Gratuity Can Be Withheld Post-Retirement for Proven Negligence Under Service Rules – Payment of Gratuity Act Does Not Override CDA Rules: Calcutta High Court

"Disciplinary Proceedings Initiated Before Retirement Continue in Legal Fiction—Recovery from Gratuity for Pecuniary Loss is Valid Even Without Termination of Service", In a decisive ruling clarifying the primacy of service rules over general gratuity legislation, the Calcutta High Court in a division bench judgment has upheld the right of a government company to withhold and recover gratuity from a retired CMD, Malay Sengupta, on the basis of disciplinary findings—even in the absence of termination from service.

The Court, comprising Justice Lanusungkum Jamir and Justice Rai Chattopadhyay, allowed FMA No. 959 of 2025, filed by MSTC Limited, setting aside a Single Judge’s judgment dated March 25, 2025, which had upheld the gratuity entitlement of the respondent under the Payment of Gratuity Act, 1972.

“The relevant rules have not been challenged and continue to hold the field. Rule 30A(ii) of the MSTC CDA Rules clearly permits recovery of pecuniary loss from gratuity if misconduct or negligence is proved in a disciplinary proceeding. Such recovery does not always require termination of service or satisfaction of conditions under Section 4(6) of the Payment of Gratuity Act.”

Rule 30A of CDA Rules Creates Legal Fiction of Continued Service—Gratuity Can Be Forfeited for Proven Misconduct or Negligence

The respondent, Malay Sengupta, was the CMD of MSTC Limited, a public sector undertaking, and was facing disciplinary proceedings at the time of his superannuation on April 30, 2009. A charge-sheet had been issued against him a few days earlier, and upon conclusion of the proceedings, a penalty order dated April 30, 2013 directed recovery of ₹10 lakhs from his gratuity.

The controversy centered on whether such a recovery could be lawfully sustained under the MSTC Conduct, Discipline and Appeal (CDA) Rules, 1980, or if the Payment of Gratuity Act, 1972 would prevail to mandate full payment.

The Court found that Rule 30A(i) and (ii) of the MSTC CDA Rules operated validly even after retirement:

“Rule 30A(i) creates a legal fiction that disciplinary proceedings instituted during service are deemed to continue even after superannuation. Rule 30A(ii) expressly empowers the employer to withhold and recover gratuity for proven pecuniary loss due to misconduct or negligence. This stands independently of the statutory scheme of the 1972 Act.”

Section 4(6) of Payment of Gratuity Act Not a Fetter on CDA Rules—Single Judge Erred by Relying on Overruled Judgment

Rejecting the arguments of the respondent that Section 4(6) of the Payment of Gratuity Act prohibits forfeiture of gratuity in the absence of termination for misconduct, the Division Bench invoked the authoritative ruling of the Supreme Court in Mahanadi Coalfields Ltd. v. Rabindranath Choubey, (2020) 18 SCC 197:

“Neither Section 4(1) nor Section 4(6) of the Payment of Gratuity Act creates a bar on departmental enquiries being continued post-retirement, or on the imposition of penalties including recovery from gratuity. The relevant service rules would govern such situations.”

The Court also pointed out that the Single Judge had erroneously placed reliance on the overruled decision in Jaswant Singh Gill v. Bharat Coking Coal Ltd., (2007) 1 SCC 663, ignoring the binding precedent of Mahanadi Coalfields, which reaffirmed the primacy of service rules.

"Rules Hold the Field Unless Set Aside—Payment of Gratuity Act Does Not Displace Binding Service Regulations"

The respondent had argued that gratuity is a property-like statutory right, and in the absence of termination or quantification of actual loss caused, its forfeiture is not legally sustainable.

But the High Court firmly rejected this, holding:

“Once it is shown that the CDA Rules—particularly Rule 30A(ii)—permit recovery for proven negligence causing pecuniary loss, the gratuity can be validly withheld or forfeited. There is no requirement under law that each case must conform to the precise conditions under Section 4(6) of the 1972 Act.”

It emphasized that Rules 30A(i) and 30A(ii) are not repugnant to the Payment of Gratuity Act, and thus, there is no question of the latter overriding them. The Court stressed:

“So long as Rules are not under challenge and have not been struck down, they are binding. The appellate and controlling authorities under the Gratuity Act cannot question disciplinary findings or substitute their own views.”

Disciplinary Order Was Never Challenged – Finality Bars Indirect Reopening of Recovery via Gratuity Claim

The respondent had never challenged the disciplinary punishment order dated April 30, 2013, and had only raised the gratuity claim four years later in 2017. This delay and inaction proved fatal:

“The disciplinary punishment attained finality. It cannot now be unsettled through a collateral claim for gratuity. The belated claim cannot override the conclusive findings of misconduct and penalty under valid service rules.”

Additionally, the Court rejected contentions of mala fides and discriminatory treatment, noting that Rule 30A permits withholding gratuity independently of whether other officers were penalized similarly or not.

From CMD to Litigation – Gratuity Recovery After Long-Drawn Disciplinary Proceedings

Malay Sengupta had been CMD of MSTC Ltd. for over a decade, with multiple extensions of his term. The disciplinary proceedings were initiated in April 2009, days before his retirement, for alleged misconduct in decisions made in 1995, 2002, and 2008.

Though he was exonerated in one charge-sheet, in others he was found guilty of causing significant financial loss to the company. A ₹10 lakh penalty was imposed through recovery from gratuity. This led him to approach the Controlling Authority, which rejected his claim in 2018. However, the Appellate Authority reversed the decision in 2019, awarding him gratuity with interest, which was affirmed by the Single Judge in 2025—until the present Division Bench overruled it.

Controlling and Appellate Authorities Under Gratuity Act Cannot Review Validity of Disciplinary Proceedings

The Court issued a strong caution against judicial or administrative overreach into settled disciplinary findings through gratuity proceedings. It held:

“The Single Judge erred in venturing into an assessment of the disciplinary record and questioning the propriety of the punishment—an exercise wholly outside the purview of judicial review in such a context.”

Citing Union of India v. Tulsiram Patel and other precedents, the Court reminded that the limited jurisdiction under the Gratuity Act cannot be used to invalidate or reinterpret disciplinary penalties.

CDA Rules Prevail—Disciplinary Recovery from Gratuity is Valid Without Service Termination

In summation, the Division Bench firmly reiterated that employers governed by their own valid service rules are entitled to withhold or recover gratuity post-superannuation, even without terminating the employee, as long as disciplinary proceedings were initiated during service and loss to the company is proven.

“The interplay of Rule 30A(ii) of the MSTC CDA Rules and Section 4(6) of the Payment of Gratuity Act is not mutually exclusive. The Rules are not inconsistent with the Act and remain enforceable.”

The Court accordingly allowed the intra-court appeal, set aside the Single Judge’s judgment dated March 25, 2025, as well as the Appellate Authority’s order dated April 30, 2019, and restored the Controlling Authority’s order dated February 20, 2018, which had denied gratuity to the respondent.

Date of Decision: December 10, 2025