Case Study: No PF Penalty on Backwages After Reinstatement

Case

Employees Provident Fund Organisation v. Ujjain Sahakari Dugdh Sangh Maryadit
Miscellaneous Petition No. 670 of 2021

Court and Date

Madhya Pradesh High Court, Indore Bench
Hon’ble Mr. Justice Vivek Rusia and Hon’ble Mr. Justice Binod Kumar Dwivedi
Date: 2 July 2025

Relevant Law

• Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  • Section 7Q – Interest payable by employer for delayed PF payment
  • Section 14B – Power to recover damages for default
  • Sections 8B and 8G – Recovery mechanisms
• Key Precedents:
  • M.P. State Co-op. Dairy Fedn. Ltd. & Anr. v. Rajnesh Kumar Jamindar & Ors., Civil Appeal No. 2442/2009 (Supreme Court)
  • Dr. Vishwanath Prasad Agnihotri & Ors. v. M.P. State Co-op. Dairy Federation Ltd. & Ors., W.P. No. 6408/2011 (MP High Court)

Background

The Ujjain Sahakari Dugdh Sangh Maryadit, a cooperative milk union in Madhya Pradesh, had compulsorily retired several employees after reviewing their 20+ years of service, labeling them as “dead wood.” The affected employees challenged their retirement before the High Court.

• The Single Judge dismissed their petitions.
• On appeal, a Division Bench reinstated the employees with 20% backwages.
• The matter reached the Supreme Court, which upheld reinstatement and enhanced the backwages to 50%.

Following the Apex Court’s order, the employees were reinstated in 2009, and backwages were paid in 2011.
The employer also suo motu deposited provident fund contributions for the backwage period.

However, in 2014, the Assistant Provident Fund Commissioner (APFC) initiated an inquiry under Sections 14B and 7Q of the EPF Act, demanding:

• ₹1,52,645/- as damages under Section 14B
• ₹1,03,382/- as interest under Section 7Q

The Central Government Industrial Tribunal (CGIT) set aside the demand. The EPFO challenged the tribunal’s order before the Madhya Pradesh High Court.

Legal Issue

Whether the employer (Dugdh Sangh) is liable to pay penal damages and interest under Sections 14B and 7Q for delayed PF contributions pertaining to backwages paid after reinstatement, when employees had not actually worked during the period.

Key Legal Findings

1. Backwages ≠ Actual Work Performed
   • The Court reiterated that when arrears of backwages are paid retrospectively and no work was actually performed, the PF contribution cannot be mandated for that period under the EPF scheme.
2. Supreme Court Did Not Direct PF Payment
   • The Apex Court’s reinstatement order included backwages but did not direct PF contribution for the retrospective period.
   • Therefore, the employer’s voluntary deposit could not attract penal damages or interest.
3. No Willful Default or Delay
   • The employees were compulsorily retired and later reinstated after prolonged litigation.
   • Since the backwages and contributions were deposited suo motu, there was no deliberate non-payment or default.
   • Hence, Sections 14B and 7Q could not be invoked to impose damages or interest.
4. Tribunal’s Order Justified
   • The CGIT correctly set aside the APFC’s order.
   • The High Court found no legal error or perversity warranting interference.

Judgment

The Madhya Pradesh High Court dismissed the EPFO’s petition, affirming the Tribunal’s order.

Key Directions:

• The order dated 20 August 2014 passed by the APFC imposing damages and interest was invalid.
• Since backwages were paid without actual work and PF contributions were deposited voluntarily, no penalty or interest could be levied.
• The liberty granted to Dugdh Sangh by the Tribunal to seek refund of its contribution was left undisturbed.

Result: Writ Petition Dismissed.

Conclusion

The Court held that provident fund contributions are linked to actual service rendered, not merely to retrospective salary disbursal. When employees are reinstated after years of litigation and receive backwages, the employer cannot be penalized for non-deposit of PF contributions for the period when no work was performed.

This ruling reinforces the principle that damages and interest under the EPF Act arise only from deliberate or negligent default, not from bona fide situations following reinstatement orders or retrospective payments.

Key Learning

• Backwages are not “wages” for EPF purposes unless accompanied by actual service rendered.
• No penalty or interest can be levied for delayed PF contributions when payments are made suo motu after reinstatement.
• Sections 14B and 7Q cannot be applied without establishing intentional default.
• Employers reinstating workers after judicial orders should:
  • Deposit PF contributions voluntarily (as a compliance safeguard).
  • Maintain records showing no deliberate delay to prevent future liability.
• The judgment provides clarity and relief for cooperative institutions and employers facing retrospective backwage liabilities.

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