ESI Act: Best Judgment Assessment Under Section 45A Cannot Be Invoked for Inadequate Records – Supreme Court Clarifies Statutory Pre-Conditions

The Supreme Court of India recently delivered a landmark judgment that brings much-needed clarity to the interpretation and application of Section 45A of the Employees’ State Insurance Act, 1948 (ESI Act). In the case of M/s. Carborandum Universal Ltd. v. ESI Corporation, the two-judge bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan held that the Employees’ State Insurance Corporation cannot invoke Section 45A to make best judgment assessments merely because records produced by an employer are perceived as inadequate or insufficient [1]. This decision reinforces the principle that statutory powers must be exercised strictly within their prescribed limits and cannot be expanded to cover situations not contemplated by the legislature.

Understanding the Employees’ State Insurance Act, 1948

The Employees’ State Insurance Act, 1948 is a pioneering social security legislation enacted by the Parliament of India to provide medical and cash benefits to workers in case of sickness, maternity, and employment injury [2]. The Act establishes a self-financing social insurance scheme wherein both employers and employees contribute specified percentages of wages to create a fund administered by the Employees’ State Insurance Corporation. Currently, employers contribute 4.75 percent while employees contribute 1.75 percent of their gross wages. The Act applies to factories and establishments employing ten or more persons, though this threshold varies in certain states. The scheme has expanded significantly since its inception and now covers millions of workers across the country.

Statutory Framework for Contribution Assessment

The Act establishes a detailed framework for determining, collecting, and recovering contributions from employers. Section 44 of the Act mandates that every principal and immediate employer must submit returns to the Corporation containing particulars relating to persons employed and maintain prescribed registers and records. This provision forms the foundation of the contribution assessment mechanism. Section 45 empowers the Corporation to appoint Social Security Officers who can inspect establishments, examine records, and verify the correctness of returns submitted by employers. These officers possess extensive powers to enter premises, require production of documents, and examine employers or employees regarding matters relevant to contribution assessment.

The Exceptional Power Under Section 45A of ESI Act

Section 45A of the Employees’ State Insurance Act (ESI Act) provides the Corporation with extraordinary powers to make best judgment determinations of contributions in specific circumstances. The provision states that where no returns, particulars, registers or records are submitted, furnished or maintained in accordance with Section 44, or where any Social Security Officer is prevented from exercising functions or discharging duties under Section 45, the Corporation may determine contribution amounts based on available information after providing reasonable opportunity of hearing [3]. This determination under Section 45A constitutes sufficient proof for recovery proceedings and can be enforced as arrears of land revenue under Section 45B.

Statutory Pre-Conditions for Invoking Section 45A

The Supreme Court in Carborandum Universal emphasized that Section 45A of the ESI Ac can be invoked only when two specific pre-conditions are satisfied. First, there must be complete non-production, non-submission, or non-maintenance of returns, particulars, registers or records as required under Section 44. Second, Social Security Officers must be prevented or obstructed from exercising their inspection functions under Section 45. The Court clarified that these conditions are not mere procedural requirements but fundamental jurisdictional pre-requisites. Without satisfying either of these conditions, the Corporation lacks the authority to resort to Section 45A proceedings.

The Delhi High Court in Masco (Private) Ltd. v. Employees’ State Insurance Corporation had earlier explained that Section 45A operates in exceptional circumstances and does not apply when returns, particulars, registers or records have been submitted, furnished or maintained, even if they are considered incorrect, incomplete or unreliable [4]. The Court held that mere discrepancies or perceived deficiencies in produced records cannot satisfy the statutory threshold of non-production. The distinction between inadequate production and non-production is fundamental to understanding the scope of Section 45A.

The Carborandum Universal Case: Facts and Proceedings

The appellant, M/s. Carborandum Universal Ltd., operates a manufacturing facility at Thiruvottiyur, Tamil Nadu, covered under the ESI Act. The company regularly remitted statutory contributions for its covered employees. However, on November 27, 1996, the ESI Corporation issued a show cause notice claiming contributions of Rs. 26,44,695 for the period from August 1988 to March 1992, alleging non-payment of contributions and non-submission of returns. The notice proposed assessment under Section 45A based on alleged non-submission of returns and non-production of complete records during earlier inspections.

Employer’s Response and Production of Records

The appellant submitted detailed explanations and participated in multiple personal hearings conducted by the Corporation. During these proceedings, the company produced ledgers for the relevant period, cash books, bank books, journal vouchers, relevant bills, contractor’s records, and returns of contributions for verification by the Corporation’s officers. Despite this substantial production of records and cooperation with the inspection process, the Corporation passed an order dated April 17, 2000 under Section 45A determining that Rs. 5,42,575.53 was due as arrears of contribution for the period from August 1988 to March 1992, along with interest at specified rates.

Challenge Before Employees Insurance Court and High Court

The appellant challenged this determination before the Employees Insurance Court under Section 75(1)(g) of the Act. The Employees Insurance Court, after considering evidence from both sides, rejected the appellant’s contentions and upheld the Corporation’s order. The Court recorded that the appellant had not produced necessary documents either during personal hearings before the Corporation or before the Court itself. On appeal to the Madras High Court under Section 82 of the Act, the High Court held that there is no limitation for initiating proceedings under Section 45A and dismissed the appeal, finding no grounds for interference with the Employees Insurance Court’s order.

Supreme Court’s Analysis and Ratio Decidendi

The Supreme Court began its analysis by examining the statutory scheme governing contribution assessment under the ESI Act. The Court distinguished between two distinct mechanisms available to the Corporation: the regular assessment procedure under Section 75 read with Section 77, and the exceptional best judgment procedure under Section 45A. The Court emphasized that Section 45A is designed as a residuary power available only when the employer makes default under Section 44 or disables the Corporation from carrying out inspection under Section 45 [5].

The Santhakumar Precedent and Its Proper Application

The Court examined the precedent established in ESI Corporation v. C.C. Santhakumar, which had addressed the relationship between Sections 45A and 77 of the ESI Act [6]. In Santhakumar, the Supreme Court had held that when records are not produced by the establishment and there is no cooperation, the Corporation has power to make assessment under Section 45A and recover the amount as arrears of land revenue under Section 45B. However, where records are produced and there is cooperation, assessment must be made under Section 75(2)(a) of the Act. The Carborandum Universal bench clarified that Santhakumar must be understood in its factual context, where the employer had actually failed to produce records and had not cooperated with inspection.

The Court held that extending the Santhakumar rationale to cases where records have been produced and personal hearings attended would be inappropriate and contrary to statutory intent. Dissatisfaction with the completeness or quality of documents does not convert production into non-production, nor does it permit the Corporation to invoke powers meant for exceptional situations. This distinction is critical because Section 45A authorizes summary determination without detailed adjudication, bypassing the normal assessment process under Section 75 which provides greater procedural safeguards.

Inadequate Production versus Non-Production

The Court articulated a fundamental principle that has significant implications for ESI assessment proceedings. The statutory threshold under Section 45A is not inadequate production but complete non-production of records. The statute does not permit best judgment determination merely because records produced are perceived as inadequate, incomplete or deficient. This holding protects employers who make genuine efforts to comply with statutory requirements by producing available records, even if the Corporation considers them insufficient for complete verification.

The Court observed that if the Corporation, after examining materials produced by an employer, believes that computations are incorrect or that further evidence is needed to decide the true nature of particular entries, the proper statutory course is to raise a dispute under Section 75. To enlarge Section 45A to cover situations of partial dissatisfaction or perceived inadequacy would amount to rewriting the statute in a manner plainly contrary to its text and structure. The legislative intent is clear that summary determination under Section 45A is permissible only in exceptional situations involving actual non-production or obstruction.

The Limitation Question and Statutory Scheme

A critical aspect of the judgment concerns the interplay between Section 45A and the limitation provisions under Section 77(1A)(b) of the ESI Act. The proviso to Section 77(1A)(b) mandates that no claim shall be made by the Corporation after five years of the period to which the claim relates. This limitation applies specifically to claims filed by the Corporation before the Employees Insurance Court under Section 75. In the present case, the demand pertained to the period from August 1988 to March 1992, the show cause notice was issued in November 1996, and the final order was passed in April 2000, clearly raising limitation concerns if regular assessment procedures were followed.

Prohibition Against Circumventing Limitation

The Court held that the statutory scheme does not allow the Corporation to bypass Section 75 merely because it finds verification inconvenient or time consuming. The appellant had consistently contended that the Corporation sought to overcome the limitation bar under Section 77(1A)(b) by resorting to Section 45A, notwithstanding that records were produced and there was cooperation with inspection. The Court agreed that when records have been produced and cooperation is forthcoming, the proper course for the Corporation is to examine correctness under Section 75 and initiate proceedings within the prescribed limitation period.

The Court explained that while Section 45A itself does not prescribe any limitation period, its invocation is subject to strict jurisdictional pre-conditions. These pre-conditions exist precisely to prevent misuse of the summary determination power and to ensure that employers who comply with statutory requirements are assessed through the regular procedure with its attendant safeguards and limitation periods. The absence of limitation in Section 45A does not grant the Corporation unfettered discretion to choose that provision whenever convenient; it applies only when statutory pre-conditions are genuinely satisfied.

Regulatory Framework and Procedural Safeguards

The ESI Act and regulations framed thereunder establish detailed procedural requirements for assessment and recovery of contributions. Section 44 mandates submission of returns in prescribed forms containing particulars relating to employed persons. The Employees’ State Insurance (General) Regulations, 1950 specify the registers and records that employers must maintain, including forms for returns, registers of employees, and wage records [7]. These requirements ensure transparency and enable proper verification of contributions due.

Role of Employees Insurance Court

Section 75 of the Act designates the Employees Insurance Court as the adjudicatory forum for deciding questions and disputes relating to contributions, benefits, and other matters under the Act. The Court has jurisdiction to determine whether any person is an employee, rates of wages, rates of contribution payable, identity of principal employer, and any other dispute between employers and the Corporation. Section 77 provides that proceedings before the Employees Insurance Court shall be commenced by application within three years from the date on which cause of action arose, with the five-year limitation on claims by the Corporation as discussed earlier.

Section 82 of the Act provides for appeals to the High Court from orders of the Employees Insurance Court if they involve substantial questions of law [8]. This appellate mechanism ensures judicial oversight of contribution determinations and protects employers from arbitrary assessments. The existence of this structured adjudicatory framework, with built-in safeguards and limitation periods, underscores why Section 45A must be confined to genuine cases of non-production or obstruction rather than being used as an alternative assessment mechanism.

Implications for Employers and the Corporation

The Supreme Court’s judgment in Carborandum Universal has several important implications for both employers and the ESI Corporation. For employers, the decision provides protection against arbitrary invocation of Section 45A when they have made genuine efforts to produce records and cooperate with inspections. Even if produced records are considered incomplete or inadequate by the Corporation, this does not justify resort to summary determination powers meant for cases of complete non-compliance. Employers can now challenge Section 45A proceedings more effectively by demonstrating that they produced relevant records and participated in the assessment process.

Guidance for Future Assessments

For the ESI Corporation, the judgment provides clear guidance on when Section 45A can legitimately be invoked. The Corporation must establish that either no records whatsoever were produced in accordance with Section 44, or that its officers were actually prevented or obstructed from exercising inspection functions under Section 45. Mere dissatisfaction with the quality, completeness or adequacy of produced records is insufficient. In such cases, the Corporation must follow the regular assessment procedure under Section 75, subject to the limitation provisions under Section 77(1A)(b).

The decision also emphasizes the importance of procedural fairness in contribution assessments. When an employer produces records and participates in hearings, the Corporation must examine those records and determine contributions through the normal adjudicatory process. If disputes arise regarding the correctness of computations or the nature of particular entries, these must be resolved by the Employees Insurance Court under Section 75 rather than through summary determination under Section 45A. This ensures that employers receive adequate opportunity to contest assessments and present evidence in their defense.

Comparative Analysis with Tax Assessment Provisions

The Court’s characterization of Section 45A as akin to best judgment assessment provisions in taxing statutes provides useful perspective. Under the Income Tax Act, 1961, best judgment assessments can be made under Section 144 when an assessee fails to comply with notices or refuses to produce accounts. However, even in tax law, such provisions are interpreted strictly and cannot be invoked merely because the tax authorities are dissatisfied with accounts produced. The same principle applies to Section 45A of the ESI Act.

This parallel with tax law is significant because it demonstrates that summary assessment powers, whether in social security legislation or fiscal statutes, are extraordinary remedies available only in exceptional circumstances. They cannot become the norm or be used as convenient alternatives to regular assessment procedures. The safeguards built into regular assessment mechanisms, including limitation periods and detailed adjudication, serve important purposes in protecting the rights of those being assessed and ensuring procedural fairness.

The Way Forward: Best Practices for Compliance

In light of the Supreme Court’s judgment, employers covered under the ESI Act should maintain meticulous records of wages paid, returns filed, and contributions remitted. When the Corporation conducts inspections under Section 45, employers should cooperate fully and produce all relevant records promptly. If records are incomplete due to loss, destruction or other reasons beyond control, employers should document these circumstances and provide whatever alternative evidence is available. This proactive approach reduces the risk of Section 45A being invoked.

Challenging Improper Section 45A Orders

When the Corporation issues a show cause notice proposing determination under Section 45A of ESI Act, employers should respond comprehensively, detailing what records have been produced and what cooperation has been provided during inspections. If a Section 45A order is nevertheless passed, employers should promptly challenge it before the Employees Insurance Court under Section 75(1)(g), arguing that the statutory pre-conditions for invoking Section 45A were not satisfied. The Carborandum Universal judgment provides strong precedential support for such challenges.

Additionally, when challenging Section 45A orders, employers should raise limitation objections under the proviso to Section 77(1A)(b) if the claim relates to periods more than five years old. The Court’s holding that the Corporation cannot bypass Section 75 and its limitation provisions by resorting to Section 45A means that limitation can be effectively pleaded even in Section 45A proceedings if the statutory pre-conditions for that provision are not satisfied [9].

Conclusion

By clearly delineating the boundaries of Section 45A of the ESI Act and holding that it cannot be invoked merely on grounds of inadequacy of produced records, the Court has reinforced fundamental principles of statutory interpretation and procedural fairness. The decision protects employers who make genuine compliance efforts while ensuring that the Corporation’s extraordinary summary assessment powers are confined to situations where they are truly necessay.

The judgment balances the social welfare objectives underlying the ESI Act with the need to protect employers from arbitrary exercise of statutory powers. While the Act is beneficent legislation deserving liberal interpretation to advance its remedial purposes, this cannot extend to expanding assessment powers beyond what the statute contemplates. The clear distinction drawn between inadequate production and non-production, and between ordinary assessment under Section 75 and exceptional assessment under Section 45A, provides a framework that both protects workers’ entitlements and ensures procedural justice for employers.

Going forward, this decision will guide the ESI Corporation in properly applying Section 45A only in genuine cases of non-compliance or obstruction, while requiring regular assessment procedures in all other cases. For employers, it provides clarity on what constitutes adequate cooperation with inspections and when Section 45A challenges are likely to succeed. Most importantly, the judgment reaffirms that even beneficial social legislation must be implemented within the bounds of statutory language and cannot be stretched to cover situations the legislature did not intend to address through summary procedures.

References

[1] M/s. Carborandum Universal Ltd. v. ESI Corporation, 2025 INSC 1455 (Supreme Court of India, December 18, 2025). Available at: https://www.verdictum.in/court-updates/supreme-court/carborandum-universal-ltd-v-esi-corporation-2025-insc-1455-section-45a-esi-act-1601788

[2] Employees’ State Insurance Act, 1948 (Act No. 34 of 1948), Ministry of Labour and Employment, Government of India. Available at: https://www.esic.nic.in/Publications/ESIAct1948Amendedupto010610.htm

[3] Section 45A, Employees’ State Insurance Act, 1948. Available at: https://indiankanoon.org/doc/1824750/

[4] Masco (Private) Ltd. v. Employees’ State Insurance Corporation, Delhi, 1975 (II) LLJ 29 (Delhi High Court).

[5] LiveLaw, “ESI Act | Best Judgment Assessment Under S.45A Can’t Be Invoked Saying Records Produced Are Inadequate: Supreme Court” (December 19, 2024). Available at: https://www.livelaw.in/supreme-court/esi-act-best-judgment-assessment-under-s45a-cant-be-invoked-saying-records-produced-are-inadequate-supreme-court-513943

[6] ESI Corporation v. C.C. Santhakumar, (2007) 1 SCC 584 (Supreme Court of India, November 21, 2006). Available at: https://indiankanoon.org/doc/650122/

[7] Employees’ State Insurance (General) Regulations, 1950. Available at: https://esic.gov.in/Tender/ESIReg1950.pdf

[8] Section 75, Employees’ State Insurance Act, 1948. Available at: https://indiankanoon.org/doc/1243820/

[9] Law Trend, “ESIC Cannot Invoke Section 45A for ‘Inadequate’ Records; Must Prove Non-Production or Obstruction: Supreme Court” (December 18, 2024). Available at: https://lawtrend.in/esic-cannot-invoke-section-45a-for-inadequate-records-must-prove-non-production-or-obstruction-supreme-court/