The Madhya Pradesh High Court has clarified that compulsory retirement, even when accompanied by forfeiture of gratuity, does not extinguish an employee’s right to encash accumulated leave. This ruling reinforces the distinction between punitive measures and statutory entitlements under service regulations, offering critical guidance to public sector banks and their employees.
Background & Facts
The Dispute
The petitioner, Kailash Chandra Arya, was compulsorily retired from service with the Madhya Pradesh Gramin Bank following a disciplinary enquiry. While the bank imposed forfeiture of gratuity as a penalty to recover alleged losses, it refused to pay earned leave encashment, invoking Regulation 67 of the Narmada Malwa Gramin Bank Officers and Employees Service Regulations, 2010. The petitioner contended that his service was not terminated but punished through compulsory retirement, a distinction that preserves his right to accumulated leave.
Procedural History
- 7 January 2024: First order issued denying leave encashment
- 18 February 2025: Rejection of petitioner’s representation seeking reconsideration
- May 2025: Writ petition filed under Article 226 of the Constitution challenging both orders
Relief Sought
The petitioner sought quashing of the impugned orders and a direction to the bank to release his earned leave encashment with interest.
The Legal Issue
The central question was whether compulsory retirement under service regulations constitutes a termination of service that triggers forfeiture of accumulated leave under Regulation 67, or whether such leave remains payable under Regulation 61(4).
Arguments Presented
For the Petitioner
The petitioner’s counsel relied on the binding precedent in Deepak Mulankar v. Central Madhya Pradesh Gramin Bank, arguing that Regulation 67 only applies to future leave and not to leave already earned. The proviso to Regulation 67 explicitly preserves the right to encash accumulated leave up to 180 or 240 days, depending on service duration. Counsel emphasized that compulsory retirement is a disciplinary punishment, not termination, and thus cannot extinguish statutory benefits accrued during service.
For the Respondent
The bank contended that Regulation 61(4) and Regulation 67 collectively operate to lapse all leave upon cessation of service, regardless of whether the cessation arises from retirement, resignation, or compulsory retirement. It argued that the intent of the regulations was to prevent misuse of leave benefits and that the petitioner’s misconduct justified denial of encashment.
The Court's Analysis
The Court undertook a textual and contextual interpretation of Regulations 61(4) and 67. It noted that Regulation 67, by its own language, governs leave that "shall lapse for availing in future" - indicating prospective application. The proviso to Regulation 67, however, carves out an exception for leave accumulated during service, explicitly stating that such leave remains payable. The Court held that reading Regulation 67 in isolation would render the proviso meaningless, violating the principle of harmonious construction.
"Regulation 67 deals with the future leave not the past leave. In case of termination only, all the monetary benefits be payable after retirement shall be ceased but when there is specific punishment of compulsory retirement forfeiture of gratuity amount. In all the three situation as per proviso leave accumulated in service shall be paid to employee or his legal representatives as the case may be under the provision of Regulation 61 (4)"
The Court found that Deepak Mulankar was directly on point and binding. It rejected the bank’s argument that misconduct negated statutory entitlements, holding that punishment and benefits are distinct legal categories. The forfeiture of gratuity was a permissible penalty under the regulations, but it did not extend to earned leave, which is a deferred wage.
The Verdict
The petitioner succeeded. The Court held that compulsory retirement does not extinguish the right to encash accumulated leave under Regulation 61(4), and that Regulation 67 must be read in conjunction with the proviso and Regulation 61(4). The impugned orders were quashed, and the bank was directed to pay leave encashment with 6% interest from the date of entitlement.
What This Means For Similar Cases
Leave Encashment Is Not Forfeited by Disciplinary Retirement
- Practitioners must distinguish between termination and compulsory retirement when advising clients on retiral benefits
- Banks and public sector employers cannot deny leave encashment merely because an employee was compulsorily retired for misconduct
- The burden now lies on the employer to prove that the service was terminated, not merely punished
Regulatory Provisos Cannot Be Ignored
- Provisos in service regulations are not decorative; they define the scope of the main provision
- Courts will apply harmonious construction to preserve statutory rights even in disciplinary contexts
- Employers must audit their internal orders to ensure compliance with the clarified interpretation of Regulations 61(4) and 67
Precedent Binding Across Gramin Banks
- The Deepak Mulankar judgment now binds all Gramin Banks under the Narmada Malwa framework
- Similar petitions in other High Courts may cite this order as persuasive authority
- Legal officers should immediately update internal guidelines to reflect this interpretation
