Instead of setting the content disposition property, I set PR_ATTACH_FLAGS "http://schemas.microsoft.com/mapi/proptag/0x37140003" to 4(for embedded image). This solved the issue. The code below worked
string file = GetImageFile();
Redemption.Attachment att = mail.Attachments.Add(file);
att.Fields[0x3712001E] = "image.logo";
att.Fields[0x37140003] = 4;
mail.Commit();
System.IO.File.Delete(file);
RDOMail msg = Globals.ThisAddIn.session.GetMessageFromID(mailItem.Item.EntryId);
mail.Item.HTMLBody = CreateHTMLBody(msg, sender, nvd_sii, recipient);
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