Kyoto City sacked the man, who was not named, after he was filmed by the security camera of his bus pilfering 1,000 yen ($7) in 2022.
The verdict was overturned in his favour, with a court ruling that the punishment was excessive.
It ruled that the man's conduct could undermine public trust in the system and the sound operation of the bus service.
The driver instructed the group to drop 150 yen worth of coins into a fare collection box, and accepted a 1,000-yen bill by hand and didn't report it properly.
The driver had been reprimanded several times during his career over various incidents, according to the ruling.
Kyoto City hailed the decision.
“If our strict measures were not accepted, then our organisation could become careless and it could result in eroding the public’s trust,“ he said.
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