CLUBBING OF ESTABLISHMENTS UNDER THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952

[Mr. M. GOVINDARAJAN]

 The expression ‘establishment’ has not been defined in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (‘Act’ for brevity).   There was a controversy in regard to the true meaning and import of this expression.  Sec. 2A was inserted in the Act by Act 46 of 1960 with effect from 31.12.1960 for the purpose of removing such doubts. 

Sec. 2A of the Act provides that for the removal of doubts, it is hereby declared that where an establishment consists of different departments or has branches, whether situate in the same place or in different places, all such departments or braches shall be treated as part of the same establishment.   

From the plain reading of the section itself it becomes clear that it was enacted for removal of doubts which had arisen in the past in regard to treatment of different departments or branches of an establishment situated in the same place or different places. There is a clear distinction between “different departments or branches of one establishment” and “different establishments”.  Distinct and separate establishments cannot be treated as departments or branches of another establishment. 

Whether two units are one or distinct will have to be considered in the light of the provisions of Sec.2-A of the Act which declares that where an establishment consists of different departments or has branches whether situated in the same place or in different places, all such departments or branches shall be treated as parts of the same establishment.   In such cases it was held in ‘Noor Niwas Nursery Public School V. Regional Provident Fund Commissioner and others’ – 2001 (88) FLR 533 that the court has to consider how far there is functional integrity between the two units, whether one unit cannot exist conveniently and reasonably without the other, and on matters of finance and employment, whether the employer has actually kept the two unit distinct or integrated. 

In ‘Gujachem Distillers India Limited, Ahmedabad V. Regional Provident Fund Commissioner’ – 1985 LIC 1714 – it was held that if one factory, whether situate, can be said to be a department or a branch of the other, it can be said that there is inter-connection between the two.   There is either mutual dependence of one over the other so that one cannot function altogether or substantially without the other or at any rate cannot thrive wholly or substantially in the absence of the other.   So, if the ingenious entrepreneurs so manage their affairs as to have separate factories, which on practical analysis can be said to be departments or branches of the other on account of certain well known interconnections, the clarification made in Section 2-A would step in ultimately to realize the high objective sought to be achieved by the Act.

In ‘Nandhini Travels Limited V. Regional Provident Fund Commissioner, Goa – 2003 (2) LLJ 810 it was held by the Division Bench that the first and foremost test to establish the functional integrity would be whether one unit would survive in the absence of the other and whether in matters of finance, the employer had kept them distinct or integrated.  Thus for the clubbing of establishments the mandatory functional is thus functional integrity.

The Delhi High Court in ‘Regional Provident Fund Commissioner V. M/s Nath Traders and anothers’ – 2007 (1) LIC 86 held that the test of functional integrity is not the absolute test for holding the two establishments as one. Nor the test whether one can exist without the other, is the absolute test for holding two establishments as one for the purpose of this Act. The Court has to consider all facts and circumstances of the case to arrive at a conclusion whether the two units can be clubbed together for the purposes of the Act or not.  In the instant case, in order to deprive the employees of the benefits of beneficial legislations and labor laws, the business was fragmented into two firms Evidences show that the two firms were, in fact, one establishment, working under one management and control. The partner was the wife of the respondent.  Merely having separate sales tax and income tax registration, shall not change the unity of the establishment. Even if a registration is separate, the income of the proprietorship firm is considered as income of the proprietor and in a partnership firm, it is considered as income of partners.  A partnership form or proprietor firm has no separate and independent identity.  They are identified with the partners or proprietors.   It is only the partner/proprietor of a firm who can sue in his name.   The law does not recognize proprietorship firm or a partnership firm as independent legal entity.  It was held that clubbing of the employees of the two firms to apply the provisions of the Act is correct.

In ‘M/s Kerala Samajam Model School through its Trust-in-charge, A.P.R. Nair V. Union of India and others’ – 2006 LLR 383 it was held that where the canteen was in the premises of school for which the school had no control or supervision over it, it is not justified to extend the provident fund benefits to the workers of the canteen. Moreover the approach of malafide and bias of the Enforcement Officer cannot be brushed aside. In his earlier inspection, he has not insisted to cover the employees in the canteen but only when his daughter studying in the school failed, he has tried to club the canteen with the school.  The Court remanded the case to the Commissioner to pass a fresh order in accordance with the law.

The Supreme Court in M/s L.N. Gadodia &Sons and another V. Regional Provident Fund Commissioner – Special leave petition (Civil) No. 11230 of 2008 decided on 26.09.2011 dealt with clubbing of establishments for the purpose of the Act. The petitioners are the sister concerns. The Department wrote to them to comply with the provisions of the Provident Funds Act failing which legal action would be initiated against them. The petitioner filed an application and disputed the clubbing of two concerns for the purposes of this Act. The Regional Provident fund Commissioner (Enforcement and Recovery) heard the application and concluded that there was integrity in the management, finance and the work force of two companies, and the entire business was being run by one family.   The management and supervision was in the hands of the same Managing Director and the finances of one company were being used by the other.   In view this the Commissioner held that both units belonged to one establishment and they have to be clubbed together for the purposes of this Act and passed an order to proceed to determine the dues from the petitioners and directed that further proceedings in the enquiry be taken up the concerned Presiding Officer.

The said order was challenged by the petitioners before the Employees Provident Fund Appellate Tribunal, which allowed the appeal and held that the clubbing was not possible in the facts of the case and set aside the order of the Commissioner.  The Department filed a petition before the High Court. The Single Judge set aside the order of the Tribunal. The Division Bench came to the same conclusion of the Single Judge. 

Being aggrieved by this the petitioner filed the present petition before the Supreme Court. The petition was dismissed by the Supreme Court. The Supreme Court found that in the present case the Directors of the two petitioner companies belong to the same family. The Managing Director is common. The two senior officers i.e., Commercial Manager and Technical Manager are common. At the time of inspection, the Enforcement Officer noticed that the employees of the companies were being swapped. Both of them have same registered address and common telephone numbers and a common gram number. The audited accounts revealed that the second petitioner company had given a loan of Rs. 5 lakhs to the first petitioner in the year 1988.   The two companies are family concerns of the Gadodia family. Hence, in the facts of the present case it is to be held that there is integrity of management, finance and the workforce in two private limited companies. The material on record leads to only on pointer that the two entities are parts of the same establishment and in which case they get covered under the Provident Funds Act.  The Supreme Court upheld the findings of the Regional Provident Fund Commissioner.