DELHI GYMKHANA CLUB LTD. Vs. EMPLOYEES STATE INSURANCE CORPORATION

Employees\' State Insurance Act, 1948

Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 2415 of 2003, Judgment Date: Oct 28, 2014

REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2415 OF 2003

DELHI GYMKHANA CLUB LTD. ..Appellant

VERSUS

EMPLOYEES STATE INSURANCE CORPN. ..Respondent

J U D G M E N T

R. BANUMATHI, J.

Short point falling for consideration in this appeal is whether
kitchen of the appellant-club and catering section thereon come within the
meaning of “factory” and “manufacturing process” as defined in Employees’
State Insurance Act, 1948 (for short ‘ESI Act’).
2. The appellant-Delhi Gymkhana Club is a member club, duly
registered under the Companies Act. Appellant-club has a kitchen to cook
food items to provide food and refreshment to its members. On 20.03.1975,
a notification was issued by the Delhi Administration, in exercise of the
powers conferred under Section 1(5) of the ESI Act, stating that the
provisions contemplated under the Act shall be extended to the
establishments specified in the Schedule thereon. In furtherance of the
said notification, the respondent-ESI Corporation sought to apply the
provisions of the Act on the appellant-club, on the ground that the
preparation of food items amounts to “manufacturing process” and that the
appellant–club is a factory/establishment covered under the provisions of
the ESI Act. After issuing the show cause notice, ESI Corporation passed
the order on 4.8.1986 under Section 45-A of the ESI Act, holding that M/s.
Delhi Gymkhana Club Limited is covered under the provisions of Employees
State Insurance Act, directing the appellant to pay Rs.6,82,655.40 as a
contribution of insurance in respect of employees for the period from
1.02.1980 to 31.08.1985, along with interest @ 6% per annum.
3. Aggrieved, the appellant filed a petition in the ESI Court
which, by a judgment dated 25.11.1986, while allowing the petition of the
appellant-club, held that preparation of eatables does not fall under
“manufacturing process” and hence, ESI Act is not applicable to the
appellant-club and the appellant was not liable to pay contribution.
Aggrieved by the same, respondent-corporation preferred appeal before the
High Court. The High Court allowed the appeal and held that the kitchen is
an integral part of the club and that cooking of foodstuffs amounts to
‘manufacturing process’ falling within the meaning of sub-section (14AA)
of Section 2 of the ESI Act, thereby falling within the meaning of
‘factory’ as defined under Section 2(12) of ESI Act. Being aggrieved, the
appellant-club is in appeal before us.
4. Contention of the appellant is that the Club is a non-profit
organization, exclusively rendering facilities to its members and that the
ESI Act is not applicable to them. It is contended that social security
perks, better than the ones contemplated under the ESI Act, are already put
in place for the benefit of employees. Contending that preparation of
food items does not amount to ‘manufacturing process’ and that provisions
of ESI Act are not applicable to the club, the appellant placed reliance on
the decision of this Court in Indian Hotels Co. Ltd. Vs. I.T.O. (2000) 7
SCC 39, wherein it was held that preparation of foodstuffs in hotel kitchen
is merely processing of food to make it edible and that there is no
manufacturing process.
5. Per contra, learned counsel for the respondent submitted that
the purpose is to extend the benefit of the scheme to the employees working
in the appellant-club and while doing so, the object of welfare
legislations, like the ESI Act, ought to be kept in mind. Refuting the
appellant’s contention that preparation of foodstuffs in the kitchen does
not amount to ‘manufacturing process’, the respondent placed reliance on
the decision of this Court in G.L. Hotels vs. T.C. Sarin (1993) 4 SCC 363,
wherein it was held that cooking forms part of manufacturing process, as it
alters and treats or otherwise adapts an article of food or substance with
a view to its use, sale, delivery or disposal in the club. It was submitted
that the High Court rightly held that the kitchen of the appellant falls
within the meaning of ‘factory’ as defined under Section 2(12) of the ESI
Act.
6. We have carefully considered the submissions and perused the
materials on record.
7. ESI Act is made applicable under Section 1(4) to all factories
including factories belonging to the Government, other than seasonal
factories. Proviso appended to Section 1(4) of the ESI Act carves out an
exception. Sub-section (4) of Section 1 of the ESI Act shall not apply to
a factory or establishment belonging to or under the control of the
Government whose employees are otherwise in receipt of benefits
substantially similar or superior to the benefits provided under this Act.
8. The provisions of Section 1(5) of the ESI Act enable the
appropriate government to issue notification in respect of any other
establishment or class of establishments, industrial, commercial,
agricultural or otherwise. In exercise of its powers under Section 1(5) of
the Act, the Delhi Administration issued the notification dated
20.03.1975 extending the provisions of the Act to certain establishments.

In furtherance of the above notification, the ESI Corporation sought to
apply the provisions of the Act to the appellant-club.
9. The word “factory” has been defined in Section 2(12) of ESI Act
as under:-
”2(12) “factory” means any premises including the precincts thereof
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 if being carried on with the aid of power or is
ordinarily so carried on but does not include a mine subject to the
operation of the Mines Act, 1952 (35 of 1952), or a railway running
shed.”

The above definition is prior to the amendment Act 29/1989. In this
appeal, we are concerned with the definition of “factory” as it existed
prior to October 20, 1989.
10. Prior to Act 29/1989, in Section 2(12) of the ESI Act, the
expressions “manufacturing process”, “power” shall have the meaning
respectively assigned to them in the Factories Act, 1948. After Act 29 of
1989, a separate definition for “manufacturing process” has been
incorporated in sub-section (14AA) of Section 2 which practically has the
same effect. It is seen from the definition of “factory” that the
following conditions are to be satisfied in order to make any premises
including the precincts thereof a factory:
(1) in the premises including the precincts thereof twenty or more
persons are employed or were employed for wages on any day of the
preceding twelve months;

(2) in any part of these premises or precincts, a manufacturing process
is being carried on, and

such manufacturing process must be carried on with the aid of power, or
is ordinarily so carried on.

11. “Manufacturing process” has been defined in Section 2(k) of the
Factories Act, 1948 as under:-
“2. (k) ‘manufacturing process’ means process for –

(i) making, altering, repairing, ornamenting, finishing, packing, oiling,
washing, cleaning, breaking up, demolishing, or otherwise treating or
adapting any article or substance with a view to its use, sale,
transport, delivery or disposal; or
pumping oil, water, sewage or any other substance; or
generating, transforming or transmitting power; or
composing types for printing, printing by letter press, lithography,
photogravure or other similar process or book binding; or
constructing, reconstructing, repairing, refitting, finishing or breaking
up ships or vessels; or
preserving or storing any article in cold storage.”

For the purpose of this appeal, we are concerned only with Section 2(k)
(i) of the Factories Act.
12. We need not go into the details of the number of employees
working in the kitchen of the appellant-club, as admittedly more than 20
persons are employed in preparation of foodstuffs and serving in the
kitchen-catering division and those employees are paid salary, wages,
gratuity etc. Admittedly, the club maintains a kitchen, refrigerator,
geyser and other equipments are used in making and preparation of
foodstuffs wherein power is used. That food items are being prepared in
the kitchen and being served in the kitchen of the appellant-club to
appellant-club’s members and their guests for payment is not disputed.
13. The object of the appellant-club is to promote polo, hunting,
racing, tennis and other games, athletic sports and recreations amongst its
members. Huge contribution is collected for becoming members of the club
and only the privileged can become the members of the appellant-club.
There are wide range of sports activities, recreations and big budget is
involved. The kitchen of the club has a direct connection with the
activities carried on in the rest of the club precincts. The members and
the guests of the members share the services of the kitchen. The ESI Act
is enacted to provide certain benefits to employees in case of sickness,
maternity in case of female employees, employment injury and to make
provision in certain other matters in relation thereto. We find no reason
as to why the employees of the appellant-club should be kept out of the
welfare coverage of the beneficial legislation like ESI Act.
14. Let us now examine whether preparation of food items in the
kitchen of the appellant-club amounts to “manufacturing process” bringing
the club within the purview of the definition of ‘factory’. It has been
consistently held by this Court that preparation of foodstuffs in hotels
and restaurants amounts to manufacturing process, thereby invoking the
applicability of the provisions of the ESI Act. This Court in G.L. Hotels
Limited and Ors. vs. T.C. Sarin and Anr., (1993) 4 SCC 363 has affirmed the
views of the High Court that “since the manufacturing process in the form
of cooking and preparing food is carried on in the kitchen and the kitchen
is a part of the hotel or a part of the precinct of the hotel, the entire
hotel falls within the purview of the definition of “Factory”.”
15. In Bombay Anand Bhavan Restaurant vs. Deputy Director,
Employees State Insurance Corporation And Anr., (2009) 9 SCC 61, the
question for consideration was whether the appellant-restaurant, which was
using LPG gas for preparation of coffee, tea and other beverages, is
covered under the ESI Act. Observing that it is a settled position of law
that cooking, preparing of food items qualifies as manufacturing process
and that the use of LPG satisfies the definition of power, this Court in
paragraphs (27) and (39) held as under:-
27. Both the appellants prepare sweets, savouries and other beverages in
their establishments. It is a settled position of law that cooking and
preparing food items qualifies as manufacturing process. In ESI v. Spencer
& Co. Ltd. (1978 Lab IC 1759 Mad) the Madras High Court held, while
dealing with the case of a hotel run by Spencer and Co., that preparation
of coffee, peeling of potatoes, making bread toast, etc. in a hotel,
involve “manufacturing process”. Similarly, the Bombay High Court in Poona
Industrial Hotel Ltd. v. I.C. Sarin (1980 Lab IC 100 Bom), held that the
kitchen attached to Hotel Blue Diamond run by the petitioners therein,
should be considered as a “factory” for the purpose of the ESI Act. Hence,
it is beyond doubt that there is manufacturing process involved in the
establishment of the appellants.
………………
39. In our view, the use of LPG satisfies the definition of power as it is
mechanically transmitted and is not something generated by human or animal
agency. Since the establishments of the appellants involve a manufacturing
process with the aid of LPG, which can now be termed as power, the
establishments of the appellants can be termed as factories, and therefore,
the ESI Act will apply to these establishments.”

16. On behalf of the appellant, it is contended that the above
decisions are in respect of hotels and the appellant is only a club which
has been running a kitchen and catering division only for the benefit of
its members and the same is not for the purpose of making any profit and it
should be held that the appellant-club does not fall within the definition
of “factory” under Section 2(12) of the ESI Act. We find no merit in the
above submission.
17. The appellant-club is catering to the elite people of Delhi.
Appellant-club provides various services to its members and organizes
several sports activities. Wide range of activities of the club are
associated with the large number of staff. Kitchen is an integral part of
the club which caters to the needs of its members and their guests, on
payment of money either in cash or by card, where the food items are
put for sale, thereby making the appellant-club fall within the definition
of ‘factory’ under Section 2(12) of the ESI Act. All the persons employed
for the purpose of supply and distribution of food prepared in the kitchen
and for doing other incidental duties in connection with the kitchen and
catering are to be regarded as employees of the factory. It hardly matters
for the employee whether the appellant’s kitchen is run with any profit
making motive or not.
18. The object of ESI Act is to provide certain benefits to the
employees in case of sickness, maternity and employment injury and also to
make provision for certain other matters in relation thereto. ESI Act is a
beneficial piece of social welfare legislation aimed at securing the well-
being of the employees and the court will not adopt a narrow interpretation
which will have the effect of defeating the objects of the Act.
19. In the case of Bombay Anand Bhavan Restaurant vs. Dy. Director
ESI Corporation & Anr. (2009) 9 SCC 61 in paragraph 20 it has been held as
under :-
“20. The Employees’ State Insurance Act is a beneficial legislation. The
main purpose of the enactment as the Preamble suggests, is to provide for
certain benefits to employees of a factory in case of sickness, maternity
and employment injury and to make provision for certain other matters in
relation thereto. The Employees’ State Insurance Act is a social security
legislation and the canons of interpreting a social legislation are
different from the canons of interpretation of taxation law. The courts
must not countenance any subterfuge which would defeat the provisions of
social legislation and the courts must even, if necessary, strain the
language of the Act in order to achieve the purpose which the legislature
had in placing this legislation on the statute book. The Act, therefore,
must receive a liberal construction so as to promote its objects.”

The same principle was reiterated in Transport Corporation of India vs.
Employees’ State Insurance Corporation & Anr., (2000) 1 SCC 332 and
Cochin Shipping Co. vs. ESI Corporation (1992) 4 SCC 245.
20. Even though the term “kitchen”, “catering” of a club may not be
called a factory in common parlance, having regard to the definition of
“manufacturing process” and that ESI Act is a beneficial legislation, a
liberal interpretation has to be adopted. Therefore, so long as
manufacturing process is carried on with or without the aid of power by
employing more than twenty persons for wages, it would come within the
meaning of “factory” as defined under Section 2(12) of the ESI Act. The
contention that the appellant-club is a non-profit making organization
would not take away the same from the purview of the Act.
21. In The Bangalore Turf Club Ltd. vs. Regional Director,
Employees State Insurance Corporation reported in (2014) Vol.9 Scale 177,
the question which was referred to a larger Bench was “whether the
Bangalore Turf Club Ltd. being engaged in organizing sports activities
which involves providing of service to the members of the Club and
outsiders can be construed as a “shop” for the purpose of extending the
benefits under the ESI Act.” Referring to Cochin Shipping Co. vs. ESI
Corporation (supra) and Bombay Anand Bhavan Restaurant vs. Deputy Director
ESI Corporation & Anr. (supra), in paragraphs (71) and (72), it was held
as under:
“71. It has consistently been the stand of the Appellants- herein that the
term ‘shop’ must be understood in its ‘traditional sense’. However, as has
been observed by this Court in the case of Bombay Anand Bhavan Restaurant
(supra), the language of the ESI Act may also be strained by this Court,
if necessary. The scheme and context of the ESI Act must be given due
consideration by this Court. A narrow meaning should not be attached to
the words used in the ESI Act. This Court should bear in mind that the
ESI Act seeks to insure the employees of covered establishments against
various risks to their life, health and well-being and places the said
charge upon the employer.

72. We find that the term ‘shop’ as urged to be understood and
interpreted in its traditional sense would not serve the purpose of the ESI
Act. Further in light of the judgments discussed above and in particular
the Cochin Shipping Case (supra) and the Bombay Anand Bhavan Case (supra),
this Court is of the opinion that an expansive meaning may be assigned to
the word ‘shop’ for the purposes of the ESI Act. As has been found above,
the activities of the Appellant-Turf Clubs is in the nature of organized
and systematic transactions, and further that the said Turf Clubs provide
services to members as well as public in lieu of consideration. Therefore,
the Appellant-Turf Clubs are a ‘shop’ for the purpose of extending the
benefits under the ESI Act.”

22. In Employees State Insurance Corporation vs. Hyderabad Race
Club, (2004) LLR 769 (SC)=(2004) 6 SCC 191, this Court has clarified that a
club will be coverable under the ESI Act.
23. In Cricket Club of India, Bombay vs. Employees’ State Insurance
Corporation (1998) LLR 729 (Bombay HC), the Bombay High Court has held that
ESI Act will apply to a club since there was no distinction between a hotel
and a club. In Employees’ State Insurance Corporation vs. Jalandhar
Gymkhana Club, (1992) LLR 733 (P & H HC), the Punjab and Haryana High Court
considered the question whether manufacturing process is being carried on
in the kitchen of the club, rendering catering services to its members. It
was held that a perusal of sub-clauses (i) to (vi) of Section 2(k) of the
Factories Act would make it clear that preparation of the items which are
prepared in the kitchen and the preservation and storing of any articles in
the cold storage would amount to a manufacturing process.
24. The counsel for the appellant claimed exemption under Section
1(4) of the ESI Act, contending that the club is already providing
medical facilities and that they have staff welfare fund out of which
employees are paid in cases of death, funeral expenses and in case of
illness and hence ESI Act is not applicable to them. The provisions of ESI
Act must be construed along the lines of the objects of the Act so that the
benefits of welfare legislation are not curtailed. ESI Act provides a kind
of social security and employees are one of the most vulnerable and
deprived section of the society, who are in the constant need of
protection, security and assistance. The social security system needs to
be effective and constructive and should have more coverage areas.
Government has the obligation to protect working class from uncertain
contingencies so that they can happily contribute towards social security
schemes. ESI Act and all the provisions of the Act are significant and are
meant to realize State’s obligation in safeguarding the rights provided
under Part IV of the Constitution. The appellant’s contention regarding
adequate social security benefits being already in place is not tenable.
25. In the light of the various decisions and the view taken by
this Court in G.L. Hotels case, the High Court has rightly held that the
preparation of food items in the kitchen of the appellant-club amounts to
“manufacturing process” and that the employees are covered under the
purview of the ESI Act. Considering the activities of the appellant-club
and that the kitchen catering forms an integral part of the appellant-
club, the High Court rightly held that the appellant-club falls within the
purview of the ESI Act and we do not find any infirmity in the order passed
by the High Court.
26. Learned counsel for the appellant-club then submitted that the
order under Section 45-A was passed in 1986 and by this time the
contribution amount payable would have accumulated and, therefore submitted
that in case if the Court holds that the employees of the appellant-club
are covered under the ESI Act, the contribution should be made prospective
from the date of the order passed by this Court. The Act being a
beneficial legislation, the above contention cannot be countenanced. ESI
contribution ought to have been paid when the demand was made in 1986. It
is very unfortunate that the appellant-club has not paid the ESI
contribution of its employees for more than three decades and is not
justified in seeking for prospective operation of the order.
27. The impugned order of the High Court does not suffer from any
infirmity warranting interference. We find no merit in the appeal and the
same is dismissed.

……………………………..J.
(T.S. Thakur)

……………………………. J.
(R. Banumathi)
New Delhi;
October 28, 2014

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