Interest on delayed gratuity repayment cannot be deducted from gratuity payable to the employee.

The respondent-employee was dismissed from service in 1997, following which the Corporation paid him gratuity of ₹46,910.

The dismissal was subsequently set aside by the appellate authority, and the employee was reinstated on 16 November 2000.

Relying on its circular dated 1 August 2007, the Corporation demanded repayment of the gratuity along with interest at 11% per annum, but the employee did not repay the amount.

Upon the employee’s superannuation in 2008, the Corporation adjusted the gratuity amount and claimed ₹43,048 towards interest from the gratuity payable to him.

The Controlling Authority directed the Corporation to pay ₹1,00,248 towards gratuity arrears and ₹12,881 as interest, rejecting the proposed deduction.

The Appellate Authority affirmed that order on 22 October 2016.

The Corporation challenged both orders under Articles 226 and 227 of the Constitution.

1. Whether the Corporation’s circular dated 1 August 2007 validly authorised recovery of interest on gratuity paid to an employee whose dismissal was subsequently set aside and who was reinstated.

2. Whether unpaid interest payable by the employee on delayed repayment of gratuity could be deducted, adjusted, or forfeited from the gratuity subsequently payable to him.

The Court applied Sections 4(6) and 14 of the Payment of Gratuity Act, 1972.

Section 4(6) permits forfeiture of gratuity only in the statutorily specified circumstances, including damage or loss caused to the employer, riotous or disorderly conduct, violence, or an offence involving moral turpitude committed in the course of employment.

Section 14 gives the Act overriding effect over inconsistent enactments, instruments, or contracts.

Relying on Jaswant Singh Gill v. Bharat Coking Coal Ltd., (2007) 1 SCC 663, and Union Bank of India v. C.G. Ajay Babu, (2018) 9 SCC 529, the Court held that forfeiture of gratuity is not automatic and must strictly satisfy Section 4(6).

Mahanadi Coalfields Ltd. v. Rabindranath Choubey, (2020) 18 SCC 71, was distinguished as concerning service rules permitting withholding of gratuity during disciplinary proceedings.

State of Punjab v. Rafiq Masih, AIR 2015 SC 696, was held inapplicable because the case did not concern excess payment but gratuity lawfully paid upon dismissal and subsequently sought to be recovered after reinstatement.

The Court also held that the Corporation’s circular was not inconsistent with the Gratuity Act insofar as it imposed interest on delayed repayment, but it could not authorise deduction from statutorily protected gratuity.

The Court distinguished between the Corporation’s substantive right to demand repayment with interest and its proposed mode of recovery.

The gratuity had been lawfully paid when the employee was dismissed, and the subsequent reinstatement created an obligation to repay that amount; accordingly, the circular imposing 11% interest was not invalid or inconsistent with the Act.

However, the employee’s services had not ultimately been terminated for any of the misconduct-based grounds specified in Section 4(6), since the dismissal had been set aside and he had been reinstated.

Therefore, the statutory conditions for forfeiture or withholding of gratuity were absent.

The Corporation could not bypass Section 4(6) by describing the deduction as an adjustment or recovery of dues.

The earlier coordinate Bench decision relied upon by the Corporation was not treated as controlling because it had not considered the effect of Sections 4(6) and 14.

The Corporation remained free to recover the amount from other non-protected monetary benefits or assets, subject to adjudication of the correct quantum of interest.

The Court held that the Corporation could validly charge interest on the gratuity not repaid after reinstatement, but could not deduct or forfeit that interest—or the underlying amount—from the gratuity payable to the employee, because such recovery was impermissible under Sections 4(6) and 14 of the Payment of Gratuity Act.

The Corporation was permitted to adjust the dues against other amounts payable to the employee that were not statutorily protected, or otherwise initiate lawful recovery proceedings.