Supreme Court clarifies applicability of Madhya Pradesh Shops and Establishments Act, 1958 to Non-Residential Clubs: P.B. Nayak & Ors. vs. Managing Director, Bhilai Steel Plant & Ors. (26 October 2021)

Date of the Judgment: 26 October 2021
Citation: P.B. Nayak & Ors. vs. Managing Director, Bhilai Steel Plant & Ors. (2021) INSC 717
Judges: K.M. Joseph, J. and Pamidighantam Sri Narasimha, J.

Can a club that provides food and refreshment services be considered a “commercial establishment” under the Madhya Pradesh Shops and Establishments Act, 1958, thereby making it subject to the Act’s regulations? The Supreme Court of India recently addressed this question, clarifying the scope of exemptions for non-residential clubs under the Act. The court’s decision hinged on whether the club’s primary function was to provide meals and refreshments, or if these services were merely incidental to its main purpose as a club.

Case Background

The case involves an appeal against a High Court judgment that overturned an order by the Appellate Authority under the Madhya Pradesh Shops and Establishments Act, 1958. The appellants, former employees of the Bhilai Steel Plant club, claimed their services were terminated illegally. The Appellate Authority had initially ruled in their favor, ordering reinstatement with back wages or compensation. However, the High Court set aside this order, stating that the club was exempt under Section 3(j) of the Act as it was a non-residential club.

Timeline

Course of Proceedings

The appellants initially approached the Appellate Authority under Section 58(2) of the Madhya Pradesh Shops and Establishments Act, 1958, contending that their services were illegally terminated. The Appellate Authority ruled in their favor, directing the Bhilai Steel Plant to reinstate them with full back wages or provide compensation. However, the High Court, in a subsequent writ petition, overturned the Appellate Authority’s decision, holding that the Act did not apply to the club due to the exemption under Section 3(j) for non-residential clubs. The appellants then appealed to the Supreme Court.

Legal Framework

The Madhya Pradesh Shops and Establishments Act, 1958, aims to regulate the conditions of work and employment in various establishments. Key definitions include:

• Establishment: Defined under Section 2(8) as “a shop, commercial establishment, residential hotel, restaurant, eating-house, theatre, or other place of public amusement or entertainment to which this Act applies…”
• Commercial Establishment: Defined under Section 2(4) as an “establishment which carries on any business, trade or profession or any work in connection with, or incidental or ancillary to, any business, trade or profession…” but does not include a factory, shop, residential hotel, restaurant, eating-house, theatre, or other place of public amusement or entertainment.
• Residential Hotel: Defined under Section 2(22) as “any premises in which a bona fide business is carried on of supplying for payment lodging or board and lodging to travellers and other members or class of members of the public and includes a residential club.”
• Restaurant or Eating-House: Defined under Section 2(23) as “any premises in which it is carried on wholly or principally the business of the supply of meals or refreshments to the public or a class of the public for consumption on the premises…”
• Shop: Defined under Section 2(24) as “any premises where goods are sold, either by retail or wholesale or both or where services are rendered to customers…” but does not include a factory, a commercial establishment, residential hotel, restaurant, eating-house, theatre or other place of public amusement or entertainment.
• Employee: Defined under Section 2(6) as “a person wholly or principally employed, whether directly or through any agency, and whether for wages or other consideration, in or in connection with any establishment…”
• Employer: Defined under Section 2(7) as “a person owning or having ultimate control over the affairs of an establishment…”

Section 3 of the Act lists establishments and persons to whom the Act does not apply. Section 3(j) specifically exempts “clubs not being residential clubs”.

Section 58 of the Madhya Pradesh Shops and Establishments Act, 1958, deals with notice of dismissal, requiring employers to provide a one-month notice or wages in lieu of notice before dispensing with the services of an employee, unless it is for misconduct.

Arguments

Appellants’ Arguments:

• The appellants contended that they were employees of the respondent club and worked in the restaurant within the club premises.
• They argued that the club’s activity of providing meals and refreshments to its members constitutes a “restaurant or eating-house” under Section 2(23) of the Madhya Pradesh Shops and Establishments Act, 1958.
• They submitted that even if the services were provided to a specific class of the public (i.e., club members, their families, and guests), the Act should still apply.
• They highlighted that the club’s bylaws allowed members, their guests, and family members to use the eating house, indicating a broader reach than a purely private entity.

Respondents’ Arguments:

• The respondents argued that the club is a non-residential club and is therefore exempt under Section 3(j) of the Madhya Pradesh Shops and Establishments Act, 1958.
• They relied on the definition of “residential hotel” in Section 2(22), which includes “residential clubs,” to distinguish non-residential clubs.
• They contended that a residential club provides lodging facilities, unlike a non-residential club, which does not, and the respondent club does not provide lodging.
• They argued that the club’s primary purpose was not to operate a restaurant, but to provide recreational and social facilities to its members.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issue:

1. Whether the respondent-club, being a non-residential club, is exempt from the provisions of the Madhya Pradesh Shops and Establishments Act, 1958, under Section 3(j) of the Act.

The court also considered the sub-issue of whether the club’s activities of providing food and refreshments to its members would qualify it as a “restaurant or eating-house” under Section 2(23) of the Act, thereby making it subject to the Act’s provisions.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

• Section 2(4) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “Commercial establishment.”
• Section 2(6) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “employee.”
• Section 2(7) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “employer.”
• Section 2(8) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “establishment.”
• Section 2(22) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “residential hotel.”
• Section 2(23) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “restaurant or eating-house.”
• Section 2(24) of the Madhya Pradesh Shops and Establishments Act, 1958, defining “shop.”
• Section 3(j) of the Madhya Pradesh Shops and Establishments Act, 1958, exempting “clubs not being residential clubs.”
• Section 58 of the Madhya Pradesh Shops and Establishments Act, 1958, dealing with notice of dismissal.

Judgment

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of distinguishing between a club that primarily operates as a social and recreational entity and one that functions as a restaurant or eating house. The Court noted that the club’s bylaws and actual operations showed that it provided various facilities like indoor and outdoor games, a library, and social gatherings, along with food and refreshment services. The Court was influenced by the fact that the club was primarily a place for members to assemble for social and recreational activities and not primarily for the purpose of having meals and refreshments.

The court’s reasoning was as follows:

The Court emphasized that the definition of “residential hotel” in Section 2(22) of the Madhya Pradesh Shops and Establishments Act, 1958, which includes “residential clubs,” provides a crucial distinction. The Court noted that the term “residential” in this context implies the provision of lodging facilities. Since the respondent club did not offer lodging, it could not be classified as a “residential club.”

The Court further reasoned that while the club provided food and refreshments, these services were incidental to its primary purpose as a club, which was to provide social, recreational, and cultural facilities to its members. The Court stated:

“In the light of this state of facts and the definition of the word ‘restaurant and eating place’ the conclusion appears to be inevitable that the respondent club cannot be characterized as premises which was ‘wholly or principally’ used for the business of supply of meals and refreshment to the public.”

The Court also noted that:

“The fact that by catering services, food and refreshment and even liquor as are permitted in Clubs under law was being provided would not make it a case where the club became premises in which the supply of meals and refreshments was ‘wholly or principally’ what was carried out.”

The Court further clarified that:

“Therefore, providing of food and refreshment cannot be described as falling outside the scope of the bye-laws. In other words, a proper interpretation of bye-law No.2 would mean that the specifically enumerated facilities in bye-law No.2 are not exhaustive.”

The Court concluded that the club was indeed a genuine club and not primarily a restaurant or eating house. Therefore, it was exempt under Section 3(j) of the Act.

Key Takeaways

• Non-residential clubs are exempt from the Madhya Pradesh Shops and Establishments Act, 1958, under Section 3(j).
• The primary purpose of a club, not merely its provision of food services, determines its classification under the Act.
• The provision of food and refreshments in a club does not automatically make it a “restaurant or eating-house” under the Act if these services are incidental to its main purpose as a club.
• The definition of “residential hotel” in Section 2(22) of the Act, which includes “residential clubs,” implies the provision of lodging facilities, which is a key distinguishing factor.

Directions

No specific directions were given by the Supreme Court.

Specific Amendments Analysis

There was no discussion on any specific amendment in the judgment.

Development of Law

The ratio decidendi of the case is that a non-residential club, which primarily functions as a social and recreational entity, is exempt from the Madhya Pradesh Shops and Establishments Act, 1958, under Section 3(j), even if it provides food and refreshment services to its members. This clarifies the scope of the exemption for non-residential clubs and emphasizes the importance of the primary purpose of an establishment in determining its classification under the Act. This does not change the previous position of law, but clarifies the interpretation of Section 3(j) of the Act.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision that the Bhilai Steel Plant club, being a non-residential club, was exempt from the Madhya Pradesh Shops and Establishments Act, 1958. The Court clarified that the club’s provision of food and refreshment services was incidental to its primary purpose as a social and recreational club and did not qualify it as a “restaurant or eating-house” under the Act. This judgment provides important guidance on the applicability of the Act to clubs and other similar establishments.