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Case Number

1187 of 1980

Judges

Mr. Justice M.P. Thakkar
Mr. Justice R.C. Mankad

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The petition challenges the legality and validity of an order dated 31/03/1980 (annexure A) passed by the Regional Provident Fund Commissioner, Gujarat State, which directed payment of damages for delayed payment of amounts under the Employees' Provident Fund/Family Pension Fund/Deposit Linked Insurance Scheme and administrative charges for the period described in the order. The challenge is brought under Article 227 of the Constitution on the ground of errors apparent on the face of the record.

The petitioner is Arvind Mills Ltd., which acquired the assets and liabilities of Ahmedabad Laxmi Cotton Mills Company Ltd. (in liquidation) pursuant to a scheme of amalgamation, compromise and arrangement sanctioned in Company Petns. Nos. 87 and 88 of 1978. Under the sanctioned scheme (sub-paragraph 4 of paragraph 16) Arvind agreed to pay all arrears due to the Provident Fund Commissioner within one month of sanction and to pay such damages as may be determined by the Regional Provident Fund Commissioner under section 14-B of the Employees' Provident Fund Act, 1952, for defaults in payment.

The arrears claimed were stated (in the petition) to be "rs. 4 47 41" by a statement at annexure A; the impugned order determined the petitioner's liability at "rs. 4 40 541" (appendix D to annexure A). The order identified 47 defaults: 9 instances of total non-payment and 38 instances where payment was made after delay. Payments in relation to the 9 non-payments were made by the petitioner in June 1979 (after scheme sanction). The impugned order levied damages variously — for some non-payments at 100% or 32%, and for delayed payments at rates ranging from 1% to 30% (details appear in appendix D to annexure A). It is this order on damages that Arvind Mills challenges.

Legal Issues Presented

Whether the order dated 31/03/1980 (annexure A) of the Regional Provident Fund Commissioner is illegal or void for errors apparent on the face of the record such as to justify interference under Article 227 of the Constitution.
Whether the quantum and rate of damages levied by the Commissioner (including imposition of 100% damages in some instances) were impermissible or excessive, particularly in view of the financial position of the defaulting entity (Ahmedabad Laxmi Cotton Mills) at the time of default.
Whether the financial condition of the transferor company (Laxmi Cotton Mills) at the relevant time, or the financial soundness of the transferee (Arvind Mills), is a relevant ground for mitigating damages.
Whether the defaults complained of were "wilful defaults" for which punitive treatment (including heavier damages) is justified.
Whether interference under Article 227 would be appropriate where the order under challenge involves an exercise of discretion by a competent authority which the High Court should not convert into an appeal on merits.

Arguments of the Parties

Petitioner's (Arvind Mills Ltd.) Arguments

The petitioner contended that the question of damages should be decided in the light of the financial position of Ahmedabad Laxmi Cotton Mills at the time the defaults occurred (1974–1977), and that Arvind's own sound finances were irrelevant to mitigation of damages.
The petitioner argued that its entry into the amalgamation scheme was effectively a rescue or social service for a sick unit, implying that the Commissioner should have taken a lenient view.
The petitioner asserted that the defaults were not wilful and that mitigation should have been considered on the basis of circumstances explaining the non-payment or delay.
The petitioner also suggested that a strict approach by the Commissioner might deter companies from undertaking schemes of amalgamation in liquidation proceedings for sick units.

Competent Authority / Respondent Position (as presented in the opinion)

The Regional Provident Fund Commissioner treated the question of damages as within his discretion under the statute and applied rates of damages varying from nominal rates (1%–10%) for many delayed payments to heavier rates (including 100%) for instances of prolonged total non-payment.
The Commissioner took the view that the financial position of the Laxmi Cotton Mills at the precise times when individual defaults fell due had not been shown by the petitioner: no month-to-month resource statements or contemporaneous bank account balances or other material were produced to justify mitigation.
The Commissioner applied the law permitting up to 100% damages for defaults under authorities and statutory scheme considerations (as referenced in the opinion).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Organo Chemical Industries v. Union of India (1979) II Labour Law Journal 416	Authority for the proposition that the competent authority may levy damages up to 100% under the statutory scheme; recognition of punitive/deterrent element in damages.	The court relied on this precedent to explain that imposition of 100% damages in certain items does not, by itself, render the order vulnerable to being set aside under Article 227. The precedent supports the Commissioner’s power to impose heavy damages where warranted.

Court's Reasoning and Analysis

The court first delineated the proper scope of judicial review under Article 227: the High Court will not convert such a petition into an appeal on merits and will not substitute its own discretion for that of the competent authority. The court emphasised that it is not necessary to agree with every reason or expression used by the authority; interference is justified only where there is an error apparent on the face of the record.

The court accepted the legal proposition (drawing on Organo Chemical Industries) that the competent authority can impose damages up to 100% as part of the statutory scheme’s punitive and deterrent character. It applied that principle to the facts before it: most delayed payments attracted nominal damages (1%–10%), while only certain instances of prolonged total non-payment attracted heavier penalties (including 100% in six of the nine total non-payment instances).

Addressing the petitioner’s core factual contention — that mitigation ought to have been granted in view of Laxmi Cotton Mills' financial distress at the time of defaults — the court examined the record and found no material placed before the Commissioner or before the court that established the precise financial position of Laxmi Cotton Mills at the point in time when each individual default occurred. The court noted the absence of month-to-month resource and utilisation statements, bank account details or contemporaneous evidence showing lack of funds at the critical times.

The court analysed the legislative intent behind the statutory provisions (secs. cited in the opinion) and emphasised their deterrent character: offences under the Act are cognizable, enhanced punishment is provided for repeated defaults, and imprisonment may be contemplated. The court held that simply pleading financial hardship, without corroborative evidence tied to the relevant times of default, could not serve to neutralise the punitive purpose of the statute or justify mitigation.

On the argument that imposition of damages would deter amalgamation schemes rescuing sick units, the court observed that the potential liability (around "rs. 4 lacs" as determined) was insubstantial compared to the overall scale of the transaction (assets and liabilities alleged at approximately "rs. 34 crores"). The court also noted that the petitioner had undertaken the obligation with full knowledge and that the interim stay obtained by the petitioner in respect of payment had, in effect, given it an interest-free use of funds — a benefit the court described as an effective abatement of part of the penalty.

Regarding the petitioner’s claim of altruism, the court rejected the characterization that the transferee acted solely as a "good samaritan", pointing to commercial advantages identified in the scheme (e.g., set-off of carry forward losses, acquisition of another unit). The court held that these motives were not relevant to assessing whether defaults by Laxmi Cotton Mills were excusable.

On whether the defaults were wilful, the court outlined circumstances that might negate wilfulness (such as external obstruction, bank strikes, or defalcation by a clerk) but found no evidence of such causes. Given that Laxmi Cotton Mills had continued its business and met other commitments while failing to remit statutory deductions, the court concluded that it could not be said the defaults were other than wilful. Again, lack of contemporaneous financial evidence was decisive.

In sum, the court found no error apparent on the face of the record in the Commissioner’s determination of damages and declined to exercise Article 227 jurisdiction to interfere with the discretionary determination of the competent authority.

Holding and Implications

Holding: The petition is dismissed. The court rejected the challenge to the impugned order.

Direct consequences set out in the opinion:

The petition "fails and is rejected." The rule is discharged with costs.
Interim orders previously granted in favour of the petitioner are vacated forthwith.
The petitioner’s application for a certificate of fitness to appeal to the Supreme Court was refused on the ground that the matter did not involve any substantial question of law of public importance requiring the Supreme Court's consideration.

The opinion does not purport to lay down a new legal precedent; it affirms the competent authority’s discretion to levy damages (including up to 100% in appropriate cases) and refuses to interfere under Article 227 given the absence of an error apparent on the face of the record and the lack of material justifying mitigation.

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Arvind Mills Limited v. R.M. Gandhi

M.P.Thakkar, R.C.Mankad:-

(1) The legality and validity of an order as per annexure a dated 31/03/1980 passed by the regional provident fund com - missioner gujarat state ordering payment of damages for delayed pay - ment of amount of provident fund/family pension fund/deposit linked insurance scheme and administrative charges for the period between march 197 3/08/1977 has been challenged by way of the present petition under art. 227 of the constitution of india on the ground that it discloses errors apparent on the face of the record. The challenge is made by the arvind mills ltd. Which acquired the assets and liabilities of an undertaking known as the ahmedabad laxmi cotton mills com - pany ltd. Which was under liquidation pursuant to the sanction accorded by the high court in company petitions nos. 87 and 88 of 1978 to the proposed scheme of amalgamation compromise and arrangement. Under the said scheme as per sub - paragraph 4 of paragraph 16 a provision was made that the arvind mills ltd. The petitioner herein shall pay all the arrears due to the provident fund commissioner within one month of the sanction of the scheme. It was also agreed by the petitioner company that the damages payable to the provident fund commissioner as may be determined by him in respect of the defaults shall be payable by the petitioner - company. The relevant portion extracted from the scheme reads as under: arvind shall also pay provident fund. E. S. I. And other dues if any for the period after 12/08/1977 and remaining unpaid upto the date of restart of the mills. Besides arvind shall pay such sum as may be determined by the regional provident fund commissioner under sec. 14 - b of the employees provident fund act 1952 for default in payment of the provident fund and other dues of laxmi cotton by due date. It appears that the arrears of provident fund were to the tune of rs. 4 47 41 per statement at annexure a annexed to the petition. The arrears were in respect of the period from november 1975 till august 1977 in the background of these facts after hearing the petitioner company the impugned order as per annexure a was passed whereby the liability of the petitioner - company was determined at rs. 4 40 541 per appendix d to annexure a. There were in all 47 defaults. In respect of 9 instances payment was not made at all. In respect of the remaining 38 payment was made after delay as mentioned in appendix d to ann - exure a. In the 9 instances of total non - payment payments were made by the petitioner company in june 1979 after the scheme was sanctioned. In respect of 6 out of these instances damages were levied at 100%. In respect of the remaining 3 damages were levied at 32%. In respect of the 33 defaults out of 38 defaults damages were levied at a rate ranging from 1% to 10% in respect of 4 defaults damages were levied at 30% and in respect of one default damages were levied 20 %. It is the impugned order levying damages in the aforesaid manner which has been challen - ged by the way of the present petition.

(2) Before we deal with the submissions urged on behalf of the petitioner we must define the scope of a petition of the present nature. This court in exercising powers under article 227 will not convert the proceeding virtually into an appeal against the impugned order. This court will not substitute its determination in place of the determination made by the competent authority. It is not for this court to consider to what extent damages would have been levied by this court if it was exercising the powers which have been exercised by the competent authority in passing the impugned order. In other words this petition cannot be treated as virtually an appeal on merits against the impugned order. So also it is not necessary in order to uphold the order passed by the competent authority that we must agree with each and every of the reasons which weighed with him or agree with every word said by him in his impugned order. It must also be realised that having regard to the law laid down in organo chemical industries v. Union of india (1979) ii labour law journal 416 it is open to the competent authority to levy damages to the extent of 100% and that the order determining damages will not become vulnerable merely on the ground that in respect of certain items 100% damages have been imposed. In the present case as mentioned earlier damages have been determined at a very nominal rate ranging between 1% to 10% in respect of 33 defaults. Damages have been levied at the rate of 100 only in respect of 6 out of the 9 items in respect of which there was total non payment for a number of years (the details regarding the extent of delay have been mentioned in appendix d to annexure a). In respect of these dues the laxmi cotton mills company ltd. Had not made any payment and payments were ultimately made by the petitioner company in june 1979 after the sanction of the scheme. It may also be realised that payments were not made notwithstanding the fact that actual deductions were made from the wages of the workmen from time to time. In other words the ded - uctions from the wages of the workmen were also retained by the laxmi cotton mills company ltd. Apart from the fact that it did not deposit the amount which was required to be deposited on its part as per the requirements of the relevant provisions of the land the scheme.

(3) It is next argued by the petitioner arvind mills ltd. Which has taken over the business of the ahmedabad laxmi cotton mills company ltd. (in liquidation) under the scheme of amalgamation that the ques - tion regarding damages requires to be resolved in the context of the financial position of the laxmi cotton mills which had committed the default at the material time between 1974 and 1977 and that the fact that the petitioner company itself is in a very sound financial condition is not relevant. It is contended that the laxmi cotton mills was in serious financial difficulties at the material time between 1974 and 1977 and that is why it had not been able to make the payments due under the act and the scheme. Be it realised that the arrears consisted of the deductions made from the wages of the workers as well. The competent authority has himself taken the view that it is not the financial position of the petitioner - company which matters but it is the financial position of the laxmi cotton mills at the material time which matters in case in is a valid argument for mitigating damages. The competent authority has however taken the view that no material has been produced to show that at the time when the payments became due the financial position of the company was such that these payments could not have been made from its resources then. No material has been produced even before us show - ing its financial position at the point of time of the individual defaults. It could have been shown as to what amount was available with the laxmi cotton mills its bank accounts and what resources it had at the material time when the payment became due. No effort has been made to produce material having an eye on the relevant point of time when the individual default occurred. We do not think that merely because the company was experiencing financial hardship it was justified in refusing to pay its dues under the act and the scheme including the deductions made from the wages of the workers the very concept of punitive damages which was been recognised by the supreme court in organo chemical industries case (supra) would be defeated if this were considered to be a legitimate ground for shutting ones eyes to the defaults or taking a lenient view of the defaults. The anxiety of the parlia - ment to deter employers from committing such duffels is made manifest in secs. 14 14 14 14 and 14ac. The offence has been made cogni - zable. Enhanced punishment is provided for every subsequent offence and a minimum jail sentence is able contemplated. We will be setting at naught the will of the parliament if we were to say that a mere averment to the effect that the payment could not be made an account of financial hardship is sufficient to mitigate the damages even if it was established that the financial position of the company was embarrassing it would not justify taking such a view. In a way every company needs finances and has even to borrow from financial institutions. Even the fact that the company is running at a loss for some years would not justify co - mmitting defaults in respect of the payments due under the act and the scheme. Under the circumstances we do not think that the competent authority has committed any error much less an error apparent on the face of the record in holding that there was no justification for taking a lenient view in respect of the damages. Be it realised that in respect of delayed payments the competent authority has taken a very lenient view and has determined damages at a rate ranging between 1% and 10%. Only in regard to defaults in the context of total non - payment for a number of years has a serious view been taken. We do not think that any error has been committed in doing so which requires to be rectified by us in exercise of powers under art. 227 of the constitution.

(4) A point was then made that if the regional provident fund commissioner were to take a strict view it would deter companies from presenting schemes for amalgamation in the course of liquidation procee - dings in respect of sick units. We do not think that a potential liability of rs. 4 lacs would have made any difference when the company was proposing to take over a sick concern involving taking over of assets and liabilities running into approximately rs. 34 crores. Besides the petitioner company was clearly given to understand that it would have to meet the obligation in respect of the damages and it had undertaken to do so with open eyes. It may also be mentioned that really speaking the damages determined by the competent authority at rs. 4 lacs have already stood abated to a considerable extent by reason of the fact that the damages which were payable at the material time do not carry interest and have not been paid till now by reason of the unconditional interim stay obtained by the petitioner company. Taking into considera - tion the present rate of interest at about 15% per annum the damages virtually stand abated to the extent inasmuch as the petitioner company has secured an unwarranted gratuitous advantage of utilising the funds for its own purposes without having to pay interest on it. This advantage on a rough calculation would work out at about rs. 60 0 and the penalty therefore stands abated to this extent as a matter of fact. We therefore do not see any reason to interfere with the order passed by the competent authority.

(5) It was also argued that the petitioner company had come forward as a good samaritan for salvaging a sick unit and was performing social service. We do not wish to enter into any elaborate discussion in the context of this argument. Suffice it to say that one would be turning ones face away from the realities of life and shutting ones eyes to the pragmatism of the world of business if we were to accept at its face value this platitudinous utterance that a hard headed business concern was entering into this arrangement for only ethical or altruistic motive. The petitioner company has entered into the amalgamation scheme pre - sumably and evidently on business consideration as it considered the same to be a good sound and promising business proposition having regard to all the circumstances such as the following: (1) it was getting the advantage of setting off carry forward losses amounting to approximately 3. 36 crores against its large scale curr - ent profits which would result in considerable saving in its tax liability. (2) it was also being enabled to take over another textile unit and enlarge its economic empire without any objection on the part of the monopolies commission which had waived its objection in order to salvage the sick unit. (3) there are several other similar advantages which were secured in the course of the scheme which we need not recount. We therefore opt out of the good samaritan school of thought. Besides it has do relevance to the question raised in this petition having regard to the fact that the competent authority had to consider the circumstances in which the default was committed by the laxmi cotton mills and not the reasons why the petitioner company entered into the scheme of amalgamation.

(6) It was then argued that it could not be said that the default committed by the laxmi cotton mills was a wilful default. To buttress such a submission the content of the expression wilful default in such a situa - tion must be examined with a purposeful eye (and not with an indulgent eye or with a what does it matter attitude) so that the object of the act is not defeated and the court does not unwittingly encourage defaults which defaults are viewed with such seriousness that a sentence of impri - sonment for such defaults has been enjoined by the parliament (which represents the collective will and weal of the people). We can visualize a situation where an employer was unable to pay the dues in time because (1) there was some agitation or unrest in the city and it was not possible to make arrangement for depositing the necessary amount in the bank or (2) a case where there was a strike on the part of the bank employees and it was not possible to pay the dues on account of the resultant situ - ation. (3) one may well ask was it inadvertent? (4) on account of outside circumstances beyond its control ? (5) on account of the defalcation on the part of the clerk entrusted with the monies? or (6) on account of negli - gence on his part? (7) was there the will to pay which was thwarted by some outside agency? if that was so it could have been urged with some credibility that it was not wilful default. But if from 1974 to 1977 the laxmi cotton mills could carry on its business and meet its other com - mitments and yet failed to pay its dues under the act it cannot be said that the default was not wilful. It is obvious that the amount which should or could have been utilised for discharge of the obligation under the act and the scheme was utilised for some other purpose. What that purpose was we do not know because the month to month resources and utilisation statements with an eye on the point of time of default from time to time as it fell due (in the context of total non - payment) have not been pro - duced before the competent authority or before us. Under the circumsta - nces we are unable to accede to the argument that respondent no. 1 has committed any error apparent on the face of the record in determining the damages as per the impugned order at annexure a. We therefore see no substance in the petition.

(7) The petition fails and is rejected. Rule is discharged with costs interim orders are vacated forthwith.

(8) The learned counsel for the petitioner applies for a certificate of fitness to appeal to the supreme court of india. In our opinion the ma - tter does not involve any substantial question of law of public importance which needs to be decided by the supreme court of india. The certificate is therefore refused.

Arvind Mills Limited v. R.M. Gandhi

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's (Arvind Mills Ltd.) Arguments

Competent Authority / Respondent Position (as presented in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Arvind Mills Limited v. R.M. Gandhi

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