Payment Of Gratuity Act Overrides Bank Rules On Forfeiture: Madhya Pradesh HC Rules Against Bank

In a significant ruling protecting the terminal dues of employees, the High Court of Madhya Pradesh at Jabalpur has curtailed the power of banks to unilaterally forfeit gratuity based on internal service regulations. Justice Vivek Jain, presiding over the case of Smt. Babita Mor vs. Central Madhya Pradesh Gramin Bank , held that the Payment of Gratuity Act, 1972, serves as a complete code that overrides inconsistent internal bank policies.

The Background: A Widow’s Struggle

The dispute involved the late Rajesh Mor, who was dismissed from service by the Central Madhya Pradesh Gramin Bank following allegations of failing to open his branch on time and a brief incident of defalcation of Rs. 1 Lakh. While the disciplinary proceedings led to his dismissal in 2017, the employee passed away shortly after his appeal was rejected.

When the petitioner, his widow, sought the release of her husband's gratuity, the bank rejected the claim, citing Clause 72(e) of the Bank’s Service Regulations, which maintains that gratuity is not payable in cases of dismissal for misconduct.

The Core Arguments

Counsel for the petitioner argued that since the alleged defalcation amount had already been recovered by the bank, there was no financial loss incurred. Under the Payment of Gratuity Act, 1972, forfeiture is only permissible to the extent of actual loss caused.

Conversely, the bank maintained that its 2010 Service Regulations distinguished between "officers" and "employees," and that the provisos within its regulations allowed for the total forfeiture of gratuity for officers dismissed on grounds of misconduct, regardless of the Payment of Gratuity Act.

Legal Analysis: The Supremacy of the Act

Justice Vivek Jain dismantled the bank’s reliance on its internal regulations, highlighting the non-obstante clause in Section 14 of the Payment of Gratuity Act. The Court emphasized that an employer’s internal rules cannot supersede a central statute.

Addressing the issue of "moral turpitude," the court clarified that the bank could not arbitrarily label misconduct as an offence involving moral turpitude to justify forfeiture. Citing the Supreme Court’s judgment in Union Bank of India v. C.G. Ajay Babu , the court noted:

> "It is not the conduct of a person involving moral turpitude that is required for forfeiture of gratuity but the conduct or the act should constitute an offence involving moral turpitude. To be an offence, the act should be made punishable under law. That is absolutely in the realm of criminal law."

Key Observations

The judgment clarifies that forfeiture of gratuity is not an automatic consequence of dismissal. The Court made several critical observations throughout its order:

• On Statutory Precedence: "The provisions of the Act, therefore, must prevail over the Rules... A statutory right accrued, thus, cannot be impaired by reason of a rule which does not have the force of a statute."
• On Criminal Liability: "Apart from the disciplinary proceedings initiated by the appellant Bank, the Bank has not set the criminal law in motion either by registering an FIR or by filing a criminal complaint so as to establish that the misconduct leading to dismissal is an offence involving moral turpitude."
• On Procedural Requirements: "To sum up, forfeiture of gratuity is not automatic on dismissal from service; it is subject to sub-sections (5) and (6) of Section 4 of the Payment of Gratuity Act, 1972."

The Verdict and Its Impact

Allowing the petition, the High Court directed the bank to release the gratuity to the petitioner within 60 days, along with 6% annual interest from the date of her husband's death. This decision reinforces the principle that terminal benefits are essential statutory entitlements that cannot be weaponized by employers via internal circulars or service rules. The ruling serves as a vital safeguard for employees and their families, ensuring that punitive internal actions do not extend to the deprivation of earned retirement benefits without clear statutory authority.