The High Court of Karnataka, in the case of Employees’ State Insurance Corporation v. M/s Bhima & Brothers Jewellers, Miscellaneous First Appeal No. 6576 of 2015, decided on 02.07.2025, examined the scope of “wages” under Section 2(22) of the Employees’ State Insurance Act, 1948 (hereinafter referred to as “ESI Act”) and clarified whether components such as annual bonus, ex-gratia payments, security agency charges, and material reimbursements are liable for ESI contribution.
The judgment reiterates that the ESI Act, though a beneficial social welfare legislation, cannot be stretched to include amounts that are discretionary, non-recurring, or reimbursement-based. Upholding the decision of the Employees’ Insurance Court, the High Court ruled in favour of the employer, thereby setting aside the contribution demand raised by the ESI Corporation.
FACTS
M/s Bhima & Brothers Jewellers (hereinafter referred to as “the Respondent”) is a registered commercial establishment engaged in the jewellery business at Mysore and was covered under the ESI Act
An inspection conducted by the Insurance Inspector on 26.08.2008 alleged that the Respondent failed to pay contributions on certain components of salary and expenses for Financial Years 2002-2003. Based on this inspection report, the Employees’ State Insurance Corporation (hereinafter referred to as “the Appellant”) issued a show-cause notice, which culminated in an order under Section 45A of the ESI Act dated 10.07.2009, demanding ₹77,139 as contribution on “committed wages.”
Aggrieved by this, the Respondent approached the Employees’ Insurance Court (E.I. Court), Mysore under Section 75 of the ESI Act, which set aside the demand on 04.06.2015.
The Appellant, aggrieved by this, filed the present appeal before the High Court of Karnataka under Section 82(2) of the Act challenging the legality of that order.
ISSUES
- Whether the E.I. Court erred in setting aside ESIC’s demand order despite the presumption under Section 45A(2) of the ESI Act that such determinations are valid unless rebutted by the employer?
- Whether payments such as bonus, ex-gratia, security agency charges, and repair and maintenance expenses fall within the definition of “wages” under Section 2(22) of the ESI Act?
CONTENTIONS OF THE PARTIES
The Appellant argued that the Respondent failed to produce comprehensive documentary evidence such as ledgers, cash books, or employee registers to rebut the contribution assessment under Section 45A(2).
It contended that the E.I. Court wrongly relied on limited oral evidence and a few documents without properly appreciating the statutory presumption in favour of the Appellant’s determination.
It further urged that the Court erred in setting aside the demand, as the Respondent had not discharged its burden to disprove the findings of the insurance inspector.
The Respondent, on the contrary, submitted that the Appellant acted mechanically and included in “wages” several items that are clearly excluded under Section 2(22). The inclusion of bonus and ex-gratia was erroneous since these are not regular or contractual payments, and hence not “wages.”
It was further contended that security agency charges were paid to independently registered contractors who already had ESI coverage; thus, the Appellant’s contributions were not payable by the Respondent. Likewise, repair and maintenance costs were material reimbursements and vendor payments, not wages to employees.
DECISION AND FINDINGS
The Hon’ble High Court of Karnataka upheld the E.I. Court’s decision and dismissed the appeal, affirming that the Appellant’s contribution demand was unsustainable in law.
The Court held that bonus and ex-gratia payments, aggregating ₹3,11,960, are explicitly excluded from the definition of “wages” under Section 2(22). Hence, the inclusion of these components in the contribution base was legally untenable.
The Appellant had added ₹64,244 towards security agency payments. The Court observed that the security staff were employed through independent agencies having their own ESI registration, making those agencies liable and not the Respondent. The Appellant had provided no contrary evidence to rebut this.
The Court found that ₹4,13,410 under “repairs and maintenance” represented material costs and independent vendor payments, with negligible labour involvement. Since there was no proof of direct employment or control over such workers, the Respondent was not liable for ESI contributions.
An amount of ₹1,53,265, attributed to Bhima & Brothers Diamonds, was wrongly clubbed with the Respondent. The Court reiterated that there was no financial or functional integration between the two businesses and rejected the Appellant’s assumption.
While Section 45A(2) allows for a statutory presumption, it does not relieve the Appellant from acting judiciously. The Appellant’s reliance solely on balance-sheet figures, without verifying the nature of the transactions, was unsustainable.
The Court emphasized that though the ESI Act is a beneficial welfare legislation, it must not be interpreted to impose arbitrary or unjust obligations on employers absent statutory justification. The Appellant must adhere to natural justice and reasonableness while passing orders under Section 45A. The High Court dismissed the Appellant’s appeal and affirmed the E.I. Court’s judgment.
AMLEGALS REMARKS
The Karnataka High Court’s judgment reaffirms judicial restraint in applying welfare statutes beyond their intended scope. The Court drew a firm line distinguishing remunerative wages from discretionary, annual, or reimbursement-inked payments.
By excluding bonus, ex-gratia, contractor charges, and material reimbursements from the definition of “wages,” the Court has underscored the principle that liability under the ESI Act must rest on demonstrable employer-employee relationships and contractual remuneration, not on incidental or discretionary outlays. The ruling reiterates that the Appellant must exercise its statutory powers judiciously and not mechanically rely on balance-sheet entries.
For any query, please feel free to reach out to mridusha.guha@amlegals.com