Gratuity Can't Be Automatically Forfeited On Employee's Dismissal Unless Conditions Under Payment Of Gratuity Act Are Met: MP High Court

The Madhya Pradesh High Court has observed that mere dismissal from service itself cannot result in automatic forfeiture of gratuity until statutory conditions under the Act are satisfied. 

The court further dismissed an appeal filed by Central MP Gramin Bank challenging the Single Judge's order directing payment of gratuity to the widow of a deceased employee who was terminated on allegations of misappropriation.

The division bench of Justice Vivek Rusia and Justice Pradeep Mittal observed; 

"Mere dismissal from service pursuant to a departmental enquiry cannot, by itself, result in automatic forfeiture of gratuity unless the statutory conditions prescribed under the Act are strictly satisfied". 

The appeal was against the order of the Single Bench of Justice Vivek Jain, which had directed the release of gratuity to the widow, despite her husband being terminated for misappropriating ₹1 lakh from the branch cash chest, noting that since there was no criminal prosecution, the bank cannot forfeit gratuity.

Per the facts of the case, the employee had challenged his termination through a departmental appeal, which was dismissed. Soon thereafter, he passed away, following which his widow filed for release of gratuity. The same was dismissed by the Bank, claiming it was not payable in cases of dismissal under Section 4(6)(b) of the Payment of Gratuity Act, 1972 (Act of 1972), read with Clause 72(e) of the Service Regulations (Regulations) of the Bank.

Section 4(6) of the Act allows for forfeiture under limited circumstances, including where the employee causes financial loss or is terminated for riotous conduct, violence, or offence involving moral turpitude committed during employment. 

The privilege to Clause 72 of the Service Regulations states that gratuity may be forfeited in cases involving financial loss to the employer, but only to the extent of the actual loss suffered. 

Before the Division bench, the counsel for the Bank argued that the employee's service conditions were governed by Service Regulations, which permitted forfeiture of gratuity upon dismissal for misconduct. The counsel argued that the Single Judge erred in applying the Act instead of Regulation 72. 

The counsel for the Bank further asserted that the deceased was an 'officer'a nd not an 'employee' under the Regulations and therefore, the proviso to clause 72(2)(e) would apply and extinguish his right to claim gratuity upon dismissal from service. 

Opposing the appeal, the counsel for the widow conteded that since no pecuniary loss was caused to the Bank as the employee had defalcated the amount already, the bank could not forfeit the gratuity. 

The division bench observed that the entitlement of forfeitute of gratuity is governed by the Payment of Gratuity Act, which is a beneficial welfare legislation having an overriding effect by virtue of Section 14 of the Act. 

Further, the bench noted that Section 4(6) clearly enumerates the limited circumstances in which gratuity may be wholly or partially forfeited. 

The bench held that the Bank had failed to establish that the statutory conditions under Section 4(6) of the Act were satisfied. The bench noted that even though the allegations of defalcation were levelled against the deceased employee in departmental proceedings, the amount had already been deposited and no pecuniary loss ultimately remained. 

Accordingly, the court further held that the requirements of Section 4(6)(b)(iii) were not fulfilled since no criminal prosecution had been initiated and no conviction of an offence involving moral turpitude was recorded by any competent criminal court. 

Rejecting the bank's reliance on clause 72, the court held that from a conjoined reading of Clause 72(1),(2)(e) and Section 14 of the Act clarifies that officers, like employees, are entitled to gratuity upon completion of qualifying service and that such a statutory right cannot be defeated except in accordance with the Act. 

Thus, the bench affirmed the impugned order and dismissed the appeal. 

Case Title: Central MP Gramin Bank v Babita Mor, Writ Appeal 3160-2025

For bank: Advocates Rajesh Maindiretta and Udit Maindiretta

For Wideo: Advocate PK Bajpai

Click here to read/download the Order