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Can an employer withhold gratuity of an employee after superannuation over pending disciplinary proceedings? Supreme Court answers

Shruti Mahajan

In a judgment delivered on Wednesday, a three-Judge Bench of the Supreme Court held that an employer has a right to withhold gratuity during the pendency of disciplinary proceedings against an employee even after superannuation. (Chairman cum Managing Director Mahanadi Coalfields vs Sri Rabindranath Choubey)

The judgment was delivered by a Bench of Justices Arun Mishra, MR Shah, and Ajay Rastogi which held that in light of the relevant Conduct Discipline and Appeal Rules (CDA Rules) in the instant case read with the provisions of the Payment of Gratuity Act, an employer has the right to withhold gratuity during the pendency of disciplinary proceedings.

The Court also considered the question of whether the disciplinary authority can impose a penalty of dismissal from service for misconduct on an employee who has superannuated.

On this issue, the Bench had differing views. While the majority opinion of Justices Mishra andShah, answered the question in the affirmative, Justice Rastogi took a different view.

Factual Matrix

An employee of Mahanadi Coalfields was charged with serious allegations of misconduct, which allegedly caused losses of over Rs 30 crore to the company, following which a departmental inquiry was initiated under the CDA Rules of 1978 put in place by Coal India Ltd.

During the pendency of these proceedings, the employee who is the respondent before the Supreme Court, superannuated. Consequently, the employer withheld the gratuity amount due to the ex-employee while the disciplinary proceedings were pending.

The retired employee submitted an application to the employer as well as the Controlling Authority under the Payment of Gratuity Act for payment of gratuity. On being informed of the pending departmental inquiry, the Controlling Authority held that the claim of the employee-respondent was "pre-mature".

The respondent challenged this before a Single Judge Bench of the Orissa High Court, which held that the writ was maintainable on the grounds that there is an appellate authority before which the respondent ought to have appeared.

Instead of filing an appeal before the Appellate Authority, the respondent­ filed an intra court writ appeal before the Division Bench of the High Court, which held that the writ petition was maintainable. It was also held that the employee's dismissal from service would not arise on account of his superannuation.

The High Court further held that the payment of gratuity cannot be withheld on the basis of the CDA Rules, as these do not have the force of a statute. The statutory right to gratuity under the Payment of Gratuity Act accrued to the respondent cannot be impaired, the High Court said.

This ruling of the High Court was challenged before the Supreme Court in the present appeal. The two questions framed by the Apex Court in this case were:

(1) Whether is it permissible in law for the employer to withhold the payment of amount of gratuity payable to the nemployee, even after his superannuation from service, because of the pendency of the disciplinary proceedings against him?

(2) Where departmental enquiry had been instituted against an employee while he was in service and continued after he attained the age of superannuation, whether the punishment of dismissal can be imposed on being found guilty of misconduct in view of the provisions made in Rule 34.2 of the CDA Rules?

On withholding payment on gratuity

On this question, the Bench unanimously held that the CDA Rules of 1978 framed by the Coal India Limited, read with the provisions of the Payment of Gratuity Act, give an employer the right to withhold gratuity during the pendency of disciplinary proceedings.

Section 4(1) of the Act confers a right to gratuity on an employee who has continuously served as an employee for five or more years and this payment becomes due to them upon their superannuation, retirement or resignation, or death or disablement.

Section 4(6) of the Act provides for withholding or forfeiture of gratuity amount in certain circumstances.

In this regard, the Court highlights that Section 4(6) would prevail over Section 4(1) given that the clause for forfeiture of gratuity contains a non-obstante clause. Further, the Act does not make any provision for cases of departmental inquiry, and therefore, these statutory provisions do not come in the way of the CDA Rules, which allow the continuation of an inquiry even after the employee's superannuation.

It was held that the charges in the instant case are of very serious nature. The respondent is alleged to have dishonestly caused coal-stock shortages. The allegation, if proved to be right, could attract the punishment of dismissal from service, and by virtue of such dismissal, attract the provisions of Section 4(6) of the Act pertaining to forfeiture of gratuity. Therefore, the employer has the right to withhold payment of gratuity amount, the Court said.

"[I]f such a charge is proved and punishment of dismissal is given thereon, the provisions of sub­section 6 of Section 4 of the Payment of Gratuity Act would be attracted and it would be within the discretion of the appellant­employer to forfeit the gratuity payable to the respondent. Therefore, the appellant­ employer has a right to withhold the payment of gratuity during the pendency of the disciplinary proceedings."
Supreme Court

On whether dismissal can be effected even after superannuation of employee

The majority judgment on this question held that,

"...the disciplinary authority has powers to impose the penalty of dismissal/major penalty upon the respondent even after his attaining the age of superannuation, as the disciplinary proceedings were initiated while the employee was in service."

Rule 34.2 of the CDA Rules states that a departmental inquiry which was initiated during the service of an employee will continue even after the employee has superannuated. The inquiry will be continued and concluded in the same manner as if the employee was still in service. For the limited purpose of this inquiry, the employee would be deemed to be still in service according to the Rules.

The Court says that the Rules create a legal fiction and this "legal fiction is required to be given logical effect".

With respect to the inquiry of a superannuated employee, the Rules provide for withholding the payment of gratuity and forfeiture of the whole or partial amount should the charge of misconduct be proved.

The forfeiture should be to the tune of losses caused by the defaulting employee's misconduct in accordance with Section 4(6)(b) of the Act, which provides for forfeiture on account of termination of service.

"The recovery of loss or forfeiture is one of the punishments which depends on exigency of termination by way of dismissal as mandated by Section 4(6). To give effect to the provisions of the Act, the punishment of dismissal can be imposed in view of Rule 34.2, otherwise it would defeat the intendment of provisions contained in Section 4(6)(a) and 4(6)(b) of the Act of 1972."
Majority opinion of the Supreme Court

The Act only deals with the aspect of payment of gratuity and does not govern the aspect of departmental inquiries. As such, Section 4(1) of the Act, does not impinge upon Rules for holding a departmental inquiry and Section 4(6) prevails over it, the majority opinion of the Court said. As regards inquiries, the relevant service rules would govern the same, it is further said.

Therefore, the Court, after considering a plethora of judgments, said "the legal fiction provided in Rules 34.2 of the CDA Rules of deemed continuation in service has to be given full effect."

The Court thus, concluded:

(1) the appellant-employer has a right to withhold the gratuity during the pendency of the disciplinary proceedings, and

(2) the disciplinary authority has powers to impose the penalty of dismissal/major penalty upon the respondent even after his attaining the age of superannuation, as the disciplinary proceedings were initiated while the employee was in service.

Minority opinion

Justice Ajay Rastogi opined that on conclusion of the inquiry, if the superannuated employee is found to be guilty, punishments prescribed under the scheme of the Rules may be inflicted, but the punishment of dismissal from service with retrospective effect is not an option available with the concerned authority.

"...either of the substantive penalties specified under Rule 27 of the Rules, 1978 including dismissal from service are not open to be inflicted on conclusion of the disciplinary proceedings and the punishment of forfeiture of gratuity commensurate with the nature of guilt may be inflicted upon a delinquent employee provided under Rule 34.3 of Rules, 1978 read with sub­section (6) of Section 4 of the Act, 1972."
Justice Ajay Rastogi

Read Judgment:

Chairman cum Managing Director Mahanadi Coalfields vs Sri Rabindranath Choubey.pdf
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