D.Y. Chandrachud, J.
1. In these proceedings under Article 226 of the Constitution, the Petitioners seek to challenge a warrant of arrest which was issued on June 25, 2001 against the Second Petitioner. In pursuance of the warrant of arrest, the Second Petitioner was detained in civil prison for a period of 9 days until July 3, 2001. On the Petition being moved for urgent orders on July 3, 2001, this Court granted ad interim relief directing the authorities to release the Second Petitioner from detention. The Petitioners stated that they were ready and willing to deposit an amount of Rs. 1 lac with the Respondent authorities towards the out-standing Provident Fund dues forthwith and that statement was recorded. The amount, the Court is informed, has been deposited. The short question which arises is whether the arrest of the Second Petitioner was in accordance with the provisions of Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (the 'E. P. F. Act, 1952').
2. The Fourth Petitioner is a private limited Company, of which the first three Petitioners are Directors. Under a Deed of Partnership dated October 11, 1985, the first three Petitioners together with one Prabhudas Manji Maru conducted a partnership business in the name and style of Mistry Prabhudas Manji. Upon the death of Prabhudas Manji Maru, the partnership firm came to be reconstituted with the remaining partners on February 6, 1992. On October 24, 1992, the business of the partnership firm was taken over by the Fourth Petitioner which is a private limited company incorporated under the Companies Act, 1956. The erstwhile partnership firm employed 130 workers and a management staff of 60. The firm was covered under the provisions of the E.P.F. Act, 1952 and was assigned Code No. MH-19589. According to the Petitioners, the provisions of the Act were complied with until December, 1997. The Petitioners have averred that in 1998. they were faced with labour problems arising out of a rivalry between two unions namely the Bhartiya Kamgar Sena and the Maharashtra Shramik Sena. The unions are alleged to have resorted to a go-slow, gheraos and acts of violence. In the middle of 1998, there was a sit-down strike, as a result of which it has been stated that the manufacturing activity has come to a standstill and the factory has been closed since January 1999. In paragraph 4 of the Writ Petition, it has been averred that the workmen had filed a complaint being Complaint (ULP) No. 144 of 1999, under the provisions of the M.R.T.U. & P.U.L.P. Act, 1971 before the Industrial Court under Item 6 of Schedule II and Item 9 of Schedule IV in which they had sought wages between the months of January and June 1999. It has been stated that by an interim order dated August 9, 1999, the Industrial Court came to the conclusion prima facie that the workers had resorted to an illegal strike and were not entitled to wages for the aforesaid period.
3. The dues which were payable on account of Provident Fund liabilities under the Act for the period January to December 1998 remained to be paid. The Assistant Provident Fund Commissioner initiated an enquiry under Section 7-A of the E.P.F. Act, 1952 and on March 30, 1999, an order came to be passed assessing a sum of Rs. 19,24,826/- as the amount which was due and payable. According to the Petitioners, the employees' share of contribution for the period was paid up in full and by October 13, 1999, a sum of Rs. 5,71,000/- was in arrears out of a total amount of Rs. 19,24,826/-. It has been stated that in 1997, proceedings for the levy of damages under Section 14-B of the Act had been initiated for the late payment of the Provident Fund dues for the period 1989 to 1996. These damages were assessed by an order dated February 1st, 1999 in the total amount of Rs. 8,61,831/-.
4. On August 9, 1999, the office of the Regional Provident Fund Commissioner (the R.P.F.C.) issued a show cause notice to the first Petitioner stating that he had been authorized to recover a sum of Rs. 14.40 lacs, which was due and outstanding under the provisions of the Act. Consequently, the notice intimated the First Petitioner that in exercise of powers under Section 8-B of the Act, the recovery certificates dated May 27, 1999 and May 13, 1999 which had been issued by the R.P.F.C. were proposed to be executed by the arrest and imprisonment of the First Petitioner.
5. The Petitioners appear to have had an outstanding dispute with the Customs Authorities and according to the Petitioners, certain amounts were due and payable to them. On November 7, 1999, the Petitioners addressed a letter to the Assistant Commissioner of Customs, Contract Cell, Group VI stating that an amount of Rs. 13.79 lacs was due and payable by the Customs Authorities on account of a refund of cash deposits paid at the time of project registration. The Customs authorities were requested to pay the amounts due and payable to the Petitioners directly to the Provident Fund authorities. A copy of the aforesaid communication was addressed to the R.P.F.C. A letter dated December 4, 1999 was thereafter addressed to the authorities under the E.P.F. Act, 1952 intimating to them that funds from the Customs Authorities were expected at the end of January 2000. In the meantime, a cheque which had been furnished in an amount of Rs. 5 lacs by the Petitioners to the Respondent Authorities had been dishonoured upon presentation and it was stated by the Petitioners that the outstanding dues under the provisions of the Act would be paid no sooner than the receipt of payments from the Customs Authorities.
6. On December 29, 1999, a show cause notice was issued to the First Petitioner once again calling upon him to show cause as to why he should not be arrested and committed to civil prison in execution of the recovery certificate which had been issued under the provisions of the Act. On behalf of the Petitioners, it has been stated that on January 7, 2000, a power of attorney came to be executed by which the R.P.F.C. was authorized to receive a cheque in the amount of Rs. 13.79 lacs which according to the Petitioners was due and payable by the Customs Department.
7. The payments which the Petitioners had assured the authorities would be forthcoming from the Customs Authorities did not materialize. On May 9, 2000, the Respondent Authorities granted one more opportunity to the Petitioners to remit an amount of Rs. 12.92 lacs together with interest and damages within a period of two weeks failing which, it was stated that, legal action would be adopted against the Petitioners. On June 10, 2000, the Petitioners in a letter to the R.P.F.C. furnished details of an amount of Rs. 8.83 lacs which was due and payable to the Petitioners by a company known as Mardia Chemicals Ltd. The Petitioners stated that the aforesaid company was likely to pay the dues of the Petitioners in July 2000, until which time the authorities were once again requested to bear with the Petitioners.
8. In the affidavit-in-reply which has been filed on behalf of the Respondents, it has been stated that in view of the representation made by the Petitioners, the Provident Fund authorities communicated with the competent authorities of the Customs department as well as Mardia Chemicals Ltd. The Customs Authorities stated that they had the first right of claim on the dues of the Petitioners for their failure to implement the conditions stipulated under Project Import Regulations, 1986. Communications dated September 23, 1999, October 18, 1999 and June 7, 2000 were addressed by the Customs Authorities to the office of the R.P.F.C. and from these communications it would be abundantly clear that no amount stands determined as due and outstanding to the Petitioners. In so far as Mardia Chemicals Ltd. were concerned, the Respondent authorities received a communication dated September 9, 2000 from the Company stating that in fact the Petitioners were liable to pay an amount of Rs. 20 lacs to the said company together with interest.
9. On April 2, 2001, show cause notices were issued to the Second and Third Petitioners calling upon them to explain why the recovery certificates which have been issued to them should not be executed by arrest and imprisonment. As noted earlier, on June 25, 2001, a warrant of arrest was issued against the Second Petitioner by which a direction came to be issued to the effect that the Second Petitioner be detained and brought before the R.P.F.C.
10. A detailed affidavit-in-reply to these proceedings has been filed on behalf of the R.P.F.C. in which a reference has been made to the numerous opportunities which were granted from time to time to the Petitioners to pay the outstanding dues under the Act. Reference has been made to the fact that the authorities communicated both with the Customs Authorities and with Mardia Chemicals Ltd. and had found that nothing was due and payable by either the Customs or the said company to the Petitioners. The department has adverted to the fact that a cheque in the amount of Rs. 5 lacs which was issued on behalf of the Petitioners was dishonoured and that the Petitioners paid paltry sums of Rs. 60,000/- on January 7, 2000, and Rs. 80,000/- in the month of March, 2000, after show cause notices were issued by the department. The Respondents have also relied upon a complaint by the Maharashtra Shramik Sena dated January 8, 2001 in which it has been stated that the workmen had not been paid their earned wages since January 1999. According to the department, the Petitioners reside in an affluent residential neighbourhood and own a Mercedes Benz and a Maruti car. In the circumstances, it has been submitted that there is no justification in not paying the dues of the department under the E.P.F. Act, 1952. Finally at Exh. 9 to the affidavit-in-reply is a copy of the Minutes dated June 25, 2001 before the R.P.F.C. of a meeting at which the Second and Third Petitioners were present. During the course of the meeting, apart from reiterating that since amounts were due and payable by the Customs Department to the Petitioners, it was sought to be urged on behalf of the Petitioners that all the properties belonging to the Petitioners have been encumbered and the Petitioners are not in a position to pay any dues at present. In the circumstances, the following conclusion has been drawn by the Commissioner:
'In view of the above statement made by the notices it appears to me that there is no possibility of exploring the scope of availability of un-encumbered property for attachment and sale or to appoint any receiver for the management of the property of the establishment since the establishment is already closed. It therefore appears to me that the only way to compel the notices to pay the P.F. dues is to arrest and detain in the civil prison.'
11. The first question which arises in these proceedings is as to whether the arrest of the Second Petitioner was carried out in accordance with law. The narration of facts in the earlier part of this Judgment would make it abundantly clear that the outstanding liabilities under the E.P.F. Act, 1952 have not been paid. The power of arrest is, however, a drastic power which is vested in public authorities, in the present case in public authorities appointed under the provisions of the E.P.F. Act, 1952. The power of arrest has to be exercised strictly in accordance with law, since it affects the personal liberty guaranteed to the subject by Article 21 of the Constitution. Section 8 of the E.P.F. Act, 1952 provides that any amount which is due from the employer inter alia in relation to an establishment to which the provident fund scheme applies in respect of any contribution payable to the fund or the damages recoverable under Section 14-B, may be recovered in the manner specified in Sections 8-B to 8-G. Section 8-B of the Act provides for the issuance of a recovery certificate where any amount is in arrears under Section 8. Under Section 8-B, upon the issuance of a recovery certificate the Recovery Officer may proceed to recover the amount specified from the establishment or the employer by one or more of the modes which are prescribed in the said Section. The modes which are provided in Section 8-B are as follows:
(a) attachment and sale of the movable or immovable property of the establishment or, as the case may be, the employer;
(b) arrest of the employer and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of the establishment or, as the case may be, the employer;
Section 8-G provides as follows:
'Application of certain provisions of Income Tax Act :- The provisions of the Second and Third Schedules to the Income-Tax Act, 1961 and the Income-Tax (Certificate Proceedings) Rules, 1962, as in force from time to time, shall apply with necessary modifications as if the said provisions and the rules referred to the arrears of the amount mentioned in Section 8 of this Act instead of to the Income-tax;
Provided that any reference in the said provisions and the rules to the 'assessed' shall be construed as a reference to an employer as defined in this Act.'
12. In the exercise of the power of effecting a recovery under Section 8-B of the Act, the provisions contained in the Second and Third Schedules to the Income Tax Act, 1961 are specifically made applicable by Section 8-G. Schedule II to the Income Tax Act provides in Part V for the Arrest and Detention of Defaulters. Sub-rules (1) and (2) have a material bearing on the present controversy and provide as follows:
'73. Notice to show cause - (1) No order for the arrest and detention in civil prison of a defaulter shall be made unless the Tax Recovery Officer has issued and served a notice upon the defaulter calling upon him to appear before him on the date specified in the notice and to show cause why he should not be committed to the civil prison, and unless the Tax Recovery Officer, for reasons recorded in writing, is satisfied -
(a) that the defaulter, with the object or effect of obstructing the execution of the certificate, has, after (the drawing up of the certificate by the Tax Recovery Officer), dishonestly transferred, concealed, or removed any part of his property, or
(b) that the defaulter has, or has had since [the drawing up of the certificate by the Tax Recovery Officer], the means to pay the arrears or some substantial part thereof and refuses or neglects or has refused or neglected to pay the same.
(2) Notwithstanding anything contained in Sub-rule (1), a warrant for the arrest of the defaulter may be issued by the Tax Recovery Officer if the Tax Recovery Officer is satisfied, by affidavit or otherwise, that with the object or effect of delaying the execution of the certificate, the defaulter is likely to abscond or leave the local limits of the jurisdiction of the Tax Recovery Officer. '
13. The power of arrest has to be, therefore, exercised in the manner which is provided for in Rule 73. Rule 73 mandates the issuance of a show cause notice to the defaulter. Rule 74 provides that when a defaulter appears before the Tax Recovery Officer in obedience to a notice to show cause, he has to be granted an opportunity of showing cause why he should not be committed to civil prison. The power of arrest and detention can be exercised under Sub-rule (1) of Rule 73 in two situations: (i) Where the defaulter has after the drawing up of the recovery certificate dishonestly transferred, concealed or removed any part of his property, or (ii) where the defaulter has, or has had since the drawing up of the certificate, the means to pay the arrears or some substantial part thereof and refuses or neglects to pay the same. The third circumstance which is provided is in Sub-rule (2) which is to the effect that the defaulter is likely to abscond or leave the local limits of the jurisdiction of the Recovery Officer with the object of delaying the execution of the certificate. Finally, it would be necessary to notice that Sub-rule (1) of Rule -73 requires that the tax recovery officer must be satisfied in regard to the circumstances which are provided for in Clauses (a) and (b) there-to and the satisfaction must be expressed in reasons which are recorded in writing.
14. If the facts of the present case are carefully scrutinized, it would be abundantly clear that the provisions of Rule 73 were not followed by the Respondent authorities before effecting the arrest of the Second Petitioner. No reasoned order was passed by the competent authority recording its satisfaction in regard to the existence of those conditions which are specified in Clauses (a) and (b) of Sub-rule (1) of Rule 73 for justifying the arrest of the Second Petitioner. It is not the case of the Respondent authorities that the Second Petitioner had dishonestly transferred, concealed or removed any part of his property. Nor indeed was it the case of the authorities that the Second Petitioner was likely to abscond or leave the local limits of the jurisdiction of the Recovery Officer with the object of delaying the execution of the recovery certificate. The only remaining issue was as to whether the defaulter has, or has had since the drawing up of the certificate, the means to pay the arrears or some substantial part thereof and refused or neglected to do so which is the requirement of Clause (b) of Sub-rule (1) of Rule 73.
15. Now it is a well settled principle of law that the simple default in making the payment of outstanding dues does not constitute a neglect or refusal to pay. In order to establish :
a neglect or refusal something more than a default must be established. Neglect or refusal implicates an element of bad faith reflecting a dishonest attempt to evade the payment of dues. In Jolly George Verghese v. the Bank of Cochin, : [1980]2SCR913 the Supreme Court while interpreting the provisions of Section 51 and Order 21, Rule 37 of the CPC 1908 held thus: 'The simple default to discharge is not enough. There must be some element of bad faith beyond mere indifference to pay, some deliberate or recusant disposition in the past or, alternatively, current means to pay the decree or a substantial part of it. The provision emphasises the need to establish not mere omission to pay but an attitude of refusal on demand verging on dishonest disowning of the obligation under the decree. Here considerations of the debtor's other pressing needs and straitened circumstances will play prominently.'
16. The same view has been taken in several judgments of the High Courts to which my attention has been drawn. In V. Ganesa Nadar v. K. Chellathai Ammal AIR 1989 Mad 8, Chief Justice M.N. cHANDURKAR held that refusal or neglect envisages a capacity to pay, but a deliberate non-payment. The learned Chief Justice held that an order of detention in civil prison cannot be made for the failure of a judgment debtor to pay the decretal debt and merely because, though he possesses immoveable property, he has failed to pay the debt. A similar view has been taken by the learned single Judge of the Madras High Court in Alagappan v. Rajaguru & Co., : AIR1985Mad353 , a learned single Judge of the Rajasthan High Court in Mukh Ram v. Hardeepsingh, and by a single Judge of this Court in Pundlik Mahadu Nazire v. Maharashtra State Farming Corporation, : AIR1992Bom48 .
17. The warrant of arrest is in the present case vitiated due to the failure of the competent authority under the Act to record its satisfaction, with reasons in writing, that would demonstrate, that the conditions which are specified in Clauses (a) or (b) of Sub-rule (1) of Rule 73 of the Rules contained in Schedule II to the Income Tax Act, 1961 have been satisfied. The File Note of June 25, 2001, (Exh. 9 to the reply) shows that the Second and the Third Petitioners stated before the authority that all their properties had already been encumbered and that it was impossible for them to furnish any security at present. Before me also, it has been stated on behalf of the Petitioners by the learned counsel that both, the residential flat at Bhulabhai Desai Road, Mumbai as well as the factory premises have been encumbered with the Central Bank of India and it is, therefore, not possible for the Petitioners to even sell the aforesaid properties. The file note dated June 25, 2001 in fact reflects that the authority was of the view that it was not possible to explore the availability of unencumbered property for attachment or sale or to appoint a Receiver for the Management of the property of the establishment since the establishment was already closed. The R.P.F.C., therefore, concluded that it appeared to him that the only way to compel the notices to pay the P.F. dues is to arrest and detain in the civil prison. In deciding to exercise the power of arrest for the aforesaid purpose, the authority had over-stepped its jurisdiction under Section 8-B read with the provisions of Section 8-G and Rule 73 of the rules contained in Schedule of the Income Tax Act, 1961. The authority has not arrived at the satisfaction, statutorily mandated as a condition precedent for effecting arrest, that the defaulter had either dishonestly transferred, concealed or removed any part of his property or, that despite being possessed of the means to pay the arrears had refused and neglected to do so. The recording of reasons which constituted the basis of the satisfaction of the authority is a condition precedent to the exercise of the power of arrest. The absence of those reasons vitiates the exercise of the power of arrest and that lacuna cannot be rectified by pointing out circumstances in justification in the affidavit before this Court. The arrest has, therefore, been carried out in a patently arbitrary manner and in violation of the personal liberty of the subject under Article 21 of the Constitution. In the circumstances the Petitioner is entitled to succeed and the ad interim order dated July 3, 2001 is, accordingly, liable to be confirmed.
18. In Collector of Malabar v. Erimmal Ebrahim Hajee : 1957CriLJ1030 , the Supreme Court dealing with a question of arrest under Section 48 of the Madras Revenue Recovery Act, 1864 for non-payment under a . recovery certificate issued under the Indian Income Tax Act 1922, held thus:
'When dues in the shape of money are to be realized by the process of law and not by voluntary payment, the element of coercion in varying degrees must necessarily be found at all stages in the mode of recovery of the money due. The coercive element, perhaps in its severest form, is the act of arrest in order to make the defaulter pay his dues. When the Collector has reason to believe that withholding of payment if wilful, or that the defaulter has been guilty of fraudulent conduct in order to evade payment, obviously, it is on the supposition that the defaulter can make the payment, but is wilfully with-holding it, or is fraudulently evading payment.'
19. Having said this, it is abundantly clear that the Petitioners are liable to pay the outstanding dues which have been duly assessed by the authorities under the provisions of the Act. The Petitioners have approached this Court under Article 226 of the Constitution and it would be permissible, in my view, to impose conditions which while securing the personal liberty of the Second Petitioner would at the same time ensure that the dues which are payable under the E.P.F. Act, 1952 are duly remitted within a reasonable period of time. The E.P.F. Act, 1952 is a piece of social welfare legislation designed to provide a measure of social security to workmen within its purview. The salutary public purpose which the Act seeks to achieve must be protected and advanced. The learned counsel appearing on behalf of the Petitioners stated that the Petitioners are ready and willing to pay the Outstanding dues under the Act, but a reasonable period of time may be granted so that the dues can be cleared in instalments. Having heard the learned counsel for the parties, I am of the view that the Petitioners should be granted time until December 31, 2002 to pay the outstanding dues. Accordingly, the following directions are issued in this regard:
(i) The learned counsel appearing on behalf of the Petitioners states that the Petitioners shall pay to the authorities an amount of Rs. 1.50 lacs towards the repayment of the outstanding dues within a period of 15 days from today.
(ii) In so far as the balance of the outstanding dues is concerned, the Petitioners agree and furnish an undertaking to the Court through the learned counsel that they shall pay the remaining dues in accordance with the following time schedule:
(a) An amount each of Rs. 75,000/-shall be paid on or before September 30, 2001 and on or before October 31, 2001.
(b) The balance of the outstanding dues shall be paid in equal monthly instalments commencing from November 15, 2001 so as to liquidate the entire outstandings on or before December 15, 2002. The outstanding dues shall carry interest at the statutory rate of 12% under Section 7-Q of the Act on a reducing balance.
These undertakings are accepted.
(iii) The learned counsel appearing on behalf of the Respondent authorities states that the Respondent authorities shall furnish a computation in regard to the interest calculation to the Petitioners within a period of one week from today so that any discrepancy in computation can be duly rectified. Parties are agreed that an authorized representative of the Petitioners will for this purpose hold a meeting with the ' competent authority on behalf of the Respondents on July 30, 2001.
(iv) The Petitioners through their learned counsel undertake that the aforesaid payments shall be made to the authorities on the due dates and an undertaking to that effect shall be filed on behalf of Petitioners No. 1, 2 and 3 as well on behalf of Petitioner No. 4 by an authorized signatory within a period of one week from today.
(v) Upon making the aforesaid payments, the Petitioners would be entitled to pursue such remedies as are open to them in law for seeking a redressal against the dues which have been demanded by the department and any payment which has been made shall abide by such final orders as may be passed. It is, however, clarified that the making of the aforesaid payment shall not be delayed on the ground that the Petitioners have preferred a challenge to the assessment before any authority.
Subject to the aforesaid, the Petition is disposed of. No costs. Certified copy expedited.