Introduction
In the recent case of Western Coal Fields Ltd. v. Manohar Govinda Fulzele[1], the Hon’ble Supreme Court (“SC”) ruled that a criminal conviction is not a prerequisite for the forfeiture of gratuity under the Payment of Gratuity Act, 1972 (“Act”). The SC clarified that gratuity can be forfeited if the employee's misconduct, by its very nature, constitutes an offense involving moral turpitude. This ruling establishes that an employer may withhold gratuity without awaiting a formal criminal conviction.
Brief facts of the Case
The case involved appeals filed by Western Coal Fields Ltd., a PSU, and the Maharashtra State Road Transport Corporation (“MSRTC”) against judgments that held the forfeiture of gratuity to be impermissible under the Act. The dispute arose over whether an employer could forfeit gratuity in cases where an employee was terminated for misconduct involving moral turpitude, even in the absence of a criminal conviction or formal criminal proceedings.
The employees in question were dismissed on grounds of misconduct. In the case of Western Coal Fields Ltd., the employee was found to have fraudulently misrepresented his birth date at the time of appointment. In the MSRTC case, the employees, who were bus conductors, were terminated for misappropriating passenger fares. The respondent employees challenged the forfeiture of their gratuity, arguing that in the absence of a criminal conviction, such action was unlawful. The lower courts ruled in their favor, relying on Union Bank of India & Ors. v. C.G. Ajay Babu[2] (“Ajay Babu”), which had held that gratuity could not be forfeited without a criminal conviction.
Issue Raised
Whether gratuity can be forfeited under Section 4(6) of the Payment of Gratuity Act, 1972 when an employee is terminated for misconduct that constitutes moral turpitude, even in the absence of a criminal conviction?
Legal Analysis by the Hon’ble SC
The SC’s analysis in the case revolved around the interpretation of Section 4(6) of the Act. This section provides that gratuity may be wholly or partially forfeited if an employee is dismissed on certain grounds. Specifically, the provision states that forfeiture can occur under two main conditions:
Under Section 4(6)(a) – If an employee is terminated for wilful omission, negligence, or damage to the employer’s property, gratuity may be forfeited to the extent of the loss caused.
Under Section 4(6)(b) – If an employee is terminated for the following acts committed during employment, gratuity can be wholly or partially forfeited:
(i) Riotous or disorderly conduct or any act of violence.
(ii) Any act constituting an offence involving moral turpitude,
The key legal question before the SC was whether an employer could unilaterally determine if an act constituted an offence involving moral turpitude through a departmental inquiry, or whether a criminal conviction was a prerequisite. The SC examined a series of previous rulings on the subject to determine whether gratuity forfeiture required a criminal conviction or if an employer could rely on internal disciplinary findings to establish misconduct.
Since the appeal was against the judgment of which relied on the case of Ajay Babu to refuse the forfeiture of gratuity by the employer. The SC discussed this case in detail, in which the SC held that gratuity forfeiture under Section 4(6)(b)(ii) requires a criminal conviction. The case involved a bank employee who was dismissed for misconduct established in a departmental inquiry, but there was no criminal prosecution or conviction. In the case the gratuity was governed by a bipartite settlement providing for better terms for gratuity and according to that, gratuity could only be forfeited if the misconduct resulted in a financial loss to the employer. However, since no financial loss was caused to the bank the forfeiture of gratuity was impermissible. The SC in that case also interpreted the statutory grounds for forfeiture of gratuity under Section 4(6)(b)(ii), stating that “the requirement of the statute is not the proof of misconduct of acts involving moral turpitude but the act should constitute an offence involving moral turpitude and such offence should be duly established in a Court of Law.”
The SC in the present case did not agree with the interpretation in Ajay Babu and clarified that Section 4(6)(b)(ii) does not require a criminal conviction for gratuity forfeiture. The SC observed that the language of the statute does not mandate a conviction, and the employer’s disciplinary authority has the power to determine whether misconduct constitutes moral turpitude. The SC noted that the interpretation in Ajay Babu did not come out of the Section 4(6)(b)(ii) of the Act. The statutory provision does not make it a requirement that the misconduct alleged and proved in a departmental enquiry should not only constitute an offence involving moral turpitude, but also should be duly established in a Court of Law. It further noted that the words “duly established in a Court of Law” cannot be supplied to the provision. Thereafter, the SC distinguished between criminal trials and disciplinary proceedings, stating that the standard of proof in a criminal trial which is that of ‘beyond reasonable doubt’ is significantly higher than in a disciplinary proceeding for which the standard of proof is ‘preponderance of probabilities’. Since Section 4(6)(b)(ii) does not explicitly require a conviction, the SC held that an employer can determine moral turpitude through internal disciplinary mechanisms.
The SC then analyzed the case of Devendra Kumar v. State of Uttaranchal[3] (“Devendra Kumar”) which was particularly relevant in answering whether suppression of material facts can be construed as an act of moral turpitude. This was particularly relevant for the Western Coal Fields case, as it involved an employee who had misrepresented material facts at the time of appointment. In Devendra Kumar, the SC held that suppressing material information amounts to fraud and constitutes an offence involving moral turpitude. In that case the SC observed that when an appointment is obtained through fraudulent misrepresentation, the question is not whether the employee is suitable for the post, but whether the appointment itself was lawfully obtained. Such an act is inherently dishonest and constitutes moral turpitude.
This ruling played a crucial role in the Western Coal Fields case, where the employee had fraudulently misrepresented his birth date to secure employment. The employer argued that this constituted an offence involving moral turpitude, justifying complete forfeiture of gratuity without requiring a criminal conviction. The SC observed that this very same reasoning must also apply in the appeals by the MSRTC were the delinquent employees, conductors in the stage carriages operated by the MSRTC were found to have indulged in misappropriation of fares collected from passengers. Misappropriation according to the SC is definitely an act constituting an offence involving moral turpitude.
Ruling of the Hon’ble SC
This ruling significantly broadened employer discretion in gratuity forfeiture cases, allowing forfeiture to be based on departmental findings rather than waiting for criminal convictions. The SC further upheld Western Coal Fields Ltd.’s decision to forfeit gratuity, as the employee had engaged in fraudulent misrepresentation, which the Court deemed an offence involving moral turpitude. However, in the MSRTC case, the SC directed the Appointing Authority to limit the forfeiture to 25% of the gratuity payable and release the balance amounts to the respondent employees. Thereby taking a sympathetic approach and recognizing that minor misappropriation should not result in complete forfeiture.
Key Insights for Employers
This Supreme Court’s ruling in this case in provides significant clarity on the forfeiture of gratuity under the Payment of Gratuity Act, 1972. Employers should carefully assess whether an employee's misconduct qualifies as an offense involving moral turpitude. While the term is not explicitly defined under the Act, it generally refers to acts that are dishonest, unethical, or against public morality, such as fraud, bribery, embezzlement, or serious workplace misconduct. Employers should document and establish clear grounds for such allegations before proceeding with forfeiture.
Each case should be evaluated on its individual merits. Employers should seek legal counsel before making forfeiture decisions to ensure compliance with judicial precedents and labor laws. This Supreme Court ruling reinforces the employer’s right to forfeit gratuity in cases of serious misconduct but also emphasizes the need for a structured and fair approach in exercising this right. Employers must act prudently, ensuring that the forfeiture is legally sound and ethically justified.
Authors:
- Gyanendra Mudrohit, Partner
- Mudrika Purohit, Associate
[1] Western Coal Fields Ltd. v. Manohar Govinda Fulzele (2025 INSC 233)
[2] Union Bank of India & Ors. v. C.G. Ajay Babu (2018) 9 SCC 529
[3] Devendra Kumar v. State of Uttaranchal (2013) 9 SCC 363