Generally, many organisations do not allow casual or paid leaves during the notice period of an employee. However, sick leave is something that is debatable. The best practice would be to let the employee avail the sick leave during notice period if required and adjust the financial equivalent during his or her full and final settlement.
Hope that answers your question. Please feel free to ask, if you have any other queries.
Separation from the company and eligibility for leave are two independent issues. No (R) No labour law has provision to prohibit employee's leave just because he/she has submitted resignation.
Any decision or policy related to the employees has to be compatible with the labour laws in vogue. You may give something more than the law stipulates but not less. In your case you are depriving employees their legitimate dues. What justification will you give if you receive notice from the labour officer?