Gratuity taxation and continuous service rules limit deductions and preserve full service computation for gratuity benefits.

Gratuity is taxable only to the extent permitted by the statutory exemption, so income tax may be deducted from gratuity only within the lawful ceiling and not by a blanket deduction. Periods described by the employer as unauthorised absence, leave without wages or suspension cannot be excluded from continuous service unless a valid order treating them as break in service is shown under the governing service rules. In the absence of such proof, service remains continuous for gratuity computation, and unlawful deductions such as group insurance and identity card charges are impermissible. The employee was therefore entitled to gratuity computed on full continuous service, subject only to lawful tax deduction.

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Issues: (i) whether income tax could be deducted from the gratuity payable to the employee and, if so, to what extent; (ii) whether the period treated by the employer as unauthorised absence, leave without wages and suspension could be excluded while computing continuous service for gratuity.

Issue (i): whether income tax could be deducted from the gratuity payable to the employee and, if so, to what extent.

Analysis: Gratuity is not wholly immune from tax in all situations. The exemption is confined to the extent permitted by law and the prescribed ceiling. The employer was therefore entitled to ascertain the tax-exempt portion of the gratuity and deduct income tax only to that extent, but not to make a blanket deduction from the gratuity amount.

Conclusion: The deduction of income tax was held unsustainable to the extent it exceeded the statutory exemption, and the assessee was entitled to the balance gratuity after lawful deduction.

Issue (ii): whether the period treated by the employer as unauthorised absence, leave without wages and suspension could be excluded while computing continuous service for gratuity.

Analysis: Under the definition of continuous service, absence does not automatically break service unless an order treating such absence as break in service is shown to have been passed in accordance with the governing standing orders, rules or regulations. No such orders were produced, and the employer's ledger extract was insufficient to establish a lawful break in service. The authorities were therefore justified in treating the employee's service as continuous for the disputed period. The deduction made towards group insurance and identity card charges was also impermissible.

Conclusion: The exclusion of the disputed period from continuous service was rejected, and the gratuity had to be computed on the basis of the full continuous service period.

Final Conclusion: The writ petition succeeded only to the limited extent of permitting tax deduction in accordance with the statutory exemption, while the employee's continuous service and higher gratuity computation were upheld.

Ratio Decidendi: Gratuity may be subjected to income tax only within the statutory exemption limit, and a break in service cannot be inferred from absence periods unless a valid order treating such absence as break in service is proved in accordance with the governing service rules.

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