AJAY RAJ SHETTY V. DIRECTOR & ANR 2025 INSC 500

DATE: 17/04/2025

COURT: Supreme Court of India

BENCH: Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanuallah

FACTS:

M/s Electriex (India) Limited (Respondent No.2) was declared a sick industry by the Board for Industrial and Financial Reconstruction (BIFR) in 2001, and a change in its management was ordered in 2002. Following legal proceedings, the High Court remanded the case to BIFR, leading to a negotiation directive for the company to settle dues with secured creditors. In 2011, officials from the Employees’ State Insurance Corporation (ESIC) visited the company's premises and discovered that while Rs.8,26,696 had been deducted from employees' wages for the period from 01.02.2010 to 31.12.2010, the amount had not been deposited with ESIC. The report identified the Appellant as the General Manager and Principal Employer of the company. Based on this, a private complaint was filed against the Appellant and the company for an offence under Section 85(a) of the Employees’ State Insurance Act, 1948.

The Trial Court convicted the Appellant under Section 85(i)(b) of the Act, sentencing him to six months in prison and a fine of Rs.5,000. The First Appellate Court upheld the conviction, leading to the filing of a Criminal Revision Petition by the Appellant and Respondent No.2 before the High Court. However, the High Court dismissed the Revision Petition, affirming the conviction on the grounds that the evidence established the Appellant's role as General Manager and Principal Employer and that the contributions were not remitted to ESIC, despite deductions from the employees' wages.

ISSUES:

The key issue before the Court was whether the Appellant, as the General Manager and Principal Employer of M/s Electriex (India) Limited, could be held criminally liable under Section 85(i)(b) of the Employees’ State Insurance Act, 1948 for failing to deposit Rs. 8,26,696 in ESI contributions that were deducted from employees' wages between February and December 2010. The Court was tasked with examining if the conviction and sentence upheld by the Trial Court, the First Appellate Court, and the High Court were legally justified based on the evidence presented.

JUDGEMENT WITH REASONING:

The Supreme Court dismissed the appeal filed by the Appellant, upholding his conviction and sentence under Section 85(i)(b) of the Employees’ State Insurance Act, 1948. The Court directed the Appellant to undergo the remaining sentence and pay the fine, if not already paid. It also withdrew the earlier exemption from surrendering and ordered the Appellant to surrender before the Trial Court within two weeks.

The Court rejected the Appellant’s claim that he was neither the General Manager nor the Principal Employer during the relevant period. It affirmed the concurrent factual findings of the Trial Court, the First Appellate Court, and the High Court, which established that the Appellant was designated as the General Manager in the company’s records and had failed to disprove this claim with documentary evidence such as appointment letters or salary slips. The Appellant also failed to identify who else might have held supervisory authority during the relevant time. Under Section 2(17) of the Act, the definition of ‘Principal Employer’ includes individuals responsible for supervision and control of the establishment, regardless of their formal designation. Based on these criteria, the Court concluded that the Appellant fell within the ambit of ‘Principal Employer’ as defined by the Act.

Further, the Court held that non-remittance of employee contributions to ESIC, after deduction from their wages, is a serious offence under Section 85(i)(a) of the Act, which mandates a minimum one-year imprisonment and a fine of Rs.10,000. However, the Trial Court had exercised its discretion to impose a lesser sentence under Section 85(i)(b), which prescribes a minimum of six months imprisonment and Rs.5,000 fine. The Supreme Court found no reason to interfere with this leniency. It also dismissed the relevance of the precedents cited by the Appellant, holding them inapplicable to the facts of this case. The Court emphasized that the statutory fine under the Act is mandatory and not subject to judicial discretion, thereby affirming both the conviction and sentence imposed by the lower courts.

ANALYSIS:

This case underscores the strict liability imposed under the Employees’ State Insurance Act, 1948 for failure to remit employee contributions deducted from wages. The Supreme Court's decision reinforces the principle that those holding managerial or supervisory positions in an establishment—regardless of their formal designation—can be deemed "Principal Employers" under Section 2(17) of the Act and held personally liable for statutory violations. The Court relied on the company's internal records identifying the Appellant as the General Manager and noted his inability to refute this designation with credible evidence. His failure to produce documents such as appointment letters or salary slips, or to identify the actual person responsible during the relevant period, weakened his defense. The ruling emphasizes that mere denial is insufficient to escape liability when the statutory framework assigns responsibility based on functional control and supervision.

From a broader legal and policy perspective, the case illustrates the judiciary’s firm stance on safeguarding the social security rights of employees. By holding the Appellant criminally liable despite the company’s financial distress and its status as a sick industry, the Court made it clear that economic hardship cannot justify defaulting on employee welfare obligations. The judgment also reflects the Court's commitment to the deterrent purpose of penal provisions under the ESI Act, particularly in cases of trust violations where employers deduct but fail to deposit contributions. It affirms that such defaults are treated as economic offences, and courts will not show leniency unless exceptional circumstances exist. The rejection of the appellant’s reliance on unrelated precedents further signifies the Court’s insistence on context-specific statutory interpretation.