High Court Rules on Withholding of Gratuity Under Service Rules

Soumyadip Mullick, MP, 22 December 2025, Kolkata: The Calcutta High Court has ruled that an employer can withhold and recover gratuity from a retired employee if the applicable service rules permit such action and disciplinary proceedings were initiated while the employee was still in service.

A Division Bench comprising Justice Lanusungkum Jamir and Justice Rai Chattopadhyay set aside a single judge’s judgment that had upheld payment of gratuity with interest to a former Chairman and Managing Director of MSTC Limited, a central public sector enterprise.

The court held that MSTC’s Conduct, Discipline and Appeal (CDA) Rules allow disciplinary proceedings to continue after retirement and also permit recovery of pecuniary loss from gratuity if misconduct or negligence is proved.

The case arose from disciplinary proceedings initiated against the officer shortly before his retirement on April 30, 2009. His gratuity was withheld pending the inquiry. After the proceedings concluded, an order dated April 30, 2013, imposed a penalty directing the recovery of Rs. 10 lakh from the gratuity amount. A review petition was later rejected. The punishment order was not challenged and thus attained finality.

The officer subsequently approached the authorities under the Payment of Gratuity Act seeking the release of gratuity with interest. While the controlling authority rejected the claim, the appellate authority directed payment with interest. That order was later upheld by a single judge.

Allowing the employer’s intra-court appeal, the Division Bench held that the gratuity authorities could not examine the legality or propriety of the disciplinary proceedings or the punishment imposed.

The court observed that once the service rules validly provide for withholding and recovery of gratuity, and the punishment order has become final, authorities under the gratuity law cannot override it. The Bench also rejected the argument that gratuity can be forfeited only if the employee is terminated from service. It held that the CDA Rules provide for recovery of pecuniary loss caused by negligence as a separate ground and that these rules are not inconsistent with the Payment of Gratuity Act.

Accordingly, the court set aside the single judge’s judgment and the appellate authority’s order directing payment of gratuity with interest, while upholding the controlling authority’s decision rejecting the gratuity claim.