Introduction:

In a significant judgment blending legal reasoning with philosophical reflection, the Bombay High Court underscored the importance of deterrence in enforcing statutory obligations, invoking the words of American thinker Benjamin Franklin to explain why mild penalties often fail to command obedience. In The Deputy Regional Director, Employees’ State Insurance Corporation vs M/s. Aashu Engineering Works (First Appeal No. 756 of 2011, 2026 LiveLaw (Bom) 91), Justice Jitendra Jain restored a penalty imposed by the Employees’ State Insurance Corporation (ESIC), Pune, on a factory unit for delayed contribution under the Employees’ State Insurance Act, 1948. The appeal was filed by the Deputy Regional Director of the ESIC challenging the ESI Court’s decision which had set aside the damages levied under Section 85-B of the Act. The respondent factory unit, M/s. Aashu Engineering Works, had been found to have delayed payment of contributions amounting to ₹96,705 and had allegedly manipulated wage and attendance records. ESIC imposed damages of ₹27,849 for the delay. The ESI Court quashed the penalty, prompting the statutory appeal before the High Court. Justice Jain, while allowing the appeal, observed that penal provisions serve not only to punish the offender but also to deter future violations, and lamented the “low deterrent effect” of laws in India which emboldens non-compliance. Quoting Benjamin Franklin’s famous line—“laws too gentle are seldom obeyed; too severe, seldom executed”—the Court stressed that a civilised society must obey the law out of principle, not merely fear of punishment. The judgment thus traversed statutory interpretation, principles of deterrence, and broader reflections on civic morality.

Arguments of the Appellant (ESIC Authorities):

Appearing for the appellant ESIC, counsel contended that the ESI Court had erred in interfering with a well-reasoned order imposing damages under Section 85-B of the Employees’ State Insurance Act. It was submitted that the respondent factory unit had defaulted in timely payment of contributions amounting to ₹96,705, and that such contributions were only paid subsequently in instalments. The respondent had claimed that it was orally permitted by ESIC officials to pay the arrears in instalments; however, no documentary evidence was produced to substantiate this claim. The appellant argued that statutory contributions under the ESI Act are mandatory in nature, forming part of a social welfare legislation intended to provide medical and financial benefits to employees. Any delay in remittance adversely affects the rights of workers and undermines the statutory scheme. The ESIC further submitted that during a field visit, its officials discovered serious discrepancies in the factory’s records. Attendance registers and wage registers were found to be manipulated. Significantly, the wage register for the year 1997 was allegedly prepared in 2001 using printed forms bearing a seven-digit telephone number, a numbering system introduced only in 1999. This, according to the appellant, clearly demonstrated fabrication of records. It was argued that had the field inspection not been conducted, the manipulation would have remained undetected, especially since old records had been destroyed. The ESIC emphasised that the damages levied were proportionate and well within statutory limits. While Section 85-B permits imposition of damages up to the amount of arrears, the authority had imposed only ₹27,849 as damages against arrears of ₹96,705, reflecting a liberal and judicious exercise of discretion. The appellant contended that the ESI Court had wrongly substituted its own view for that of the statutory authority without demonstrating perversity or arbitrariness in the original order. Therefore, restoration of the ESIC’s order was warranted.

Arguments of the Respondent (Factory Unit):

On behalf of the respondent factory unit, it was argued that the delay in payment was neither wilful nor contumacious. The respondent claimed that financial constraints had necessitated payment in instalments and that the ESIC authorities were orally informed of the same. It was contended that the authority ought to have taken a lenient view in light of the circumstances, especially since the principal contribution amount was eventually paid. The respondent further argued that the imposition of damages was excessive and punitive, and that the ESI Court was justified in setting aside the penalty in exercise of its supervisory jurisdiction. It was submitted that damages under Section 85-B should not be imposed mechanically and must take into account mitigating factors, including absence of mala fide intention. The respondent disputed allegations of record manipulation and suggested that discrepancies in registers were clerical or procedural in nature rather than indicative of deliberate falsification. The factory unit also contended that the damages imposed were disproportionate to the delay and that the ESI Court rightly intervened to prevent unjust enrichment of the statutory body. The respondent urged that social welfare legislation must be implemented with sensitivity and fairness, and that small industrial units should not be subjected to harsh penalties that threaten their viability.

Court’s Judgment:

Justice Jitendra Jain undertook a comprehensive analysis of the statutory framework and the factual matrix before setting aside the ESI Court’s order. The Court began by reiterating the dual purpose of penal provisions: first, to penalise the offender or defaulter, and second, to act as a deterrent not only to the defaulting party but also to others who might contemplate similar violations. The Court observed that one of the primary reasons for frequent violations of law in India is the “low deterrent effect” or lack of fear of legal consequences. Such an approach, the Court noted, runs contrary to the principles of orderly societal functioning within the boundaries of law. Invoking Benjamin Franklin’s observation that “laws too gentle are seldom obeyed; too severe, seldom executed,” Justice Jain highlighted the delicate balance between proportionality and deterrence. A penalty that is too mild may foster a perception that non-compliance carries minimal consequences, thereby emboldening violators. At the same time, excessively harsh penalties may be impractical to enforce. In the present case, the Court found that the ESIC had exercised its discretion judiciously. Against arrears of ₹96,705, damages of only ₹27,849 were imposed, well below the statutory maximum. The authority had even taken a liberal approach by calculating damages from the date of issuance of the visit notice rather than from the original due date of payment. The Court took serious note of the discrepancies uncovered during the field visit, particularly the apparent fabrication of wage registers. The fact that the 1997 wage register was prepared in 2001 on forms bearing a seven-digit telephone number introduced only in 1999 strongly indicated manipulation. Justice Jain observed that such conduct justified imposition of damages, as it reflected an attempt to conceal non-compliance. The Court rejected the respondent’s plea of oral permission to pay in instalments, holding that statutory obligations cannot be waived or modified without written authority. On the broader issue of civic responsibility, the Court remarked that true virtue lies in obeying the law out of principle rather than mere fear of punishment. A law, the Court stated, is valuable not merely because it exists, but because it embodies what is right. Concluding that the ESI Court had erred in interfering with a reasoned and proportionate order, Justice Jain quashed the ESI Court’s decision and restored the ESIC’s original order imposing damages. The First Appeal filed by the ESIC was accordingly allowed.