Holding

Interest on belated payment of gratuity is a statutory right under Section 7(3A) of the Payment of Gratuity Act, 1972 and cannot be denied by judicial discretion.

Summary

The appellant, a retired employee of Karnataka Agro Industries Corp., had been suspended in 1999, the suspension was later withdrawn, and he retired in 2000 without any order regularising his service or settling salary and allowances. He filed a writ petition seeking full salary for the suspension period, gratuity, cash equivalent of earned leave and interest on the gratuity. The High Court Single Judge granted the monetary reliefs but denied interest on the delayed gratuity, citing doubts about the appellant’s entitlement. The Division Bench held that the appellant was entitled to interest but said the Single Judge’s discretion in refusing it was not arbitrary, and dismissed the appeal. The Supreme Court held that Section 7(3A) of the Payment of Gratuity Act, 1972 imposes a mandatory duty on the employer to pay interest on belated gratuity unless the delay is due to the employee’s fault and written permission is obtained, leaving no discretion to deny interest. Consequently, the Court set aside the High Court order and directed the employer to pay interest at 10% from the date gratuity became payable, allowing the appeal.

Issues considered

Whether the employer is statutorily obligated to pay interest on delayed gratuity under Section 7(3A) of the Payment of Gratuity Act, 1972.
Whether the High Court’s exercise of discretion in refusing interest on belated gratuity was permissible or arbitrary.

Legislation cited

Payment of Gratuity Act, 1972s. 7, s. 7(3A), s. 8

Subjects

gratuityinterest on delayed paymentPayment of Gratuity Actstatutory rightservice lawsuspensionsuperannuationemployer liability

Judgment

A H.GANGAHANUMEGOWDA
v.
KARNATAKA AGRO INDUSTRIES CORPN. LTD.

FEBRUARY 5, 2003 lw·

B
[SHIVARAJ V. PATIL AND ARIJIT PASAYAT, JJ.)

Service Law:

c belatedPayment of Gratuity Act, 1972-Ss. 7 and 8-Gratuity-lnterest on
payment of-Denial by Court in exercise of its discretion-Propriety
of-Held, denial not correct-Payment of gratuity with or without interest
does not lie in the domain of discretion, but it is a statutory compulsion-
Specific benefits expressly given in a social beneficial legislation cannot be
ordinarily denied.
D
Suspension of appellant was withdrawn, but on his superannuation,
no order was passed regarding regularization of the suspension period and
settlement of salary and allowances payable to him on retirement.
Appellant filed writ petition seeking payment of full salary and allowances
for the period of suspension, gratuity cash equivalent of earned leave with
E interest thereon and provident fund dues. Single Judge of High Court
disposing of the writ petition, granted reliefs to the appellant but in
exercise of its discretion refused payment of interest on belated payment
of gratuity. In appeal, Division Bench held that though the appellant was
entitled to interest on belated payment of gratuity, but the discretion
F exercised by the Single Judge in denying the same was not arbitrary.

In appeal to this court, appellant contended that interest on
belated payment of gratuity is a statutory right and denial of the same in
exercise of discretion was not correct.

G Allowing the appeal, the Court

HELD: 1. Section 7 of Payment of Gratuity Act; 1972, mandates the
employer to pay the gratuity within the specified time and to pay interest
on the delayed payment of gratuity. No discretion is available to exempt
or relieve the employer from payment of gratuity with or without interest
H 832
H. GANGAHANUME GOWDA 1•. KARNATAKA AGRO INDUS. CORPN. LID. 833
as the case may be. However, under the proviso to Section 7(3A) of the A
Act, no interest shall be payable if delay in payment of gratuity is due to
the fault of the employee and further condition that the employer has
obtained permission in writing from the controlling authority for the
delayed payment on that ground. Payment of gratuity with or without
interest as the case may be does not lie in the domain of discretion but it
is a statutory compulsion. Specific benefits expressly given in a social B
beneficial legislation cannot be ordinarily denied. Employees on retirement
have valuable rights to get gratuity and any culpable delay in payment of
gratuity must be visited with the penalty of payment of interest. Earlier
there was ~o provision for payment of interest on the delayed payment of
gratuity. Sub-section (3A) was added to Section 7 by an amendment, which C
came into force with effect from 1st October, 1987. (836-H; 837-A-D)

State of Kera/a and Ors. v. M Padmanabhan Nayyar. I (1985) 50 FLR
145 and Charan Singh v. Mis Bir/a Textiles and Anr.• (1988) 57 FLR 543
SC, referred to.
D
2. In the present case the Single Judge having held that the appellant
was entitled for payment of gratuity was not right in denying the interest
on the delayed payment of gratuity having due regard to Section 7(3A) of
the Act. It was not the case of the respondent that the delay in the payment
of gratuity was due to the fault of the employee and that it had obtained
permission in writing from the controlling authority for the delayed E
payment on that ground. There is a clear mandate in the provisions of
Section 7 to the employer for payment of gratuity within time and to pay
interest on the delayed payment of gratuity. There is also provision to
recover the amount of gratuity with compound interest in case amount of
gratuity payable was not paid by the employer in terms of Section 8 of F
the Act. Since the employer did not satisfy the mandatory requirements
of the proviso to Section 7(3A), no discretion was left to deny the interest
to the appellant on belated payment of gratuity. Single Judge could not
refuse the grant of interest exercising discretion as against the mandatory
provisions contained in Section 7 of the Act. (838-B-D, F)
G
CIVIL APPELLATE JURISDICTION : Civil Appeal No. I 024 of
"" 2003.

From the Judgment and Order dated 21.11.200 I of the High Court of
Karnataka in WA No. 4177/200 I.
H
834 SUPREME COURT REPORTS (2003] I S.C.R.

A Ms. Anjana Chnadrashekhar and G.V. Chandashekhar for P.P. Singh,
fJr the Appellants.

Naresh Kaushik, Narendra K. Roy, B.W. Dayal, Ms. Shilpa Chohan
and Lalitha Kaushika for the Respondent. ~.

B The Judgment of the Court was delivered by

SHIVARAJ V. PATIL J. Leave granted. ~

A limited point that arises for consideration and decision in this appeal
is whether Division Bench of the High Court having found the appellant
c entitled to interest on belated payment of gratuity was right in denying the
same holding that the discretion exercised by the learned Single Judge in that
regard was not arbitrary.

While in service, the appellant and few other officials were kept under
suspension in March, 1999. Aggrieved by the same, the appellant and others
D filed writ petition Nos. 11893-11898 of 1999 inter a/ia contending that order
of suspension passed was one without authority of law and without application
of mind. After service of notice in the writ petitions, the respondent-
Corporation realizing that it was not possible to support the said order of
,>
suspension, withdrew the same by an order dated 21.5 .1999. Taking note of
the order dated 21.5.1999 revoking the suspension, the High Court disposed
E
of the writ petitions as having become infructuous, however, reserving liberty
to the writ petitioner to approach the High Court for seeking appropriate
relief, if necessary. The appellant reached the age of superannuation on
1.1.2000 and retired. The respondent-Corporation. did not pass any order
regarding regularization of the suspension period and settlement of salary
F and allowances payable to him on retirement. In this situation, the appellant
was constrained to approach the High Court again in Writ Petition No. 26980
of 2000 seeking payment of full sal~ry and allowances for the period of
suspension, gratuity, cash equivalent of earned leave together with interest
thereon @ 18% per annum and settlement of provident ft.ind dues. During the
pendency of the writ petition, however, the respondent settled the provident
G fund dues. The High Court disposed of the writ petition on 18.6.2001 holding
that since the appellant had retired from service, the enquiry contemplated
earlier could not have been proceeded with in the absence of enabling provision -+
in the service rules of the respondent-Corporation and consequently granted
reliefs to the appellant except interest on belated payment of gratuity. -The
H appellant, aggrieved by the order of the learned Single Judge, to the extent
H. GANGAHANUMEGOWDA i·. KARNATAKA AGRO lNDUS.CORPN. LID. (PATIL, J.} 835

of denial of interest on the belated payment of gratuity, filed Appeal No. A
4177 of 200 I. The Division Bench in the appeal found that the appellant was
entitled to payment of interest on the belated payment of gratuity, but, however,
held that the discretion exercised by the learned Single Judge in denying
interest was not arbitrary. In that view, the writ appeal was dismissed.

The learned counsel for the appellant urged that claim for interest on B
belated payment of gratuity is a statutory right as envisaged under Sections
7 and 8 of the Act; the High Court committed an error in denying the same
to the appellant on the ground of discretion on the facts and circumstances
of the case. According to the learned counsel, when the appellant on fact was
found to be entitled to interest, he should not have been denied the same. C

The learned counsel for the respondent-Corporation argued in support
and justification of the impugned order.

In order to appreciate the above contentions urged, it is necessary to
notice the provisions of the Payment of Gratuity Act, 1972 (for short 'the D
Act') to the extent they are relevant. They are extracted below:-

, . "7 Determination of the amount of gratuity

(I) A person who is eligible for payment of gratuity under this Act
or any person authorized, in writing to act on his behalf shall
send a written application to the employer, within such time and E
in such form, as may be prescribed, for payment of such gratuity.

(2) As soon as gratuity becomes payable, the employer shall, whether
an application referred to in sub-section (I) has been made or not,
determine the amount of gratuity and give notice in writing to the F
+ person to whom the gratuity is payable and also to the controlling
authority specifying the amount of gratuity so determined.

(3A) If the amount of gratuity payable under sub-section (3) is not
paid by the employer within the period specified in sub-section G
(3), the employer shall pay, from the date on which the gratuity
becomes payable to the date on which it is paid, simple interest
at such rate, not exceeding the rate notified by the Central
Government from time to time for repayment of long-term
deposits, as that Government may, by notification specify; H
836 SUPREME COURT REPORTS [2003) I S.C.R.

A Provided that no such interest shall be payable if the delay in
the payment is due to the fault of the employee and the employer
has obtained permission in writing from the controlling authority
for the delayed payment on this ground.

8. Recovery of gratuity If the amount of gratuity payable under this
B Act is not paid by the employer, within the prescribed time, to the
person entitled thereto, the controlling authority shall, on an
application made to it in this behalf by the aggrieved person,
issue a certificate for that amount to the Col.lector who shall
recover the same, together with compound interest thereon at
such rate as the Central Government may, by notification, specify,
c from the date of expiry of the prescribed time as arrears of land
revenue and pay the same to the person entitled thereto;
Provided that the controlling authority shall, before issuing a
certificate under this section, give the employer a reasonable
opportunity of showing cause against the issue of such certificate.
D
Provided further that the amount of interest payable under this
section shall, in no case exceed the amount of gratuity payable
under this Act."

It is evident from Section 7(2) that as soon as gratuity becomes payable,
E the employer, whether any application has been made or not, is obliged to
determine the amount of gratuity and give notice in writing to the person to
whom the gratuity is payable and also to the controlling authority specifying
the amount of gratuity. Under Section 7(3), the employer shall arrange to pay
the amount of gratuity within 30 days from the date it becomes payable.
Under sub-section 3(A) of Section 7, if the amount of gratuity is not paid by
F the employer within the period specified in sub-section (3), he shall pay,
from the date on which the gratuity becomes payable to the date on which
it is paid, simple interest at such rate not exceeding the rate notified by the t
Central Government from time to time for repayment of long term deposits;
provided that no such interest shall be payable if the delay in the payment is
G due to the fault of the employee and the employer has obtained permission
in writing from the controlling authority for the delayed payment on that
ground. From the provisions made in Section 7, a clear command can be seen
mandating the employer to pay the gratuity within the specified time and to
pay interest on the delayed payment of gratuity. No discretion is available to
exempt or relieve the employer from payment of gratuity with or without
H interest as the case may be. However, under the proviso to Section 7(3A), no
H. GANGAHLNUMEGOWDA "· KARNATAKAAGRO INDUS.CORPN. Lm. [PATIL, l.J 83 7
interest shall be payable if delay in payment of gratuity is due to the fault of A
the employee and further condition that the employer has obtained permission
in writing from the controlling authority for the delayed payment on that
ground. Under Section 8, provision is made for recovery of gratuity payable
under the Act, if not paid by the employer within the prescribed time. The
Collector shall recover the amount of gratuity with compound interest thereon B
as arrears of land revenue and pay the same to the person entitled. A penal
provision is also made in Section 9 for non-payment of gratuity. Payment of
gratuity with or without interest as the case may be does not lie in the domain
of discretion but it is a statutory compulsion. Specific benefits expressly
given in a social beneficial legislation cannot be ordinarily denied. Employees
on retirement have valuable rights to get gratuity and any culpable delay in C
.
pa)'ment of gratuity must be visited with the penalty of payment of interest
was the view taken in State of Kera/a and Ors. v. M Padmanabhan Nayyar,
(1985) 50 FLR 145. Earlier there was no provision for payment of interest
· on the delayed payment of gratuity. Sub-section (3A) was added to Section
7 by an amendment, which came into force with effect from I st October,
1987. In the case of Charan Singh v. Mis. Bir/a Textiles and Anr., (1988) 57 D
FLR 543 SC, this aspect was noticed in the following words:
... "There was no provision in the Act for payment of interest when the
same was quantified by the Controlling Authority and before the
Collector was approached for its realization. In fact, it is on the E
acceptance of the position that there was a lacuna in the law that Act
22 of 1987 brought about the incorporation of sub-section 3(A) in
Section 7. That provision has prospective application."

In the background of this legal position, now we turn to the facts of the
present case. The appellant was under suspension from 15.3.1999 to 21.5.1999. F
+ On attaining the age of superannuation, he retired from services of the
respondent-Corporation on 1.1.2000. The learned Single Judge, after
considering the rival contentions, disposed of the writ petition issuing directions
to the respondent-Corporation to settle the full salary and allowances for the
period of suspension, gratuity, cash equivalent to leave salary, deferred leave,
concession amount etc. As regards the claim of interest on gratuity, the G
learned Single Judge held as under:-

"Since there was a doubt as to whether the petitioner is entitled to the
gratuity, cash equivalent of leave salary etc., in view of the divergent
opinion of the Courts during the pendency of an enquiry proceeding
of a retired employee, in my view, the petitioner is not entitled to the H
838 SUPREME COURT REPORTS (2003) I S.C.R.

A relief of interest for the belated payment of gratuity and other
amounts."

It is clear from what is extracted above from the order of learned Single
Judge that interest on delayed payment of gratuity was denied only on the
ground that there was doubt whether the appellant was entitled to gratuity,
B cash equivalent to leave etc., in view of divergent opinion of the courts
during the pendency of enquiry. The learned Single Judge having held that
the appellant was entitled for payment of gratuity was not right in denying
the interest on the delayed payment of gratuity having due regard to Section
7(3A) of the Act. It was not t_he case of the respondent that the delay in the
C payment of gratuity was due to the fault of the employee and that it had
obtained permission in writing from the controlling authority for the delayed
payment on that ground. As noticed above, there is a clear mandate in the
provisions of Section 7 to the employer for payment of gratuity within time
and to pay interest on the delayed payment of gratuity. There is also provision
to recover the amount of gratuity with compound interest in case amount of
D gratuity payable was not paid by the employer in terms of Section 8 of the
Act. Since the employer did not satisfy the mandatory requirements of the
proviso to Section 7(3A), no discretion was left to deny the interest to the ..
appellant on belated payment of gratuity. Unfortunately, the Division Bench
of the High Court, having found that the appellant was entitled for interest,
E declined to interfere with the order of the learned Single Judge as regards the
claim of interest on delayed payment of gratuity only on the ground that the
discretion exercised by the learned Single Judge could not be said to be
arbitrary. In the first place in the light of what is stated ab~ve, the learned
Single Judge could not refuse the grant of interest exercising discretion as
against the mandatory provisions contained in Section 7 of the Act. The
F Division Bench, in our opinion, committed an error in assuming that the
learned Single Judge could exercise the discretion in the matter of awarding
interest and that such a discretion exercised was not arbitrary.

In the light of the facts stated and for the reasons aforementioned, the
impugned order cannot be sustained. Consequently, it is set aside. The
G respondent is directed to pay interest @ 10% on the amount of gratuity to
which the appellant is entitled from the date it became payable till the date
of payment of the gratuity amount. Tlte appeal is allowed accordingly \\'.Hh
cost quantified at Rs. 10,000.

K.K.T. Appeal allowed.
H