PNB Regulations | Bank Can't Withhold PF & Gratuity Without Proving Actual Loss Caused By Employee : Supreme Court

The Supreme Court recently ruled in favor of an employee(appellant), directing the Punjab National Bank (PNB) to release the provident fund (PF) and gratuity due to him who was compulsorily retired. The court held that as per the Punjab National Bank (Officers’) Service Regulations, 1979(1979 Regulations), the bank could withhold the PF amount only when any loss is proved to be caused to it by an employee’s act. In this case, the bank not only failed to prove the alleged loss but also denied a fair hearing to him.

It observed, “The Single Judge was right in observing that the Board of Directors has not afforded an opportunity to the appellant on the issue of causing loss or damage to the Bank, prior to the passing of the resolution of appropriation of the contribution of the Bank from the provident fund account of the appellant.”

On the issue of payment of gratuity, the court considered the provisions of the 1979 Regulations and provisions of the Gratuity Act and further relied on the judgment of YK Singhla Punjab National Bank (2013) 3 SCC 472 which held that the Gratuity Act prevails over all regulations. Furthermore, the court pointed out that the bank's circular only classified dismissal/removal for denial of gratuity and not the penalty for compulsory retirement.

The bench opined “The explanation as given in clause 14(1)(a) of the said Circular clarifies that in case of termination after at least 10 years of service in the Bank, if such termination is not by way of punishment as dismissal or removal, the gratuity may be paid. In the said explanation, the denial of gratuity to an employee, who is inflicted with the major penalty of compulsory retirement, has not been included. Therefore, the gratuity is payable to the appellant under the 1979 Regulations in terms of the explanation under the said Circular.”

The Supreme Court bench comprising Justices JK Maheshwari and Justice K.V. Vishwanathan was hearing an appeal against the division bench judgment of the Calcutta High Court which denied PF and gratuity to the appellant who was compulsorily retired from the PNB.

In the present case, the appellant was compulsorily retired as Senior Manager of the Punjab National Bank after he was found guilty by the disciplinary authority in 2010. As a result, he was denied leave encashment, employer’s contribution of provident fund, gratuity, and pension. He filed a writ petition before the HC claiming only the terminal benefits accruing to him but did not challenge his compulsory retirement. Meanwhile, the Board of Directors passed a resolution in 2010 denying his employer’s contribution to the provident fund. The Single Judge HC in 2012 directed the bank to pay PF, gratuity, and leave encashment within 8 weeks. No pension was granted since he was not an in­service candidate when the scheme for shifting to the pension regime became operational.

In the appeal, the division bench set ­aside the grant of provident fund (Bank’s contribution) and gratuity on the pretext that by an act of the appellant, the loss has been caused to the Bank.

Aggrieved by the same, the appellant approached the Supreme Court.

The only issue before the court was regarding the denial of the employer’s contribution of Provident Fund and non­payment of gratuity to the appellant because of the order of compulsory retirement.

Bank failed to prove any loss and denied fair hearing to employee, must pay its share of PF

The Court began by referring to Chapter IX of the 1979 Regulations, which outlined the terminal benefits for bank employees. By analyzing Punjab National Bank Employees’ Provident Fund Trust Rules(P.F. Trust Rules) 13 and 14, the court found that the bank retained the first lien on its contributions made to the individual accounts of its members, to recover any losses incurred at any time.

Although it was alleged that there were irregularities in granting loans by the appellant, the court observed that the charge sheet did not accuse the appellant of causing any loss to the bank, nor did it quantify the alleged loss.

The court found that the resolution of the Board of Directors was passed unilaterally without allowing the appellant to respond or explain. Therefore, the court ruled that the findings recorded by the Single Judge about payment of the Bank’s contribution to the provident fund was equitable, just and liable to be upheld, setting aside the findings of the Division Bench

Penalty of compulsory retirement not a ground for denial of gratuity, it’s only in the case of dismissal/removal

Next, on the issue of payment of gratuity, the court began by examining Regulation 46 of Chapter IX of the 1979 Regulations, which deals with gratuity for bank employees. But it found that “the said Regulations were silent on the contingency as to what would happen if an officer is met with a penalty of compulsory retirement.”

To resolve this matter, the court delved into Section 4(6) of the Payment of Gratuity Act,1972 (Gratuity Act), which outlined conditions under which an employee's gratuity could be withheld upon termination. It specified that the forfeiture of gratuity can be directed to the extent of any damage or loss caused or the destruction of property belonging to the employer.

The court also referred to the case of Y.K. Singla v. Punjab National Bank (2013) 3 SCC 472, which emphasized that the provisions of the Gratuity Act would prevail over all other regulations, including the Punjab National Bank (Employees’) Pension Regulations, 1995.

Furthermore, the court noted the bank's attempt to harmonize the provisions of Regulation 46 of the 1979 Regulations and the Gratuity Act. This was outlined in Circular No. 1563 issued on January 16, 1997, which specified the instances in which gratuity could be forfeited,

The court further identified Regulation 4 of the Punjab National Bank Officer Employees’ (Discipline and Appeal) Regulations 1977 (1977 Regulations) which classified compulsory retirement as a major penalty. The court found that only in the case of dismissal/removal, the gratuity wouldn’t be paid. Notably, the penalty of compulsory retirement was not included in the explanation for denying gratuity benefits. Consequently, the court affirmed that the appellant was entitled to receive gratuity under the 1979 Regulations, as stipulated by the explanation in the Circular.

Opportunity for hearing must be granted before denying gratuity

Moreover, the court observed that the appellant was not provided with an opportunity for a hearing before the gratuity was forfeited.

It then pointed to the Full Bench decision of the Punjab & Haryana High Court in the UCO Bank case, which emphasized providing a fair hearing, observing thus “No doubt, the irregularities committed by the respondent may have exposed the Bank to such losses. However, that is entirely different from the loss having been suffered by the bank. It is for this reason that it was incumbent upon the appellant ­Bank to mention specifically the actual loss having been suffered, if it suffered, in the show cause notice itself with particulars of that loss to enable the respondent to meet the same. We are, therefore, of the opinion that the show cause notice or the final orders passed, forfeiting the gratuity, do not meet the legal requirements and have to be set aside.”

In this case, the court found that the judgment in the UCO Bank case applied directly, as the quantification of loss had not been proven during the inquiry. Furthermore, the appellant was not afforded an opportunity for a hearing before the denying gratuity.

Taking a comprehensive view of the 1977 Regulations, 1979 Regulations, Circular dated January 16, 1997, and the factual circumstances, the court concluded that the appeal deserved to be allowed. It affirmed the findings of the learned Single Judge and set aside the judgment rendered by the Division Bench.

Case title: Jyotirmay Ray v. Field General Manager, Punjab National Bank

Citation:  2023 LiveLaw (SC) 966

Click Here To Read/Download Judgment