2024 (8) TMI 1244 - HC - Income Tax

Non payment of Gratuity payable to director or managing director - Controlling Authority-cum-Labour Court passed orders rejecting the applications filed by the Petitioners inter-alia holding that they were in control over the affairs of the Company and therefore did not fit in definition of the term employee HELD THAT - Since the amount claimed by Petitioners is in excess of Rs. 10, 00, 000/- they have contended that there is a contract with Respondent No. 1 under which Petitioners are entitled to receive gratuity. Thus right to receive gratuity is essentially premised on existence of agreement under Section 4 (5) of the Payment of Gratuity Act. Therefore the key to the issue at hand is existence or otherwise of an agreement to pay gratuity within the meaning of Section 4 (5). No doubt section 4 (5) is also applicable to an employee and unless person seeking enforcement of agreement is an employee jurisdiction of Controlling Authority under the Payment of Wages Act would be unavailable and a plain claim of a person (not being an employee) to enforce specific performance of agreement for payment of amount described as gratuity may not lie before the Controlling Authority. The first inquiry should have been about the issue as to whether Petitioners were employees of the first Respondent-Company. However since substantially high amount of Rs. 1, 21, 96, 154/- is claimed by both Petitioners as gratuity as compared to cap of Rs. 10, 00, 000/- each under Section 4 (3) a slightly different approach is being adopted where I first embark upon the path to enquire about existence of agreement under Section 4 (5) of the Act between the parties. What is contemplated under sub-section (5) of Section 4 of the Payment of Gratuity Act is any award or agreement or contract with the employer . Admittedly the claim is not premised on existence of any Award and therefore what needs to be proved is existence of an agreement or contract. No express written agreement or contract is however produced on record under which the first Respondent-company agreed to pay any gratuity to Petitioners. In absence of such express written contract Petitioners contend that the entries made in the Balance Sheet for the year ending 31 March 2012 are required to be construed as an agreement for payment of gratuity. Whether Balance Sheet prepared for taxation purposes would constitute an agreement for payment of gratuity under section 4 (5) ? - Mere reflection of an entry in the liability column of balance sheet would amount to creation of a right which never existed. Such right will have to be independently established either through a transaction or a document in the form of a contract. In the present case there is no underlying document in the form of a contract between Petitioners and the First Respondent-Company under which it agreed to pay gratuity to Petitioners. For the purpose of application of sub-section (5) of Section 4 of the Payment of Gratuity Act it is necessary that existence of specific agreement or contract must be proved. In the present case beyond reflection of entry in the balance sheet there appears to be no underlying document under which the First Respondent-Company agreed to pay any gratuity to Petitioners. Thus in absence of any underlying agreement or contract it cannot be stated that mere entry in balance sheet would give rise to creation of liability for the First Respondent-Company to pay gratuity under the provisions of subsection (5) of Section 4 of the Payment of Gratuity Act. An entry made by Petitioner themselves in the balance sheet of the company on 15 September 2012 (five days before execution of SPA) is made basis for claiming gratuity of Rs. 1.21 crores. The claim puts an additional burden on purchasers over and above the purchase price of Rs. 23 crores. There is no underlying agreement for payment of gratuity to directors to support the stray entry in the balance sheet. There is nothing of record to indicate that the previous directors (Mr. and Mrs. Deo) who owned 50% stake in the company during financial year 2010-11 were paid any gratuity. Petitioners names do not figure in the list of employees for whom gratuity is insured by purchasing insurance policy from LIC under Section 4A of the Act. Even then if a specific agreement was to be produced for payment of better terms of gratuity under Section 4 (5) of the Act the claim of Petitioners could have been awarded. Mere entry in the balance sheet created for the first time by Petitioners who were in complete control of the company on that date that too 5 days before sale of their stake in the company cannot amount to agreement under provisions of section 4 (5) of the Payment of Gratuity Act. Petitioners claim for gratuity is thus totally untenable and has rightly been rejected by the Controlling and Appellate Authorities.

Summary

Issues Involved:
1. Non-payment of gratuity to ex-promoters and directors.
2. Definition of "employee" under the Payment of Gratuity Act.
3. Validity of the balance sheet entry as an agreement for gratuity.
4. Applicability of Section 4(5) of the Payment of Gratuity Act.
5. Jurisdiction of the Controlling Authority.
6. Applicability of Section 4A of the Payment of Gratuity Act.
7. Comparison with Provident Fund and Employees State Insurance Acts.
8. Precedent cases and their applicability.

Detailed Analysis:

1. Non-payment of Gratuity to Ex-promoters and Directors:
The petitioners, who were ex-promoters and directors of the respondent company, claimed gratuity for their tenure as employees. They contended that a provision for gratuity was made in the company's balance sheet for the year ending March 31, 2012.

2. Definition of "Employee" under the Payment of Gratuity Act:
The petitioners argued that they fit the definition of "employee" under Section 2(e) of the Payment of Gratuity Act as they were employed for wages. They produced salary slips and claimed that their roles as directors did not negate their status as employees.

3. Validity of the Balance Sheet Entry as an Agreement for Gratuity:
The petitioners relied on the balance sheet entry, which mentioned a provision for gratuity payable to directors, as an agreement under Section 4(5) of the Payment of Gratuity Act. The court examined whether such an entry could constitute an agreement for gratuity.

4. Applicability of Section 4(5) of the Payment of Gratuity Act:
Section 4(5) allows for better terms of gratuity under any award, agreement, or contract. The court found no express written agreement or contract beyond the balance sheet entry. The court held that an entry in the balance sheet, prepared for taxation purposes, does not constitute an agreement under Section 4(5).

5. Jurisdiction of the Controlling Authority:
The court noted that the jurisdiction of the Controlling Authority under the Payment of Gratuity Act is contingent upon the claimant being an "employee." Given the absence of an underlying agreement, the claim did not fall within the purview of the Controlling Authority.

6. Applicability of Section 4A of the Payment of Gratuity Act:
Section 4A mandates compulsory insurance for gratuity liability. The court observed that the petitioners were not listed in the LIC Group Gratuity Scheme, indicating they were not treated as employees for gratuity purposes.

7. Comparison with Provident Fund and Employees State Insurance Acts:
The petitioners argued that they were treated as employees under the Provident Fund Act and should similarly be considered under the Payment of Gratuity Act. The court found this argument unconvincing, noting that the schemes and definitions under these acts are different.

8. Precedent Cases and Their Applicability:
The petitioners cited several cases, including BCH Electric Limited and Venus Alloy Pvt. Ltd., to support their claims. The court distinguished these cases based on their specific facts and contexts. The court also referred to the case of Ramchander's Coaching Institution Pvt. Ltd., noting that it involved unique facts such as consent terms and inclusion in the LIC Group Gratuity Scheme, which were not present in the current case.

Conclusion:
The court concluded that the petitioners did not have an agreement for gratuity under Section 4(5) of the Payment of Gratuity Act. The balance sheet entry alone did not create a liability for the respondent company to pay gratuity. The petitions were dismissed, and the orders of the Controlling Authority and Appellate Authority were upheld.