In a case of conscious artificial splitting of salary to reduce statutory contribution, the Bombay High Court restored the order passed by the Employees Provident Fund Organisation under Section 7A of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, determining arrears of provident fund dues.
The Court held that the Authority was justified in determining that the Saket College of Arts, Commerce & Science (Respondent) had artificially structured the wages to reduce the contribution base. The Court specifically pointed out that the “nature of payment, not its label, is decisive. Genuine allowances and incentives stand excluded. Artificial splitting of regular wages does not”.
A Single Judge Bench of Justice Amit Borkar explained the correct interpretation of “basic wages” under Section 2(b) of the EPF Act to reiterate that the social welfare legislation is intended to secure the financial interests of employees, and courts must remain vigilant against practices that defeat the object of the law.
The Single Judge observed that the definition of “basic wages” under Section 2(b) is inclusive, and as a general rule, all payments that are part of normal remuneration for services rendered constitute basic wages. Essentially, an employer cannot avoid liability merely by giving recurring payments a different label, as the substance of the payment prevails over its form.
The Bench also held that the Authority under Section 7A is empowered to examine the substance of wage structures and is not bound by the labels assigned to salary components. It has the jurisdiction to determine if a wage structure is an artificial arrangement designed to minimise statutory liability.
Since the Authority’s order is based on a detailed examination of the Respondent’s own statutory records, including Form 11, provident fund challans, and Income Tax returns, the Bench said that the Authority had made a clear finding of avoidance by comparing the actual wages paid with the declared wages Basic plus Dearness Allowance, which was artificially capped at the statutory ceiling of Rs. 6,500.
As the wrongful practice was consistently followed over several years for both existing and former employees, indicating a conscious wage design, the Bench concluded that the Provident Fund Appellate Tribunal adopted a narrow approach by focusing solely on the fact that the declared basic wages did not exceed the Rs 6,500 ceiling.
The Tribunal failed to examine how the wage structure was designed and did not engage with the Authority’s core finding of artificial splitting, thereby missing the real point in issue. Accordingly, the Bench quashed the order passed by the Provident Fund Appellate Tribunal.
Briefly, an initial inquiry under Section 7A of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 was commenced following complaints and a subsequent report by an Enforcement Officer, which found non-compliance by the Respondent establishment for the period from May 2009 to May 2014. The Authority, upon examining the salary registers, concluded that the Respondent had split wages to reduce the base on which provident fund contributions were calculated, thereby avoiding its statutory liability. Consequently, the Authority passed an order determining arrears of provident fund dues amounting to Rs. 2.91 lacs.
The Respondent challenged this order before the Provident Fund Appellate Tribunal, which set aside the determination made by the Employees Provident Fund Organisation under Section 7A.
Appearances:
Advocates Sandeep Mishra, Madhura Mulay, and Payoja Gandhi, for the Petitioners
Advocates A. P. Wachasundar, S. D. Vyas, P. V. Nelson Rajan, S. D. Chipade, and S. R. Crasto, for the Respondents
