Gratuity Forfeiture Requires Quantified Financial Loss, Mere Termination as Punishment Insufficient: Punjab & Haryana HC on State Bank of Patiala Gratuity Regulations, 1979 (Reg. 19) - 2025-05-13

Gratuity Cannot Be Forfeited Solely on Grounds of Disciplinary Punishment Without Quantified Financial Loss, Rules Punjab & Haryana High Court

Chandigarh: The High Court of Punjab and Haryana, in the case of STATE BANK OF PATIALA vs SK SHARMA (RSA 2861 / 1997) , has affirmed that an employer cannot withhold gratuity from an employee terminated on disciplinary grounds unless a specific financial loss caused by the employee is quantified and an order for its recovery from the gratuity is made. The bench, presided over by Justice K.S.Garewal , dismissed the appeal filed by the State Bank of Patiala, upholding the concurrent findings of the lower courts.

Case Background

The respondent, SK Sharma , was an employee of the State Bank of Patiala. His services were terminated by way of punishment following a disciplinary inquiry, via an order dated February 21, 1990. The bank subsequently decided to forfeit his gratuity. Aggrieved, Mr. Sharma filed a suit seeking a declaration that he was entitled to his terminal benefits, including gratuity, along with interest.

The Trial Court, by its judgment dated February 20, 1997, decreed the suit in favour of Mr. Sharma , holding him entitled to proportionate gratuity under the State Bank of Patiala (Payment of Gratuity to Employees) Regulations, 1979 (hereinafter "1979 Regulations"). The State Bank of Patiala's appeal against this decision was dismissed by the 1st Appellate Court on August 29, 1997. The present Regular Second Appeal (RSA) was filed by the Bank challenging these judgments.

Arguments Presented

The appellant (State Bank of Patiala) contended that the lower courts had erred in construing Regulation 19 of the 1979 Regulations. Their primary argument was that since Mr. Sharma was removed from service "by way of punishment," as per Regulation 19(1)(e), he was not entitled to gratuity. Regulation 19(1)(e) states that gratuity shall be payable to an employee on "termination of his service in any other way except by way of punishment after completion of ten years of continuous service."

The respondent (SK Sharma ) , countered that Regulation 19(2)(b) of the 1979 Regulations specifically provides for forfeiture of gratuity. This clause permits forfeiture only to the extent of any financial damage or loss caused to the bank by the employee's act, wilful omission, or negligence. Mr. Sharma argued that no financial loss was ever assessed, quantified, or mentioned in his removal order (Ex.P3) or the subsequent communication (Ex.D1). Therefore, he remained entitled to his gratuity.

Court's Analysis and Interpretation of Regulations

The High Court framed the primary question of law as: "whether under Regulation 19 of the 1979 Regulations, the gratuity payable to an employee could be withheld in the case of termination of the services of the employee by way of punishment in spite of the fact that there is nothing on record to show any financial loss to the Bank nor is there any specific order specifying the financial loss caused?"

The Court meticulously examined Regulation 19 of the 1979 Regulations.

* Regulation 19(1) outlines the circumstances under which gratuity is payable, including sub-clause (e) regarding termination after 10 years of service "in any other way except by way of punishment."

* Regulation 19(2) deals with the forfeiture of gratuity. Specifically,

Regulation 19(2)(b) states: "the gratuity of an employee whose services have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the bank, shall be forfeited to the extent of the damage or loss so caused."

Justice Garewal observed that the bank's interpretation of Regulation 19(1)(e) in isolation was flawed. The Court emphasized a harmonious construction of the entire Regulation 19:

> "Reading the entire Regulation 19 alongwith Clause (e) of the proviso of the 1979 Regulations harmoniously, would lead to an irresistible conclusion that Clause (e) would apply in a situation where a person has completed 10 years of service and his services are sought to be terminated in any way except by way of punishment. Thus, the said proviso clarifies that in case after 10 years of service, the Bank chooses to terminate the services of an employee but the same is not by way of punishment, then in that situation also, the gratuity would be payable."

The Court clarified that Regulation 19(1)(e) confirms gratuity eligibility in non-punitive terminations after 10 years. However, the specific conditions for forfeiture of gratuity are laid down in Regulation 19(2).

Crucially, the judgment highlighted:

> "The Regulation which deals with the scope and the extent to which the gratuity can be forfeited is Regulation 19(2)(b) of the 1979 Regulations which specifically provides that forfeiture is permissible only to the extent of financial loss. The reliance of the learned counsel for the appellant, to the effect that under clause (e) of the proviso, in case of any punishment, the gratuity is not to be granted, is accepted, then in that situation, the Regulation 19(2)(b) of the 1979 Regulations would be rendered redundant."

The Court found it undisputed that there was "no crystallization of any alleged financial loss caused to the appellant on account of the act of the respondent-plaintiff either in the order of removal dated 21.02.1990 or in the letter dated 29.02.1990 (Ex.D1)." Therefore, the question of forfeiture "to the extent of said loss, would not arise."

Final Decision

Finding no merit in the bank's appeal, the High Court dismissed it. The judgments of the Trial Court (dated February 20, 1997) and the 1st Appellate Court (dated August 29, 1997), which held SK Sharma entitled to his gratuity, were upheld.

This judgment reiterates the principle that gratuity is a hard-earned benefit and its forfeiture is permissible only under specific conditions, primarily linked to quantified financial loss caused to the employer, even if the employee's services are terminated as a form of punishment.