Latest Blogs from SBS and Company LLP

    Proposed Caro, 2016 With Additional Reporting Requirements


    On 9th February, 2016 the Ministry of Corporate Affairs has proposed new Companies (Auditor's Report) Order (CARO), 2016. The Ministry had set-up a Committee on 16th September, 2015 to examine and recommend matter for inclusion in the statement to be attached with Auditor’s Report under Section 143(11) of the Companies Act, 2013 (2013 Act) for the financial year 2015-16 onwards.

    Section 143(11) of the Companies Act, 2013requires that the auditor’s report of specified class of companies should include a statement on the prescribed matters. As per the section 143 of the Companies Act, 2013, every report of the auditor under this section should contain matters specified under applicable CARO.

    The newly proposed CARO, 2016 contains 15 clauses, out of which some clauses have been carried forward from present CARO, 2015. MCA has issued exposure draft of CARO, 2016 for stakeholders’ comments. The draft, if approved, shall be applicable for FY 15-16 onwards.

    In comparison to CARO (2015), CARO (2016) proposes few additional reporting requirements and eliminates some of the reporting requirements.

    1. Applicability

    Every report made by the auditor under Section 143 of the 2013 Act for Financial Year commencing on or after April 1st 2015 would include CARO 2016. There is no difference between CARO, 2016 and CARO, 2015 from the point of view of applicability, except that CARO, 2016 is not applicable on private limited company, not being a subsidiary or holding of a public company, when its:

    • Paid up capital and reserves and surplus does not exceed Rs. 1 crore as at balance sheet date; and
    • Total borrowings from banks or financial institution at any point of time during financial year does not exceed Rs. 1 crore; and
    • Total revenue, including revenue from discontinuing operations, does not exceed Rs. 10 crore.

    Other companies not covered under CARO 2016

    • Banking company as defined under section 5(c) of the Banking Regulation Act, 1949.
    • Insurance company as defined under the Insurance Act, 1938
    • Companies incorporated with Charitable objects, that is companies licenses to operate under the Section 8 of 2013 Act.
    • One Person Company as defined under section 2(85) of the 2013 Act
    • Small company as defined under section 2(85) of the 2013 Act

    CARO, 2016 shall not apply to the auditor's report on consolidated financial statements whereas CARO, 2015 is applicable in such case. CARO is applicable to a foreign company as defined under Section 2(42) of the 2013 Act.


    As compared to CARO 2015, the reporting requirements under the CARO 2016 (draft) have been increased.

    .               Additional reporting requirements in CARO, 2016 Fixed Assets

    Auditor should report whether title deeds of immovable properties are held in the name of the company. If not, provide details thereof.

    Loans and investments

    Auditor should report whether the company has granted any loans, secured or unsecured to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. If so whether the terms and conditions of the grant of such loans are not prejudicial to the company's interest.

    Auditor should report in respect of loans, investment and guarantees, whether provisions of section 185 and 186 of the Companies Act, 2013have been complied with. If not, details should be provided


    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Exploring The Controversy Of Service Tax Applicability On Goods Transport Operators


    Under the erstwhile positive based taxation scheme, service tax on road transport services was initially introduced in the year 1997 and the levy is on ‘Goods Transport Operators’. Considering the hue and cry from the truck operators across the nation, levy of service tax is withdrawn. Levy of service tax is re-introduced in year 2004 on ‘Goods Transport Agency Services’.Now under the Negative list regime effective from 01.07.2012, all goods transport services are covered under Negative list except the services of ‘Goods Transport Agency’ and Courier Agency

    The above mentioned legal developments would certainly indicate that there is no service tax on services of ‘Goods Transport Operator’ services. However recent judicial decisions are contrary to this view on the reasoning that goods transport agency services includes services of truck operators. In this backdrop, an attempt is made to unleash various facets of this controversy.

    Legislative Background in Levy of Service Tax on ‘Goods Transport Agency’ Service:

    As discussed above, after the levy was withdrawn on the services of truck operators, Government has constituted a Committee(Bharadwaj Committee) to suggest the modalities to levy service tax on goods transport services. The key recommendations of this Committee are reproduced as under;

    1. Recommended to levy service tax on services provided by any commercial concern which (is common carrier under the Carriers Act, 1865) books the goods for transportation by road, issues consignment note and provides value added services over and above the mere carriage of the goods be called the goods booking agency.
    2. The committee recommended to make it mandatory to these agencies to issue a consignment note to the sender of goods against the receipt of goods for transportation. For this purpose, it is recommended to amend the Carrier Act, 1865. It is also suggested that till such time the said act is amended, the said requirement can be made mandatory under Service Tax laws or by notifications.
    3. Any organization/person who possesses the vehicle by virtue of ownership under lease/hire agreement etc and is responsible only for affecting the carriage of goods and is not required to issue consignment note. The truck owner can alternatively be called as truck operator. Normal truck operators who hire their vehicles for transportation are not subject to service tax.
    4. As transport sector is unorganized, the committee also recommended implementing reverse charge mechanism keeping the liability to pay service tax to Government either on the consignor or consignee responsible to pay freight.


    With these recommendations, service tax is reintroduced in the FY 2004-05 on the services of ‘Goods transport agency’ i.e. those providing services in relation to transport of goods by road and are required to issue consignment note.

    Accordingly, the term ‘Goods Transport Agency’ was defined under the erstwhile section 65(50b)— “means any person who provides service in relation to transport of goods and issues consignment note by whatever name called .”

    With these legal developments and committee recommendations, it is very clear that the legislative intent is not to tax the services of truck owners whether it is individual truck owners or organizations owning trucks. Otherwise there is no requirement to re-draft/rephrase the legal provisions when the levy is re-introduced in the FY 2004-05. Further, this legislative intent is clearly evident by budget speech of Finance Minister. The relevant extract is reproduced as under;

    “149. 58 services have been brought under the net so far. I propose to add some more this year. These are business exhibition services; airport services; services provided by transport booking agents, transport of goods by air; survey and exploration services; opinion poll services; intellectual property services other than copyright; brokers of forward contracts; pandal and shamiana contractors; outdoor caterers; independent TV/radio programme producers; construction services in respect of commercial or industrial constructions; and life insurance services to the extent of risk premium. I may clarify that there is no intention to levy service tax on truck owners or truck operators........................................................ ” (emphasis supplied)

    Now under the Negative List regime, Section 66D provides for negative list of services. Entry(P) of this list provides that all services provided by way of transportation of goods by road except the services of a ‘goods transport agency’ or ‘courier agency’. Further the term ‘Goods Transport Agencny’ has been defined under Section 65B(26) by reproducing the same definition as prevailing under section 65(50b) as stated above.

    Thus the legal provisions both under erstwhile regime as well as under the negative list regime are same and moot the intention to levy service tax only on services of goods transport agency alone. However, the revenue went on to stretch the meaning of the word ‘goods transport agency’ to include services of truck operators also and accordingly the matter landed before the judicial forums.

    Position upheld by Judicial Forums in the initial years of levy:

    The judicial forums in the initial years of levy have resorted to the same interpretation considering the committee report and finance minister speech, concluded that services provided by truck owners are not subject to service tax. The following decisions are for reference.

    1. Lakshminarayana Mining Co vs. CST, 2009(16)STR691(Tri-Bang)
    2. CCE vs. Kanakadurga Agro Oil Products Private Limited, 2009(15)STR399(Tri-Bang)
    3. KMB Granites Private Limited vs. CCE,2010(19)STR437(Tri-Bang)

    Subsequent Regulatory Legislation ‘The Carriage By Road Act, 2007’ in congruence with above position:

    Subsequently, a regulatory legislation ‘The Carriage by Road Act, 2007 was passed by Parliament which

    repealed the earlier Carriers Act, 1865. As stated above, the committee recommended to levy service tax

    on services of common carriers alone excluding the truck operators. Accordingly, ‘Common Carrier’ is

    defined under section 2(a) of the Act as follows;

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Significance Of Internal Audit

    1. Introduction:

    Internal audit provides effectiveness of organisation’s internal control system, risk management, governance. Internal audit looks beyond the financial transactions and extends to advisory services, organisation growth, policy matters, work environment and relevant recommendations to the management etc.

    Global regulations such as FCPA in US, UK Bribery Act, SOX Act, COSO, Fraud Risk Management (FRM) by RBI and introduction of IFC (Internal Financial Controls) in companies Act,2013 are the few witness stating the seriousness for requirement of Fraud detection mechanism.

    There are instances where organisations extricated from frauds and financial hardship due to early detection and corrective measures by the internal audit team. Internal audit facilitates the organisation to take timely decisions and emphasize on proactive environment than reactive, which is vital in the dynamic economy.

    1. Objective:

    This article aims at illustrating few significant aspects explaining the benefits of internal audit.

    1. What is Internal Audit?

    According to the Institute of Chartered Accountants of India (ICAI), “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal cont rol system.”

    According to the Institute of Internal Auditors (IIA), “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.

    Accordingly, Internal Audit can be broadly understand as management’s independent activity to facilitate the management to -

    ?         Improve and add value in governance mechanism.

    ?         Strengthen the strategic risk management and internal control system.

    4. Why Internal Audit?

    Considering the objectivity of internal audit, it can be viewed as amanagement independent activity to strengthen its own organisation than a statutory requirement. Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization.

    4.1 Major Benefits:

    4.1.1 Facilitates strong system to compliance with law:“Ignorantia juris non excusat” means ignorance of law excuses no one. In the present world of business there are so many stringent norms mandated by regulators, further law is being revised continuously, which demands continuous updation. However it might be the difficult for organisational staff, who majorly concentrate on execution of day to day operations. Further, sometimes organisations may not afford as many professionals.


    An effective internal audit team with versatile experts can provide organisation a strong system to compliance with the law.


    4.1.2 Facilitates informed decisions by the management: in-time quality information helps in quality decisions; internal audit will provide the requisite analysed data to make effective decisions by the management. Instances are there where analysis done by the internal audit team helped management to take vital decisions wrt business expansion such as manufacture of profitable by product, optimisation of ideal resources etc.


    4.1.3 Facilitates implementation of effective internal control system: Internal audit examines the policies and procedures of an organisation on a regular basis and ensures the effectiveness of internal control system in force. For instance finding the absence of maker checker control in bills processing will curb processing of fake bills by implementing maker checker control.


    4.1.4 Facilitates to strengthen the risk assessment process: Due to increase of complexity in business process new risk factors are emerging. Internal audit plays vital role in evaluating inherent and non inherent risks exist in the business and thereby to mitigate the risk.


    4.1.5      Facilitates dedicated review of operations and Fraud detection: with the expansion of business, management oversight dilutes in review of operations which gives ample of opportunities for fraudulent operations. Internal audit with dedicated review of operations will put check to the emerging frauds. Artificial entries in pay roll detected during internal audit will put an end to the fraud in salary payments.

    4.1.6_ Facilitates pro activeness than reactive nature: Internal audit facilitates the regular review of operations and through its timely review and information it enables the management to be a proactive than a reactive.

    4.1.7 Protect interest of the investors: All investors can’t be a part of management; they may not have insight into all the operations and process. Internal audit plays a vital role in protecting the interest of the investors. An effective audit system will boost up the confidence in the investors about the effective performance of their organisation.

    4.2 Requirement under Indian Companies Act 2013 applicable to Companies only:

    As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for the following nature of companies.


    Listed Company

    Unlisted Public


    Private Company

    Paid up share capital (during

    preceding F.Y.)

    Always applicable

    Not less than

    Rs. 500Millions


    Turnover (during preceding F.Y.)

    Always applicable

    Not less than

    Rs. 2000Millions

    Not less than

    Rs. 2000Millions

    Outstanding Loans / borrowings

    from banks/Financial Institutes

    (at any point of time during

    preceding F.Y.)

    Always applicable

    Not less than

    Rs. 1000Millions

    Not less than

    Rs. 1000Millions

    Outstanding deposits (at any point

    of time during preceding F.Y.)

    Always applicable

    Not less than

    Rs. 250Millions



    1. Conclusion:

    Effective internal audit is one of the major pillars in the growth of an organisation. Internal Audit is a prerequisite for every emerging organisation in the dynamic business environment. However unless the Internal auditor treated as admonitor and backed by management, effectiveness will be mere fancy. Hence, pervasive perception towards internal auditor is required to be changed and to achieve its objectivity internal audit should be recognised as intramural mechanism of the organisation.

    Establishing a professional internal audit activity should be a governance requirement for all organisations. This is not only important for larger and medium sized organisations but also may be equally important for smaller entities , as they may face equally complex environments with a less formal, robust organisational structure to ensure the effectiveness of its governance and risk management process.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Country By Country Reporting - Action 13 - BEPS Project

    Action 13 of the action plan on base erosion and profit shifting (BEPS action plan, OECD, 2013) requires the development of “rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”.

    In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been developed.

    First, the guidance on transfer pricing documentation requires multinational enterprises (mne’s) to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations. A brief checklist of info to be filed/maintained is provided in the later part of the article.

    Second, it requires that detailed transactional transfer pricing documentation be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. Local files are basically the TP documentations maintained as per the local tax laws (rule 10D currently in India)

    Third, large mne’s are required to file a country-by-country report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires mne’s to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires mne’s to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. This is basically presenting and populating the data in the following tables:

    Taken together, these three documents (master file, local file and country-by-country report) will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries. This information should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.

    Countries participating in the BEPS project agree that these new reporting provisions, and the transparency they will encourage, will contribute to the objective of understanding, controlling, and tackling BEPS behaviours.

    The specific content of the various documents reflects an effort to balance tax administration information needs, concerns about inappropriate use of the information, and the compliance costs and burdens imposed on business. Some countries would strike that balance in a different way by requiring reporting in the country-by-country report of additional transactional data (beyond that available in the master file and local file for transactions of entities operating in their jurisdictions) regarding related party interest payments, royalty payments and especially related party service fees. Countries expressing this view are primarily those from emerging markets (argentina, brazil, people’s republic of china, colombia, india, mexico, south africa, and turkey) who state they need such information to perform risk assessment and who find it challenging to obtain information on the global operations of an mne group headquartered elsewhere. Other countries expressed support for the way in which the balance has been struck in this document. Taking all these views into account, it is mandated that countries participating in the BEPS project will carefully review the implementation of these new standards and will reassess no later than the end of 2020 whether modifications to the content of these reports should be made to require reporting of additional or different data.

    Consistent and effective implementation of the transfer pricing documentation standards and in particular of the country-by-country report is essential. Therefore, countries participating in the OECD/G20 BEPS project agreed on the core elements of the implementation of transfer pricing documentation and country-by-country reporting. This agreement calls for the master file and the local file to be delivered by mne’s directly to local tax administrations. Country-by-country reports should be


    filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral convention on mutual administrative assistance in tax matters, bilateral tax treaties or tax information exchange agreements (TIEAs). In limited circumstances, secondary mechanisms, including local filing can be used as a backup.

    Threshold limit for applicability: These new country-by-country reporting requirements are to be implemented for fiscal years beginning on or after 1 january 2016 and apply, subject to the 2020 review, to mnes with annual consolidated group revenue equal to or exceeding euro 750 million. It is acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

    In order to facilitate the implementation of the new reporting standards, an implementation package has been developed consisting of model legislation which could be used by countries to require mnc groups to file the country-by-country report and competent authority agreements that are to be used to facilitate implementation of the exchange of those reports among tax administrations. As a next step, it is intended that an xml schema and a related user guide will be developed with a view to accommodating the electronic exchange of country-by-country reports.

    It is recognised that the need for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a country-by-country reporting requirement. This need has been addressed when designing government-to-government mechanisms to be used to facilitate the automatic exchange of country-by-country reports.

    Jurisdictions endeavour to introduce, as necessary, domestic legislation in a timely manner. They are also encouraged to expand the coverage of their international agreements for exchange of information. Mechanisms will be developed to monitor jurisdictions’ compliance with their commitments and to monitor the effectiveness of the filing and dissemination mechanisms. The outcomes of this monitoring will be taken into consideration in the 2020 review.

    Changes expected in Budget 2016:

    The Indian government in the upcoming budget in February end would be announcing the changes in the Indian TP regulations to be on par with the global updates in realtion to the BEPS project and CBCR reporting. The Indian counterparts of the global MNE’s should be maintaining the TP documentations (local files) in line with the global reporting’s as part of the CBCR or global TP documentations to avoid inconsistencies. With growing transparency and exchange of information’s it would be a very interesting period to see as to how the litigation statistics would respond.

    Some Basic Questions to ponder upon:


    1. When is the first year companies will be expected to file?


    The latest action 13 report suggests that countries participating in the OECDBEPS project will require groups to file in 201 7 in respect of FY16 results.


    1. What will happen if the ultimate parent company is located in a country which has not implemented CBC reporting?


    The OECD agreement builds in a response for situations where a company’s parent jurisdiction does not implement (e.g., the parent is in the Cayman Islands), which is direct filing by the company in every country or possibly the substitution of a lower tier entity to serve as the parent for CBC collection and exchange purposes.


    1. What does the OECD mean by the term multinational group? Is it true that companies will not need to file if they are part of a privately owned group?


    Action 13 refers to multinational enterprises (mnes) though it does not define mnes. Guidelines for multinational enterprises OECD201 1 gives the following description:


    “a precise definition of multinational enterprises is not required for the purposes of the guidelines. These enterprises operate in all sectors of the economy. They usually comprise companies or other entities established in more than one country and so linked that they may coordinate their operations in various ways. While one or more of these entities may be able to exercise a significant influence over the activities of others, their degree of autonomy within the enterprise may vary widely from one multinational enterprise to another. Ownership may be private, state or mixed”


    The latest implementation guidance provides that smaller and medium size enterprises (smes) with annual consolidated revenue of less than€750 million in the preceding year will not be required to file a CBC report. It states that no special industry exemptions should be provided, no general exemption for investment funds should be provided, and no exemption for non-corporate entities or non-public corporate entities should be provided.


    Accordingly, unless a group falls within the sme definitionall groups holding overseas operations that form part of their consolidation will need to file, regardless of ownership structure.

    1. Who is the reporting mne? In a large multinational group, it is possible that consolidated accounts are prepared for financial investors at more than one level? For example, group Bis a 65% subsidiary of company A with the remaining 35% of shares being publically held and prepares consolidated financial statements.

    Action 13 states that: ”a reporting mne is the ultimate parent entity of an mne group.”. In the case outlined above, in our view, only company A would have to submit the CBC report. The notes on the master file suggest that it would be possible to present the data on a divisional basis where for instance the business divisions operate independently. This courtesy does not seem to be extended to CBC reporting. However, if it would aid understanding and follow up, it might make sense to file addendum CBC reports broken down on divisional lines.

    1. What do companies need to consider in terms of preparing for real CBC reporting and master file/ local file?

    Simply giving the OECD list of data points to internal audit and asking them to confirm that they can provide the data is likely to result in a rather mechanical result without the tax impact being considered. This is really something that should be done in cooperation between tax and accounting people.

    Companies should consider whether they can get all the information e.g., independent subcontractors, or how they would be translating their figures from local to group currency in case they would report on local GAAP..

    Consistency should be kept in mind here both in terms of consistency between the CBC report, master file and local file and also that the underlying TP documentation is consistent to "the message" in the CBC report delivered to the tax authorities. The outcome of a risk assessment analysis performed by the tax authorities based on the CBC report might be linked to other actions or information (hybrids/exchange of information - rulings etc).

    1. Confidentiality?

    Action 13 requires tax authorities to ensure confidentiality of the report be maintained. However, mnes should prepare that certain aspects could become public. In certain countries, there is political agitation to make the documentation public. In the UK, both the labour and conservative party manifestos open the possibility of making the information public. The likelihood is high that questions from tax authorities and ensuing controversy will get media attention.

    Master File Details:

    Organization structure

    Business description





    Financial and tax


    Structure chart:

    Important drivers

    of business profit

    Overall strategy




    for the group

    Annual consolidated

    financial statements

    u Legal ownership

    u Geographic


    Supply chain of:

    List of important

    Identification of

    financing entities

    description of

    existing unilateral

    Advance Pricing


    (APAs) and other

    tax rulings

    ? 5largest products/

    services by turnover

    ? Products/services

    generating more

    than 5% of turnover

    intangibles and

    legal owners


    Main geographic

    markets of above


    List of important



    Details of financial

    transfer pricing




    List and brief

    description of

    important service


    R&D and intangible

    transfer pricing





    Functional analysis

    of principal

    contributions to

    value creation by

    individual entities

    Details of

    important transfers







    divestitures during

    fiscal year





    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

    Restraints On Termination Of Employment

    Resource Inputs Limited

    Employment relations in India are governed by Labour Laws such as Industrial Disputes Act, Industrial Employment (Standing Orders) Act, Trade Union Act and also Constitution of India and collective and individual contracts and judicial precedents. Most of the labour and employment laws primarily apply to ‘workman’ as defined in the Industrial Disputes Act. There are around 165 Labour Legislations in India of which 55 central legislations while 110 are state enacted legislations. Employees who are not workman as per the definition of workman in the Industrial Disputes Act, the employer-employee relations are governed by contract of employment. Generally a written contract with an employee is in the form of letter of appointment. These employees are governed by The Indian Contract Act 1872 and Specific Relief Act.

    The Labour Laws with a view to protect the employment and prevent exploitation brought-in certain restrictions under some circumstances in different Labour Laws besides defining the procedures in dealing with acts of misconducts, if any, committed by the workmen. The Model Standing Orders have defined the acts which constitute misconduct and the punishments that can be imposed upon workmen on finding him guilty by following the defined procedure. The Industrial Disputes Act has imposed restrictions even after following the procedures laid down in Standing Order under certain special circumstances and protected workmen.

    In this paper an attempt is made to analyze the provision under Employee State Insurance Act, Maternity Benefit Act and Industrial Disputes Act with regard to the restrictions imposed on the employer on dismissal or discharge of a workman.

    ESI Act

    The employees with gross monthly wage of Rs. 15,000/- and below, working in factories (other than seasonal factories) and shops and establishments with ten or more employees in the notified areas are covered under Employee State Insurance Act. The educational institutions, hospitals and construction workers are also covered under the Act. Employees who are not covered under ESI Act are covered under Employee Compensation Act and Maternity Benefit Act. Some of the benefits provided under the ESI Act are ‘Sickness Benefit’ ‘Maternity Benefit’ and ‘Disablement benefit’.

    In accordance with the Section 73 of the ESI Act employer shall not dismiss, discharge or reduce or otherwise punish an employee during the period when he / she is in receipt of sickness benefit or maternity benefit and also during the period in receipt of disablement benefit for temporary disablement or is under medical treatment for sickness or is absent from work as a result of certified illness arising out of pregnancy or confinement. During the said period no notice of dismissal or discharge or reduction shall be served on an employee. Thus there is statutory embargo on the employer not to dismiss or punish an employee during the period of above mentioned circumstances.


    The Bombay High Court in the matter of Divisional Controller, Maharastra State RTC Vs SherkhanChhotekhan [2004 LLR 600] held that the dismissal of an employee, as covered under the ESI Act during receipt of his sickness benefit, would be void and the employee will be entitled to reinstatement with other benefits.

    The Bombay HC in the matter of RamchandraSitaramKale(deceased) Vs Maharashra State Road Transport Corporation [2009 (120) FLR 100] held that in case where a notice of dismissal or discharge or reduction is given during the specified period of illness, the same shall remain in abeyance because the same is not valid nor the same can be made operative during that period.

    The Karnataka High Court in the matter between Guest Keen Williams Ltd Vs PO Labour Court held that the bar in section 73 of the Act only requires the employer not to dismiss or terminate during the period of sickness benefit period. However, in the case of voluntary abandonment, this will not be applicable.

    If any employer contravenes the section 73, it would not only render the dismissal or discharge invalid but also expose the management itself to the peril of prosecution under section 85 of the Act.

    The Kerala High Court in the matter of Kerala State Co-Operative Coir Marketing Federation Limited VsSreekumar [2002, III LLJ 101] examined the question whether the ESI Court is competent to consider the validity of an order of dismissal of an employee on the ground of violation of section 73 and held that the ESI Court is not competent and it can only take penal action against the employer, if proved, violation of section 73.

    The workmen has to take up his claim for reinstatement only under Industrial Disputes Act and not under ESI Act.

    Maternity Benefit Act

    In accordance with the section 12 of Maternity Benefit Act no employer shall dismiss or discharge a women employee who is absent from duties under the provisions of this act and also any time during pregnancy. Women employee will be entitled to maternity benefit under Act on working a minimum of 80 days in the twelve months preceding the date of expected delivery. Women employees engaged directly or through any agency or contractor is also covered under the Act.

    The Supreme Court in the matter of Municipal Corporation of Delhi Vs Female Workers (Muster Roll) [AIR 2000 SC 1274] held that the provisions of the Maternity Benefit Act entitle maternity leave even to women engaged on casual basis or on muster roll basis on daily wages and not only those in regular employment.

    Supreme Court in the matter of NeeraMathurVs LIC of India ruled in favour of the pregnant employees. In the instant case the employee while on probation she applied for maternity leave and the company discharged her from service on reasons of deliberately withheld the fact of being pregnant at the time of filling up a declaration form prior to being appointed. The court ordered reinstatement.


    Industrial Disputes Act

    Section 33 of the Industrial Disputes Act imposes restrictions and a temporary ban on the employer’s right to alter the conditions of service of a workman or to punish him by way of discharge or dismissal while an industrial dispute is pending before conciliation authority or Labour Court or Industrial Tribunal or Arbitration. The employer has a responsibility to seek prior approval of the authority before whom the disputes is pending for effecting any change in conditions of service or

    for discharging or dismissing the workman in respect of any matter or misconduct that is connected with the dispute u/s. 33(1) and in case of misconduct not connected with the dispute, the employer can pass an order of discharge ordismissal, but he should seek approval subsequently u/s. 33(2)(b) and also make payment of wages for one month.

    Thus for imposing a penalty of dismissal or discharge on a workmen for his acts of misconduct which is not connected with the dispute pending before the authority after conducting enquiry and establishing the misconduct in according with the Standing Orders of the industrial establishment, the employer is required to make an application for approval after passing the orders under Sec 33(2)(b) of the Act which is a major constraint to the employer in addition to payment of one month wages to a workmen who has committed misconduct.

    The employer is required to do all the three acts simultaneously, that is the discharge or dismissal of the workman, making payment of one month wages and making application for approval for discharge or dismissal of the workman. The Supreme Court in the matter of Straw Board Manufacturing Co Ltd VsGobind, [1962 I LLJ 420] held that employer shall ensure that all the three actions shall be simultaneous and shall form part of the same transaction failing which the application runs the risk of being rejected.

    The Supreme Court in the matter of Tata Steel VsModak [1966 AIR 380] and Jaipur ZillaSahakariBhoomiVikas Bank Ltd Vs. Ram Gopal Sharma [2002 (92) FLR 667] held that in case of misconduct not connected with a pending dispute u/s 33(2), the employer may first discharge or dismiss the workman after domestic enquiry and then can seek approval of the concerned industrial court. If the approval is granted, the discharge or dismissal shall take effect from the date of the order. In case of refusal of approval application, then the workman is deemed to be in continuous service.

    However the jurisdiction of the Tribunal on the application made for approval after dismissal or discharge of a workmen for a misconduct not connected with the dispute before it is limited to:

    • Whether a proper domestic enquiry was conducted in accordance with the Standing Orders by observing the principles of natural justice.
    • Whether a prima facie case for dismissal based on the evidence on record is made out
    • Whether the employer had arrived at bona fide conclusion that the workman was guilty of the misconduct.
    • Whether the dismissal or discharge was not intended to victimize the workman.


    and the Tribunal does not sit as a Court of Appeal re-appreciating the evidence and it only examine the proceedings and finding of the enquiry to ascertain whether prima facie case had been made out or not. In the matter of discharge or dismissal connected with the dispute pending before the Tribunal or in the Conciliation proceedings, the Supreme Court in the matter of Lord Krishna Textile Mills Vs its workmen [1961 AIR 860] held that in case of misconduct connected with pending dispute, u/s 33(1), the discharge or dismissal shall take effect only on the approval granted by the concerned Industrial Court. The Supreme Court in the matter of Ram LakhanVs Presiding Officer [2001(I) LLJ 449] also held that during the pendency of management’s application for permission to dismiss the workman, the company shall pay the subsistence allowance if placed under suspension.

    The Act imposed restrictions on discharge or dismissal of a protected workman during pendency of an industrial dispute. The Karnataka High Court in the matter of Bagalkot Cement Co Vs The Management of Kanoria Industrial Ltd [2006 LLR 674] held that dismissal of protected workman, without seeking permission will be violation of section 33(3) of the ID Act.

    All the registered trade union office bearers will not become protected workmen automatically. Only such of those office bearers whose names have been notified by the registered trade union on or before 30th April every year and approved by the Management will alone fall under the category of protected workman. The total number of protected workman shall be restricted to one percent of the total number of workman subject to a minimum of five and maximum of one hundred. If the number of registered trade unions are more than one, the protected workman shall be based on the membership of the each registered trade union. The period of recognition of the workman as a protected workman will be valid for twelve months only.

    Thus it is essential to the employers to understand the restrictions imposed on discharge or dismissal by different legislations under certain special circumstances before taking a decision even in disciplinary matters.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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