“One-Time Leave Encashment” Doctrine: Supreme Court Bars Second Encashment After Re-Employment
Commentary on State of Sikkim & Ors. v. Dr. Mool Raj Kotwal, 2025 INSC 559

1. Introduction

The Supreme Court of India, in The State of Sikkim v. Dr. Mool Raj Kotwal (2025 INSC 559), settled a long-standing administrative confusion by holding that a government servant who has already received cash payment for 300 days of unutilised earned leave on attaining superannuation cannot claim a fresh second leave encashment for leave earned during a subsequent period of re-employment. The ruling overturns concurrent decisions of the Sikkim High Court and endorses the State’s clarificatory Office Memorandum dated 27-02-2020.

Parties

• Appellants: State of Sikkim & Others
• Respondent: Dr. Mool Raj Kotwal, former Medical Advisor & Chief Consultant, STNM Hospital, Gangtok

Key Issue: Whether Rule 36 of the Sikkim Government Services (Leave) Rules, 1982 (“Leave Rules”) permits a second leave encashment on completion of re-employment, distinct from the first encashment granted at superannuation.

2. Summary of the Judgment

Justice J.K. Maheshwari (for a two-judge Bench) allowed the State’s appeal and laid down the following core holdings:

1. Rule 36 applies only to Government servants retiring from regular service under Rule 98 of the Sikkim Government Service Rules, 1974 (“Service Rules”) and caps encashment at 300 days.
2. Rule 32, which deems a re-employed retiree to have “entered service afresh” only for leave accrual and utilisation, does not create a fresh right to leave encashment beyond the 300-day ceiling already availed.
3. The 2020 Office Memorandum clarifying that the 300-day limit is inclusive of leave earned during extension/re-employment is intra-vires and consistent with the Rules.
4. Withdrawal of the earlier sanction (dated 31-05-2019) was lawful; the plea of violation of natural justice failed because no substantive right existed.

3. Detailed Analysis

3.1 Precedents Cited & Their Influence

• State Of Rajasthan v. Senior Higher Secondary School, Lachhmangarh (2005) 10 SCC 346 – The Court quoted the definition of leave encashment as “salary for un-availed leave”, emphasising its nature as deferred compensation. While not directly on Sikkim Rules, the case provided jurisprudential context on the purpose of encashment benefits.
• No other binding precedent was expressly cited; instead, the Bench conducted a Rule-by-Rule statutory interpretation. The absence of conflicting Supreme Court authority allowed the Court to declare a clear new principle.

3.2 Legal Reasoning

1. Textual Interpretation of Rule 36
   • Two cumulative limbs: (i) retirement under Service Rules; (ii) credit limit of 300 days.
   • The phrase “who retires from service” was held to mean retirement from regular service, not departure after re-employment.
   • The provision’s silence on re-employment was construed as deliberate.
2. Role of Rule 32
   • Creates a legal fiction only for accrual/availability of leave; it does not override the cap or trigger fresh encashment rights.
   • Treating Rule 32 as a gateway to repeat encashment would defeat the 300-day ceiling expressly built into Rule 17 (leave accumulation) and Rule 36.
3. Purposive & Fiscal Considerations
   • Leave encashment is “deferred wages” rewarding extra work during one service tenure.
   • Allowing multiple encashments would risk “unjust enrichment” and strain the public exchequer, contrary to principles of sound public finance.
4. Validity of the Clarificatory Memorandum (27-02-2020)
   • Treated as interpretative, not legislative; therefore, it could operate retrospectively.
   • The State is competent to issue clarifications to correct systemic errors so long as substantive rights are not curtailed contrary to the parent Rules.
5. Natural Justice Argument Repelled
   • Because the respondent never possessed a vested right to second encashment, absence of a pre-decisional hearing caused no prejudice (relies on the “useless formality” doctrine).

3.3 Impact Assessment

Immediate Impact

• Approximately 100+ re-employed officers in Sikkim (and potentially in similarly worded State rules) cannot claim a second encashment.
• The State can lawfully recover or refuse payments sanctioned under the earlier misconception.

Long-Term Impact

• Harmonisation across India: Many State leave rules mirror Central Civil Services (Leave) Rules, 1972. The judgment, though construing Sikkim’s rules, will be persuasive nationally whenever an employee seeks double encashment.
• Policy Formulation: Governments may refine re-employment contracts to clarify “No second encashment” clauses, thereby reducing litigation.
• Fiscal Discipline: Reinforces auditors’ objections against duplicate encashment, strengthening public-finance safeguards.

4. Complex Concepts Simplified

• Leave Encashment: A lump-sum payment equivalent to salary for the number of earned-leave days lying unused on retirement. Think of it as cashing in saved vacation days.
• Re-employment: Post-retirement contractual engagement at the discretion of the Government, usually for specialised skills or public interest, and distinct from “extension of service.”
• Legal Fiction: A deeming provision that treats a situation as if it existed, even though it does not. Rule 32 pretends a re-employed retiree is a “new entrant” only for certain purposes.
• Ultra Vires: An act beyond legal power or authority. The High Court had implied the clarificatory memorandum was ultra vires; the Supreme Court held it intra-vires.
• Natural Justice: Procedural fairness requiring notice and hearing before adverse action. The Court said it is not violated when no substantive right exists.

5. Conclusion

The Supreme Court has articulated a crisp “One-Time Leave Encashment” rule: a Government servant’s entitlement to encashment is exhausted upon first retirement and cannot be resurrected after re-employment. By disentangling Rule 32 from Rule 36, the Court has brought clarity, prevented potential windfall gains, and safeguarded the public purse. Administratively, the judgment urges States and the Union to revisit service conditions of post-retirement engagements and ensures that benefits meant as a singular terminal package do not transform into recurring liabilities.

Key takeaway: Leave encashment is a single-occasion, capped benefit. Re-employment is a new tenure for work, not a license to reopen the encashment ledger.