[Payment Of Gratuity Act] Mere Reflection In Balance Sheet Doesn't Give Rise To Gratuity Claim In Absence Of Underlying Agreement: Bombay HC

While considering the claim for payment of gratuity by the Directors of a company, the Bombay High Court has observed that an entry in the liability column of the balance sheet of the company cannot be considered an 'agreement' between the company and directors under Section 4(5) of the Payment of Gratuity Act.Justice Sandeep V. Marne stated “…it cannot be stated that mere reflection of an entry in the liability column of balance sheet would amount to creation of a right which never existed. Such right will have to be independently established either through a transaction or a document in the form of a contract.”The petitioners are ex-promoters and directors of the respondent company, claiming payment of gratuity for their services. The Controlling Authority/Labour Court rejected the application of the petitioners. It held that the petitioners were not covered under the definition of 'employee' under the Payment of Gratuity Act, 1972, as they were in control over the affairs of the company. In an appeal, the Appellate Authority/Industrial Court also rejected the petitioner's plea. The petitioners thus appealed to the High Court. The petitioners contended that the entries made in the Balance Sheet should be considered as an agreement for payment of gratuity. Mere entry in balance sheet does not give rise to liability in absence on any agreementThe High Court referred to Section 4(5) of the Payment of Gratuity Act, which provides for right of an employee to receive better terms of gratuity under 'any award or agreement or contract' with the employer. The Court stated that for the application of Section 4(5), the existence of a specific agreement or contract must be proved. The Court referred to the judgment of the Supreme Court in Asset Reconstruction Company (India) Ltd., was about the applicability of provisions of Section 18 of the Limitation Act for extension of the period of limitation for filing an application under the IBC. In this case, the Apex Court had held that an entry in the balance sheet would amount to acknowledgement of debt under Section 18 of the Limitation Act. However, the High Court distinguished between 'acknowledgement' of liability from 'creation' of liability. It observed that 'acknowledgement' of liability would only arise in respect of some 'right'. This means that the liability must arise out of a transaction or contract. It stated that mere acknowledgement' would not be enough to prove the existence of right and liability The Court noted that mere reflection of an entry in the liability column of the balance sheet would not lead to the creation of a right that never existed. It stated that the right has to be independently established either through a transaction or a document in the form of a contract.“Therefore mere 'acknowledgment' would not be sufficient to prove existence of right and liability arising out of such right must be independently established. In absence of proof of existence of 'liability in respect of a right', mere acknowledgement through a balance sheet entry would not amount to creation of such liability.”Here, it noted that the petitioners did not produce any written agreement or contract to show that the respondent company agreed to pay any gratuity. It was of the view that “…that in absence of any underlying agreement or contract, it cannot be stated that mere entry in balance sheet would give rise to creation of liability for the First Respondent-Company to pay gratuity under the provisions of subsection (5) of Section 4 of the Payment of Gratuity Act.”The Court further took note of the admissions of petitioners in their cross-examination. It observed that there was no understanding or agreement between the petitioners and the company for payment of gratuity. The Court thus held that there was no agreement between the petitioners and respondent company as per Section 4(5). Hence, petitioners cannot claim gratuity by relying on entry in the balance sheet. Directors excluded from gratuity fund under Section 4AThe Court also noted that the names of the petitioners' were not included in the list of employees for whom gratuity is insured by purchasing an insurance policy from Life Insurance Corporation of India under Section 4A of the Act. Under Section 4A, the employer is required to obtain insurance from LIC for liability towards gratuity payment under the Act. The Court also referred to Rule 102 of Income Tax Rules, 1962, which excludes the director of a company from being admitted to the gratuity fund if the director owns a share carrying more than 5% of the total voting power. Noting that the petitioners had more than 5% voting power, the Court said that they could not be entitled to gratuity under the Act. Even though the Court held that the petitioners' were not entitled to gratuity it made certain observations on whether a director or managing director of a company could be considered as an 'employee'.The Court noted that every case of a director of a...

[Payment Of Gratuity Act] Mere Reflection In Balance Sheet Doesn't Give Rise To Gratuity Claim In Absence Of Underlying Agreement: Bombay HC

Sanjana Dadmi

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