The Bombay High Court has clarified that forfeiture of gratuity under Section 4(6)(a) of the Payment of Gratuity Act, 1972 cannot be automatic. The employer must quantify the financial loss caused by the employee and issue a separate show-cause notice before invoking forfeiture. This judgment reinforces the principles of natural justice in disciplinary proceedings involving gratuity forfeiture.
Background & Facts
The Dispute
The respondent, Shri Avinash Yashwant Patil, was employed with the petitioner, The Jalgaon District Central Co-operative Bank Limited, for nearly 34 years. His services were terminated on 20.06.2017 following a departmental inquiry, which also resulted in the forfeiture of his gratuity. The respondent challenged both the termination and the forfeiture of gratuity through separate legal proceedings.
Key Facts
The respondent was employed with the petitioner-Bank from 30.04.1983 to 20.06.2017
He was terminated for unauthorized disbursement of loans, allegedly causing a loss of Rs. 29,13,683 to the Bank
The termination order also stipulated forfeiture of gratuity
The respondent filed:
A complaint before the Labour Court under the MRTU and PULP Act, 1971 challenging the termination
An independent application (PGA No. 12 of 2017) before the Controlling Authority under the Payment of Gratuity Act, 1972 challenging the forfeiture of gratuity
The Controlling Authority directed the petitioner to release the gratuity with interest
The Appellate Authority (Industrial Court, Jalgaon) upheld the Controlling Authority’s order
Procedural History
20.06.2017: Termination order issued with forfeiture of gratuity
PGA No. 12 of 2017: Application filed before Controlling Authority under the Payment of Gratuity Act, 1972
06.03.2024: Controlling Authority directed payment of gratuity with interest
13.09.2024: Appellate Authority dismissed the appeal, upholding the Controlling Authority’s order
WP No. 2139 of 2025: Present writ petition filed before the Bombay High Court
Relief Sought
The petitioner sought to quash the orders of the Controlling Authority and Appellate Authority, contending that the forfeiture of gratuity was lawful. The respondent sought payment of gratuity with interest from the date of termination.
The Legal Issue
The central question was whether forfeiture of gratuity under Section 4(6)(a) of the Payment of Gratuity Act, 1972 can be invoked without:
Quantifying the actual loss caused to the employer, and
Issuing a separate show-cause notice to the employee regarding the intention to forfeit gratuity.
Arguments Presented
For the Petitioner
The respondent was found guilty of unauthorized disbursement of loans, causing financial loss to the Bank
The termination order itself stipulated forfeiture of gratuity, and no separate notice was required
The loss of Rs. 29,13,683 was recoverable from borrowers, and the respondent’s misconduct justified forfeiture
The respondent’s application under the Payment of Gratuity Act was not maintainable as he had already challenged the termination before the Labour Court
For the Respondent
No criminal proceedings were initiated against the respondent for the alleged misconduct
The loss claimed by the Bank was not quantified, and a substantial amount had already been recovered from borrowers
Forfeiture of gratuity under Section 4(6)(a) requires proof of actual loss and a separate show-cause notice
The Payment of Gratuity Act and MRTU and PULP Act operate in different spheres, and the respondent was entitled to seek redressal under both
The Court's Analysis
The Court examined Section 4(6)(a) of the Payment of Gratuity Act, 1972, which permits forfeiture of gratuity only to the extent of the damage or loss caused by the employee’s wilful omission or negligence. The Court observed:
"Forfeiture of gratuity was permissible if loss caused to employer due to wilful omission or negligence of respondent. In present case, no specification of actual loss caused to petitioner-Bank is available. The dismissal order stipulates that respondent was responsible for unauthorized disbursement of loans amounting to Rs. 29,13,683/- is still due and recoverable. The Controlling Authority has referred to the evidence recorded on behalf of Bank, it suggests that aforesaid amount is recoverable from twenty eight farmer-borrowers and loan amount of around nine farmer-borrowers has been recovered. It is therefore evident that, till this date, so-called loss caused to Bank is not determined. Therefore, even by invoking clause (a) of sub-section (6) of Section 4, no exact amount liable to be forfeited from the gratuity of respondent can be determined."
The Court relied on the precedent set in The Chairman and Managing Director, Bank of Maharashtra v. Shri Kishore S/o. Shankarrao Khandatkar, where it was held that forfeiture of gratuity under Section 4(6)(a) requires:
Quantification of the loss caused to the employer, and
A separate show-cause notice to the employee.
The Court also referred to Nanubhai Nichhabhai Desai v. Deputy General Manager, UCO Bank, where it was observed that forfeiture of gratuity cannot be invoked without specific findings on the quantum of loss and adherence to principles of natural justice.
On the maintainability of the respondent’s application, the Court held that the Payment of Gratuity Act, 1972 and the MRTU and PULP Act, 1971 operate in different spheres. While the Labour Court adjudicates disputes under the MRTU and PULP Act, the Controlling Authority under the Payment of Gratuity Act has independent jurisdiction to address grievances related to gratuity forfeiture.
The Verdict
The Bombay High Court dismissed the writ petition, upholding the orders of the Controlling Authority and Appellate Authority. The Court directed the petitioner to pay the respondent’s gratuity with interest from the date of termination, as the forfeiture was invalid due to the lack of quantified loss and separate show-cause notice.
What This Means For Similar Cases
Forfeiture Requires Quantified Loss and Separate Notice
Employers cannot automatically forfeit gratuity under Section 4(6)(a) without:
Quantifying the actual loss caused by the employee’s misconduct
Issuing a separate show-cause notice to the employee regarding the intention to forfeit gratuity
The burden of proof lies on the employer to establish the extent of loss before invoking forfeiture
Independent Jurisdiction Under the Payment of Gratuity Act
Employees can challenge forfeiture of gratuity under the Payment of Gratuity Act, 1972 even if they have already initiated proceedings under other labour laws (e.g., MRTU and PULP Act)
The Controlling Authority under the Payment of Gratuity Act has exclusive jurisdiction to adjudicate disputes related to gratuity forfeiture
Principles of Natural Justice Must Be Followed
Employers must adhere to principles of natural justice before forfeiting gratuity
A departmental inquiry for termination does not substitute for a separate show-cause notice for gratuity forfeiture
The termination order must clearly specify the quantum of loss to justify forfeiture under Section 4(6)(a)
