249, dealing with the
E.S.I. Act held that in order that some one may be an ""employee"" within ; the definition, he has to be employed for wages. The concept would
bring in a contract of employment. The position of a partner qua the firm is not that of master and servant or employer and employee which
concept I involves an element of subordination, but that of equality. Though the Supreme Court dealt with the case of partnership firm in order to
bring a partner as an employee, there must be a contract of employment and mere payment of remuneration would not be sufficient to bring the
status of an employee. In the same judgment, it is held that though the provisions of the Employees'' State Insurance Act is beneficial statute, it has
to be liberally construed, the Court cannot travel beyond the scheme of statute.
The Supreme Court in Food Corporation of India Vs. The Union of India and Others, : dealing with the question whether headload workers
engaged by contractor in loading and unloading operations at Railway Station are employees of Food Corporation of India, held that there must be
an agreement which will show that the appellant was the real employer of the headload workers through contractors.
Justice Sri K.G. BALAKRISHNAN (as he then was) speaking for the Division Bench of the Kerala High Court in Employees'' State
Insurance Corporation v. Vattiyoorkavu H.W. Co-operative Society 1999 III LLJ (Suppl) 452 has after going through the definition of employees
in the Employees'' State Insurance Act went into the crucial point whether any wages paid to the members of the society, found that by the nature
of the functioning of the society, it appears all the members of the society share the profit according to the quantity of the finished products and the
price of the yarn is collected from the members. It cannot be said that the members of the society were working as employees and were earning
therefrom. It was found that members of the society are not workers of the society; that they were self-employed and that they share the profits
and therefore, the Employees'' State Insurance Act will not cover them.
A learned Judge of the Punjab and Haryana High Court in Punjab, Kadhi Mandal v. Regional Provident Fund Commissioner, Punjab 1996 III
LLJ (Supp) 60 (P&H) has, held that under similar circumstances, there is no master and servant relationship in that case, the Mandal is an
institution with the object of promoting Khadi and in order to fulfil the object, cotton yarn is provided to the weavers and then they come to the
contractor. The weavers take the raw material and prepare the Khadi cloth and return the Khadi cloth to the society, which pay the remuneration
to the weavers on the basis of the work done by them. The Regional Provident Commissioner held that the weavers are working in connection
with the work of the establishment and therefore, they are covered under the Act. The learned Judge, after considering the definition and
provisions, held that from a combined reading of Rules 2(a) and 2(f), it is clear that there must be relationship of master and servant between the
employer and the employee. Unless the requisite control of the master over the servant is there, the relationship of master and servant cannot be
said to be existing. They are not compelled to take the yarn and to do the work. It is entirely the discretion of the members and the weavers to
offer to work. There is no evidence to show any kind of supervision or control. The learned Judge distinguished the judgment in P.M. Patel and
Sons v. Union of India , that the test for determining the relationship of master and servant lay in the existence of the right in the master to supervise
and control the work done by the servant not only in the matter of directing what work that servant was to do but also the manner in which he
should do it. The significant feature of the judgment lies in the observation of the Supreme Court in Shri Birdhichand Sharma Vs. First Civil Judge
Nagpur and Others, : that in the case of beedi industry, the right of rejection of beedies if they did not come up to the proper standard was
evidence of supervision and control exercised by the manufacturer. But, in the present case, there is no question of rejecting of the cloths or
supervision over the weavers and there is no question of compelling them to do the work. Further, the society is a non-profitable organisation to
help the poor weavers to have their own cotton loom in their own houses and share their profits through a co-operative venture. We, therefore,
agree with the view taken by the learned Judge in relation to the relationship of the members with the society.
A Division Bench of the Kerala High Court in Regional Director, E.S.I. Corporation Vs. Sarathi Lines (P) Ltd., has held that merely because it
is legally possible for a Director or Managing Director to function in the capacity of an employee, it does not mean that in all cases a Director or
Managing Director who receives remuneration has necessarily to be treated as an employee. It has to be established that either under the
provisions of articles of association or of separate agreement there was contract of employment between the company and the Managing Director
or the Director. In our case, admittedly, there is no contract pleaded or evidence produced to show that there is employer and employee
relationship.
A Division Bench of our High Court in South India Surgical Company Vs. The Regional Director, Employees'' State Insurance Corporation,
Madras-34, dealing with the coverability of E.S.I. Act, held that it has been seen whether the appellant was exercising any supervisory control over
the workers or they were operating as an independent contractor and it was further held that the contractual relationship is a sine qua non for
holding that there is a relationship between the employer and the employee.
On behalf of the respondent, a reference was made to the judgment of a Division Bench of the Kerala High Court in Kunnathunad C.C. Coop.
Society Vs. Regional Director, ESIC, . That was a case where the society itself engaged in the manufacturing process employing its own members
for wages. That society is distinct from its members. Hence, the society employing its members for wages in the manufacturing process is liable to
be covered under the Act. In that case, the members work in the premises of the society for the wages paid by the society and in the light of
expression ""wages"" u/s 2(22) of the Act to mean all remuneration paid by the society being distinct legal entity from its members and of the
members work for wages for the society, they are employees. There is no such finding with materials in our case.
Yet another reference was made to the judgment of a Division Bench of our High Court in Madras Government Servants Co-operative
Society Ltd., Madras Vs. Employees'' State Insurance Corporation, Madras, where a question arose whether a co-operative society engaged in
financing its members would be a ""shop"" and would come within the meaning of the E.S.I. Act. This judgment has no application to the facts of the
present case.
In Pondicherry State Weavers'' Co-operative Society Vs. Regional Director, Employees'' State Insurance Corporation, Madras, a Division
Bench of our High Court held that there is no bar for the society employing its members and there being a contract of an employment between the
society and its members, then the members so employed should be taken to have two independent capacities, one as a member of the society and
the other as an employee of the society. Under these circumstances, the Division Bench has held that there can be a contract of employment which
is established in that case.
The judgment of the Supreme Court in P.M. Patel and Sons v. Union of India (supra), is a case where workers were employed in the business
of manufacture and sale of beedies, there is a control and supervision retained by the employer. The Supreme Court held that the home workers
received the raw materials, roll the beedies at home and deliver them to the manufacturer subject to the right of rejection clearly shows the requisite
degree of control and supervision for establishing the relationship of master and servant between the home workers and the manufacturers. That is
not the case here. On the contrary, it is pointed out that the members of the society have their own looms in their residence and they do their work
along with their family members and there is no supervision and time frame work, etc. There is absolutely no question of master and servant-
relationship between the members and the society.
A constitutional Bench of the Supreme Court repelling the challenge to the provisions of Sections 1(3)(b) and 17 in Mohamedalli v. Union of
India AIR 1964 SC 930 : 1963 1 LLJ 536 held that the underlying idea behind provisions of the Act is to bring all kinds of employees and is
intended to benefit the employees. Their Lordships also held that the co-operative societies stand on a special footing which distinguish from other
establishments or corporation and it is the settled policy of the Government to roster co-operative societies with a view to their development and
growth in the interest of community, of course, this is in reference to societies employing workers and paying wages. That apart, the emphasis is on
(sic) the employment and the protection of interest of employees.
The learned single Judge''s attention was not drawn on those aspects with the result, there was a finding as though the society paid wages to
the members of the society and they work in connection with the business of the society. We have seen that the proceedings u/s 7A of the Act has
to be drawn only after an enquiry like a suit and for a proper determination, the so called material furnished by the Assistant Secretary of the
society, viz., heads of accounts was, in no way, sufficient material to come to conclusion on the various aspects of the coverability as well as
determination of the amounts due.
For all these reasons stated above, we set aside the order of the learned single Judge, quash the impugned order and the writ appeal is
allowed.