Deterrent Effect Evaporates In Thin Air If Invoked After Fourteen Years: Bombay High Court Fixes ‘Reasonable Time’ For ESI Damages

“Even In Absence Of Express Limitation, Power Must Be Exercised Within A Reasonable Period”, In a significant pronouncement on the limits of statutory penal powers, the Bombay High Court held that an order imposing damages under Section 85-B of the Employees’ State Insurance Act, 1948 cannot be passed after an inordinate delay merely because the statute does not prescribe an express limitation period.

Justice Jitendra Jain ruled that even assuming there is no specific limitation provided under the Act for passing an order under Section 85-B, such power must be exercised within a “reasonable period.” On analysing the scheme of the Act, the Court treated five years as a reasonable benchmark and held that an order passed fourteen years after payment of contribution was unsustainable.

The appeal filed by the ESIC was dismissed and the order of the ESI Court quashing the damages was upheld.

M/s. Bombay Gymkhana Ltd., incorporated to promote sports and recreation, had initially contested the applicability of the ESI Act. Its application before the ESI Court was dismissed in 1987, and its appeal before the High Court was dismissed for non-appearance in 1996. Thereafter, the applicability of the Act stood accepted.

On 15 March 1989, the ESIC demanded Rs. 14.92 lakhs towards contribution for the period 1972–1989. The Gymkhana paid the amount on 7 September 2000, without prejudice to its rights and with an understanding that no interest would be charged.

In 2011, ESIC raised a demand of Rs. 29.17 lakhs towards interest on delayed contribution. That litigation culminated in dismissal of the Gymkhana’s appeal by the High Court in 2022, limited to the issue of rate of interest.

Meanwhile, on 16 April 2014, the Corporation issued a show cause notice proposing damages of Rs. 16.26 lakhs under Section 85-B for delayed payment of contribution. The order confirming damages was passed on 30 June 2014, almost fourteen years after payment of the contribution.

The ESI Court set aside this order, primarily relying on the proviso to Explanation (b) to Section 77(1A). Aggrieved, the Corporation approached the High Court.

“Where Power Is Conferred, It Has To Be Exercised In A Reasonable Manner”

The High Court clarified that it would decide the matter on the premise that there is no express limitation period provided under Section 85-B. The larger question of whether any express limitation exists was expressly kept open.

The Court observed:

“It is settled law, by now, that whenever a Statute does not provide limitation period for doing an act or for passing an order then the said act should be done or order should be passed within a reasonable period.”

The Court emphasised that this principle applies more rigorously where the provision imposes penal civil financial liability. The power to impose damages under Section 85-B, being penal in character, cannot be exercised at any indefinite point of time.

“Five Years Can Be Treated As A Reasonable Period” – Legislative Scheme Provides Guidance

Justice Jain analysed the scheme of the ESI Act to determine what would constitute a reasonable period.

The Court referred to the second proviso to Section 45-A, which prohibits passing an order for determination of contribution beyond five years from the date on which contribution becomes payable. It also referred to Regulation 32, which mandates preservation of records only for five years. Further, the proviso to Explanation (b) to Section 77(1A) bars the Corporation from making claims after five years of the period to which the claim relates.

Though not holding these provisions as directly applicable to Section 85-B, the Court held that they provide a legislative “clue.”

After analysing these provisions, the Court concluded:

“After examining the Scheme of the Act, in my view, the ‘reasonable period’ for claiming damages under Section 85-B… would be five years.”

Applying this yardstick, since the contribution was paid on 7 September 2000, the order under Section 85-B ought to have been passed on or before September 2005. The order passed on 16 April 2014 was therefore far beyond reasonable time.

“Levy Of Interest Has No Relation To Damages Under Section 85-B”

The Corporation argued that interest proceedings and litigation justified the delay in initiating damages.

Rejecting this submission, the Court held:

“The levy of interest and the challenge to the said levy… has no relation whatsoever to the order passed under Section 85-B which levied damages on the delayed payment of contribution and not on the interest.”

Since damages were calculated on delayed contribution and not on interest, pendency of interest litigation could not justify a fourteen-year delay in initiating penalty proceedings.

“Welfare Legislation Does Not Give Licence To Act Beyond Reasonable Time”

Addressing the submission that the ESI Act is a beneficial social legislation and that penalty provisions must have deterrent effect, the Court made a crucial observation:

“Merely because legislation is a welfare legislation, it does not give a licence to the appellant-corporation to pass an order beyond reasonable period.”

The Court further underlined the principle of certainty in penal matters, stating:

“For deterrent effect, penal provision should be invoked immediately and not after a long delay of fourteen years. Deterrent effect loses its essence if invoked after a long period of delay.”

The message was clear — social welfare objectives cannot override fundamental principles of fairness and reasonable exercise of statutory power.

The High Court dismissed the appeal and answered the substantial question of law against the ESIC and in favour of Bombay Gymkhana. It upheld the ESI Court’s order quashing the damages imposed under Section 85-B.

Significantly, the Court clarified that the question whether there exists any express limitation under the Act for Section 85-B proceedings is kept open for adjudication in an appropriate case.

In effect, the judgment establishes that in the absence of an express statutory limitation, five years would ordinarily constitute a reasonable period for initiating and passing orders under Section 85-B, ensuring certainty and fairness in the administration of penal provisions under the ESI Act.

Date of Decision: 24/02/2026