Holding

Section 858 provides an enabling, discretionary provision; the levy of damages is not mandatory and must be exercised with due consideration of mens rea, and Regulation 31C must be read in conformity with the Act.

Summary

The employer, H.M.T. Ltd., failed to deposit the Employees' State Insurance contributions within the statutory period, prompting the Employees' State Insurance Corporation (ESIC) to claim interest and damages under Section 858 of the Employees' State Insurance Act, 1948. The Karnataka High Court limited interest to two years and held that Section 858 is an enabling provision, not mandating the levy of damages, and therefore refused to award damages. On appeal, the Supreme Court examined whether the provision is mandatory, the effect of Regulation 31C of the Employees' State Insurance (General) Regulations, 1950, and whether a penalty requires mens rea. The Court held that Section 858 confers discretionary authority; damages are not compulsory, and Regulation 31C must be interpreted in harmony with the Act and cannot override its discretionary nature. It also affirmed that mens rea or actus reus is a necessary ingredient for imposing penalties. Consequently, the Supreme Court set aside the High Court’s partial judgment, allowed the appeal, and remitted the matter to the High Court for fresh determination of damages, with no order as to costs.

Issues considered

Whether Section 858 of the Employees' State Insurance Act, 1948 imposes a mandatory levy of damages for delayed contribution deposits.
Whether Regulation 31C of the Employees' State Insurance (General) Regulations, 1950 makes the quantum of damages compulsory.
Whether the levy of damages under the Act requires proof of mens rea or actus reus.
Whether subordinate legislation can override the discretionary nature of the statutory provision.

Legislation cited

Employees' State Insurance Act, 1948s. 2(17), s. 39, s. 858
Employees' State Insurance (General) Regulations, 1950s. Regulation 31C

Subjects

Employees' State Insurance Actpenaltydamagesenabling provisionregulationdiscretionary authoritymens reasubordinate legislationinterestcontribution default

Judgment

[2008] 1 S.C.R. 646

A EMP. STATE INSURANCE CORPORATION ~
v.
H.M.T. LTO. ANO ANR.
(C.A. No. 340 of 2008)
JANUARY 11, 2008
B
[S.B. SINHA AND J.M. PANCHAL, JJ.]

"-'
Employees State Insurance Act, 1948- ss. 858 and 2(17)
- D~posit of contribution payable under the Act - Delay in
c deposit by employer - Levy of damages - Held: Is not
imperative in all cases - s. 858 provides for an enabling
provision - It does not envisage mandatory levy of damages
- When discretionary jurisdiction is conferred on a statutory
authority.to levy penal damages by reason of an enabling
D provision, the .same cannot be construed as imperative -
Regn. 31 C to be construed keeping in view language used in
Legislative Act and not de hors the same - Employees State
Insurance (General) Regulations, 1950 - Regn.31C. •
Interpretation of statutes- Subordinate legislation - Held:
E Must conform to provisions of the Legislative Act.
Penalty/Damages - Levy of - Necessary ingredients for
- Held: Existence of mens rea or actus reus to contravene a
statutory provision is a necessary ingredient for levy of
damages.
F 1
Respondent-employer failed to deposit the amount
due in respect of contribution payable under the '
Employees State Insurance Act, 1948 within the specified
period. Appellant-Corporation raised claim for payment
G of interest for delayed payment and furthermore le· ·ied
damages in terms of Section 858 of the Act.
High Court held that although period of delay was -..--
slightly more than two years, some reasonable time
should be allowed for deposit of contributions and, thus, ·
H 646
EMP. STATE INSURANCE CORPORATION v. 647
H.M.T. LTD. AND ANR.

restricted the period of payment of interest to two years A
only. It furthermore held that in the facts and
circumstances of the case, no damage should be directed
to be levied as Section 858 of the Act provides for an
enabling provision and does not make it mandatory to
levy damages in every case. B
In appeal to this Court, it was contended that the
t ""· High Court while passing the said judgment erred in failing
to take into consideration the purported effect of
Regulation 31 C of the Employees State Insurance
(General) Regulations, 1950 which provides for levy of C
interest as well as damages.
Interpretation and application of Section 85-B of the
Act and Regulation 31 C of the Regulations was thus in
question in the present appeal.
D
Allowing the appeal and remitting the matter to High
.J Court, the Court
HELD:1.1. Section 858 of the Employees State
Insurance Act, 1948 provides for an enabling provision. It
does not envisage mandatory levy of damages. It does · E
not also contemplate computation of quantum of damages
in the manner prescribed under the regulations. [Para 12]
[652-B]
1.2. An employee being required to be compulsorily
/' insured, the employer is bound to make his part of the F
~ contribution. An employee is also bound to make his
contribution under the Act. But the same does not mean
that levy of damages in all situations would be imperative.
[Para 13] [652-C, D]
1.3. Section 858 of the Act uses the words 'may G
recover'. Levy of damages thereunder is by way of
penalty. The Legislature limited the jurisdiction of the
authority to levy penalty, i.e., not exceeding the amount
of arrears. Regulation 31 C of the Employees State
Insurance (General) Regulations, 1950 therefore must be H
648 SUPREME COURT REPORTS [2008] 1 S.C.R.

A construed keeping in view the language used in the ...
Legislative Act and not de hors the same. It is a well known
principle of law that a subordinate legislation must
conform to the provisions of the Legislative Act. [Paras ·
12, 14] [652-D, E]
B 1.4. A penal provision should be construed strictly.
Only because a provision has been made for levy of
penalty, the same by itself would not lead to the " i

conclusion that penalty must be levied in all situations.
Such an intention on the part of the legislature is not
c decipherable from Section 858 of the Act. When a
discretionary jurisdiction has been conferred on a
statutory authority to levy penal damages by reason o'f
an enabling provision, the same cannot be construed as
imperative. Even otherwise, an endeavour should be
D made to construe such penal provisions as discretionary,
unless the statute is held to be mandatory in character.
[Para 17] [653-E, F, G]
1.5. The statute itself does not say that a penalty has
to be levied only in the manner prescribed. It is also not a
E case where the authority is left with no discretion. The
legislation does not provide that adjudication for the
purpose of levy of penalty proceeding would be a mere
formality or imposition of penalty as also computation of
the quantum thereof became a foregone conclusion.
F Ordinarily, even such a provision would not be held to be ,.-
..
providing for mandatory imposition of penalty, if the
proceeding is an adjudicatory one or compliance of the
principles of natural justice is necessary thereunder.
[Para 20] [655-8, C]
G
1.6. Existence of mens rea or actus reus to
contravene a statutory provision must also be held to be
a necessary ingredient for levy of damagss and/or thti
---
quantum thereof. [Para 21] [655-D]
H Hindustan Times Ltd. v. Union of India [{1998) 2 SCC
EMP. STATE INSURANCE CORPORATION v. 649
H.M.T. LTD. AND ANR. [S.B. SINHA, J.]

-
"· .... 242] - distinguished.
Prestolite (India) Ltd. v. Regional Director and Anr. [1994
A

Supp.(3) SCC 690] and Dilip N. Shroff v. Joint Commissioner
of Income Tax, Mumbai and Anr. [(2007) 6 SCC 329]- referred
to.
B
2. The High Court was not wrong in opining that
t ... Section 85-B provides for an enabling provision. What,
however, cannot be appreciated is that such a construction
itself would lead to the conclusion that the High Court is
entitled to substitute its view in place of the statutory c
authority. Therefore, the matter should be considered
afresh for determination of quantum of damages etc ..
[Para 22] [655-E, F]
CIVILAPPELLATE JURISDICTION : Civil Appeal No. 340
of 2008. D
From the final Judgment and Order dated 12.9.2005 of
the High Court of Karnataka at Bangalore in Writ Appeal No.
2587 of 2004 (L~ESI).
C.S. Rajan, V.J. Francis and Anupam Mishra for the E
Appellant.
CV. Francis, G. Prakash and Sanjay R. Hegde for the
Respondent.

l' The Judgment of the Court was delivered by F
r
S.B. SINHA, J. Leave granted.
1. Interpretation and application of Section 85-B of the
Employees State Insurance Act (The Act) and Regulation 31 C
of the Employees State lm:urance (General) Regulations, 1950 G
(The Regulations) is in question in this appeal which arises out
-}"
of a judgment and order dated 12.9.2005 passed by a Division
Bench of the Karnataka High Court in Writ Appeal No.2587 of
2004 allowing the appeal in part preferred from the judgment
and order dated 25.3.2000 passed by a learned Single Judge
H
650 SUPREME COURT REPORTS [2008) 1 S.C.R.

A of the said Court in Writ Petition No.38753 of 1998.
.... .-
"..--

2. Respondent is an 'employer' within the meaning of the
provisions of Section 2(17) of the Act. Indisputably, prior to
issuance of the notification dated 27 .3.1992, the wage ceiling
of the employees was restricted to Rs.1,600/- per month. The
B same was increased to Rs.3000/- per month with a view to bring
them within the purview of the Act.
&. •

3. Validity of the said notification was challenged in a large
number of writ petitions by the employees. By an interim order
c passed by the Hi~1h Court, the operation of the notification was
directed to be stayed. The said writ petitions were dismissed
by an order dated 5.8.1992.
4. Writ appeals were filed by the 'employees' through their
respective Trade Unions. While admitting the said appeals, the
D interim order operating during the pendency of the writ petition
was allowed to continue.
The said writ appeals were also dismissed by the Division
Bench of the High Court by reason of a judgment and order
dated 11. 7.1995, inter alia, on the premise that there was no
E impediment for the respondent herein to deposit the
contributions of the employees concerned.
5. On and from the said date interest was claimed till the
date of actual payment. Appellant thereafter also raised a claim
F for payment of interest for delayed payment and furthermore r
levied damages in terms of Section 85B of the Act.
6. A writ petition filed by the respondent hei·ein questioning
the validity of the said notice dated 9.6.1998 was dismissed by
an order dated 25.3.2000. A review petition was filed by the
G appellant' herein which was also dismissed on merits.
'{·
An intra court appeal was preferred thereagainst and by
reason of the impugned judgment, it was allowed in part opining:
1. that although period of deiay is slight:y more than two
H years, some reasonable time should be a!lowed for
EMP. STATE INSURANCE CORPORATION v. 651
H.M.T. LTD. AND ANR. [S.B. SINHA, J.]
--f
" ,J.-
deposit of contributions and, thus, restricting the A
period of payment of interest to two years only.
2. No damage should be directed to be levied in the
facts and circumstances of the case as Section 858
of the Act provides for an enabling provision and
does not make is mandatory to levy damages in 8
every case.
t •

7. Mr. C.S. Rajan, learned Senior Counsel appearing for
the appellant, submitted that the High Court committed a serious
error in passing the impugned judgment in so far as it failed to c
take into consideration the purported effect of Regulation 31C .
of the Regulations which provides for levy of interest as also
damages.
8. Mr. C.V. Francis, learned counsel appearing on behalf
of the respondent, on the other hand, would support the D
impugned judgment.
9. The said Act was enacted to provide for certain benefits
to ~he employees of an establishment in case of sickness,
maternity and employment injury and to make provisions for
certain other matters in relation thereto. ·
E

10. Chapter IV of the Act provides for payment of
contributions. Section 39 of the Act postulates payment of
contributions thereunder both by the 'employer' as also the
~ 'employee'. F
-1 t 11. Section 858 of the Act empowers the Corporation to
recover damages in the event an employer fails to make the
payment of the amount due in respect of contribution; subject,
however, to the condition that the amount thereof would not
exceed the amount of arrears as may be specified in the G
(
... Regulations. Proviso appended thereto incorporates the
principles of 'Natural Justice'.
~

J 12. Obligation on the part of the employer to deposit the
contributions of both the 'employer' and the 'employee' is not in
H
652 SUPREME COURT REPORTS [2008] 1 S.C.R.

A dispute.
What is in dispute is as to whether the amount of damages
specified in Regulation 31 C of the Regulation is imperative in
character or not.
B It is a well known principle of law that a subordinate
legislation must conform to the provisions of the Legislative Act.
Section 858 of the Act provides for an enabling provision. It • •
does not envisage mandatory levy of damages. It does not also
contemplate computation of quantum of damages in the manner
c prescribed under the regulations.
13. The statutory liability of the employer is not in dispute.
An employee being required to be compulsorily insured, the
employer is bound to make his part of the contribution. An
employee is also bound to make his contribution under the Act.
D But the same does not mean that levy of damages in all
situations would be imperative.
14. Section 858 of the Act uses the words 'may recover'.
Levy of damages thereunder is by way of penalty. The
E Legislature limited the jurisdiction of the authority to levy penalty,
i.e., not exceeding the amount of arrears. Regulation 31C of
the Regulations, therefore, in our opinion, must be construed
keeping in view the language used in the Legislative Act and
not de hors the same.
F 15. Our attention, however, has been drawn to a decision ~
of this Court in Hindustan Times Ltd. v. Union of India ((1998)
2 sec 242] wherein it has been laid down :
"From the aforesaid decisions, the following principles
can be summarized :
G
The authority under Section 14-B has to apply his mind to
the facts of the case and the reply to the show-cause
notice and pass a reasoned order after following principles
of natural justice and giving a reasonable opportunity of
being heard; the Regional Provident Fund Commissione;
H
EMP. STATE INSURANCE CORPORATION v. 653
H.M.T. LTD. AND ANR. [S.S. SINHA, J.]
,,, ~
usually takes into consideration the number of defaults, A
the period of delay, the frequency of default and the amounts
involved; default on the part of the employer based on
plea of power-cut, financial problems relating to other
indebtedness or the delay in realization of amounts paid
by the cheques or drafts, cannot be justifiable grounds for B
the employer to escape liability; there is no period of
' ... limitation prescribed by the legislature for initiating action
for recovery of damages under Section 14-8."
16. It was, however, opined that in certain situations, the
employer can claim the benefit of 'irretrievable prejudice' in case c
a demand for damages is made after several years. In that case,
this Court was concerned, inter alia, with a question in regard
to the effect of levy of damages after a long time. The question
which, inter alia, arose for consideration therein was as to
whether suo moto reitisional jurisdiction could be exercised by D
.J
the revisional authority at any time it desires. The Court made a
distinction between the cases involving 'recovery of money' from
iT
an employer who had withheld the contributions made by the
workmen in trust and other cases. It was in that situation opined
supra. We are not concerned with such a situation herein. E
17. A penal provision should be construed strictly. Only
because a provision has been made for levy of penalty, the same
by itself would not lead to the conclusion that penalty must be
levied in all situations. Such an intention on the part of the
~ 7 legislature is not decipherable from Section 858 of the Act. When F
\' a discretionary jurisdiction has been conferred on a statutory
authority to levy penal damages by reason of an enabling
provision, the same cannot be construed as imperative. Even
otherwise, an endeavour should be made to construe such penal
provisions as discretionary, unless the statute is held to be G

'\.
• mandatory in character.
18. In Prestolite (India) Ltd. v. Regional Director & Anr
[1994 Supp.(3) SCC 690], th is Court rejected a contention
raised by the Regional Director of Employees Insurance that
H
'·
'
654 SUPREME COURT REPORTS [2008] 1 S.C.R.

A under the Employee's State lnusrance General Regulations
.
guidelines have been indicated showing as to how·damages
for delayed payment are to be imposed and since such
guidelines have been followed, no exception should be taken
thereto made to the irr.pugned adjudication, stating :
8 "Even ifthe regulations have prescribed general guidelines
and the upper limits at which the imposition of damages
:.. I
can be made, it cannot be contended that in no case, the
mitigating circumstances can be taken into consideration
by the adjudicating authority in finally deciding the matter
c and it is bound to act mechanically in applying the
uppermost limit of the table. In the instant case, it appears
to us that the order has been passed without indicating
any reason whatsoever as to why grounds for delayed
payment were not to be accepted. There is no indication
D as to why the imposition of damages at the rate specified
in the order was required to be made. Simply because
the appellant did not appear in person and produce
.
materials to support the objections, the employee's case
could not be discarded in limine. On the contrary, the
E objection ought to have been considered on merits."

19. In Difip N. Shroff v. Joint Commissioner of Income
Tax, Mumbai & Anr. [(2007) 6 SCC 329], this Court stated :
"40. Thus, it appears that there is distinct line of authorities
F which clearly lays down that in considering a question of ,..
penalty, means rea is not a relevant consideration. Even
assuming that when the statute says that one is liable for
penalty if one furnishes inaccurate particulars, it may or
may not by itself be held to be enough if the particulars
furnished are found to be inaccurate is anything more
G
needed but the question would still be as to whether
reliance placed on some valuation of an approved valuer
and, therefore, the furnishing of inaccurate particulars was
• ~

not deliberate, meaning thereby that an element of mens
rea is needed before penalty can be imposed, should
H
EMP. STATE INSURANCE CORPORATION v. 655
H.M.T. LTD. AND ANR. [S.B. SINHA, J.]
> have received serious consideration in the light of a large A
number of decisions of this Court."
20. We agree with the said view as also for the additional
reason that the subordinate legislation cannot override the
principal legislative provisions.
B
The statute itself does not say that a penalty has to be
i -I
levied only in the manner prescribed. It is also not a case where
the authority is left with no discretion. The legislation does not
provide that adjudication for the purpose of levy of penalty
proceeding would be a mere formality or imposition of penalty c
as also computation of the quantum thereof became a foregone
conclusion. Ordinarily, even such a provision would not be held
to providing for mandatory imposition of penalty, if the
proceeding is an adjudicatory one or compliance of the
principles of natural justice is necessary thereunder.
D
21. Existence of mens rea or actus reus to contravene a
statutory provision must also be held to be a necessary
ingredient for levy of damages and/or the quantum thereof.
22. The Division Bench of the High Court, therefore, in our
opinion, was not wrong in opining that Section 85-B provides E
for an enabling provision. What, however, cannot be appreciated
that is such a construction itself would lead to the conclusion
that the High Court is entitled to substitute its view in place of
the statutory authority. In our considered view, therefore, the
.., matter should be considered afresh for determination of quantum F
• of damages etc. in the light of the observations made
herein before.
23. We are, therefore, of the opinion that the impugned
judgments cannot be sustained. It is set aside accordingly and
G
the matter is remitted to the High Court for consideration of the

~
• matter afresh in the light of the observations made herein. The
appeal is allowed to the aforementioned extent. In the facts and
circumstances of this case, there shall be no order as to costs.
8.8.B. Appeal allowed. H
.:i