Supreme Court Reduces Interest on Deferred Salaries and Pensions in Andhra Pradesh: State of Andhra Pradesh vs. Dinavahi Lakshmi Kameswari (2021)

Date of the Judgment: 8 February 2021
Citation: Civil Appeal No 399 of 2021 (Arising out of SLP (C) No 12553 of 2020)
Judges: Dr. Justice D.Y. Chandrachud and Mr. Justice M.R. Shah

Can a state government defer the payment of salaries and pensions to its employees due to a financial crisis? The Supreme Court of India addressed this question in a recent case arising from Andhra Pradesh, where the state government had deferred payments due to the COVID-19 pandemic. The court examined the legality of the deferment and the imposition of interest on the delayed payments. The Supreme Court bench comprised of Dr. Justice D.Y. Chandrachud and Mr. Justice M.R. Shah.

Case Background

In March and April 2020, the State of Andhra Pradesh issued two Government Orders (GOMs), specifically GOMs No. 26 on 31 March 2020 and GOMs No. 37 on 26 April 2020, in response to the financial crisis caused by the COVID-19 pandemic. The state’s revenue had significantly declined, with a 52% drop in the first quarter of 2020-21 compared to the previous year.

GOMs No. 26 ordered a deferment of salaries and pensions for all government employees and pensioners. The deferment percentages varied, with 100% for elected officials, 60% for All India Service officers, 50% for other government employees, and 10% for Class-IV and other specified employees. This order was to apply to the salaries and pensions for March 2020, payable in April 2020, and would remain in effect until further notice.

Subsequently, GOMs No. 27 on 4 April 2020, modified the order to allow full salary payments to employees of the medical and health, police, and sanitation departments. Further, GOMs No. 37 on 26 April 2020, directed the payment of full pensions to all categories of pensioners.

A former District and Sessions Judge filed a writ petition in the High Court of Andhra Pradesh challenging the deferment of salaries and pensions. The petitioner argued that salaries and pensions are a matter of right and sought a direction for the state government to pay the outstanding amounts.

Timeline

Course of Proceedings

The High Court of Andhra Pradesh ruled in favor of the petitioner, stating that the Public Interest Litigation (PIL) was maintainable as the petitioner had no personal interest and had instituted the proceedings pro bono. The High Court held that pensions are payable for past services rendered and can only be withheld under specific circumstances, such as grave misconduct, which were not present in this case. The High Court also noted that salaries are payable on the last day of every month under Article 72 of the Andhra Pradesh Financial Code.

The High Court further held that the entitlement to salary is intrinsic to the right to life under Article 21 and the right to property under Article 300A of the Constitution. The court concluded that the State could not defer salaries and pensions through a government order without proper legal recourse. Although the government orders mentioned the state plan under Section 23 of the Disaster Management Act, 2005, the court found that the Act did not provide for deferred payment of salaries or pensions.

Based on these findings, the High Court directed the state to pay the deferred salaries and pensions for March and April 2020, along with interest at 12% per annum.

The State of Andhra Pradesh appealed to the Supreme Court, challenging only the interest component of the High Court’s order. The Supreme Court, during the preliminary hearing, directed the state to pay the deferred amounts in two equal tranches by 15 December 2020 and 15 January 2021 and stayed the interest payment.

Legal Framework

The High Court referenced several legal provisions in its judgment:

• Article 21 of the Constitution of India: This article guarantees the right to life and personal liberty, which the High Court interpreted to include the right to receive salary.
• Article 300A of the Constitution of India: This article states that no person shall be deprived of his property save by authority of law, which the High Court interpreted to include the right to receive salary and pension.
• Article 72 of the Andhra Pradesh Financial Code: This provision mandates that salary is payable on the last day of every month.
• Rule 9 of the Andhra Pradesh Revised Pension Rules 1980: This rule specifies the circumstances under which pension can be withheld or deferred, such as grave misconduct or negligence, which were not applicable in this case.
• Section 23 of the Disaster Management Act, 2005: The High Court noted that the government orders mentioned this provision, but found that it did not provide for deferred payment of salaries or pensions.
• Article 162 of the Constitution of India: This article pertains to the executive power of a state. The High Court noted that the State had intervened by issuing an administrative order in exercise of its powers under Article 162 of the Constitution without enacting a proper legislation for the deferment of salary or, as the case may be, pensions.

Arguments

Arguments on behalf of the State of Andhra Pradesh (Appellants):

• The decision to defer salaries and pensions was taken due to the precarious financial position of the State as a result of the COVID-19 pandemic.
• The State acted bona fide and provided relaxations for front-line workers in the police, health, and sanitation departments.
• The State also issued a subsequent relaxation for the payment of pensions to pensioners.
• If interest is to be paid, it should be confined only to the employees of the State falling in categories 3, 4 and 5 of the GOMs dated 31 March 2020.

Arguments on behalf of the Respondent:

• The State intervened by issuing an administrative order in exercise of its powers under Article 162 of the Constitution without enacting a proper legislation for the deferment of salary or, as the case may be, pensions.
• The High Court’s intervention was justified because the State had deferred salaries and pensions through an administrative order without proper legal backing.
• The deferment of salaries and pensions caused serious hardships to the pensioners, justifying the High Court’s direction for payment of interest at 12% per annum.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in the judgment. However, the core issue before the court was:

1. Whether the State Government was liable to pay interest on the deferred salaries and pensions, and if so, at what rate and for which categories of employees?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court did not explicitly cite any authorities in the judgment. However, the High Court cited the following:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Supreme Court did not explicitly refer to any authorities in its judgment. However, the High Court’s view of the authorities was implicit in the Supreme Court’s decision to uphold the direction for payment of interest, albeit at a reduced rate.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that salaries and pensions are the rightful entitlements of employees and pensioners. While the Court acknowledged the financial difficulties faced by the State of Andhra Pradesh due to the COVID-19 pandemic, it emphasized that the State could not avoid its obligation to pay its employees and pensioners their dues. The Court also considered that the imposition of interest should not be used as a means to penalize the State but to ensure that employees and pensioners are compensated for the delay in receiving their dues.

The court’s reasoning was based on the following steps:

The Court considered the High Court’s decision to impose a 12% interest rate. It found that while the High Court was correct in directing the payment of interest, the rate was too high. The Supreme Court emphasized that the payment of interest is not meant to penalize the state government but to compensate employees and pensioners for the delay in receiving their dues. The court also considered the prevailing bank interest rates while reducing the interest rate to 6%.

The Supreme Court’s decision was based on the principle that the State is obligated to pay its employees and pensioners their dues. The court recognized that while the State faced financial difficulties, it could not avoid its responsibility to ensure that those who had served the state were paid what they were owed. The court also considered the need to balance the rights of the employees and pensioners with the financial constraints of the state.

The majority opinion was delivered by Dr. Justice D.Y. Chandrachud and Mr. Justice M.R. Shah. There were no dissenting opinions.

The Supreme Court’s decision has implications for future cases involving the deferment of salaries and pensions by state governments. It reinforces the principle that salaries and pensions are a matter of right and that state governments cannot avoid their obligation to pay these dues, even in times of financial crisis.

The judgment did not introduce any new doctrines or legal principles. It reaffirmed the existing principles of the right to life and property as they apply to the payment of salaries and pensions.

The court quoted the following from the judgment:

“Salaries are due to the employees of the State for services rendered. Salaries in other words constitute the rightful entitlement of the employees and are payable in accordance with law.”

“Likewise, it is well settled that the payment of pension is for years of past service rendered by the pensioners to the State. Pensions are hence a matter of a rightful entitlement recognised by the applicable rules and regulations which govern the service of the employees of the State.”

“There can be no gainsaying the fact that the Government which has delayed the payment of salaries and pensions should be directed to pay interest at an appropriate rate.”

Key Takeaways

• State governments cannot defer salaries and pensions without proper legal backing.
• Salaries and pensions are considered rightful entitlements of employees and pensioners.
• Interest should be paid on deferred salaries and pensions to compensate for the delay.
• The rate of interest should be reasonable and not punitive.
• Financial difficulties do not justify the non-payment of salaries and pensions.

This judgment sets a precedent for the payment of salaries and pensions during financial crises. It clarifies that while states may face financial constraints, they cannot avoid their obligations to their employees and pensioners. This decision also highlights the importance of proper legal procedures when deferring payments.

Directions

The Supreme Court directed that the Government of Andhra Pradesh shall pay simple interest computed at the rate of 6% per annum on account of deferred salaries and pensions within a period of thirty days from the date of the order. This direction was confined to categories 3, 4, 5 and 6 of GOMs No 26 dated 31 March 2020 and to all pensioners of the State.

Development of Law

The ratio decidendi of the case is that state governments are obligated to pay salaries and pensions to their employees and pensioners, and any deferment of such payments must be accompanied by the payment of interest to compensate for the delay. This judgment reinforces the existing legal position that salaries and pensions are a matter of right and cannot be arbitrarily deferred. There is no change in the previous position of law, but this case further clarifies the application of the existing law in the context of financial crises.

Conclusion

The Supreme Court’s decision in the case of State of Andhra Pradesh vs. Dinavahi Lakshmi Kameswari modified the Andhra Pradesh High Court’s order by reducing the interest rate on deferred salaries and pensions from 12% to 6%. The Court upheld the principle that salaries and pensions are a matter of right and that the State is obligated to pay them, even in times of financial hardship. This judgment clarifies the legal position on the deferment of salaries and pensions and sets a precedent for future cases.