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Gratuity: Employee cannot seek synthesis of Gratuity Act & Employer's Scheme in Claim - Ceiling limit U/s 4(3) of ten lakh rupees was applicable; SC

The SC on April 29, 2020 {BCH ELECTRIC LIMITED v. PRADEEP MEHRA} held that the appellant was right in going by the provisions of the Act in the present matter and by the ceiling prescribed under Section 4(3) of the Payment of Gratuity Act, 1972 (hereinafter referred to as ‘the Act’). It was held that any mistakes on its part in making some extra payments to some of the other employees would not create a right in favour of others, including respondent, in the face of the stipulations in the Trust Deed and the Scheme.

The SC Bench, comprising of Justice U U Lalit & Justice Sanjiv Khanna, observed that the Court laid down in earlier dicta that an employee must take complete package as offered by the employer, or that which is available under the Act and he could not have synthesis or combination of some of the terms under the scheme provided by the employer while retaining the other terms offered by the Act.

It was further observed by the SC that the explanation to Section 2(e) was also omitted by amendment in 1994. Consequently, the definition of “employee” now ceased to have any limit on wages and all employees, who otherwise answer the description in the definition, regardless of wages that they would receive, now stand covered by the Act.

It was held, thus, as on the day, when the respondent resigned from his service, that is, on 01.06.2012, the relevant ceiling in Sub-Section (3) of Section 4 was at the level of “ten lakh rupees” and for an employee to be covered by the definition obtaining in Section 2(e) of the Act, there was no wage-bracket or ceiling.

It was further observed by the SC that in terms of Section 4(1) of the Act gratuity shall be payable to an employee in the eventualities referred to therein if he had rendered continuous service for not less than five years. It was held that explanation to Section 4(2) inter alia states that the gratuity shall be payable at the rate of 15 days’ wages for every completed year of service or part thereof in excess of six months. It was further held that explanation to Section 4(2) lays down how the gratuity is to be calculated, while Section 4(3) stipulates that the amount of gratuity payable to an employee shall not exceed certain limit and thus puts a cap on the amount payable towards gratuity. It was held that Section 4(5) then states that nothing in said Section shall affect the right of an employee to receive better terms of gratuity under “any award or agreement or contract with the employer”.

It was held that, when two choices are available, one under provisions of the Act and one under such arrangement with the employer and if the latter offers better terms, the employee cannot be denied right to receive those higher benefits. But with a caveat, that the employee has to choose either the scheme under the Act, or the arrangement, if any, with the employer. There cannot be synthesis of both, while deciding the Gratuity payable to the employee.



By Trust Deed executed on 19.03.1979 between the appellant, a company registered under the Indian Companies Act, 1956 on one hand and three trustees on the other, an “Approved Gratuity Fund” was constituted “for the purpose of providing Gratuities to the employees of the Company under the Act and the Gratuity Scheme of the Company ('in short' Scheme)”.

After having put in about 12 years’ of service, the respondent resigned with effect from 01.06.2012 with the appellant, when his last drawn wages were Rs. 24,50,000/-per month. A sum of Rs. 36,70,015/- was thereafter paid to the respondent towards retiral dues by the appellant. The respondent raised a claim that he was entitled to gratuity amount of Rs. 1,83,75000/-. By communication dated 09.08.2012, a bank draft in the sum of Rs. 10,19,452/- was forwarded by the appellant to the respondent being the sum of Rs. 10 Lakhs towards gratuity along with interest accrued thereon from the date of cessation of service of the respondent.

The Claim petition was filed by the respondent, wherein, it was prayed that the respondent was entitled to the balance sum of Rs. 1,73,75,000/- (Rs.1,83,75,000/- less Rs. 10,00,000/- which was received) towards gratuity along with interest at the rate of 18% per annum. The petition was allowed by the Controlling Authority. The order was upheld by the Appellate Authority, Single Judge of HC and thereafter by Division Bench of HC. Resulting, in present appeal before the SC by the  appellant Company challenging concurrent findings of four Foras below.



It was held by the SC that the intent of the Trust Deed and the Scheme is clear that the governing principles as regards the amount to be calculated and the rates to be applied have to be in accordance with the provisions of the Act, if an employee is covered by the provisions of the Act. The Court held that if the amount is to be so calculated according to the provisions of the Act, in case of employees covered by the provisions of the Act, there is no other alternative which is offered by the Company or which is part of any award or agreement or contract entered into between the employer and employees. It was held, thus, no reliance could be placed on Section 4(5) of the Act to submit that the employees are entitled to some greater advantage than what is available under the Act. The Court held that for Section 4(5) to apply there must be two alternatives, one in terms of the Act and one as per the award or agreement or contract with the employer. It was held that the Scheme on which heavy reliance was placed to submit that it afforded and made available better terms of gratuity itself emphasizes that in case of the employees who are covered under the Act, the amount payable as gratuity shall be in terms of the provisions of the Act. The Court held that the Scheme does not therefore offer to the employees covered by the Act any other alternative apart from what is payable under the Act. 

It was held by the Court that if an employee is covered by the provisions of the Act, according to Rule 6(b) of the Scheme, the amount of gratuity has to be calculated in accordance with the provisions of the Act. The Appendix to the Scheme reiterates the same principle. It was held, thus, in case of such an employee the gratuity has to be calculated in accordance with the provisions of the Act and while so calculating, not only the basic principle available in Section 4(2) as to how the gratuity is to be calculated must be applied but also the ceiling which is part of Section 4(3) must also apply. It was held that the rates and the modalities of calculations of gratuity as available under the Scheme of the Rules are to apply only to those employees who are not covered by the provisions of the Act.

As in present case the ceiling limit of Rs. 10,00,000/- was applicable under Section 4(3), to Gratuity payable by the Act, at the relevant time. The SC, therefore, held that Rs. 10,00,000/- is to what the respondent was entitled for as per ceiling, and was rightly being given the said amount by the appellant company as Gratuity.

The Court, therefore, concluded that it has no hesitation in holding that the Authorities under the Act and the High Court erred in accepting the claim preferred by the respondent. The SC allowed the appeal and set aside the impugned judgment and order and dismissed the Claim Petition preferred by the respondent. 

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