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Tuesday, January 6, 2015



                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                       CIVIL APPEAL NO. 2415 OF  2003

DELHI GYMKHANA CLUB LTD.                           ..Appellant



                               J U D G M E N T


            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
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.

Relevant portion of the said notification reads as under:
|“1. Any premises including the precincts|In the Union  |
|thereof  whereon ten or more persons but|Territory of  |
|in any case less than twenty persons,   |Delhi.        |
|are employed or were employed for wages |              |
|on any day of the preceding twelve      |              |
|months and in any part of which a       |              |
|manufacturing process is being carried  |              |
|on with the aid of power or is          |              |
|ordinarily so carried on; but excluding |              |
|a mine subject to the operation of the  |              |
|Mines Act 1952 (35 of 1952) or railway  |              |
|running shed or an establishment which  |              |
|is exclusively engaged in any of the    |              |
|manufacturing process specified in      |              |
|clause (12) of Section 2 of the         |              |
|Employees State Insurance Act, 1948 (34 |              |
|of 1948).                               |              |
|2. 2. Any premises including the        |In the Union  |
|precincts thereof whereon twenty or more|Territory of  |
|persons are employed or were employed   |Delhi.        |
|for wages on any day of the preceding   |              |
|twelve months, and in any part of which |              |
|a manufacturing process is being carried|              |
|on without the aid of power, or is      |              |
|ordinarily so carried on; but excluding |              |
|a mine subject to the operation of the  |              |
|Mine Act, 1952 (35 of 1952) to a railway|              |
|running shed or an establishment which  |              |
|is exclusively engaged in any of the    |              |
|manufacturing process specified in      |              |
|clause (12) of Section 2 of the         |              |
|Employees’ State Insurance Act, 1948 (34|              |
|of 1948).                               |              |
|3…………..”                                |              |

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

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.

                                                               (T.S. Thakur)

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

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