Civil Imprisonment under the Employees Provident Fund Act & Miscellaneous Provisions Act, 1952

Legal Provisions:

The Employees PF & MP Act, 1952 (hereinafter the ‘PF Act’) is a beneficial legislation, and applies to a wide variety of factories and establishments. The Officers under the Act are given wide powers for the recovery of PF contributions from Employers. Default in Employers’ contributions entails both civil and penal consequences. This note is restricted to the Mode of Recovery of Employers’ Contributions through Civil Imprisonment.

In respect of modes of recovery of monies due from Employers, the relevant provisions of the PF Act are Sections 8, 8-B and 8-G r/w the Second Schedule of the Income Tax Act, 1961.

1. Section 8 of the PF Act provides for the Modes of recoveries referred to above. The Section provides as under:

“Section 8. Mode of recovery of moneys due from employers:

Any amount due –

(a) from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or, as the case may be, the Insurance Fund damages recoverable under Section 14-B, accumulations required to be transferred under sub-section 2 of Section 15 or under sub-section (5) of section 17 or any charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme; or

(b) xxx

may, if the amount is in arrear, be recovered by the Central Provident Fund Commissioner or such other officer as may be authorized by him, by notification in the Official Gazette, in this behalf in this same manner as an arrear of land revenue.”

1. Section 8-B contemplates the issuance of a Recovery Certificate to a Recovery Officer, and empowers the Recovery Officer to recover monies dues from the Employer by various modes, including civil imprisonment. The Section reads as under:

“Section 8-B. Issue of certificate to the recovery officer:

• Where any amount is in arrear under Section8, the authorized officer may issue, to the Recovery Officer, a certificate under his signature specifying the amount of arrears and the Recovery Officer, on receipt of such certfificate, shall proceed to recover the amount specified therein from the establishment or, as the case may be, the employer by one or more of the modes mentioned below:-

1. Xxx
2. Arrest of the employer and his detention in prison;
3. Xxx

• The authorized officer may issue a certificate under sub-section (1), notwithstanding that proceedings for recovery of the arrears by any other mode have been taken.”

1. Section 8-G makes the Second and Third Schedules of the Income Tax Act, 1961 and Income Tax (Certificate Proceeding) Rules, 1962, applicable with necessary changes in terms of any arrears as mentioned in Section 8 of the PF Act. Rule 4 of the Second Schedule of the Income Tax Act, 1961 lays down substantially similar modes of recovery as compared to those laid down in Section 8-B. Under the Income Tax Act, when a certificate of Recovery is issued, the Recovery Officer will send a Notice to the defaulter to pay the dues within the time specified in the Notice, and if payment is not made, then Rule 4 lays down Modes of Recovery. The said Rule 4 of the Income Tax Act reads as under:

“4. Mode of Recovery-

If the amount mentioned in the notice is not paid within the time specified therein or within such further time as the Tax Recovery Officer may grant in his discretion, the Tax Recovery Officer shall proceed to realize the amount by one or more of the following modes:

(a) by attachment and sale of the defaulter’s movable property;

(b) by attachment and sale of the defaulter’s immovable property;

(c) by arrest of the defaulter and his detention in prison;

(d) by appointing a receiver for the management of the defaulter’s movable and immovable properties.”

The positions of the Courts in respect of the modes of recovery of PF contributions from defaulting employers has been that any one or more modes can be used, that the same are alternative and not exclusive. Further, the Recovery Officer has been given the discretion to choose the mode or modes of recovery as he may consider adequate. There are no strictures to the effect that the Recovery Officer should opt for arrest and detention of the employer as a last resort.

A Division Bench of the Punjab & Haryana High Court has held in Mohan v. Regional Provident Fund Commissioner & Anr. [2002 III LLJ 779 P&H.DB] that the modes of recovery are alternative and not exhaustive, and that the Recovery Officer can adopt any of the recovery modes. There is no bar in adopting the mode of arrest and detention, i.e. civil imprisonment, before exhausting other modes under the PF Act. The finding of the Hon’ble High Court, in Para ____, is as under:

“We are further of the view that the modes of recovery specified in clauses (a), (b) and (c) of S. 8-B(1) of the Act are alternative modes and not exclusive of each other and it is open to the Recovery Officer to resort to one or more of the modes. The use of the expression “by one or more of the modes mentioned below” in the substantive part of S. 8-B(1) makes it clear that the Legislature has, with a view to ensure that the dues payable under the Act are recovered, empowered the Recovery Officer to resort to one or all of the modes for recovery of the arrears… there is nothing in S. 8-B(1) and other provisions of the Act from which it can be inferred that the Recovery Officer cannot adopt the mode specified in Clause (b) of S.8-B(1) before exhausting other modes of recovery.”

The inability of an employer to make the PF contributions due to bad market conditions or defaulting customers, etc. has been held as no excuse by the Hon’ble Karnataka High Court in Chandan A. Rajan v. U.O.I & Ors. [2007 III LLJ 42]. In that case the employer was put in jail u/S. 8-B(1)(b) of the Act for failure to pay provident fund contribution though he personally narrated the facts and circumstances of his default due to market recessions, slump in the off take, his customers’ default in making payment, lack of funds and mounting interest liability, and as such he was compelled to defer the statutory obligations. He filed a writ petition stating that his arrest was arbitrary. The Hon’ble High Court upheld the action of the Provident Fund Authority. Arresting and detention in civil prison for non-payment of provident fund dues is not illegal nor unconstitutional.

The Hon’ble Bombay High Court has states, however, that the power to order arrest and detention is not absolute and unfettered. Section 8-B read with Section 8-G require reference to the relevant provisions of the Income Tax Act, 1961. The arrest and detention must be made in accordance with the provisions of Rule 73 of the Second Schedule of the Income Tax Act, which requires the issuance of a Notice to Show Cause. The said Rule requires that the Recovery Officer may issue a Show Cause Notice to the defaulting Employer if he is satisfied that the conditions stated in the said Rule exist. The Hon’ble High Court has held that the Recovery Officer cannot issue a Show Cause Notice without considering the said conditions, and cannot order arrest without giving an opportunity to the Employer of being heard. For issuing the Show Cause Notice, the Recovery Officer has to be satisfied, for reasons to be recorded in writing:

(a) that the defaulter, with the object or effect of obstructing the execution of the certificate, has after the drawing up of the certificate by the Recovery Officer, dishonestly transferred, concealed, or removed any part of his property, or

(b) that the defaulter has, or has had since the drawing up of the certificate by the Recovery Officer, the means to pay the arrears or some substantial part thereof and refuses or neglects or has refused or neglected to pay the same.

The Hon’ble High Court in Kanaiyalal Prabhudas Maru & Ors. V. RPF Commissioner & Ors. [(2002) I LLJ 297 Bom] and in ATV Projects India Ltd. v. Office of the RPF Commissioner [(2005) I LLJ 1046 Bom] set aside the orders for arrest on the grounds that they were not in accordance with the requirements of Rule 73 as stated above and that they were, therefore, arbitrary.

It may, therefore, be observed that the courts have upheld the discretion of the officer empowered under the PF Act to use his discretion to resort to any mode of recovery of PF contributions from defaulting Employers. However, at least in the case of ordering arrest and detention, such discretion must be exercised judiciously, based on the criteria laid down in Rule 73 in the Second Schedule of the Income Tax Act, 1961.