Section 4(6)(b)(ii) Payment of Gratuity Act: SC Clarifies When Employer Can Forfeit Gratuity

The Supreme Court has said under Section 4(6)(a) of the Payment of Gratuity Act, 1972, an employer's right to forfeit the gratuity of an employee whose services were terminated for misconduct causing damage or loss is limited to the extent of the damage proved. It clarified that mere allegations of loss, without independent evidence or an audit report to substantiate the computation of damages, are insufficient to justify withholding gratuity.

A Bench of Justices Prashant Kumar Mishra and Shree Chandrashekhar made the observation while allowing appeals filed by Prabhat Kumar Singh and others. The Bench found that the employer had failed to prove the extent of loss suffered by it to justify forfeiture of the employees' gratuity.

When can an employer forfeit gratuity for misconduct?

Court held that an employer can forfeit gratuity to the extent of the damage or loss caused by the employee's misconduct, but the extent of such loss has to be proved by independent evidence.

The appellants had challenged the high court order dismissing their writ petitions. The petitions had challenged the March 24, 2023 order passed by the Appellate Authority under the Payment of Gratuity Act, 1972, which had set aside the April 18, 2022 order of the Controlling Authority allowing the appellants' gratuity claims.

The appellants were employed with Accu Pack Engineering Pvt Ltd in its Production Planning and Control Department from 2007 onwards. They resigned from their posts by submitting resignation letters on different dates. Prabhat Kumar Singh's resignation alone was accepted on October 3, 2018, and was to take effect from November 3, 2018, when he was to be relieved. The resignations of the other appellants were never accepted.

The appellants were issued termination letters on November 14, 2018, without any prior inquiry. Before this, on November 5, 2018, they were issued show-cause notices asking why their gratuity should not be forfeited to the extent of the loss allegedly caused to the company on account of their misconduct. The loss was quantified at Rs 50 lakh in the notices.

The company claimed that the appellants did not submit any reply to the show-cause notices and, therefore, it was entitled to withhold their gratuity while settling their claims.

Why did the Controlling Authority initially allow the gratuity claims?

The Controlling Authority, while allowing an application filed by the appellants under Section 8 of the Payment of Gratuity Act on April 18, 2022, held that the requirements under Section 4(6)(b)(ii) for forfeiture of gratuity had not been fully complied with.

Section 8 of the Payment of Gratuity Act, 1972 handles the recovery of unpaid gratuity. If an employer fails to pay the owed gratuity on time, the aggrieved employee can apply to the controlling authority to issue a recovery certificate to the District Collector, who then recovers the money plus compound interest like land revenue arrears.

The Controlling Authority found that the FIR filed by the company against the appellants did not give the employer the authority to withhold their gratuity.

As per Section 4(6)(b)(ii), the misconduct has to be established as an offence involving moral turpitude for which the employee has to be convicted by a court of competent jurisdiction.

The Controlling Authority also observed that in the absence of specific allegations or a charge relating to pecuniary loss caused to the company, gratuity could not be forfeited.

The company challenged this order before the Appellate Authority, which allowed the appeal on March 24, 2023. The high court subsequently affirmed the Appellate Authority's order.

What did the employees argue about the alleged Rs 50 lakh loss?

The appellants argued that there was "absolutely not an iota of evidence" regarding the extent of loss suffered by the company. Therefore, the prerequisite for withholding gratuity to the extent of the loss suffered by the company had not been satisfied under Section 4(6)(b)(ii) of the Act.

They also submitted that no inquiry was conducted before their services were terminated. Therefore, the company had no occasion to prove the extent of the alleged loss, while the appellants had no opportunity to disprove the company's claim in the absence of an inquiry.

The company, on the other hand, argued that the appellants had accepted the misconduct during their cross-examination and, therefore, it was entitled to forfeit their gratuity.

It submitted that, according to the appellants' own admission, they used to procure goods from a supplier company at Rs 3,600 and sell them to the respondent company at Rs 6,900. The difference between the two prices, according to the company, represented the loss suffered by it and no further proof was required.

Why did the Supreme Court reject the company's claim of loss?

The Supreme Court found that since the appellants' termination was not preceded by any inquiry, they were not given an opportunity to contest the company's claim regarding the loss allegedly suffered by it.

Court also noted that the FIR lodged by the company against the appellants was investigated and closed by the jurisdictional Investigating Officer. The closure report stated that there was no financial loss or misappropriation to the complainant.

The Bench further noted that although the company had quantified its net loss at not less than Rs 50 lakh, there was no accompanying document in the form of a calculation or audit report to substantiate the claim.

"In any case, such computation or assessment of loss has to be presented before the Controlling Authority, which too was not done by the respondent company," Court said.

"It is for the company to have proved the financial loss suffered by it due to the misconduct of the appellants, and they cannot take benefit of statements made by the appellants in their cross-examination in the proceedings before the Controlling Authority," the Bench said.

"The financial loss suffered by the company has to be proved by producing independent evidence before the Controlling Authority. Even before this court, no such document has been submitted with the counter-affidavit of the respondent," it added.

Employer's right to forfeit gratuity is limited to proven damage

Court referred to the Madhya Pradesh High Court's decision in Permali Wallance Ltd Vs State of Madhya Pradesh (1996), where it was held that an employer's right to forfeit the earned gratuity of an employee whose services were terminated for any act, wilful omission or negligence causing damage to the employer is limited to the extent of the damage and proof of such damage.

"We are in agreement with the view taken by the High Court of Madhya Pradesh, as we have independently found that the respondent company has failed to submit any proof of extent of damage suffered by it by submitting documents in support of such claim by the company," the Bench said.

The Supreme Court also reiterated that, in the present case, the FIR filed by the company had resulted in a closure report finding that no financial loss or misappropriation had been committed against the company.

The Bench accordingly allowed the appeals and set aside the orders passed by the High Court and the Appellate Authority. It restored the April 18, 2022 order passed by the Controlling Authority allowing the appellants' gratuity claims.

Court directed that the order of the Controlling Authority be complied with within two months.

Case Title: Prabhat Kumar Singh Vs Accu Pack Engineering Pvt Ltd

Bench: Justices Prashant Kumar Mishra and Shree Chandrashekhar

Date of Judgment: July 28, 2026