Introduction:

In N. Manoharan v. The Administrative Officer & Anr. (2026 LiveLaw (SC) 137), the Supreme Court of India delivered a significant ruling clarifying the scope of the Payment of Gratuity Act, 1972 (PG Act) vis-à-vis Central Government employees governed by the Central Civil Services (Pension) Rules, 1972 (CCS Rules). The appellants were retired employees of the Heavy Water Plant (HWP), Tuticorin, an establishment functioning under the Department of Atomic Energy (DAE), Government of India. They approached the Court contending that although gratuity had been paid to them under the CCS (Pension) Rules, they were entitled to a higher gratuity under the PG Act and therefore claimed the differential amount.

The case raised an important question of law: Can employees who are Central Government servants, and whose gratuity is governed by the CCS Rules, simultaneously invoke the Payment of Gratuity Act for enhanced benefits? A Bench comprising Justice Pankaj Mithal and Justice S.V.N. Bhatti, with the judgment authored by Justice Bhatti, answered this question in the negative, affirming the exclusionary clause under Section 2(e) of the PG Act and dismissing the appeal.

Background and Procedural History:

The Heavy Water Plant, Tuticorin, is a strategic unit under the Department of Atomic Energy, involved in activities essential to India’s nuclear programme. The appellants were long-serving employees who, upon retirement, received gratuity calculated in accordance with the CCS (Pension) Rules, 1972, applicable to Central Government servants. Dissatisfied with the amount, they asserted that had the gratuity been computed under the Payment of Gratuity Act, 1972, they would have been entitled to a higher sum.

Accordingly, the retired employees approached the Controlling Authority under the PG Act, claiming the differential gratuity. The Controlling Authority ruled in their favour, holding that the Heavy Water Plant qualified as an “industry” and that its employees were covered by the PG Act. This view was affirmed by the Appellate Authority.

The Union of India and the HWP authorities challenged these findings before the Madras High Court. A Single Judge upheld the orders of the Controlling and Appellate Authorities, agreeing that the PG Act applied. However, on appeal, a Division Bench of the Madras High Court reversed the decision. The Division Bench held that employees of the Heavy Water Plant were Central Government employees governed by the CCS (Pension) Rules and, by virtue of the exclusion clause under Section 2(e) of the PG Act, were not “employees” within the meaning of that Act.

Aggrieved by the reversal, the retired employees approached the Supreme Court.

Issues Before the Supreme Court:

The Supreme Court was primarily concerned with the following issues:

Whether the Heavy Water Plant, Tuticorin, is an establishment whose employees fall within the definition of “employee” under Section 2(e) of the Payment of Gratuity Act, 1972.

Whether Central Government employees governed by the CCS (Pension) Rules, 1972, can claim gratuity under the Payment of Gratuity Act in addition to or in substitution of gratuity under the CCS Rules.

Whether earlier precedent, particularly Municipal Corporation of Delhi v. Dharam Prakash Sharma (1998) 7 SCC 22, supported the appellants’ claim.

Arguments on Behalf of the Appellants (Employees):

The appellants, represented by Ms. Haripriya Padmanabhan, Senior Advocate, contended that the authorities under the PG Act had rightly exercised jurisdiction. Their submissions were structured around the following key arguments:

First, it was argued that the Heavy Water Plant is an “industry” within the meaning of the Payment of Gratuity Act. The appellants submitted that the nature of activities carried on by the HWP—industrial production and technical operations—squarely brought it within the industrial framework contemplated under labour welfare legislation. Therefore, employees working therein could not be excluded merely because the establishment functioned under a government department.

Second, the appellants contended that the Payment of Gratuity Act is a beneficial and social welfare legislation, intended to secure a dignified retiral benefit for employees. Such legislation, they argued, must receive a liberal and purposive interpretation, especially when two possible interpretations exist. According to them, exclusion under Section 2(e) should be narrowly construed.

Third, heavy reliance was placed on the Supreme Court’s decision in Municipal Corporation of Delhi v. Dharam Prakash Sharma (1998) 7 SCC 22, where employees of the Municipal Corporation of Delhi were extended the benefit of the PG Act even though the Corporation had adopted the CCS Rules. The appellants argued that adoption or application of CCS Rules for pensionary benefits should not, by itself, disentitle employees from claiming gratuity under the PG Act.

Fourth, it was submitted that the PG Act provides for higher gratuity compared to the CCS Rules and that denying such benefit would be discriminatory and contrary to the object of labour welfare laws. The appellants argued that nothing in law expressly prohibited Central Government employees from opting for the more beneficial gratuity scheme, especially when the Controlling Authority and Appellate Authority had already recognized their entitlement.

Lastly, the appellants contended that the functional autonomy and industrial character of the HWP distinguished it from core governmental departments, and therefore, its employees should not be treated strictly as Central Government servants for the purposes of the PG Act.

Arguments on Behalf of the Respondents (Union of India / HWP Authorities):

The respondents were represented by Mr. S.D. Sanjay, Additional Solicitor General of India, who firmly opposed the appeal. The core of the respondents’ case rested on statutory interpretation and constitutional status.

First, the respondents emphasized that Section 2(e) of the Payment of Gratuity Act expressly excludes persons who hold a post under the Central Government and are governed by any other Act or rules providing for gratuity. The appellants, being governed by the CCS (Pension) Rules, clearly fell within this exclusion. Therefore, the question of invoking the PG Act simply did not arise.

Second, it was argued that the Heavy Water Plant is not an independent statutory corporation or autonomous body, but an integral and inseparable adjunct of the Department of Atomic Energy, which itself is a core department of the Union Government. Employees of HWP are recruited, governed, and regulated as Central Government servants.

Third, the respondents contended that the appellants could not be permitted to “approbate and reprobate”—that is, they could not claim the status and benefits of Central Government employees for pension and service matters, and at the same time seek to discard that status when it came to gratuity by invoking the PG Act.

Fourth, distinguishing the MCD v. Dharam Prakash Sharma judgment, the respondents argued that Municipal Corporation of Delhi employees were not Central Government servants but employees of a statutory municipal corporation. The adoption of CCS Rules by MCD did not convert its employees into government servants. Hence, the precedent was inapplicable.

Finally, the respondents submitted that allowing Central Government employees to claim gratuity under the PG Act would lead to anomalous and unintended consequences, opening the floodgates for similar claims across government departments, contrary to legislative intent.

• Statutory Framework: Section 2(e) of the Payment of Gratuity Act:

The Court placed significant reliance on Section 2(e) of the PG Act, which defines “employee” and expressly excludes:

“any such person who holds a post under the Central Government or a State Government and is governed by any other Act or by any rules providing for payment of gratuity.”

The presence of this exclusionary clause, according to the Court, leaves little scope for ambiguity. Parliament, in its wisdom, consciously excluded Central and State Government employees who are already governed by separate gratuity regimes.

Court’s Analysis and Findings:

The Supreme Court agreed with the reasoning of the Division Bench of the Madras High Court and declined to interfere with its findings. The Court’s analysis proceeded on multiple levels.

At the outset, the Court examined the constitutional and administrative character of the Heavy Water Plant. It noted that on an examination of its constitution, establishment, and continuation, the HWP clearly functioned as an adjunct of the Department of Atomic Energy. The Court consciously refrained from delving into individual appointment orders or circulars, observing that the jurisdictional fact—whether the appellants were “employees” under Section 2(e)—could be determined from the institutional character of HWP itself.

The Court held that the appellants undeniably held posts under the Central Government and were governed by the CCS (Pension) Rules, which provide for gratuity. Therefore, they squarely fell within the exclusionary clause of Section 2(e) of the PG Act.

Justice Bhatti, authoring the judgment, made a crucial observation endorsing the respondent’s argument:

“The employees cannot claim to have the benefit of CCS Rules, status of a Central Government employee, while for gratuity, the benefits under the PG Act.”

This principle, the Court held, strikes at the root of the appellants’ claim. The statutory scheme does not permit a pick-and-choose approach where an employee selectively invokes different regimes to maximize benefits.

With respect to Municipal Corporation of Delhi v. Dharam Prakash Sharma, the Court carefully distinguished the precedent. It observed that MCD employees were not Central Government servants but employees of a statutory corporation, notwithstanding the adoption of CCS Rules. In contrast, HWP employees are directly embedded within the governmental framework. Therefore, the ratio of the MCD case had no application.

The Court further held that once employees are excluded from the definition of “employee” under Section 2(e), the jurisdiction of the Controlling Authority under the PG Act itself is ousted. Consequently, the orders passed by the Controlling Authority and Appellate Authority were without jurisdiction.

Accordingly, the Supreme Court dismissed the appeal and upheld the Division Bench judgment.

Judgment:

The Supreme Court conclusively held that:

Employees of the Heavy Water Plant, Tuticorin, are Central Government employees.

They are governed by the Central Civil Services (Pension) Rules, 1972, which provide for gratuity.

By virtue of Section 2(e) of the Payment of Gratuity Act, 1972, such employees are excluded from the ambit of the PG Act.

They are not entitled to claim gratuity or any differential amount under the PG Act.

The appeal was accordingly dismissed.