TaxTMI 
TaxTMI 
TaxTMI 
2024 (8) TMI 1244
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....l 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 Authority) for payment of gratuity. In res....
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....d 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 would submit that Petitioners are treated as employe....
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....roduced 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 date. Mr. Kshirsagar would submit that both the Courts b....
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....e 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: j) Retirement Benefits (AS 15): i. Provident Fund: The eligible employees of the Comp....
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....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 gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned: Provided that in the case of a piece-rated employee, daily wages shall be comput....
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....fication 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 claimed by Petitioners is in excess of Rs. 10,00,000/-, they have contended that there is a contract with Respondent No. 1, under which Petitioners are entitled to receive gratuity. Thus, right to receive gratuity is essentially premised on existence of agreement under Section 4 (5) of the....
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....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 in Asset Reconstruction Company (India) Ltd. Versus. Bishal Jaiswal and anr 2021 6 SCC 366. The issue before the Apex Court was however slightly different, than the one that needs to be decided in the present case, i.e. whether an entry in the balance sheet would amount to acknowledgment of ....
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....tion 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 between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship. Such intention can be inferred by implication from the nature of the admission, and need not be expressed in words. If the statement is fairly clear then the....
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.... 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 (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion. We, therefore, set aside the majority judgment of the Full Bench of NCLAT dated 12-3-2020. 47. NCLAT, in the impugned judgment dated 22-12-2020, has, without reconsidering the majority decision of the Full Bench in V. ....
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....sist 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 of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. (2) Where the writing containing the acknowledgment is undated, or....
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....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 rise to creation of liability for the First Respondent-Company to pay gratuity under the provisions of subsection (5) of Section 4 of the Payment of Gratuity Act. 27) If there is still any ambiguity about existence of an agreement for payment of gratuity by first Respondent-Company to Petitioners, the same is cleared by specific admission given by Petitioner-Anil Govind Ganu in his cross examination, wherein he stated as under: 'The....
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....n 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 the balance sheet was finalised before Share Purchase Agreement was signed. It is true to say that the company has not raised any objection for that. It is true to say that as provision of gratuity in balance-sheet was admitted to the company, hence, company has not raised any objection. It is true to say that the payment slip Exh.U-17 is of our company. I have knowledge about all provisions of Gratuity Act. (emphasis added) 30) Mr. Bapat reads the above statements in cross examination of Respon....
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....e 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 Act as under: (f) "employer" means, in relation to any establishment, factory, mine, oilfield, plantation, port, railway company or shop-- (i) belonging to, or under the control of, the Central Government or a State Government, a person or authority appointed by the appropriate Government for the supervision and control of employees, or where no person or authority has been so appointed, the head of the Ministry or the Department concerned, (ii) belonging to, or under the control of, any local authority....
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....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 term 'employer' or 'employee' would depend on facts and circumstances of each case. So far as the present case concerned, both the authorities below have concurrently held that Petitioners were in complete control of the affairs of the company. Also, under Section 2 (e) of the Payment of Gratuity Act, the expression used is 'employed for wages'. Therefore, someone needs to employ a person for fitting him/her in the definition of the term 'employee'. Also under Section 7 (2) of the Act, the employer is under obligation to determine the amount of gratuity ....
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....ither 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 the consideration of Rs. 23 crores already paid to Petitioners under the SPA. In my view, therefore this is a clear case where Petitioners are attempting to extract additional amounts from the purchasers over and above the consideration price of Rs. 23 crores. 38) Reliance is placed on resignation letters of Petitioners to buttress the claim of they being 'employees'. The resignations are shown to have been tendered by Petitioners on 1 October 2012. The Appellate Authority has doubted the genuineness of those resignation letters, by making following observations: 12. In his resig....
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....esignation 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 just 50% shareholders but also directors of the company. They have apparently resigned as directors during the year 2011-12. In clause 12.4 of the SPA, they are described promoters and shareholders of the company, relevant part whereof reads thus: The Company has not entered into any deed of disassociation with Mr. Prafulla R. Deo and Ms. Madhuvanti Deo, the erstwhile promoters and directors of the Company. (emphasis added) 41) Also, there are two separate heads in entry No. 13 under head 'Employee Benefits Expenses' of 'Salary and Wages' against which figure of Rs. 34,675,975.06/- is reflecte....
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.... 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 that contribution was not made in respect of the remuneration paid to its directors. Therefore, order was passed demanding such contribution from the company which was questioned by the company raising a plea that its directors did not fall under the category of 'employees'. In the above factual background, the Apex Court considered the issue as to whether director of a company would fall in the exhaustive definition of the term 'employee' under subsection (9) of Section 2 of the E.S.I. Act and held in paras-7, 8, 11, 12, 13, 14 and 15 as under: 7. For determination of the question involved, appropriate it ....
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.... 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 employer to any pension fund or provident fund, or under this Act; (b) any travelling allowance or the value of any travelling concession; (c) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or (d) any gratuity payable on discharge;" 11. This Court also approved the interpretation of relevant provisions of the ESI Act by the Karnataka High Court in the following : (Apex Engg. case [ESI Corpn. v. Apex Engg. (P) Ltd., (1998) 1 SCC 86 : 1998 SCC (L&S) 178 : (1997) 77 FLR 878] , SCC p. 97, para 13) "13. A Division Bench of the Karnataka High Court in ESI Corpn. v. Margarine and Refined Oils Ltd. [ESI Corpn. v. Margarine and Refined Oils Ltd.,....
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....ration 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 to them. Interestingly, even while seeking to challenge the aforesaid order dated 6-4-2005 by way of proceedings under Section 75 of the ESI Act, the respondent Company chose not to lead any evidence before the Court. Hence, there was nothing on record to displace the facts asserted on behalf of the appellant Corporation in its order dated 6-4-2005; rather the factual assertions in the said order remained uncontroverted. The order dated 6-4-2005 had been questioned by the respondent Company only on the contention that the Directors do not fall within the category of "employee" but no attempt was made to show as to how and why the remuneration paid to its Directors would not fall within the purview of "wages" as per the meaning assigned by sub-section (22) of Section 2 of the ESI ....
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....' 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 of the matter, the judgment in Venus Alloy Private Limited cannot be selectively relied upon by Petitioners in absence of evidence to show that contributions were made to the fund in respect of the remuneration earned by them. 46) Mr. Bapat has also relied upon judgment of the Apex Court in BCH Electric Limited (supra) which in my view has no application to the issue involved in the present case. The judgment deals with the issue of right of an employee to receive better terms of gratuity under Section 4 (5) of the Act as compared to the statutory limit of Rs. 10,00,000/- imposed under Section 4 (3) of the Act. This is not the issue involved in the present case and therefore it is not necessary to delve deeper into that aspect. 47) For answering the issue at hand, provisions of Section 4A....
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....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 punishable with fine which may extend to ten thousand rupees and in the case of a continuing offence with a further fine which may extend to one thousand rupees for each day during which the offence continues. Explanation.-- In this section approved gratuity fund shall have the same meaning as in clause (5) of section 2 of the Income-tax Act, 1961 (43 of 1961). (emphasis added) 48) Thus under Section 4A of Payment of Gratuity Act, every employer is required to obtain insurance from the Life Insurance Corporation of India towards his liability for payment towards gratuity under the Act. Sub-section (2) of Section 4A exempts the employers who had already established 'approved gratuity fund' and who desire to continue the arrangement and also the employer who employs more than 500 employees and who establishes such 'approved gratuity fund'. Under Exp....
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....ce 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 the Life Insurance Corporation of India. In the first category of companies, directors having more than 5% voting power, cannot be paid gratuity. Therefore, there is no reason why the directors of second category of companies, should be made entitled for payment of gratuity. Mere procurement of an Insurance policy from Life Insurance Corporation under Section 4A (1) would not place the directors of such company on higher pedestal in comparison to the companies who have set up 'approved gratuity fund'. In my view, therefore since both the Petitioners had more than 5% voting power, they cannot be paid gratuity under the provisions of the Payment of Gratuity Act. 51) Mr. Bapat has contended that Petitioners are treated as 'employees' for provident fund and that the definition of 'employee' under the PF Act is similar to the one under the Payment of Gratuity Act. In my view it is ....
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.... 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 the following terms: ""Employees" shall mean the employees participating in the Gratuity Fund other than personal and domestic servants and shall be deemed to include the Directors who are wholetime bonafide employee of the Company and do not beneficially own shares in the Company carrying more than 5% voting rights in the Company." The submission is that the Respondent, being a director of the company carrying more than 5% voting rights in the company (he admittedly has 33.33% shareholding in the company), is not entitled to be treated as an employee under this scheme even if he be a whole-time bona fide employee of the company. This argument has no force for two reasons. Firstly, any scheme made by an employer for the purposes of compulsory insurance under Section 4-A of the Act is not exhaustive of the rights and liabilities of the parties concerning payment of gratuity. In fact, sub-sec....
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....spondent 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 and policy taken from the LIC in connection with the scheme. There is a letter addressed by Appellant No. 1 to the Respondent on 30 November 2012, writing to him about the former having forwarded his request for payment of gratuity to the LIC - Group Gratuity Scheme. There is also another letter on record, namely, letter dated 1 November 2011 addressed by Appellant No. 1 to the LIC in connection with the Group Gratuity Scheme giving a list of its employees on its payroll as on 1 November 2011. This list shows the name of the Respondent as an employee with salary of Rs.2 lakh per month as part of the Gratuity Scheme. This clearly shows that not only was the Respondent entitled to receive gratuity but that suitable provisions were made throughout towards payment of such gratuity. The last clinching evidence in this behalf is the consent terms themselves where there is an unequivocal admission of liability to p....
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....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's director. The said judgment cannot be cited in support of an absolute proposition that in every case, director of a company automatically becomes an employee under the Payment of Gratuity Act or that gratuity is payable to all directors, in absence of an agreement. 54) Mr. Bapat has contended that Ramchander's Coaching Institution Pvt. Ltd. answers the issue of right of director to receive gratuity despite possession of more than 5% voting power. In my view, this court has allowed gratuity claim of Respondent therein only due to factor of (i) consent terms agreeing to pay gratuity, (ii) name of director actually included in list of employees in LIC group gratuity scheme and (iii) deposit of amounts by the company for the director in LIC's scheme. It is in the light of these unique facts that this Court repelled the objection of directors with 5% voting power not fitting in the definition of the term 'employee' unde....