Holding

Gratuity is not an approved expenditure and therefore cannot be included while computing the amount of grant‑in‑aid.

Summary

The Rajasthan Welfare Society, an aided non‑government educational institution, challenged the State of Rajasthan's refusal to allow the gratuity payable to its employees to be counted as part of the approved expenditure for computing grant‑in‑aid under the Rajasthan Non‑Government Educational Institution Act, 1989. The issue was whether gratuity, as mandated by the Payment of Gratuity Act, 1972 and incorporated by Rule 82 of the 1993 Rules, falls within the definition of "actual salary" under Rule 14(a) or any other item (b) to (v) of approved expenditure, and whether Note 2 to Rule 14 permits its inclusion. The Court examined the statutory language of the Act, the Rules, and the note, concluding that gratuity is a non‑recurring, post‑retirement payment and does not constitute salary or any item of approved expenditure. It also held that Note 2 refers only to rules framed by institutions and approved by the Government, not to Rule 82, which merely obliges institutions to pay gratuity. Consequently, gratuity cannot be included in the computation of grant‑in‑aid, and the High Court's decision was affirmed.

Issues considered

Whether gratuity payable to employees of aided educational institutions is to be included in the approved expenditure for computing grant‑in‑aid under the Rajasthan Non‑Government Educational Institution Act, 1989 and its Rules.
Whether Rule 14(a) includes gratuity as part of "actual salary".
Interpretation of Note 2 appended to Rule 14 regarding the inclusion of gratuity.
Whether gratuity falls under any of the four heads of grant specified in Rule 9.

Legislation cited

Payment of Gratuity Act, 1972s. 4
Rajasthan Non-Government Educational Institutions (Recognition, Grant-In-Aid and Service Conditions etc.) Rules, 1993s. Note 2, s. Rule 14, s. Rule 82, s. Rule 9

Subjects

grant-in-aidgratuitynon-government educational institutionapproved expendituresalary definitionRule 14Rule 9Payment of Gratuity Act

Judgment

RAJASTHAN WELFARE SOCIETY A
v.
STATE OF RAJASTHAN

APRIL 7, 2005

[Y.K. SABHARWAL AND TARUN CHATTERJEE, JJ.] B

Grant-in-aid :

Rajasthan Non-Government Educational Institution Act, 1989-Sections
7, 16 and 2(r)-Rajasthan Non-Government Educational Institutions C
(Recognition, Grant-in-Aid and Service Conditions Etc.) Rules, 1993-Ru/es
14 and Note 2 (appended to Rule 14), 82-Payment of gratuity by the aided
educational institutions to their employees-Inclusion of, while computing
Grant-in-aid-Held: Gratuity is not approved expenditure within the meaning
of the Rules, hence, not includible while computing the amount of Grant-in- D
aid-Payment of Gratuity Act, 1972.

The question which arose for consideration in these appeals and SLPs
is whether the amount of gratuity payable to the employees of the aided
educational institutions has to be taken into consideration for computing
the amount of grant-in-aid. E
Dismissing the appeals and SLPs, the Court

Held : 1. Rajasthan Non-Government Educational Institution Act,
1989 stipulates that no aid can be claimed as a matter of right and the
aid may cover such part of the expenditure of the institution as may be F
prescribed. The prescribed expenditure is as contained in the Rajasthan
Non-Government Educational Institutions (Recognition, Grant-in-Aid and
Service Conditions Etc.) Rules, 1993. Under Rule 14, the approved
expenditure can relate to only items from (a) to (v) mentioned therein. It
is nobody's case that the expenditure on gratuity falls under items (b) to G
(v). Under Item (a) only expenditure on actual salary and provident fund
- contribution not exceeding 8.33% in respect of teaching and non-teaching
staff can be included. Tl}e amount to be paid as a. gratuity fo terms of
Section 4 of the Payment of Gratuity Act, cannot be said to be a part of
'actual salary' as postulated by Rule 14. (392-G-H; 393-A-B)
387 fl
388 SUPREME COURT REPORTS [1005] 3. $.C.R.

A Ahmedabad Pvt. Primary Teachers' Association v. Administrative Officer
and Ors., (20041 1 SCC 755, held inapplicable.

2. Note 2 appended to Rule 14 states that ordinarily the charges on
account of payment of gratuity paid to former teachers are not admitted
for the purpose of grant-in-aid unless the Rules on the subject are
B approved by the Government. The words 'the ru~es on the subject' in Note
2 cannot be interpreted to mean rule contained in other part of the Rules,
namely, Rule 82. If Rule 82 is to ·be interpreted as a rule approved by the
Government to contribute the amount of gratuity while computing grant-
in-aid, the question of appending Note 2 would not have arisen. Clearly,
C Note 2 refers to Rules framed by Non-Government Educational
Institutions which are to be approved by the Government and not the
Government itself making the Rules and approving the same. [393-C-E]

3. The gratuity cannot be termed_ to be an emolument for the time
being payable to the employees so as to come within the definition of salary
D defined in Section 2 (r) of the Act. Further, Rule 14 uses the word 'actual
salary'. Gratuity is payable at the time of retirement/termination of the
employment. The. non-recurring payment of this nature cannot be included
in the definition of salary. Further, gratuity cannot be included in the :fl

E
approved expenditure as under Rule 9 the State Government can sanction
the. grants under four Heads provided therein and gratuity does not fall
under any one of them. It is not claimed that gratuity falls under Heads 2
-
to 4. Head No.l is 'maintenance or recurring grant'. Admittedly a gratuity
cannot come under the category ofmaintetrnnce. It is also not a recurring
grant. Therefore, the gratuity within the meaning of the Act and the Rules
cannot form part of recurring grant. It is not includible as part of
F approved expenditure for the purposes of computing the amount of grant
payable to the appellant. {393-F; 394-C-EJ

Metal Box Company of India Limitedv. Their Workmen, [1969) l SCR
790, held inapplicable. '
G CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2936 of2002.

From the Judgment and Order dated 29.5.2000 ,of the,Rajasthan High
Court in D.B.C.S.A. (W) No. 323 of 1998.

WITH
'".;. ' . ,·• ~ .. i.' '. . .. ~ .. ," '\ .....·. ·... ·.. ... ·. ·. '·.
H
RAJASTHAN WELFARE SOCIETY v. STATE OF RAJASTHAN [Y.K. SABHARWAL, J.] 3 89

S.L.P.(C) No. 21640/2003, C.A. Nos. 2934, 2935, 2940/2002, S.L.P. A
(C) No. 4544/2004.

A.K Ganguli, M.N. Krishnamani, R.S. Suri, M.S. Singhvi, Vinay K.
Shailendra, Sushi I Kumar Jain, Ms. Pratibha Jain, A.P. Dhamija, H.D. Thanvi,
Ram Niwas, Sarad Singhania, Aruneshwar Gupta, Naveen Kumar Singh, Ms.
Shivangi, Parmanand Gaur, Manish Kumar, Ansar Ahmad Choudhary, S. B
Pani, Annam D.N. Rao, Anil Kamwal, Dr. K.P.S. Dalal, D.P Sharma, Dr.
Sushi! Balwada, Ms. Shobha and Ms. K. Sarada Devi with them for the
appearing parties.

The Judgment of the Court was delivered by
c
Y.K. SABHARWAL, J. Gratuity is to be paid to an employee on the
termination of his employment in terms of the provisions of the Payment of
Gratuity Act, 1972. The question for determination in the present case is
whether the amount of gratuity payable to the employees of the aided
educational institutions has to be taken into consideration or not for determining D
the amount of grant-in-aid. The question has to be examined in the context
of Rajasthan Non-Government Educational Institution Act, 1989 (for short,
'the Act') which came into force with effect from 1st January, 1993.

The power of the State Government to make rules is contained in
Section 43 of the Act. Section 43 of the Act, inter alia, provides that the E
Rules may provide for the terms and conditions for grant of recognition to
Non-Government Educational Institutions. Rules can also be framed for the
giving of grants-in-aid. In exercise of powers conferred by Section 43 and all
other powers enabling the State Government in this behalf, Rules called the
Rajasthan Non-Government Educational Institutions (Recognition, Grant-in-
Aid and Service Conditions Etc.) Rules, 1993 (for short, 'the Rules') have F
been made.

The appellant is running an aided educational institution. The expression
'aided institution' has been defined in Section 2(b) of the Act to mean a
recognized institution which is receiving aid in the form of maintenance G
· grant from the State Government. The Act has been enacted to provide for
- better organization and development of education in the non-Government
Educational Institutions in the State of Rajasthan. The expression 'recognised
institution' is defined in Section 2(q) of the Act to mean a Non-Government
Educational Institution affiliated to any University or recognized by the Board,
Director of Education or any officer authorized by the State Government or H
390 SUPREME COURT REPORTS [2005] 3 S.C.R.

A the Director of Education in this behalf. The educational institution being run
by the appellant is a recognized institution. Section 2(a) defines 'aid' to mean
any aid granted to a recognized educational institution by the State
Government. The educational institution of the appellant has been granted
aid within the meaning of the Act. The expression 'employee' includes a
B teacher and every other employee working in a recognized institution. The
expression 'salary' has been defined in Section 2(r) as follows : __._,

"'Salary' means the aggregate of the emoluments of an employee
including dearness allowance or any other allowance or relief for the
time being payable to him but does not include compensatory

c allowance."

Section 7 of the Act provides for grant-in-aid tci recognized institutions.
It, inter alia, provides that no aid shall be claimed by an institution as a
matter of right. Section 7(4) provides that "the aid may cover such part of the
expenditure of the institution as may be prescribed". Section 16 of the Act
D enables the State Government to regulate the terms and conditions of
employment. It, inter a/ia, provides that the State Government may regulate
the recruitment and conditions of service, including conditions relating to
qualifications, pay, gratuity, insurance, age ofretirement, entitlement ofleave,
conduct and discipline, of persons appointed as employees of aided institutions
in the State. Section 29 of the Act provides that the scales of pay and
E allowances except compensatory allowances with respect to all the employees
of an aided institution shall not be less than those prescribed for the staff
belonging to similar categories in Government institutions~ The expression
'compensatory allowance' is defined in Section 2(d) to mean an allowance
granted to meet personal expenditure necessitated by the special circumstances
F in which duty is performed and shall include a travelling allowance but shall
not include a· sumptuary allowance nor the grant of a free passage to or from
any place outside lndi,a.

Chapter III of the Rules deals with 'AID, ACCOUNTS AND AUDIT',
containing Rules 9 to 22. Rule 9 relates to the sanction·of grants-in-aid and
G reads as under :

"Rule 9. Grants~ The State Government may at its discretion sanction -
following grants-

(1) Maintenance or recurring grant.

H (2) Non"recurring grant towards equipments, building etc.
RAJASTHAN WELFARE SOCIETY v. STATE OF RAJASTHAN [Y.K. SABHARWAL', J.] 39 J

(3) Ad hoc, non recurring or recurring grant to an institution which A
is of an all India Character and its project and activities have
been approved by the Central or State Government on such terms
and conditions as it may deem fit to impose.

(4) Such other grants as may be sanctioned by the Government from
time to time." B
Rule IO provides for general conditions governing grant-in-aid. It, inter
alia, provides that every institution which applies for grant-in-aid shall be
deemed to have accepted its obligation to comply with the conditions laid
therein, one of it being that the Management shall appoint teachers and other
staff and shall follow the conditions of service, as laid down in the Rules. C
Rule 11 deals with the procedure for grant-in-aid. Rule 13 deals with the
assessment of annual recurring grant. It, inter alia, provides that annual
recurring grant will be given on the basis of estimated expenditure of the
current year and be subject to adjustment from the grant payable in the next
year. It is also stipulates that the approved expenditure shall be arrived at D
according to the Rules and such other instructions that may be issued from
time to time. Rule 14, deals with approved expenditure and to the extent
relevant for the present case reads as under :

Rule 14. Approved Expenditure-Approved expenditure referred to
in Rule 13 above, shall relate to the following items onlyAll the items E
from (a) to (v) mentioned below will fonn component 'A' of the
admissible items of the expenditure.

(a) Actual salary, and provident fund contribution not exceeding 8.33%
in respect of teaching and non-teaching staff.

(b) to (v) .......... " F

Note 2 appended to .Rule 14 is relevant for the present purposes and
reads thus :

"Note.· 2. Charges on account of contribution made by the Institution
to a pension fund or a gratuity scheme or on account of the pension G
or gratuity paid to former teachers are ordinarily not admitted for the
purpose of grant-in-aid unless the Rules on the subject are approved
by Government;

Provided that in the case of staff obtained on lent services from any
State Government or Government of India, pension and leave salary H
392 SUPREME COURT REPORTS (2005] 3 S.C.R.

A contribution shall be allowed as approved expenditure."

Rule 82 provides that the employees of the aided educational institutions
shall be entitled to gratuity as payable under the Payment of Gratuity Act,
1972, as amended from time to time.

B The Division Bench of the High Court by the impugned judgment on
construction of the Act and the Rules, has come to the conclusion that the
State Government is not liable to reimburse the· aided institution for the
. expenditure incurred by it on payments of gratuity to its employees as the
said amount is riot a part of the approved expenditure. The appellant ninnirig
the educational institution has challenged the correctness of the view taken
C in the impugned judgment reversing the decision of learned Single Judge.
The entitlement of the employees of the aided educational institution to
gratuity cannot be called in question iri view of the provisions contained in
Section 16 of the Act and Rule 82 made by the State Government in exercise
D of its rule making power. The teachers may not be the employees within the
meaning of definitfon of einployee as defined in th~ Payment of Gratuity Act,
1972 but that is of no relevance in view of Section 16 and Rule 82. The
decision in Ahmedabad Pvt. Primary Teachers' Association v. Administrative
Officer and Ors., (2004] 1 SCC 755 relied upon by learned counsel for the
appellant for the proposition that the teachers are not covered by the definition
E of employees under the Gratuity Act renders no assistance in the present case
to the appellant in view of benefit of the said Act hiving been extended to
the employees of the aided educational institutions. The definition of employee
under the Act includes teachers and every other employee working in a
recognized institution. We are unable to accept the contention that the teachers
F of non-Government aided educational institutions are not entitled to gratuity.
The appellant's liability to pay the gratuity under Section 4 of the Gratuity
Act cannot be doubted: The only question -is whether appellant is entitled to
include the proportionate amount of gratuity in the approved expenditure for
the purposes of computation of grant in aid. For this purpose, we have to
consider the provisions of .the Act and the Rules.
G
Section 7 of the Act stipulates that no aid can be claimed as a matter ·
of right and the aid,may cover such part of the expenditure of the institution
as may be prescribed. The prescribed expenditure is as contained in the
Rules. Under Rule 14, the approved expenditure can relate to only items
from (a) to (v) mentioned therein. It "is nobody's case that the expenditure on
H gratuity falls under items (b) to (v). Under Item (a) only expenditure on
RAJAS THAN WELFARE SOCIETY v. STATE OF RAJAS THAN [Y. K. SABHARW AL, J.] 393

actual salary and provident fund contribution not exc~eding 8.33% in respect A
of teaching and non-teaching staff can be included. The contention urged is
that the gratuity is part of salary. We are unable to agree. The amount to be
paid as a gratuity in terms of Section 4 of the Gratuity Act, under no
circumstances, can be said to be a part of 'actual salary' as postulated by
Rule 14. Further, some of the items (b) to (v), wherever recurring or non- B
recurring expenditure is to form part of approved expenditure, specifically
provide for it. Admittedly, the expenditure on gratuity does not fall under
Items (b) to (v) as the only contention urged was that it falls under Rule
14(a).

The position becomes further clear on a plain reading of Note 2 appended C
to Rule 14. It is clear that ordinarily the charges on account of payment of
gratuity paid to former teachers are not admitted for the purpose of grant-in-
aid unless the Rules on the subject are approved by the Government. The
words 'the rules on the subject' in Note 2 cannot be interpreted to mean rule
contained in other part of the Rules, namely, Rule 82. We are unable to
accept the contention that Rule 82 would be the rule on the subject approved D
by the Government. If Rule 82 is to be interpreted as a rule approved by the
Government to contribute the amount of gratuity while computing grant-in-
aid, the question of appending Note 2 would not have arisen. Clearly, Note
2 refers to Rules framed by Non-Government Educational Institutions which
are to be approved by the Government and not the Government itself making E
the Rules and approving the same. As already stated, Rule 82 only makes it
obligatory for aided educational institutions to pay gratuity to their employees
in accordance with the Gratuity Act.

The gratuity cannot be termed to be an emolument for the time being
payable to the employees so as to come within the definition of salary defined p
in Section 2 (r) of the Act. Further, Rule 14 uses the word 'actual salary'. Be
that as it may, it seems clear the non-recurring payment of this nature cannot
be included in the definition of salary. Gratuity is payable at the time of
retirement/termination of the employment. Reliance on the decision in the
case of Metal Box Company of India Ltd. v. Their Workmen, [1969] I SCR
790 can render little assistance to the appellant. It is a case under Payment G
of Bonus Act. It was only dealing with accountancy principles. Observations
were made that an estimated liability under the gratuity schemes even if it
amounts to a contingent liability and is not a debt under the Wealth Tax Act,
if properly ascertainable and its present value is fairly discounted, is deductible
from the gross receipts while preparing the profits and loss account. In trading H
394 SUPREME COURT REPORTS (2005) 3 S.C.R.

A circles or in rule or direction in the Bonus Act, there was no prohibition from
such a practice. The question in that case was whether while working out the
net profits the trader can provide from his gross receipts his liability to pay
a certain sum for every additional year of service which he receives from his
employees. It was answered in affirmative. If such liability was properly
ascertainable, it was ·possible to arrive at a proper discounted value. This
B decision, in our view, is not relevant to determine the point in issue in the
present case.

Further gratuity cannot be included in the approved expenditure as
under Rule 9 the State Government can sanction the grants under four Heads
C provided therein and gratuity does not fall under any one of them. It is not
claimed that the gratuity falls under Heads 2 to 4. The Head No. I is
'maintenance or recurring grant'. Admittedly a gratuity cannot come under
the category of maintenance. It is also not a recurring grant as already noticed
hereinbefore. It is, thus, clear that payment of gratuity cannot come under
any of the four categories mentioned in Rule 9.
D
In view of the aforesaid, the gratuity within the meaning of the Act and
the Rules cannot form part of recurring grant. It is not includible as part of
approved expenditure for the purposes of computing the amount of grant
payable to the appellant. In this view, communication dated 26th May, 1994
of Government of Rajasthan to the effect that the Rules do. not provide for
E grant-in-aid on amount of gratuity, the same being not included in the approved
expenditures, cannot be held to be illegaL This will, however, not affect the
rights of the employees to get the gratuity from the concerned institution.

Before parting, we wish to note that if representations are made by
F aided Non~Government Educational Institutions, the State Government would
consider sympathetically the question of the gratuity amount payable to the
employees being taken into consideration for the purpose of computing the
amount of grant-in-aid. We, however, clarify that pending making of such
representation and its consideration, the payment of gratuity to the employees
shall not be delayed.
G
In view of the above, we find no infirmity in the impugned judgment
of the High Court and, therefore, the appeals and the special leave petitions
are dismissed.

D.G. Appeals and SLP's dismissed.