The 2010 amendment in the Gratuity Act cannot be treated to be retrospective: Supreme Court

By - Shriya Singh*

The Supreme Court in a recent judgment observed that the amended Payment of Gratuity Act, 2010 does not have a retrospective effect.  According to the amendment the upper limit of the gratuity amounts payable under Section 4 of the Payment of Gratuity Act, 1972 was increased from 3.5 Lakhs to 10 Lakhs.

The appeal was directed against an order issued by the High Court of Jharkhand which denied the appellant’s request to declare the Payment of Gratuity (Amendment) Act, 2010 effective from 1.1.2007. Based on the facts of the case, the appellants were former employees of Coal India Limited. The Government of India approved the enhancement of the gratuity for the executives and non-unionized supervisors of Central sector Enterprises like the Coal India Limited where the appellants were also employed. 

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The ceiling of the gratuity was raised to 10 Lakhs w.e.f. 1.1.2007 in terms of office memorandum of Government of India dated 26.11.2008. Therefore, the appellants were paid a sum of 10 Lakh rupees as gratuity. However, the statuary upper limit of gratuity in 2007 as per the Payment of Gratuity Act was Rs. 3.5 Lakhs. 

Under the Income tax Act, the amount of gratuity received by an employee that does not exceed the upper limit set by the Payment of Gratuity Act is free from taxation. Since the upper limit of gratuity in 2007 was Rs. 3.5 Lakhs, the appellants were required to pay TDS on the remaining amount. 

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Further, after the amendment in 2010 in the Payment of Gratuity Act the upper limit was raised from Rs. 3.5 Lakhs to 10 Lakhs. With the amendment in the upper limit, the appellants sought that it takes effect retroactively from January 1, 2007, so they can claim a full tax exemption for the gratuity they received. 

Thus, the appellants challenged the date of commencement as 24.5.2010 and argued that the Gratuity Act must be made effective from 1.1.2007. The counsel for appellants also argued that since the amended Gratuity Act grants liberalized benefits, it would have a retrospective effect. They further contended that the cut-off date as 24.5.2010 has created 2 categories. First, those who reached the age of superannuation before the stated date, and second, those who reached the age of superannuation on or after 24.5.2010. 

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The Court observed that the gratuity paid to the appellants on the basis of office memorandum dated 26.11.2008 would fall under Sub-section (5) of Section 4 of the Payment of Gratuity (Amendment) Act. “The Gratuity Act contemplated rupees ten lakhs as the amount of gratuity only from 24.5.2010. Such gratuity is the amount payable only once. Thus, the cut-off date cannot be said to be illegal, it being a one-time payment. Therefore, such amendment in the Gratuity Act cannot be treated to be retrospective. Therefore, the provisions of the statute cannot be said to be retrospective”, the bench observed.

Therefore, the Court concluded, “…we find that the date of commencement fixed by the Executive in the exercise of power delegated by the Amending Act cannot be treated to be retrospective as the benefit of higher gratuity is one-time available to the employees only after the commencement of the Amending Act. The benefit paid to the appellants under the office memorandum is not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income Tax Act”. Accordingly, the Court held that there was no error in the order passed by the High Court.

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*Shriya Singh is a 1st year student pursuing B.A.LL.B.(Hons.) from National Law University, Delhi.