TaxTMI 
TaxTMI 
2024 (8) TMI 1244
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....ted' and were its Directors. Petitioner-Anil Govind Ganu claims that during the period from 26 March 1993 to 16 October 2012, he worked for the Company as its employee. His last drawn salary was Rs. 8,60,000/-. It is also claimed that Petitioner-Ashwini Anil Ganu worked for the Company from 1 January 1996 to 3 October 2010 and drew salary as an employee. Her last drawn salary was Rs. 3,00,000/-. Petitioners claimed that in the annual accounts for the year ending 31 March 2012, a provision was made for payment of amount of Rs. 1,21,96,154/- towards gratuity. Petitioners transferred 100% equity stake in the Company-Innovative Technomics Private Limited in favour of the purchasers by executing Share Purchase Agreement (SPA) dated 20 September 2012. After execution of the SPA, Petitioners tendered their resignations on 1 October 2012. Petitioners thereafter demanded payment of outstanding gratuity from Respondents and sent legal notice dated 29 September 2015 alongwith Form No. I for outstanding gratuity amount. Petitioners thereafter filed applications bearing No. 10/2015 and 11/2015 before the Controlling Authority under the Payment of Gratuity Act-cum-Labour Court, Pune (Controlling....
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....once it is proved that Petitioners were employed for wages, mere capacity as Directors of the Company did not come in their way of drawing gratuity. Mr. Bapat would further submit that specific provision was made in the Balance Sheet for payment of gratuity to the Directors. That Respondents' witness specifically gave admission that the said Balance Sheet was finalised before execution of the Share Purchase Agreement and that Respondents did not raise any objection to reflection of liability to pay gratuity to Petitioners while finalising the said Balance Sheet. That the witness also admitted genuineness of the salary slips. He would submit that considering the above admissions, clear case was made out for allowing the applications. 5) Mr. Bapat would further submit that under the provisions of sub-section (5) of Section 4 of the Payment of Gratuity Act, it is lawful for the employer to enter into an agreement for providing gratuity better than the one provided for in the Act. That in the present case, there was an agreement for payment of gratuity as reflected in the Balance Sheet. He would rely on judgment in BCH Electric Limited Versus. Pradeep Mehra (2020) 15 SCC 262. He wou....
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....itions of employment etc. No other salary slips are produced on record. The resignation shows to have been tendered is on the post of Director and there is nothing to indicate that the same was actually submitted or that any decision was taken thereon for its acceptance. So far as Balance Sheet is concerned, he would submit that even if the entries therein are to be considered, the same would, at the highest, mean that provision for gratuity is made for all Directors of the Company, which would include even future Directors and it is entirely erroneous on the part of the Petitioners to presume that the figure specified therein is for payment of gratuity exclusively for Petitioners. That it is an admitted position that the names of the Petitioners did not figure in the LIC Group Gratuity Scheme, which is clear admission of absence of capacity of Petitioners as employees. That the Balance Sheets were prepared by Petitioners themselves before the Share Purchase Agreement for raising false claim of gratuity. That Share Purchase Agreement contains specific Indemnity clause, which indemnifies the purchasers in respect of any acts or deeds committed by Petitioners prior to the closing dat....
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....ducted towards Provident Fund contribution and after deducting income tax, the net amount payable is shown to Rs. 5,06,990/-. Similarly for Petitioner-Ashwini Ganu, basic pay is shown as Rs. 3,00,000/-, HRA of Rs. 15,000/-, total earnings of Rs. 3,15,000/- and after deducting Provident Fund of Rs. 36,000/- in addition to income tax of Rs. 87,400/-, net pay is shown as Rs. 1,91,600/-. 13) Petitioners have not produced any other salary slip for the period prior to May 2012 and this aspect is strongly highlighted by Mr. Kshirsagar. By highlighting this factor, it is sought to be suggested that Pay Slips for the months of May 2012 are created only for the purpose of claiming gratuity shortly before execution of the SPA on 20 September 2012. Similar contention is raised by Mr. Kshirsagar in respect of the entries reflected in the annual accounts. In the Balance Sheet for the year ending 31 March 2012, following entry is reflected: D) I Long-Term Provisions Provision for employee benefits Gratuity payable to Directors Leave Encashment Rs.12,196,154/- 14) Similarly, in the Notes forming part of Balance Sheet, following remarks are made relating to retirement benefits: ....
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....has rendered continuous service for not less than five years,- (a) on his superannuation, or (b) on his retirement or resignation, or (c) on his death or disablement due to accident or disease: Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement: [Provided further that in the case of death of the employee, gratuity payable to him shall be paid to his nominee or, if no nomination has been made, to his heirs, and where any such nominees or heirs is a minor, the share of such minor, shall be deposited with the controlling authority who shall invest the same for the benefit of such minor in such bank or other financial institution, as may be prescribed, until such minor attains majority.] Explanation.-For the purposes of this section, disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement. (2) For every completed year of service or part thereof in excess of six months, the employer shall pay grat....
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....tified by the Central Government from time to time'. Thus after 2018 amendment, sub-section (3) of Section 4 reads thus: (3) The amount of gratuity payable to an employee shall not exceed such amount as may be notified by the Central Government from time to time. By Notification dated 11 April 2018, the Central Government has notified that the amount of gratuity payable to an employee under the Act shall not exceed twenty lakh rupees. However, for the present case, since the claim for gratuity pertains to the year 2012, the subsequent amendment of the year 2018 and notification issued in pursuance thereof is irrelevant. 17) Thus, under Section 4 of the Payment of Gratuity Act, in normal circumstances, gratuity payable to an employee is required to be computed as 15 days wages for each completed days of service, subject to maximum amount of Rs. 10,00,000/-. However, where any specific award, agreement or contract is entered into between an employee or employer for payment of higher amount of gratuity, the right of the employee to receive gratuity as per such Award, Agreement or Contract is preserved under Section 4 (5). 18) In the present case, since the amount cla....
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....12 under the heading 'Non-current liability' as 'Gratuity payable to Directors' and the amount is indicated as Rs. 1,21,96152/-. There is no dispute to the position that apart from this entry, there is no contract or agreement between Petitioners and first Respondent Company to pay gratuity to them. Here, Petitioners were the only two directors at the time of finalisation of the balance sheet, which is also signed by them on 15 September 2012 i.e. 5 days before execution of the SPA. Therefore, even if any express written contract was to be executed between Petitioners and the first Respondent Company, it would have been most certainly be signed by Petitioners themselves on behalf of the Company. This aspect is being considered in latter portion of the judgment. What needs to be considered at this juncture is whether such entry would constitute an agreement within the meaning of Section 4 (5) of the Payment of Gratuity Act. 21) The issue as to whether an entry reflected in balance sheet of a company can be construed as an acknowledgment of debt so as to attract Section 18 of the Limitation Act, 1963 fell for consideration before the three Judge Bench of the Apex Court....
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....ion under Section 18 of the Limitation Act ? The Apex Court answered the question by considering the provisions of Sections 292, 128, 129, 134, 137 of the Companies Act as well as various judgments and held as under: 15. In an illuminating discussion on the reach of Section 18 of the Limitation Act, including the reach of the Explanation to the said section, this Court in Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria ["Shapoor Fredoom Mazda"], after referring to Section 19 of the Limitation Act, 1908, which corresponds to Section 18 of the 1963 Act, held: "6. It is thus clear that acknowledgment as prescribed by Section 19 merely renews debt; it does not create a new right of action. It is a mere acknowledgment of the liability in respect of the right in question; it need not be accompanied by a promise to pay either expressly or even by implication. The statement on which a plea of acknowledgment is based must relate to a present subsisting liability though the exact nature or the specific character of the said liability may not be indicated in words. Words used in the acknowledgment must, however, indicate the existence of jural relationship betwee....
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....nishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134 (7). Equally, the auditor's report may also enter caveats with regard to acknowledgments made in the books of accounts including the balance sheet. A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills [Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR 1962 Cal 115] , that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgment of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act. 46. It is, therefore, clear that the majority decision of the Full Bench in V. Padmakumar is contrary to the aforesaid catena of judgments. The minority judgment of Justice....
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....of such entry in the balance sheet would amount to acknowledgment of debt under Section 18 of the Limitation Act as held by the Apex Court in Asset Reconstruction Company (India) Ltd. and would result in running of fresh period of limitation from the date of the Balance Sheet. 24) However, the judgment in Asset Reconstruction Company (India) Ltd. still does not assist the determination of issue involved in the present case, which is about entry in balance sheet amounting to existence of agreement. The Apex Court has dealt with the issue of 'acknowledgment' of liability as contradistinct from the concept of 'creation' of liability. The question of 'acknowledgement' of liability would arise only if it is created and exists. The liability must arise out of a transaction or a contract. Section 18 of the Limitation Act provides for computation of fresh period of limitation from the time an acknowledgement is signed about 'liability' in respect of 'any property or right'. Section 18 provides thus: '18. Effect of acknowledgment in writing.-(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment ....
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....a of acknowledgment is based must relate to a present subsisting liability though the exact nature or the specific character of the said liability may not be indicated in words. (emphasis added) 26) Thus, it cannot be stated that mere reflection of an entry in the liability column of balance sheet would amount to creation of a right which never existed. Such right will have to be independently established either through a transaction or a document in the form of a contract. In the present case, there is no underlying document in the form of a contract between Petitioners and the First Respondent-Company under which it agreed to pay gratuity to Petitioners. For the purpose of application of sub-section (5) of Section 4 of the Payment of Gratuity Act, it is necessary that existence of specific agreement or contract must be proved. In the present case, beyond reflection of entry in the balance sheet, there appears to be no underlying document under which the First Respondent-Company agreed to pay any gratuity to Petitioners. I am therefore of the view that in absence of any underlying agreement or contract, it cannot be stated that mere entry in balance sheet would give ri....
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....as no legal validity in the eyes of law. Hence the Applicant with mala fide intention has suppressed various facts like reason for resignation, transfer of shares date on which entry regarding the payment of gratuity in the books of account was made etc. to mislead the Hon'ble Court. (emphasis and underlining supplied) 29) Mr. Bapat has strenuously relied on cross examination of Respondents' witness in which he made following statements : 14 .... I have seen balance sheet of the year 2011 and 2012. It is true to say that, there is provision noted about gratuity of Directors in Auditors note of balance sheet. It is true to say that, the applicant was getting salary from the respondent company. I cannot tell whether the applicant was getting pay slip or not. It is true to say that, the provision about gratuity of Directors in Auditors note o balance sheet was made same as the claim of the applicant. 15) It is true to say that the applicant was observing Management as Director in the company. It is true to say that before signing of Share Purchase Agreement, the applicant was observing daily management of the company. It is true to say that t....
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....same 5 days before execution of the SPA. 32) Having held that there is no agreement within the meaning of Section 4 (5) of the Payment of Gratuity Act, the issue of Petitioners fitting into the definition of the term 'employee' becomes academic. It however must be observed here that in every case a director or managing director of a company drawing salary for work performed for the company cannot be excluded from definition of the term 'employee'. The shareholders, directors and managing directors may change in respect of the company. However, the responsibility to pay the gratuity is on the company and not on the managing directors, directors or shareholders. In the present case also, there appears to be change in share holding pattern in respect of the first Respondent Company, where some other individuals owned 50% shares in the company till previous year ending March 2011. A director or managing director who works for the company and draws remuneration can be considered to be 'employee' of the company for various labour related legislations. It all depends on facts and circumstances of each case. The term 'employer' has been defined under Section 2(g) the Payment of Gratuity....
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....ratuity under the Payment of Gratuity Act. The petitioner cannot be said to be an employer/co-employer, as, even looking to the definition of "employer," if any person is having ultimate control of the affairs of the company, he can be considered as employer. The petitioner was not having any such control in his hands and after considering the evidence on record, the authorities have come to the conclusion that the respondent was not having any such control and accordingly he was entitled to benefit of gratuity under the Payment of Gratuity Act, 1972, as an employee of the company. 8. However, so far as the instant case is concerned, the question which is required to be considered is whether the respondent was an employee of the company or not and looking to the reasoning given by both the authorities to the effect that he had no ultimate Control over the management and considering the definition of "employee" as well as "employer" given in the Act. I am of the opinion that the view taken by the authority is absolutely correct and no interference of this Court is required. 34) Thus, the question whether a director or managing director would fall in the definition of the....
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..... So far as the alleged liability created towards payment of gratuity to directors under entries in the Balance Sheet are concerned, the same would not bind the First Respondent Company or its purchasers/Directors in view of 'Entire Agreement' clause. Clause-16.1 of the SPA which reads thus: 16.1 This Agreement constitutes the entire Agreement between the parties with respect to the subject matter hereof to the exclusion of and shall supersede the Term Sheet executed between the Parties and all other term sheets, agreements, arrangements, understandings and assurances, either written or oral, existing or proposed, between the Parties hereto or their Affiliates including with any Third Party relating to the subject matter hereof. 37) The 'entire agreement' clause is always intended to incorporate the entire transaction between the parties to be governed only by the covenants of the SPA and by no other documents. If Petitioners are permitted to rely upon entries in the balance sheet for the purpose of creating a liability on purchasers for amount of Rs.1,21,96,154/-, the same would constitute an additional liability for the purchasers towards the sellers, over and above t....
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.... sold their entire equity stake in the Company on 20 September 2012 and closing date in the SPA was indicated as the date of signing of the agreement. Thus, Petitioners otherwise did not have any connection with the company from 20 September 2012 and therefore it is quite incomprehensible as to why they were required to resign from the position of directors of the Company on 1 October 2012. This appears to be the reason why there is no endorsement or acknowledgment on the said resignation letters and the Appellate Authority cannot entirely be faulted for doubting the genuineness of the said resignation letters. 40) Even otherwise, the relevant entry in the Balance Sheet is 'gratuity payable to Directors' and it is difficult to interpret the said entry to mean that the same was payable only to the directors existing as on 31 March 2012 and not to the directors who functioned before 2011-12 or who became directors after execution of the SPA. As observed above there is no underlying agreement or board resolution which agreed payment of gratuity to directors. Why gratuity is claimed selectively by Petitioners is also not explained when Mr. P. R. Deo and Mrs. R. P. Deo were not ju....
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....quired under Section 4A of the Payment of Gratuity Act, list of employees is submitted and that the said list does not contain Petitioners' names. Mr. Kshirsagar has placed on record the renewed Group Gratuity Insurance Policy No. 638644 with annual renewal date of 1 February 2013 in which names of 57 employees of the first Respondent-Company, figures of their salaries, total accumulated gratuity, life cover etc. is indicated. Admittedly, Petitioners' names are not reflected in the said list. This is yet another factor to infer that Petitioners were never treated as employees of the company. 43) In support of his plea that Petitioners were 'employees', Mr. Bapat has relied upon judgment of the Apex Court in Venus Alloy Private Limited (supra) in which the issue was about company's liability to make contribution to Employees State Insurance Corporation (ESIC) in respect of the remuneration paid to its directors. In that case, the company was covered under the provisions of the Employees State Insurance Act, 1948 and had been depositing the amount of contribution with reference to the wages paid to some of its employees. In the inspection carried out by the ESIC, it was observed t....
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.... of the expressions "or under the standing orders of the establishment".] but does not include- (a) any member of the Indian naval, military or air forces; or (b) any person so employed whose wages (excluding remuneration for overtime work) exceed such wages as may be prescribed by the Central Government: Provided that an employee whose wages (excluding remuneration for overtime work) exceed such wages as may be prescribed by the Central Government at any time after (and not before) the beginning of the contribution period, shall continue to be an employee until the end of that period;" 8. The expression "wages" is defined in sub-section (22) of Section 2 of the ESI Act in the following terms: "2. (22) "wages" means all remuneration paid or payable, in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled and includes any payment to an employee in respect of any period of authorised leave, lock-out, strike which is not illegal or lay-off and other additional remuneration, if any paid at intervals not exceeding two months, but does not include- (a) any contribution paid by the employe....
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....pany and as such could be added to the list of the remaining 19 employees so as to make a total of 20 for covering the establishment under Section 2 sub-section (12) of the Act which defines "factory" to mean, 'any premises including the precincts thereof- (a) ... or (b) whereon twenty or more persons are employed or were employed for wages on any day of the preceding twelve months, and in any part of which a manufacturing process is being carried on without the aid of power or is ordinarily so carried on,'." 13. We are clearly of the view that what has been observed and held by this Court in Apex Engg., in relation to the Managing Director of a company, applies with greater force in relation to a Director of the Company, if he is paid the remuneration for discharge of the duties entrusted to him. 14. It is noticed that in the present case, the appellant Corporation in its impugned order dated 6-4-2005 specifically asserted that the Directors of the Company were paid remuneration at the rate of Rs 3000 p.m. and they were falling within the definition of "employee" under the ESI Act and hence, contribution was payable in regard to the amount paid ....
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....g of ESI Act and that any contribution was made to ESIC in respect of the remuneration paid to them. The column 'ESI No.' in the payslip is blank. Thus Petitioners were not treated as employees within the meaning of ESI Act. The reliance on judgment in Venus Alloy Private Limited, far from assisting Petitioners' case, actually militates against them. 45) Also, the scheme under the ESI Act is entirely different where the establishments covered under the ESI Act are required to make contribution to the Employees State Insurance Fund held and administered by ESIC for payment of benefits and provision of medical treatment to the insured persons. The wages paid to an employee forms the unit in respect of which the contribution is to be made under the Act. The definition of the term 'wages' under the ESI Act includes 'remuneration' also. The term 'employer' is not even defined in the ESI Act. The scheme of both the enactments are also entirely different. In any case, Petitioners are not treated as 'employees' within the meaning of ESI Act nor have they made contributions on the basis of remuneration earned by them to the Employee State Insurance Fund. In that view ....
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....d manner and no employer shall be registered under the provisions of this section unless he has taken an insurance referred to in sub-section (1) or has established an approved gratuity fund referred to in sub-section (2). (4) The appropriate Government may, by notification, make rules to give effect to the provisions of this section and such rules may provide for the composition of the Board of Trustees of the approved gratuity fund and for the recovery by the controlling authority of the amount of the gratuity payable to an employee from the Life Insurance Corporation of India or any other insurer with whom an insurance has been taken under sub-section (1), or as the case may be, the Board of Trustees of the approved gratuity fund. (5) Where an employer fails to make any payment by way of premium to the insurance referred to in sub-section (1) or by way of contribution to an approved gratuity fund referred to in sub-section (2), he shall be liable to pay the amount of gratuity due under this Act (including interest, if any, for delayed payments) forthwith to the controlling authority. (6) Whoever contravenes the provisions of sub-section (5) shall be pu....
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....102 of the Income Tax Rules would indicate that in respect of those employers who have already established 'approved gratuity fund', such employer is not under statutory obligation to obtain insurance from Life Insurance Corporation of India for his liability for payment of gratuity. In respect of such employers who have obtained 'approved gratuity fund', its directors owning shares in a company carrying more than 5% of the total voting power cannot be admitted to such 'approved gratuity fund'. When in respect of a company which has set up 'approved gratuity fund', its director having more than 5% voting power cannot be admitted to such approved gratuity fund and therefore cannot be paid gratuity, I do not see any reason why director of a Company who is statutorily obliged to obtain insurance under Section 4A (1) of Payment of Gratuity Act from the Life Insurance Corporation of India should be placed at an higher pedestal for payment of gratuity. Section 4A of Payment of Gratuity Act recognizes two classes of employers, viz. i) employers who have set up 'approved gratuity fund' and ii) employers who are mandatorily required to obtain insurance from t....
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....Law Board for payment of gratuity 'in pursuance of the Consent Terms'. The application was opposed by the Appellants inter-alia on the ground that Respondent was an employer rather than employee within the meaning of Payment of Gratuity Act and the payments made to him were in the nature of Director's remuneration and not wages within the meaning of the Act. In the above factual background, this Court held as under : 5. .... The Act provides for payment of gratuity for every completed year of service or part thereof in excess of six months at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned. The Act also provides for compulsory insurance for the employer's liability of payment of gratuity under the Act. Such insurance has to be obtained from the LIC. It is the case of the Appellants that the first Appellant company has obtained such insurance and that there is a scheme of gratuity prepared in that behalf. The scheme is in the form of a trust deed between the employer, i.e. the first Appellant company, and the trustees. This trust deed has various clauses which inter alia include the definition of employees, which is in....
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....company from entering into a separate contract for payment of gratuity with a whole-time employee who has been holding more than 5 per cent voting rights in the company. Secondly, it has been brought out on record by the Respondent before the CLB that whereas there were suitable provisions made towards the company's liability to pay gratuity to the employees including whole time directors prior to the scheme, i.e. till the year 2001, with effect from the year 2001 an appropriate provision was made by depositing suitable amounts towards gratuity payable to the employees including the Respondent with the LIC. There is an admitted document on record in this behalf, namely, the letter dated 3 January 2014 addressed by the LIC that the total accumulation value of gratuity payable to the Respondent as on 1 November 2012 was Rs. 10 lakh as per the scheme rules. This was in response to a query addressed by the Respondent to the LIC under Master Policy No. GGCA/658728 taken by the Appellant company from the LIC in relation to gratuity payable by it to its employees. Then, there are also other documents on record which show that the Respondent was actually included in the gratuity scheme....
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....the quantum of gratuity payable was a ministerial exercise, which in the facts of the case, the CLB was entitled to undertake. 53) Thus, in Ramchander's Coaching Institution Pvt. Ltd. this Court allowed claim for gratuity towards enforcement of Consent Terms filed before the Company Law Board. This Court noticed that in addition to Consent Terms filed before the Company Law Board, specific provision was made by depositing suitable amounts towards gratuity payable to employees (including the Respondent) with LIC. Thus under the Group Gratuity Scheme purchased under the provisions of Section 4A of the Act, the amounts were deposited for payment of gratuity to Respondent therein. There was a letter addressed by LIC indicating the accumulated amount of gratuity payable to Respondent as Rs. 10,00,000/-. Furthermore, the company had addressed a letter to the LIC in connection with Group Gratuity Scheme alongwith list of its employees on payroll, which reflected Respondent's name. It is in the light of the above unique facts of the case that this Court upheld the claim for gratuity in Ramchander's Coaching Institution Pvt. Ltd. in respect of Respondent, who also happened to be company'....