DEDUCTION FROM GRATUITY, TOWARDS DISCHARGE OF A BANK LOAN GIVEN TO AN EMPLOYEE, IS ILLEGAL

Section 4(1) of Payment of Gratuity Act, 1972 deals with the payment of gratuity. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years-

• On his superannuation; or
• On his retirement or resignation; or
• On his death or disablement due to accident or disease.

The completion of continuous service of 5 years shall not necessary where the termination of the employment of any employee is due to death or disablement.

The Act is a piece of welfare legislation as held by the Supreme Court in ‘Ahmedabad Private Primary Teachers’ Association V. Administrative Officer’ – 2004 (1) TMI 639 - SUPREME COURTand its provisions are in the nature of social-security measures like employment insurance, provident fund and pension.   The Supreme Court in ‘Balbir Kaur V. SteelAuthority of India Limited’ – (2000) 6 SCC 493 held that gratuity under the Payment of Gratuity Act, 1972 is no longer in the realm of charity but a statutory right given to the employee. 

In ‘Burhanpur Tapti Mills Limited V. Burhanpur Tapti Mills Mazdoor Sangh’1964 (11) TMI 79 - SUPREME COURT it was held that gratuity is a lump sum payment considered necessary for an orderly and humane elimination from the industry of superannuated or disabled employees, who but for such retiring benefits would continue in employment even though they function inefficiently. 

Section 4(6) of the Act provides for forfeiture of gratuity in certain circumstances.  It provides that notwithstanding anything contained in Section 4(1)-

• The gratuity of an employee, whose services have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of, properly belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;
• The gratuity payable to an employee may be wholly or partially forfeited-
  • If the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part; or
  • If the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.

Thus if a workman is guilty of serious misconduct such as acts of violence against the management or other employees or riotous or disorderly behaviour in or near the place of employment, which though not directly causing damage, is conducive to grave indiscipline, then his gratuity can be forfeited in its entirety. 

Section 13 of the Act gives protection to the payment of gratuity.  It provides that no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, Railway Company or shop exempted under Section 5 shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.  In ‘D.S. Nakara V. Union of India’ 1982 (12) TMI 151 - SUPREME COURT it was held that gratuity is a social welfare measure rendering socio economic justice by providing economic security in the fall of life when physical and mental prowess is ebbing, corresponding to ageing process and when, once falls back on savings.   Such payments cannot be withheld unless specifically permitted by any statutory provision.  taxtmi.com

In such a situation, any amount (like loan obtained by the employee from the Bank, co-operative society etc.,) other than specifically permitted by any statutory provisions, cannot be deducted from gratuity payable to an employee.  In ‘Karnataka State Road Transport Corporation, Bangalore, rep. by its Chief Law Officer V. Deputy LabourCommissioner and the Appellate Authority, Bangalore and others’ – 2012-III-LLJ-355 (Kar) an employee employed in the Karnataka State Road Transport Corporation retired on superannuation.   The employee rendered 34 years 9 months and 29 days.   The Corporation calculated gratuity for 27 years 6 months as the period of continuous service by excluding 7 years, 3 months and 22 days alleging absence, leave without salary, suspension and others and accordingly computed a sum of Rs.1,70,5000/- as gratuity.  A further sum of Rs.54,350/- was also deducted on the premise that the employee was liable to pay towards discharge of a loan extended by the State Bank of Mysore, HSR Layout, while in service. 

The employee filed an application under Rule 10 of the Payment of Gratuity (Central) Rules, 1972 before the Controlling Authority for gratuity.  One among the grounds in the application is illegal deduction of Rs.54,350/- towards discharge of bank loan from gratuity.  The Controlling Authority declined to accept the deduction of Rs.54,350/- towards discharge of bank loan provided to the employee by the State Bank of Mysore, HSR Layout as legal.   Against this order the Corporation filed this writ petition before the High Court.

The Corporation contended that the employee having not discharged the debt due to State Bank of Mysore,, the deduction was made from the gratuity.   The High Court held that the contention over justification to deduct and discharge the loan with the State Bank of Mysore, HSR Layout, is frivolous.  Section 4(1) and 4(6) of the Act, when read, in conjunction, the only irresistible conclusion is deduction by way of forfeiture to the extent of damage or loss caused by the employee during his service, from the gratuity of that employee, whose service is terminated for any act, wilful omission or negligence causing any damage or loss or destruction of property belonging to the employer and the gratuity payable to an employee wholly or partially  forfeited; if the service of such employee is terminated for his riotous or disorderly conduct or any other act of violence on his part or if the service of such employee is terminated for any act which constitutes an offence involving moral turpitude provided that such offence is committed by him in the course of his employment.   In the instant case it is not that the employee was terminated for any of the aforesaid reasons, so as to withhold gratuity on the wholly or partially so as to fall within Section 4(6) of the Act.   That being the factual position, deduction of Rs.54,350/- allegedly towards discharge of the loan extended to the employee by the State Bank of Mysore, HSR Layout cannot but be held to be illegal.  The petitioner Corporation illegally deducted the amount from out of the gratuity payable to the employee, which did not have the permission under the Act much less under their own regulations, since no provision under the Regulations is shown to invest such a power in the petitioner.