Service jurisprudence: An interplay of disciplinary proceedings and Gratuity

The nodal ministry, which deals with labour is the Ministry of Labour & Employment. The contribution of two Union Ministers, Shree Jag Jeevan Ram and Shree V. V. Giri, while holding the portfolio of labour ministry is immense. The efforts of these two great personalities in bringing the best practices an enunciated by the International Labour Organisation (ILO) in Indian labour management has changed scenario a lot. Infusion of the idea of collective bargaining, right to form an association, equal pay for equal work, right to maternity etc. are a few illustrations to it.

There are two significant wings beneath it, labour wing and employment wing. Labour wing is responsible for executing and implementing 28 labour statutes (both central & state) to inject harmonisation and peace in the industrial establishment.

On the other hand, employment wing is entrusted with the task of registration, recognition, offering vocational guidance to the interested candidates and further to obtain data on employment market information.

Hence, it can be said that through judicial pronouncements on both the aspects, two significant jurisprudence have been emerged namely: labour jurisprudence and employment (service) jurisprudence. The entire gamut of labour legislation may be classified into the following broad categories:

  • Legislations on Industrial relations (Industrial Dispute Act, 1947, Trade Union Act, 1926 etc.)
  • Wage Legislations (Code on wages, 2019)
  • Social Security (terminal dues) legislation (Provident Fund, Gratuity, Pension, Employee State Insurance etc.)
  • Legislation concerning health, safety and welfare (Factories Act., 1948 etc., Employees’ Compensation Act, 1923 etc.)

The workforce and establishment relationship may be classified into two set up:

  • Employer-employee direct relationship;
  • Principal employer and contract-labour system.

The whole set up of labour & employment mechanism runs through this. Contract labour system is primarily governed by the Contract Labour (Regulation & Abolition) Act, 1970. There is another important law which functions as a model law for industrial establishments to suggest them to imbibe necessary terms of employment and conditions of service in that particular establishment is Industrial Employment (standing order) Act, 1946. Thus, there is no gainsaying of the fact that we have a plethora of legislation addressing the best labour practices be it on industrial relationships, participation in management, wage regulation, health, safety, welfare, social security etc. At the same time, it is also appreciable that we have a rich jurisprudence through judicial pronouncements like Bangalore water supply case [(1978) AIR 548], Salal Hydro projects case [(1984) 3 SCC 538], Asiad workers case [(1982) AIR 1473], Bijay Cotton Mills case [(1955) AIR 33] are a few to count.

The constitution of India envisages a socio-welfare economy. Item no. 23 of the concurrent list read with Article 246 actually set the tone to legislate on social security and social insurance by conferring concurrent jurisdictions to both, the centre as well as state govt. In continuation thereof, this article is an attempt to trace the trajectory of judicial progress on one of the most crucial aspects of payment of Gratuity and pendency of disciplinary proceedings.

The payment of Gratuity Act, 1972 (hereinafter referred to as PG Act) is a beneficial piece of legislation. The noble notion behind the Act is to strengthen the social security net of an employee after his retirement or otherwise. This is welfare and social security legislation. Section 4 of the Act is the charging section, which gives a statutory right to an employee to get a gratuity amount. Section 4(1) of the Act set the eligibility criteria;

It is payable to an employee on the termination of his employment after he has rendered continuous service of a minimum of five years in that particular establishment. Section 4(1) flags three situations where such termination of employment occurs:

  • Superannuation (on attaining the age of retirement);
  • Retirement or resignation;
  • On his death or disablement due to accident or disease. 

In contrast to this, section 4(6) which is a non-obstante clause which enumerates the circumstances which empower the employer of the concerned establishment to forfeit the payable Gratuity. The position of law on forfeiture of Gratuity is prescribed under section 4(6) of the Act, 1972. It can be said that section 4(1) is the eligibility clause; however, section 4(6) is the forfeiture clause. The literal interpretation of section 4(6) presupposes an idea of termination of employment as a precondition/prerequisite to forfeit the Gratuity. The forfeiture clause provides the grounds on which it may be forfeited:

  • Any act/ wilful omission or negligence causing any damage or loss to or destruction of, property belonging to the employer;
  • An act which may be tagged as riotous, disorderly conduct or any act of violence or any act involving moral turpitude.

Usually, it is seen that each establishment has its own rules regulating the conduct & discipline of its employees during the course of employment. Such rules usually prescribe the penalties to be inflicted on the delinquent employee once the proceedings as initiated under such rules are concluded. These disciplinary proceedings run on the basic notions of natural justice and usually adhere to the procedural clutches of law as enumerated in their rules. The remedy against the findings/order of such disciplinary proceedings usually lies in preferring appeal before the prescribed authority. Such appellate authority in most of the cases may be the head of the department. The set of rules as prescribed to monitor the conduct and discipline of an employee at workplace is the prime charter which governs the employees during the course of employment. These disciplinary rules usually prescribe the penalties into two major segments:

  • Minor penalty (like censure, giving memo, withholding increment or promotion, recovery of any pecuniary loss etc.)
  • Major penalty (like dismissal, rank reduction, compulsory retirement, removal from service etc.)

The payment of gratuity act is having no explicit mentioning of any disciplinary proceedings. Section 14 of the Act, gives an overriding effect to the Act over other statutes, rules, regulations, order or any of the terms of the contract governing the parties. The Gratuity is on a different footing as compared to other terminal dues be it a pension, provident fund or anything else. The Apex court held time and again that it’s a very holy terminal due which cannot be withheld for any reason whatsoever except as provided under the Act. Section 13 of the Act says that it is not subject to any attachment proceedings be it civil, criminal or revenue.

Section 7 of the Act read with Rule 7(1) of Payment of Gratuity Rules 1973 gives a statutory right to an employee to seek Gratuity from the employer of the establishment by applying through Form I. The rules made under the Act prescribes various specimen sample forms. Form N gives a format to get a direction from the Controlling Authority within the meaning of rule 10(1) for the defaulting employer. Form T prescribes the format for recovery of Gratuity from the erring employer as an arrear of land revenue.

On careful perusal of the various provisions of the Act, it is clear that the Act provides for forfeiture of Gratuity solely on the grounds as mentioned under section 4(6) of the Act. Such forfeiture may be full or partial. The law says that the forfeited amount should commensurate to the actual loss caused to the employer. In other words, before forfeiting the Gratuity, the quantification of the actual damage caused is a must.

Therefore the employers usually withhold the entire payable Gratuity unless the disciplinary proceeding in relation thereto is not concluded. Section 7(3) and section 7(3A) which talks about the timeline of 30 days within which it should be paid to the eligible employee, if not paid within such period, then a simple interest runs @10% till its full and final realisation. Looking at the scheme of the Act, upon submission of Form N to the Controlling Authority/officer (CO), the CO under section 7(4) of the Act passes an order. The issues which come for determination before the CO are the admissibility of the claim of the employee, as to the persons entitled to receive such amount on behalf of the employee etc. Section 7(7) of the Act gives the provision for appeal before the prescribed authority within sixty days.

The second proviso of the section 7(7) says that such appeal before the prescribed authority is not admissible unless the payable amount is deposited with the CO. The Act does not provide any provision for the second appeal before the High Court, but such orders of the appellate authority are amenable to the writ jurisdictions under Article 226/227 of the Constitution of India. Now looking into the scheme of the Act, its statements, objects and reasons it is clear that a statutory duty is casted upon the employer to arrange the payable Gratuity for the employee who is otherwise eligible under section 4(1) of the Act and does not shadowed by the trigger of section 4(6) of the Act. Therefore following interesting question of laws arises in relation thereto:

What would be the fate of disciplinary proceedings initiated under the relevant rules against the delinquent employee during the course of employment but could not come to conclusion and the employee is permitted to retire?

If the service of an employee is not terminated with respect to the grounds as mentioned under section 4(6) (a) & (b), the employer loses his right to forfeit the Gratuity?

At what stage, it can be said that the disciplinary proceedings has been initiated against the delinquent employee?

  • What if the charge-sheet is not issued against the delinquent and the employee is permitted to retire from his services?
  • Can service rules can carve out some additional grounds for forfeiture of Gratuity as given under section 4(6) of the Act, 1972?
  • Is PG, Act 1972 a complete code in itself?
  • Whether the penalty of dismissal can be inflicted upon the delinquent employee, who is permitted to superannuate?
  • Is the service rule of deemed employee fiction and in consequence thereof the process of forfeiture of Gratuity in derogation of section 4(6) of the PG, Act, 1972?

Mahanadi judgment overrules Jaswant Gill judgment, whether Mahanadi judgment is having a retrospective effect and will affect the outcome of all the pending proceedings before any authority at any stage?

To answer the above questions, it is necessary to travel into various judicial pronouncements on the subject. In the matter of D V Kapoor v. Union of India [(1990) 4 SCC 314] rule 9(2) of Civil Services Pension Rules, 1972 came up for consideration, wherein perhaps for the very first time, the apex court held that if any disciplinary proceeding is initiated against a serving employee and before the proceeding reaches to its logical end, the delinquent employee superannuates, then for the purpose of conduction and conclusion of such proceeding, he/she shall be in deemed employment.

Therefore, in this case, the legal fiction of deemed employee was created. Then in another case, State Bank of Patiala v. Ram Niwas Bansal [(2014) 12 SCC 106] the court again emphasised the creation of legal fiction of deemed employee and further held as a marginal note that order of dismissal may be passed even after the superannuation of delinquent. Then in another important case, Union of India v. Ajay Patnaik [(1995) 6 SCC 442] the apex court discussed at a great length, various implications and impediments of the issue of the continuance of disciplinary proceedings after the superannuation of an employee. In this case, the court went on saying that, the departmental inquiry should not be closed without making any finding on merits; otherwise employee will get rid of departmental proceedings by lapse of time.

Then a division bench judgment of the Hon’ble Supreme Court in Jaswant Singh Gill v. M/s Bharat Coking Coal Ltd.[(2007) 1 SCC 663] actually turned the wheels of entire jurisprudence in almost different directions. In this case, it was opined that in order to trigger forfeiture clause of section 4(6) of the PG Act, 1972, there must be the termination of employment that too precisely on the grounds as enumerated under section 4(6) (a) & (b) of the Act.

In other words, the court held that once a delinquent employee is permitted to retire from his services, then in any case no major penalty including dismissal can be inflicted upon the employee. The court interpreted service rules of the company M/s Bharat Coking Coal Ltd. in a narrower sense without addressing the full dimensions, implications and repercussions of pending disciplinary proceedings.

The court in the subject case said that section 14 of the PG Act, 1972 is having an overriding effect over all the statutes, rules, regulations etc. and such service rules falls short of any legislative backing or statutory force. Therefore, PG Act, 1972 shall be having an upper hand as compared to relevant service rules.  The court said, a statutory right accrued thus cannot be impaired by reason of rule which is devoid of any statutory support or legislative competency. In Gill judgment the court expressed opinion that the PG Act, 1972 is a self-contained and complete code in itself.

The legislative mandate of the Act is unequivocal and unambiguous in its character. In this case, the court also examined the scope of writ jurisdiction of High Courts carefully.  It was underlined that a High Court while sitting as a court of writ to adjudicate upon the admissibility of gratuity claims is having a very limited scope to examine. A High court cannot sit as court of appeal for the purpose of re-appreciating the evidence on records.

The writ courts are not supposed to interfere with the findings/conclusions drawn in the departmental inquiry so long as it is based on some evidence and follow the bare minimal procedural requirements. In case of State of Andhra Pradesh v. Shree Ram Rao [AIR (1963) SC 1723], the scope of writ remedy was scrutinised by the Apex court while entertaining payment of gratuity matters, it was made explicitly clear that the High court cannot travel beyond the three jurisdiction i.e. question as tos:

  • competency and jurisdiction of the authority concerned;
  • procedural adherence;
  • compliance of canons of natural justice.

Therefore, the law laid down in Jaswant Gill case was the law of the land until Mahanadi judgment was pronounced. It is noteworthy to mention that the judgment delivered by the three judge’s bench of the Apex Court in the matter of CMD-Mahanadi Coal Fields Ltd. v. Shree Rabindra Nath Chaubey [(2020) SCC Online SC 470] put rest to the judicial turmoil on the subject. Three judge’s bench of Justice Arun Mishra, Justice M.R. Shah and Justice Ajay R. Rastogi of the Supreme Court examined the whole jurisprudence in the light of PG Act, 1972 and the relevant service rules.

An employee of the Mahanadi Coal Fields company was permitted to retire, while the disciplinary proceedings against the delinquent employee was going on for his alleged Act of gross misconduct and thereby causing a pecuniary loss to the company to the tune of Rs. 31 crore approximate. The rules governing the conduct & discipline of the employees of Mahanadi Company was named as Conduct, Discipline and Appeal Rules, 1978 (hereinafter referred as CDA Rules). Rule 34(2) of the CDA rules creates a legal fiction of deemed employee, and thus stating that during the course of any disciplinary inquiry, the delinquent employee is permitted to retire, then for the purpose of conduction and conclusion of such inquiry the employee shall be considered to be in employment even though he/she is permitted to retire.

Further to add, Rule 34(3) states that if at the conclusion of such inquiry the delinquent is found guilty of the alleged charges, then his Gratuity shall be forfeited to make good the pecuniary loss caused to the employer due to any misconduct of the delinquent. The same question arose before the court in the matter of State Bank of India v. Ram Lal Bhaskar [(2011) 10 SCC 249], wherein Rule 19(3) of the State Bank of India Officers’ Service Rules, 1992 was in question as to the fact of continuance of departmental inquiry after retirement. The court in this matter examined the issue of continuance of any pending disciplinary inquiry against the delinquent employee and held the same. But the issue of inflicting major penalties like dismissal after retirement was left unanswered. In Mahanadi case, the court explored the legislative intent of section 4(1) & 4(6) of the Act read with rules 34(2) and 34(3) of the CDA Rules, 1978.

The court explained the fact that there is no bearing of PG Act upon the conduction and conclusion of disciplinary inquiry. No provision of the PG Act deals with disciplinary proceedings. In other words, PG Act cannot control, supervise, and direct the employers’ right to hold a departmental proceeding against the delinquent. Further to add, none of the provisions of the PG Act prescribes what sort of punishments can be imposed/inflicted as a conclusion of such inquiry upon the superannuation of the delinquent. It can be said that neither the provisions of section 4(1) or 4(6) creates and blockade on departmental inquiry nor even its continuation after superannuation.

It can also be said that the CO as established under section 3 of the PG Act, 1972 lacks any sort of jurisdiction or competency to deal with the matters under the relevant service rules. The service rules of any establishment is the supreme charter when it comes to govern the conduct and discipline of an employee in due course of his/her employment. The court in this judgment tried to trace out the legislative intent behind the incorporation of section 4(6) of the Act.

The court declined to apply literal rule of statutory interpretation as was applied in the case of Jaswant Gill by giving the literal meaning to the term termination. Further, in the said situation, if there cannot be any dismissal after superannuation of the delinquent employee then the legislative intent would be defeated of section 4(6) of the Act.  In Mahanadi case, the court applied the purposive rule of the statutory interpretation. It was held that rule 34(2) and rule 34(3) of the CDA Rules 1978 are there to give a purposive meaning and logic to section 4(6) of the Act.

In other words, it is there to support and supplement section 4(6) of the Act nor to supplant it. The post-retirement benefits are something which is supposed to be earned by an employee for a long, meritorious and clean service rendered by him, it is not paid out of charity or of gratitude of the employer. The forfeiture of Gratuity is a sort of penalty which is inflicted as a consequence of proved alleged misconduct as enumerated under section 4(6) (a) & (b) of the PG Act. Section 4(1) of the PG Act do not impinge upon the continuation of disciplinary inquiry but findings of such disciplinary inquiry has a direct link with section 4(6) of the PG Act.

Therefore, it would cause miscarriage of public justice, if the law gives a green signal to the lapse of the continuing disciplinary inquiry against the delinquent employee on his superannuation. The recovery of loss (which is pecuniary in nature) from the withheld gratuity amount is the well-recognised and well-guarded right which is available to the employer. If the argument of lapse of pending disciplinary inquiry against the delinquent on his superannuation is considered, the legislative mandate and object of section 4(6) of the Act would be defeated.

Such an interpretation would lead to travesty of justice and also would be very opposite to the basic tenets of public policy, public trust and public confidence in the governance as well public justice. An inquiry initiated against the delinquent employee when he/she was in employment must reach to a logical end. Legal fiction of deemed employee must meet to its logical end for which it was created. No meaningful or fruitful purpose would be served if the law permits lapse of pending disciplinary proceedings on the attainment of superannuation.

Therefore, Rule 34(2) and rule 34(3) is not ultra vires to section 4(6) of the PG Act.  And thus it cannot be a matter of any dispute or contention that PG Act is not a self-contained and compete code in itself. It has a bearing of the outcome of the pending disciplinary inquiry if initiated on the ground of misconduct as mentioned under section 4(6) (a) & (b) of the Act. It would not be out of context to mention the case of Balbir Kaur v. Steel Authority of India Ltd. [(2000) 6 SCC 493] where the Apex court while succinctly fixing the aims and objects of the PG Act, 1972 said that payment of Gratuity is no longer in the realm of charity, it is a well-recognised statutory right given to an employee who is otherwise eligible to get Gratuity. 

It is to reiterate again that forfeiture of Gratuity is allowed only on the grounds as mentioned under section 4(6) of the PG Act and not for any other offence as enumerated under the relevant service rules of the establishment. However, Justice Ajay R. Rastogi penned down a separate judgment in the case. Justice Rastogi agreed with Justice M. R. Shah on the point of not lapsing the pending disciplinary inquiry after the delinquent employee attains the age of superannuation. But on the issue whether a major penalty like dismissal can be inflicted after superannuation on the delinquent employee upon conclusion of such inquiry, Justice Rastogi held that such penalty cannot be inflicted after the superannuation of the employee. Further to add, Justice Rastogi said the withholding/forfeiture of Gratuity will wholly depend upon the scheme of relevant service rules too.


The law as laid down by division bench of the Apex Court in the matter of Jaswant Gill was the law of the land until 27.05.2020, i.e. the date when three judges’ bench in Mahanadi case overruled the law laid down in Jaswant Gill Case. In a nut shell as on date the law of the land on forfeiture of Gratuity is that an employer is very well in his right to withhold the payable Gratuity either in full or in part even when the delinquent employee is permitted to retire and the disciplinary inquiry which was initiated before his superannuation but concluded after his superannuation.

The law of the land says that on attaining the age of superannuation of the delinquent employee, the pending disciplinary inquiry do not lapse automatically. And the employer is very well in his right to inflict the penalty as per the conclusion of such inquiry.

In other words, major penalties like dismissal may be inflicted as an outcome of the pending disciplinary proceedings even after the retirement of the delinquent employee. In the matter of UCO Bank v. Rajinder Lal Cooper [(2007) 6 SCC 694] the court made it emphatically crystal clear that if the charge sheet is served upon the delinquent employee after his/her superannuation from the employment, then in that case the charge-sheet, inquiry report, orders of disciplinary authority and of appellate authority are devoid of any legal jurisdiction/justification and thus not tenable in law. The disciplinary proceedings actually starts when the charge-sheet is served upon the delinquent employee not otherwise in any case.

Now a moot question which leaves in the lurch the fate of all the pending proceedings under the PG Act for the adjudication of gratuity claims under section 4(6) of the Act under various forums as prescribed under the Act or for that matter before any constitutional court. The basic tenets of law and justice demands that any alteration in law be it through enactment of any statute or through some judicial pronouncement must carry prospective effect especially if the effect of such alteration/ruling is having a chilling effect upon the rights, liabilities, and obligations of any individual.

However, if such amendment/ruling is just to include some procedural nuances or relaxing the existing ones without affecting the rights/liabilities and obligations of any individual may be having a retrospective effect. The ruling in Mahanadi Case is something which substantially alters the rights, liabilities, obligations of an employee who were permitted to retire on attainment of the age of superannuation way before 27.05.2020 but their matters are pending before forums for adjudication for their claims of Gratuity. Therefore, the question of prospective/retrospective application of the ruling in Mahanadi judgment is something which is earnestly required to be addressed the issue as of now.


Bharat Bhushan Pandey
Deputy Legal Advisor
Legal Department

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