Employers Can Withhold Gratuity For Loss Caused By Employee; Disciplinary Rules To Prevail Over Gratuity Act: Calcutta High Court

Background Facts

The respondent was a Presidential appointee to the Board of Directors of the MSTC Limited (Appellant). He served as the Chairman and Managing Director (CMD) of MSTC Limited. A disciplinary proceeding was initiated against him before his retirement. His gratuity was withheld pending the outcome of the proceeding. The disciplinary authority imposed a penalty directing recovery of Rs. 10 lakhs from his gratuity for pecuniary loss caused to the company. The employee's subsequent review was also rejected.

Therefore, the employee claimed his gratuity before the competent statutory authority. The Controlling Authority also rejected his claim. However, the Appellate Authority under the Payment of Gratuity Act reversed this decision, directing payment of gratuity with interest from the date of his retirement. This order was upheld by a Single Judge of the Calcutta High Court.

Aggrieved by the same, MSTC Limited filed the intra-Court appeal before the High Court.

It was contended by MSTC Limited that the Single Judge wrongly applied the Payment of Gratuity Act, 1972 to a managerial employee who does not fall under the definition of an employee. It was argued that the Conduct, Discipline and Appeals (CDA) Rules were binding on the employee.

The MSTC CDA Rules empowered the employer to withhold gratuity and recover pecuniary losses caused by an employee's negligence or misconduct, independent of the conditions under the Gratuity Act. Relying upon the Supreme Court judgment in Mahanadi Coalfields Ltd. v. Rabindranath Choubey, it was contended that service rules providing for a deemed continuation of employment for disciplinary purposes and permitting recovery from gratuity, are not restricted by the Gratuity Act.

On the other hand, it was argued by the employee that he was entitled to gratuity under the Payment of Gratuity Act, 1972 which accrued upon his superannuation. The disciplinary proceeding was initiated at the fag end of his career based on old allegations. Further, the order of forfeiture was passed without calculating the specific loss attributable to his conduct, as required under Section 4(6) of the Gratuity Act.

He argued that the company's Chief Vigilance Officer was made the sole witness against him, therefore rendering the proceeding biased. Further, the forfeiture of the entire gratuity amount was disproportionate and discriminatory, when the loss arose from a collective decision of a purchase committee. The company had later released the forfeited gratuity of other officers involved in the transaction.

Findings of the Court

It was observed by the Division Bench that the company's Rule operated in two distinct situations. Firstly, for misconduct covered under Section 4(6) of the Gratuity Act, and secondly, for any misconduct or negligence causing pecuniary loss to the company. It was held that the rule granted the employer a standalone right to withhold and recover proven losses from gratuity, independent of the strict conditions of the Payment of Gratuity Act.

Reliance was placed on the Supreme Court's judgment in Mahanadi Coalfields Ltd. v. Rabindranath Choubey. It was held that service rules providing for a deemed continuation of employment for disciplinary purposes and permitting recovery from gratuity, are not overridden by the Payment of Gratuity Act.

It was further held that the disciplinary order passed under the CDA Rules resulting in a quantified recovery had attained finality, therefore, the employee's claim for gratuity was not maintainable. The Controlling Authority had correctly rejected the claim, however, the Appellate Authority and the Single Judge had erred in interfering with the decision.

The orders of the Appellate Authority and the Single Judge were set aside, while the order of the Controlling Authority which had denied the gratuity claim, was upheld by the Division Bench. Consequently, the intra-court appeal filed by the MSTC Limited was disposed of by the Division Bench.

Case Name : MSTC Limited vs. Malay Sengupta and Ors.

Case No. : FMA 959 of 2025

Counsel for the Appellant : Soumya Majumder, ld. Sr. Adv., Victor Chatterjee, Jayeeta Sengupta

Counsel for the Respondent : Biplab Ranjan Bose