Holding

Amount received on encashment of earned leave is not part of "basic wage" under Section 2(b) of the EPF Act.

Summary

The Manipal Academy of Higher Education challenged the inclusion of amounts received on encashment of earned leave as part of "basic wage" under Section 2(b) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, which would obligate the employer to make pro‑rata EPF contributions. The Regional Provident Fund Commissioner had held the encashment amount to be part of basic wage, but the EPF Appellate Tribunal and the Karnataka High Court set aside that view. The Supreme Court examined the definition of "basic wage" and applied the test of universality, noting that leave encashment is a contingent, optional payment not earned by all employees. Relying on earlier decisions such as Bridge & Roof Co. and T.I. Cycles, the Court held that leave encashment does not fall within "basic wage" and therefore does not attract employer contribution. The Court allowed the appeals, directing that any contributions already made may be adjusted and no refund claim is permissible.

Issues considered

Whether the amount received on encashment of earned leave constitutes "basic wage" within the meaning of Section 2(b) of the Employees' Provident Fund and Miscellaneous Provisions Act, 1952, thereby attracting employer's EPF contribution.

Legislation cited

Employees' Provident Fund and Miscellaneous Provisions Act, 1952s. 2(b), s. 6

Subjects

Employees' Provident Fundbasic wageleave encashmentemployer contributionuniversality testbeneficial legislation

Judgment

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[2008] 4 S.C.R 772
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A · MANIPAL ACADEMY OF HIGHER EDUCATION
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v. j-·

PROVIDENT FUND COMMISSIONER f'

(Civil Appea! No. 1832 of 2004) ).

MARCH 12, 2008
B :
(DR. ARIJIT PASAYAT AND P. SATHASIVAM, JJ.)

LabowLaw:
~
Employees' Provident Fund and Miscellaneous t
c Provisions Act, 1952:
s.2(b) - 'Basic. Wage' - 'Leave encashment' - HELD:
Amount received by encashing earned leave is not a part of
"basic wage" under s.2(b) requiring pro rata contribution by
employer.
0
In the instant appeals filed by the employer, the
question for consideration before the Court was: whether
the amount received by encashing the earned' leave is a
part of "basic wage" under Section 2(b) of the Employees'
E Provident Fund and Miscellaneous Provisions Act, 1952
requiring pro rata employer's contribution?
Allowing the appeals, the Court
HELD: 1.1 It is to be noted that any amount of
F contribution cannot be based on contingencies and
uncertainties. The test is one of universality. In the case •j
of encashment of leave the option may be available to all r !
the employees but some may avail and some may not
:·
avail. That does not satisfy the test of universality.
G [para 11] [781-G, H; 782-A]
Bridge & Roof Co. (India) Ltd. v. Union of India 1963 (2)
SCR 978; Jay Engineering Works Ltd. and Ors. v. Union of
India and Ors. 1963 (3) SCR 995; Tl Cycles of India, Ambattur
')..
v. M.K. Gurumani and Ors. 2001 (7) sec 204; Daily Partap V.
H 772
-\'
'' MANIPALACADEMY OF HIGHER EDUCATION v.
PROVIDENT FUND COMMISSIONER

Regional Provident Fund Commissioner 1998 (8) SCC 90 -
773

A
relied on.
Hindustan Lever Employees' Union v. Regional
Provident Fund Commissioner and Anr. 1995 (2) LLJ. 279 -
distinguished.
B
1.2 The term 'basic wage', which includes all
emoluments earned by an employee while on duty or on
leave or on holidays with wages in accordance with the
terms of the contract of employment, can, for the purpos~s
of emoluments earned while on leave, only mean basic c
wages for weekly holidays, national holidays and festival
holidays etc. In many cases the employees do not take
leave and encash it at the time of retirement or same is
encashed after his death which can be said to be
uncertainties and contingencies. Though pr_ovisions
D
have been made for the employer for such contingencies
unless the contingency of encashing the leave is there,
"-<. the question of actual payment to the workman does
not take place. Basic wage was never intended to
include amounts received for leave encashment.
[para 12] [782-A-D] E

2. Though the statute in question is a beneficial one,
the concept of beneficial legislation becomes relevant
only when two views are possible. [para 13] [782-D]
3 If any payment has already been made, it can be F
i - adjusted for future liabilities and there shall not be any
refund claim since the fund is a running one. [para 14]
[782-E]
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
G
1832 of 2004
-I

From the final Judgment and Order dated 14.10.2003 of
the High Court of Karnataka at Bangalore in Writ Appeal No.
7466 of 2000 (L-PF)
H
A
774 SUPREME COURT REPORTS

WITH
[2008] 4 S.C.R.
"
j· •
Civil Appeal Nos. 2535, 2536, 2539, 2540 and 2541 of
,,-
2004.
'
Dr. Rajeev Dhawan, Lakshmi Raman Singh for the
B Appellant.
Ashok Bhan, Kiran Bhardwaj, A. Tarique, B. Krishna
Prasad and D.S. Mahra for the Respondent.
~
The Judgment of the Court was delivered by
c DR. ARIJIT PASAYAT, J. 1. In all these appeals common
points of law are involved and therefore they are disposed of by
a .common judgment.
2. The dispute in each case is whether the amount
D received by encashing the earned leave is a part of "basic wage"
under Section 2(b) of the Employees' Provident Fund and
Miscellaneous Provisions Act, 1952 (in short the 'Act') requiring >
pro rata employer's contribution. In each case the Regional )-

Provident Fund Commissioner (in short the 'Commissioner')
held that the amount received on encashment of earned leave
E I
has to be reckoned for the purpose of Section 2(b) of the_Act.
Accordingly, demands were raised. Appeal was preferred •
before the Employees Provident Fund Appellate Tribunal (in
short the 'Tr_ibunal') which held that it is not a part of basic wages. r
However, it was observed that a different view was taken by the
F
Bombay High Court and, therefore, the respondent in the
appeals i.e. the Commissioner should take up the matter before
)I
..
the Kam-<:itaka High Court. Accordingly, Writ Petitions were filed
before the Karnataka High Court. A learned Single Judge
allowed the Writ Petitions and set aside the impugned orders. I
G The present appellant preferred Writ Appeals before the ,l
I
Karnataka High Court which came to be dismissed by the 'l
common impugned judgment.
)oi
3. Learned counsel for the appellant pointed out that the
impugned judgment cannot be sustained as it merely followed
H

I
jj
., MANI PAL ACADEMY OF HIGHER EDUCATION v. 775
PROVIDENT FUND COMMISSIONER [PASAYAT, J.]

the judgment of the Bombay High Court in Hindustan Lever A
Employees' Union v. Regional Provident Fund Commissioner
and Anr. (1995 (2) LLJ. 279). It is pointed out that different view
has been taken by the Madras High Court in Thiru Arooran Sugar
Ltd. and Ors. v. Assistant Provident Fund Commissioner,
Employees Provident Funds Organisation and connected B
cases disposed of by judgment dated 12.10.2007. It is
submitted that the controversy was settled long back in Bridge
& Roof Co. (India) Ltd. v. Union of India (1963 (2) SCR 978)
which was followed in Jay Engineering Works Ltd. and Ors. v.
Union of India and Ors. (1963 (3) SCR 995); and the concept c
of beneficial legislation is misplaced philanthropy where the
statutes and principles underlying it are clear and the question
is no longer res integra.
4. Learned counsel for the respondent on the other hand
submitted that even applying Bridge Roof's case (supra) the D
view taken by the Bombay High Court and the Karnataka High
.t
Court in the present impugned judgment reflects the correct
""(
position in law.
5. Sections 2(b) and 6 of the Act read as follows:
E
"2(b) "Basic wages" means all emoluments which are
earned by an employee while on duty or on leave or on
holidays with wages in either case in accordance with the
terms of the contract of employment and which are paid
or payable in cash to him, but does not include- F
~

i (i) the cash value of any food concession;

~ (ii) any dearness allowance (that is to say, all cash
payments by whatever name called paid to any employee
on account of a rise in the cost of living), house rent
G
allowance, overtime allowance, bonus, commission or any
other similar allowance payable to the employee in respect
of his employment or of work done in such employment;
(iii) any presents made by the employer.
H
~

776 SUPREME COURT REPORTS [2008] 4 S.C.R.

A 6. Contributions and matters which may be provided "'i- .
for in the Scheme- The contribution which shall be paid
by the employer to the Fund shall eight and one-third per
cent of the basic wages dearness allowances and
retaining E!llowance (if any) for the time being payable to
B each of the employees (whether employed by him directly
or by or through a contractor) .and the employees'
contribution shall be equal to the contribution payable by
the employer in respect of him and may if any employee
so desires and if the Scheme makes provision therefore """
be an amount not exceeding eight and one-third per cent
r
c
of his basic wages dearness allowances and retaining
allowance (if any) subject to the condition that the employer
shall not be under an obligation to pay any contribution
over and above his contribution payable under this section;
D Provided that in its application to any establishment or
class of establishments which the Central Government _).
after making such inquiry as it deems fit may by notification )"
in the Official Gazette specify this sedion shall be subject
to the modification that for the words "eight and one-third
E per cent" at both the places where they occur the words
"ten per cent" shall be substituted:
Provided further that where the amount of any contribution
payable under this Act involves a fraction of a rupee the
Scheme may provide for the rounding off of such fraction
F to the nearest rupee half of a rupee or quarter to a rupee. )J.
r
Explanation 1: For the purposes of this section dearness
allowance shall be deemed to include also the cash value l·
of any food concession allowed to the employee. 'o.
G Explanation 2: For the purposes of this section retaining ....
allowance means an allowance payable for the time being
to an employee of any factory or other establishment during
any period in which the establishment is not working for . _:;.

retaining his services."
H
MANIPALACADEMY OF HIGHER EDUCATION v. 777
PROVIDENT FUND COMMISSIONER [PASAYAT. J.]

6. In Bridge Roof's case (supra) it was inter-alia observed A
~
as follows:
"8. The main question therefore that falls for decision is as
to which of these two rival contentions is in consonance
withs. 2(b). There is no doubt that "basic wages" as defined
therein means all emoluments which are earned by an B
employee while on duty or on leave with wages in
accordance with the terms of the contract of employment
~ and which are paid or payable in cash. If there were no
exceptions to this definition, there would have been no
difficulty in holding that production bonus whatever be its c
nature would be included within these terms. The difficulty,
however, arises because the definition also provides that
certain things will not be included in the term "basic wages",
and these are contained in three clauses. The first clause
mentions the cash value of any food concession while the D
third clause mentions that presents made by the employer.
,._
' The fact that the exceptions contain even presents made
-"(
by the employer shows that though the definition mentions
all emoluments which are earned in accordance with the
terms of the conttact of employment, care was taken to E
exclude presents which would ordinarily not be earned in
accordance with the terms of the contract of employment.
Similarly, though the definition includes· "all emoluments"
which are paid or payable in cash, the exception excludes
the cash value of any food concession, which in any case F
was not payable in cash. The exceptions therefore do not
..."" seem to follow any logical pattern which would be in
consonance with the main definition.

9. Then we come to clause (ii). It excludes dearness
allowance, house-rent allowance, overtime allowance, G
bonus, commission or any other similar allowance payable
to the employee in respect of his employment or of work
done in such employment. This exception suggests that
even though the main part of the definition includes all
emoluments which are earned in accordance with the
778 SUPREME COURT REPORTS
.,
[2008) 4 S.C.R.

A terms of the contract of employment, certain payments '+"
which are in fact the price of labour and earned in
accordance with the terms of the contract of employment .
are excluded from the main part of the definition of "basic
wages". It is undeniable that the exceptions contained in
B clause (ii) refer to payments which are earned by an
employee in accordance with the terms of his contract of
employment. It was admitted by counsel on both sides
before us that it was difficult to find any one basis for the .....
exceptions contained in the three clauses. It is clear .
c however from clause (ii) that from the definition of the
word "basic. wages" certain earnings were excluded,
though they must be earned by employ_ees in accordance
with the terms of the contract of employment. Having
~
excluded "dearness allowance".from the definition of "basic
wages", s. 6 then provides for inclusion of dearness
D
allowance for purposes of contribution. But that is clearly
the result of the specific provision in s. 6 which lays down ).:
that contribution shall be 6-1/4 per centum of the basic >
wages; dearness allowance and retaining allowance (if
any). We must therefore try to discover some basis for the
E exclusion in clause (ii) as also the inclusion of dearness
allowance and retaining allowance (for any) in s. 6. It seems
that the basis of inclusion in s. 6 and exclusion in clause
(ii) is that whatever is payable in all concerns and is earned
(
by all permanent employees is included for the purpose,
F of contribution under s. 6, but whatever is not payable by
all concerns O( may not be earned by all employees of a ..
)I.

concern is excluded for the purpose of contribution.
Dearness allowance (for examples is payable in all
concerns either as an addition to basic wages or as a
G part of consolidated wages where a concern does not
have separate dearness allowance and basic wages. \'
Similar!y: retaining allowance is payable to all permanent
employees in· all seasonal facfories like sugar factories
arid is tf1.erefore included in s. 6; but house-rent allowance
H is not p~ld in many concerns and sometimes in the same
- MANIPALACADEMY OF HIGHER EDUCATION v. 779
PROVIDENT FUND COMMISSIONER [PASAYAT, J.]

concern it is paid to some employees but not to others, for A
the theory is that house-rent is included in the payment of
basic wages plus dearness allowance or consolidated
wages. Therefore, house-rent allowance which may not
be payable to all employees of a concern and which is
certainly not paid by all concern is taken out of the definition s
of "basic wages", even though the basis of payment of
house-rent allowance where it is paid is the contract of
employment. Similarly, overtime allowance though it is
generally in force in all concerns is not earned by all
employees of a concern. It is also earned in accordance c
with the terms of the contract of employment; but because
it may not be earned by all employees of a concern it is
excluded from "basic wages". Similarly, commission or
any other similar allowance is excluded from the definition
of "basic wages" for commission and other allowances
0
are not necessarily to be found in all concerns; nor are
they necessarily earned by all employees of the same
concern, though where they exist they are earned in
accordance with the terms of the contract of employment.
It seems therefore that the basis for the exclusion in clause
(ii) of the exceptions ins. 2(b) is that all that is not earned E
in all concerns or by all employees of concern is excluded
from basic wages. To this the exclusion of dearness
allowance in clause (ii) is an exception. But that exception
has been corrected by including dearness allowance in s.
6 for the purpose of contribution. Dearness allowance F
( which is an exception in the definition of "basic wages", is
included for the propose of contribution by s. 6 and the
real exceptions therefore in clause (ii) are the other
exceptions beside dearness allowance, which has been
included through s. 6. G
7. Similarly in Jay Engineering's case (supra) it was
•t observed as follows:
"9. Finally, it was urged that even if the payment for
production between the quota and the norm is not H
780 SUPREME COURT REPORTS [2008] 4 S.C.R. ''
A production bonus which can be taken out of definition of -+
basic wages in the Act, it should be treated as payment
in the nature of "other similar allowance" appearing in s.
2(b)(ii). We are of opinion that this payment for work done
between the quota and the norm cannot be treated as any
8 "other similar allowance". The allowances mentioned in
the relevant clause are dearness allowance, house-rent
allowance, overtime allowance, bonus, and commission.
Any "other similar allowance", must be of the same kind. ~

The payment in this case for production between the quota '
~

c and the norm has nothing of the nature of an allowance, it
is a straight payment for the daily work and. must be
included in the words defining basic wage i.e., "all
emoluments which are earned by an employee while on
duty or on leave with wages in accordance with terms of
the contract of employment".
D
10. In the view we have taken of the scheme in this case, )... )
the petition succeeds partly. We direct that the petition of
the payment which is made by the petitioner for production
"'
above the "norm" would be production bonus and would
E be covered by the judgment of this Court in Bridge and
Roof Company, but that portion of the payment which is
made by petitioner for production up to the quota as well
as production between the "quota" and the "norm" is basic
wage within the meaning of that term in the Act. The petition
F is therefore partially allowed as indicated above. In the )J
Circumstances we pass no order as to costs." ~
r.. ,
8. It is to be noted that in the case before. the Bombay
High Court the factual scenario was somewhat peculiar. There
the employer was including the amount of leave encashment as
G emoluments for the purpose of calculating provident fund dues
from the employer as well as employee's contribL!tion. When
the Employees' Union took up the issue to the Commissioner it
k
was informed that the provision does not provide for deduction
of provident fund on leave encashment. "
H
• MANIPALACADEMY OF HIGHER EDUCATION v.
PROVIDENT FUND COMMISSIONER [PASAYAT, J.]
781

9. On the strength of the letter dated 3.7.1991 of the A
Commissioner, Hindustan Lever Ltd. decided to make provision
for deduction. It was this direction of the department which was
challenged by the Union. In this context the High Court has held
that the Commissioner's letter/circular was illegal and leave
encashment dues should be included for provident fund B
contribution. In fact it was the understanding of the parties over
the period that leave encashment will be included in the wages.
10. The basic principles as laid down in Bridge Roof's
case (supra) on a combined reading of Sections 2(b) and 6 are
as follows: c
(a) Where the wage is universally, necessarily and
ordinarily paid to all across the board such
emoluments are basic wages.
(b) Where the payment is available to be specially paid D
to those who avail of the opportunity is not basic
•.... wages. By way of example it was held that overtime
allowance, though it is generally in force in all
concerns is not earned by all employees of a concern.
It is also earned in accordance with the terms of the E
contract of employment but because it may not be
earned by all employees of a concern, it is excluded
from basic wages.

= :,,.
(c) Conversely, any payment by way of a special incentive
or work is not basic wages. F
-1
11. In Tl Cycles of India, Ambattur v. M.K. Gurumani and
Ors. (2001 (7) SCC 204) it was held that incentive wages paid
in respect of extra work done is to be excluded from the basic
wage as they have a direct nexus and linkage with the amount
G
of extra output It is to be noted that any amount of contribution
cannot be based on different contingencies and uncertainties.
...., The test is one of universality. In the case of encashment of leave
the option may be available to all the employees but some may
avail and some may not avail. That does not satisfy the test of
H
782 SUPREME COURT REPORTS [2008] 4 S.C.R.

A universality. As observed in Daily Partap v. Regional Provident -+
Fund Commissioner (1998 (8) SCC 90) the test is uniform
treatment or nexus under- dependent on individual work.
12. The term 'basic wage' which includes all emoluments
which are earned by an employee while on duty or on leave or
B on holidays with wages in accordance with the terms of the
contract of employment can only mean weekly holidays, natior:ial
holidays and festival holidays etc. In many cases the employees
do not take leave and en cash it at the time of retirement or same
is encashed after his death which can be said to be uncertainties
c and contingencies. Though provisions have been made for the
employer for such contingencies unless the contingency of
encashing the leave is there, the question of actual payment to
the workman does not take place. In view of the decision of this
Court in Bridge Roof's case (supra) and Tl Cycles's case (supra)
D the inevitable conclusion is that basic wage was never intended
to include amounts received for leave encashment.
...,.
13. Though the statute in question is a beneficial one, the
concept of beneficial legislation becomes relevant only when
two views are possible.
E
14. The appeals deserve to be allowed which we direct.
But if any payment has already been made it can be adjusted
for future liabilities and there shall not be any refund claim since
the fund is running one. There will be no order as to costs.
F R.P. Appeals allowed. '-,I
r