Full Judgment Text
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PETITIONER:
SHASHIKANT LAXMAN KALE AND ANR.
Vs.
RESPONDENT:
UNION OF INDIA AND ANR.
DATE OF JUDGMENT20/07/1990
BENCH:
VERMA, JAGDISH SARAN (J)
BENCH:
VERMA, JAGDISH SARAN (J)
VENKATACHALLIAH, M.N. (J)
OJHA, N.D. (J)
CITATION:
1990 AIR 2114 1990 SCR (3) 441
1990 SCC (4) 366 JT 1990 (3) 267
1990 SCALE (2)71
ACT:
Income Tax Act, 1961: Chapter III--Section 10--Clause
(10-C) --Scope and Constitutional validity of--Public Sector
Companies--Employees-Voluntary Retirement--"Golden hand-
shake"to employees-Exemption from income-tax--Held clause
(10-C) does not include employees of a private sector compa-
ny.
Constitution of India, 1950: Article 14 Public Sector
Companies-Employees-Amount received at the time of voluntary
retirement--Exemption from tax under clause (10-C) of Sec-
tion 10 of Income Tax Act, 1961--Exclusion of non-public
sector employees from clause (10-C) and consequent denial of
benefit of tax exemption--Held public sector employees
constitute a distinct class--Clause (10-C) is neither arbi-
trary nor violative of Article 14 Object of cluase (10-C)
explained.
Taxing Statute--Constitutional validity of--Reasonable-
ness of classification--Determination of--Scope for classi-
fication in a taxing statute is greater--Court should look
beyond obstensible classification into purpose of law and
apply the test of "palpable arbitrariness"
Statutory interpretation--Statute--Determination of
object and purpose--Permissible Aid--Statement of objects
and reasons of the Bill--Whether can be looked into.
Finance Bill--Explanatory Memorandum--Heading-Neither
determinative of object nor can camouflage the object of the
Act.
HEADNOTE:
By Finance Act, 1987, clause (10-C) was inserted in
section 10 of the Income-Tax Act, 1961. The effect of this
clause was to grant tax exemption to employees of the public
sector in respect of the amount received under the voluntary
retirement scheme approved by the Central Government.
The petitioners-an employee of a private sector company
and the trade-union of the said private company-flied a writ
petition in this
442
court challenging the validity of clause (10-C) contending;
(i) the denial of benefit of tax exemption to employees of
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private sector company being arbitrary and discriminatory,
the impugned clause was unconstitutional as violative of
Article 14: (ii) the heading ’Welfare-Measures’ to the
Memorandum explaining the provisions in the Finance Bill
1987 proposing insertion of clause (10-C) in section 10 of
the Income-Tax Act, 1961 was decisive of the object of its
enactment; the tax benefit being in the nature of welfare
measure the impugned clause must be so construed as to apply
to all employees equally, whether of the public sector or
private sector in order to uphold its validity.
Dismissing the petition, this Court,
HELD: There is a distinction between the public and
private sectors. The Government or the public sector under-
takings are as a distinct class separate from those in the
private sector and the fact that the profit earned in the
former is for public benefit instead of private benefit,
provides an intelligible differentia from the social point
of view which is of prime importance for the national econo-
my. Thus, there exists an intelligible differentia between
the two categories which has a rational nexus with the main
object of promoting the national economic policy or the
public policy. This element also appears in the impugned
enactment itself wherein ’economic viability of such compa-
ny’ is specified as the most relevant circumstance for grant
of approval of the scheme by the Central Government. This
intrinsic element in the provision itself supports the view
that the main object thereof is to promote and improve the
health of the public sector companies even though its effect
is a benefit of its employees. The economic status of em-
ployees of a public sector company who get the benefit of
the provision is also lower as compared to their counterpart
in the private sector. Viewed in this perspective, the very
foundation of the challenge to the impugned provision on the
basis of economic equality of employees in both sectors is
non-existent. Once the stage is reached where the differen-
tiation is rightly made between a public sector company and
a private sector company and that too essentially on the
ground of economic viability of the public sector company
and other relevant circumstances, the argument based on
equality does not survive. This is independent of the dis-
parity in the compensation package of employees in the
private sector and the public sector. The argument of dis-
crimination is based on initial equality between the two
classes alleging bifurcation thereafter between those who
stood integrated earlier as one class. This basic assumption
being fallacious, the question of any hostile discrimination
by granting the benefit only to a few in the same class
denying the same to those left out does not arise. [465D-H;
466A-B]
443
2. The purposes of the impugned legislation include
reduction in the existing gap between the lower compensation
package in public sector and the higher compensation package
of the counterpart in private sector in addition to prevent-
ing misuse of the benefit in private sector which is not
subject to the control of administration by Government like
that in the public sector. One of the purposes is streamlin-
ing the public sector to cure it of one of its ailments of
overstaffing. The provision is an incentive to the unwanted
personnel to seek voluntary retirement thereby enabling the
public sector to achieve the true object indicated. The
personnel seeking voluntary retirement no doubt get a tax
benefit but then that is an incentive for seeking voluntary
retirement and at any rate that is the effect of the provi-
sion or its fallout and not its true object. The real dis-
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tinction between the true object of an enactment and the
effect thereof, even though appearing to be blurred at
times, has to be borne in mind, particularly in a situation
like this. [466F-H; 467A-B]
2.1 Keeping in view the true object of the impugned
enactment, there is no doubt that employees of the private
sector who are left out of the ambit of the impugned provi-
sion do not fall in the same class as employees of the
public sector and the benefit of the fall-out of the provi-
sion being available only to the public sector employees
cannot render the classification invalid or arbitrary. The
other clauses in section of the Act further show that the
scheme of section 10 contemplates a distinction between
employees based on the category of their employer. This
classification cannot, therefore, be faulted. [67B-C]
Hindustan Paper Corporation Ltd. v. Government of Kerala
JUDGMENT:
v. Union of India & Ors. etc. etc., Judgments Today 1982 (2)
SC 465; L.K. Jha Memorial Lecture, delivered on the 6th
December 1988, by Shri R.N. Malhotra, Governor, Reserve Bank
of India, on "Growth and Current Fiscal Challenges", re-
ferred to.
Hindustan Antibiotics v. Workmen, [1967] 1 SCR 652 and
S.K. Dutta, 1. T.O. v. Lawrence Singh Ingty, [1968] 68
I.T.R. 272, distinguished and held inapplicable.
R.D. Shetty v. International Airport Authority of India,
[1979] 3 SCR 1014, cited.
2.2 In view of the simultaneous definition of ’public
sector company’ in the Income-Tax Act, there can be no
occasion to construe this
444
expression differently without which a private sector compa-
ny cannot be included in it. It is, therefore, not possible
to construe the impugned provision while upholding its
validity in such a manner as to include a private sector
company also within its ambit. [468C-D]
3. The principles of valid classification are that those
grouped together in one class must possess a common charac-
teristic which distinguishes them from those excluded from
the group; and this characteristic or intelligible differen-
tia must have a rational nexus with the object sought to be
achieved by the enactment. [449D]
Re The Special Courts Bill, 1978, [1979] 2 S.C.R. 476,
referred to.
4. The latitude for classification in a taxing is much
greater; and in order to tax something it is not necessary
to tax everything. These basic postulates have to be borne
in mind while determining the constitutional validity of a
taxing provision challenged on the ground of discrimination.
1451C]
P.H. Ashwathanarayana v. State of Karnataka, [1989]
(Supp.) 1 S.C.C. 696; Federation of Hotel and Restaurant
Association of India v. Union of India, [1989] 178 I.T.R.
97; Kerala Hotel and Restaurant Association & Ors. v. State
of Kerala & Ors., A.I.R. 1990 SC 913 and 1. T.O. v. N. Takin
Roy Rymbai, [1976] 103 I.T.R. 82 SC, referred to.
East India Tobacco Co. v. Andhra Pradesh, A.I.R. 1962 SC
1733; Vivian Joseph Ferriera v. Municipal Corporation of
Greater Bombay, AIR 1972 S.C. 845 and Jaipur Hosiery Mills
v. State of Rajasthan, A.I.R. 1971 SC 1330, cited.
5. The Court should, therefore, look beyond the obsten-
sible classification and to the purpose of the law and apply
the test of ’palpable arbitrariness’ in the context of the
felt needs of the times and societal exigencies informed by
experience to determine reasonableness of the classifica-
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tion. [453B]
5.1 It is necessary to discern the true purpose or
object of the impugned enactment because it is only with
reference to the true object of the enactment that the
existence of a rational nexus of the differentia on which
the classification is based, with the object sought to be
achieved by the enactment, can be examined to test the
validity of the classification. [453E-F]
445
5.2 There is a clear distinction between the legislative
intention and the purpose or object of the legislation.
While the purpose or object of the legislation is to provide
a remedy for the malady, the legislative intention relates
to the meaning or exposition of the remedy as enacted. While
dealing with the validity of a classification, the rational
nexus of the differentia on which the classification is
based has to exist with the purpose of object of the legis-
lation, so determined. [453H; 454A]
Francis Bennion’s Statutory Interpretation, 1984 edi-
tion, page 237, referred to.
6. For determining the purpose or object of the legisla-
tion, it is permissible to look into the circumstances which
prevailed at the time when the law was passed and which
necessitated the passing of that law. For the limited pur-
pose of appreciating the background and the antecedent
factual matrix leading to the legislation, it is permissible
to look into the statement of Objects and Reasons of the
Bill which actuated the step to provide a remedy for the
then existing malady. [454B-C]
A. Thangal Kunju Musaliar v. M. Venkitachalam Potti &
Anr., [1955] 2 S.C.R. 1196; State of West Bengal v. Union of
India, [1964] 1 S.C.R. 371 and Pannalal Binjraj v. Union of
India, [1957] S.C.R. 233, referred to.
6.1 To sustain the presumption of constitutionality,
consideration may be had even to matters of common knowl-
edge; the history of the times; and very conceivable state
of facts existing at the time of legislation which can be
assumed. Even though for the purpose of construing the
meaning of the enacted provision, it is not permissible to
use these aids, yet it is permissible to look into the
historical facts and surrounding circumstances for ascer-
taining the evil sought to be remedied. The distinction
between the purpose or object of the legislation and the
legislative intention is significant in this exercise to
emphasise the availability of larger material to the Court
for reliance when determining the purpose or object of the
legislation as distinguished from the meaning of the enacted
provision. [454F-H]
7. An explanatory memorandum is usually ’not an accurate
guide of the final Act’. [455C]
Francis Bennion’s Statutory Interpretation, 1984 Edn. page
529,referred to.
446
7.1 A catch-phrase possibly used as a populist measure
to describe some provisions in the Finance Bill in the
explanatory memorandum while introducing the Bill in the
Parliament can neither be determinative of, nor can it
camouflage the true object of the legislation. It is not
unlikely that the phrase ’welfare measures’ was used to
emphasise more on the effect of the provisions thereunder on
the taxpayer for populism. [457G]
&
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ORIGINAL JURISDICTION: Writ Petition No. 136 of 1989.
(Under Article 32 of the Constitution of India).
Narayan B. Shatye, Mukul Mudgal, Venkatesh Rao, Sudhir
Gopi for the Petitioners.
A.B. Divan, V. Gauri Shankar, S.C. Manchanda, Ashok
Sagar, Ms. Amrita Mitra, Ms. A. Subhashini, Ravinder Narain,
S. Sukumaran, M.K. Shashidharan, S. Rajappa for the Respond-
ents.
The Judgment of the Court was delivered by
VERMA, J. This petition under Article 32 of the Consti-
tution challenges the constitutional validity of clause
(10-C) inserted in section 10 of the Indian Income-tax Act,
1961 (hereinafter referred to as ’the Act’) by the Finance
Act, 1987 with effect from 1.4.1987. Section 10 deals with
incomes not included in total income for the purpose of
taxation under the Act. The effect of clause (10-C) so
inserted in section 10 of the Act is that any payment re-
ceived by an employee of a public sector company at the time
of his voluntary retirement in accordance with any scheme
which the Central Government may, having regard to the
economic viability of such company and other relevant cir-
cumstances, approve in this behalf, is not included in the
total income of such employee resulting in grant of tax
exemption to that extent to him. The petitioners contend
that the denial of this benefit to an employee of a private
sector company at the time of his voluntary retirement
amounts to an invidious distinction between public sector
employees and private sector employees in the matter of
taxation and is arbitrary and unintelligible amounting to
hostile discrimination.
The initial submission on behalf of the petitioners was
that the aforesaid clause (10-C) of section 10 of the Act is
constitutionally invalid for this reason. However, during
the course of arguments the
447
stand of the petitioners was modified to contend that the
provision must be so construed as to apply to all employees
equally, whether of the public or private sector, in order
to uphold its validity. The question, therefore, is whether
there is any such hostile discrimination as alleged by the
petitioners and if so, is it possible to construe the provi-
sion in the manner suggested on behalf of the petitioners to
apply it equally to all employees of the public as well as
private sectors?
The first petitioner is an employee of second respond-
ent--Peico Electronic and Electricals Limited, a private
sector company--and the second petitioner is a registered
trade union representing the employees of the second re-
spondent-company. Counsel for the second respondent-company
sought to support the petitioners’ case. Counsel for the
first respondent supporting the validity of the provision
indicated that employees of the public sector constituted a
distinct class for the purpose of taxation so that there was
no discrimination between employees of the same class if the
real object of the provision is borne in mind. We shall
refer to the arguments of the two sides in some detail
later.
Chapter III of the Indian Income Tax Act, 1961 relates
to "incomes which do not form part of the total income".
Section 10 in Chapter III deals with "incomes not included
in total income". It provides that in computing the total
income of a previous year of any person, any income falling
within any of the clauses therein shall not be included. The
several clauses in section 10 specify different incomes
which would ordinarily be included in the total income of
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the assessee for the purpose of taxation but for such a
provision. Clause (10-C) of Section 10 is as under:
"(10-C):--any payment received by an employee’ of a public
sector company at the time of his voluntary retirement in
accordance with any scheme which the Central Government may,
having regard to the economic viability of such company and
other relevant circumstances, approve in this behalf."
We may now summarise the arguments advanced before us.
Shri Shetye for the petitioners first contended that the
reason given for enacting clause (10-C) as indicated in the
memorandum explaining provisions of the Finance Bill, 1987
is that the tax benefit is given as a welfare measure. He
argued, if so, all employees whether of private or of public
sector are in the same class and are entitled equally to the
448
benefit of a welfare measure for employees. His next conten-
tion is that, if that be the only stated basis of the clas-
sification, it has no rational nexus with the object of the
provision and it violates Article 14 of the Constitution.
Learned counsel for the petitioners referred to certain
other clauses in section 10 of the Act which apply equally
to all employees irrespective of the category of their
employer, to suggest that all such measures being for bene-
fit of employees, no further classification of the employees
is permissible with reference to the category of their
employer. It was further urged that consequently the exclu-
sion of non-public sector employees is not only discrimina-
tory but also arbitrary. On this basis it was contended that
instead of striking down the provision as invalid which
while denying the benefit to the public sector employees
would not also serve any useful purpose for the private
sector employees, the court should adopt a positive and
constructive approach and the provision so construed as to
extend its benefit to all employees irrespective of the
category of their employer to uphold its validity.
Shri Dewan for the second respondent, a private sector
company, supported learned counsel for the petitioners. He
contended that if there be any such discrimination then the
question to ask is: whether the Parliament intended to
confine the benefit of this welfare measure only to employ-
ees of the public sector? He further contended that it is
possible to read the provision in such a manner as to extend
its benefit to all employees instead of confining it only to
the public sector employees.
In reply, Dr. Gauri Shankar for the first respondent
contended that the employees of public sector constitute a
distinct class for this purpose in view of the fact that the
public sector undertakings have a distinct character and
role in the national economy. He argued that to make the
public sector undertakings economically more viable and
thereby contribute more to the national economy, it has
become necessary to streamline and trim the higher echelons
by inducing the unwanted personnel to leave voluntarily with
a "golden hand-shake" instead of resorting to retrenchment
which involves several complication including protracted
litigation which is not conducive to the wellbeing of the
public sector undertakings. He argued that this problem does
not exist in the private sector where the higher employees
can leave or be asked to leave, without corresponding diffi-
culties, experienced in the public sector. This provision is
meant essentially for employees at the higher levels in the
public sector undertakings whose economic status cannot be
equated with their counterpart in the
449
private sector. For this reason equating the two sets of
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employees for the tax benefit was urged to be unjustified,
there being an intelligible differentia between them. Dr.
Gauri Shankar also contended that the real object of the
enactment was to streamline the public sector by reducing
overstaffing at the higher level and the consequent tax
exemption to the retiring employee was merely the effect or
fall-out of the real object. The provision was meant to
induce the unwanted personnel to seek voluntary retirement
and thereby promote the real object of streamlining the
ailing public sector. To support his argument, he produced
material indicating the historical background and factual
matrix including material to show the great disparity in the
emoluments and perquisites, i.e., compensation package of
the private sector and the public sector employees particu-
larly at the higher levels.
The main question for decision is the discrimination
alleged by the petitioners. The principles of valid classi-
fication are long settled by a catena of decisions of this
Court but their application to a given case is quite often a
vexed question. The problem is more vexed in cases falling
within the grey zone. The principles are that those grouped
together in one class must possess a common characteristic
which distinguishes them from those excluded from the group;
and this characteristic or intelligible differentia must
have a rational nexus with the object sought to be achieved
by the enactment. It is sufficient to cite the decision in
[1979] 2 SCR 476--In Re The Special Courts Bill, 1978--and
to refer to the propositions quoted at p. 534-537 therein.
Some of the propositions are stated thus:
"2. The State, in the exercise of its governmental power,
has of necessity to make laws operating differently on
different groups or classes of persons within its territory
to attain particular ends in giving effect to its policies,
and it must possess for that purpose large powers of distin-
guishing and classifying persons or things to be subjected
to such laws.
3. The Constitutional command to the State to afford equal
protection of its laws sets a goal not attainable by the
invention and application of a precise formula. Therefore,
classification need not be constituted by an exact or scien-
tific exclusion or inclusion of persons or things. The
Courts should not insist on delusive exactness or apply
doctrinaire tests for determining the validity of classifi-
cation in any given case. Classification is justified if it
is not palpably arbitrary.
450
4. The principle underlying the guarantee of Article 14 is
not that the same rules of law should be applicable to all
persons within the Indian territory or that the same reme-
dies should be made available to them irrespective of dif-
ferences of circumstances. It only means that all persons
similarly circumstanced shall be treated alike both in
privileges conferred and liabilities imposed. Equal laws
would have to be applied to all in the same situation, and
there should be no discrimination between one person and
another if as regards the subject-matter of the legislation
their position is substantially the same.
6. The law can make and set apart the classes according to
the needs and exigencies of the society and as suggested by
experience. It can recognise even degree of evil, but the
classification should never be arbitrary, artificial or
evasive.
7. The classification must not be arbitrary but must be
rational, that is to say, it must not only be based on some
qualities or characteristics which are to be found in all
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the persons grouped together and not in others who are left
out but those qualities or characteristics must have a
reasonable relation to the object of the legislation. In
order to pass the test, two conditions must be fulfilled,
namely, (1) that the classification must be rounded on’ an
intelligible differentia which distinguishes those that are
grouped together from others and (2) that differentia must
have a rational relation to the object sought to be achieved
by the Act.
8. The differentia which is the basis of the classification
and the object of the Act are distinct things and what is
necessary is that there must be a nexus between them. In
short, while Article 14 forbids class discrimination by
conferring privileges or imposing liabilities upon person
arbitrarily selected out of a large number of other persons
similarly situated in relation to the privileges sought to
be conferred or the liabilities proposed to be imposed, it
does not forbid classification for the purpose of legisla-
tion, provided such classification is not arbitrary in the
sense above mentioned.
451
11. Classification necessarily implied the making of a
distinction or discrimination between persons classified and
those who are not members of that class. It is the essence
of a classification that upon the class are cast duties and
burdens different from those resting upon the general pub-
lic. Indeed, the very idea of classification is that of
inequality, so that it goes without saying that the mere
fact of inequality ,n no manner determines the matter of
constitutionality."
(emphasis supplied)
It is well-settled that the latitude for classification
in a taxing statute is much greater; and in order to tax
something it is not necessary to tax everything. These basic
postulates have to be borne in mind while determining the
constitutional validity of a taxing provision challenged on
the ground of discrimination.
The scope for permissible classification in a taxing
statute was once again considered in a recent decision. of
this Court in P.H. Ashwathanarayana v. State of Karnataka,
[1989] Suppl. 1 SCC 696. After a review of earlier deci-
sions, it was stated therein as under:
"It is for the State to decide what economic and socialpoli-
cy it should pursue and what discriminations advance those
social and economic policies. In view of the inherent com-
plexity of these fiscal adjustments, courts give a larger
discretion to the legislature in the matter of its prefer-
ences of economic and social policies and effectuate the
chosen system in all possible and reasonable ways ..... "
(emphasis supplied)
In Federation of Hotel and Restaurant Association of
India v. Union of India, [1989] 178 ITR 97, it was said as
under:
"... The test could only be one of palpable arbitrariness
applied in the context of the felt needs of the times and
societal exigencies informed by experience."
"... A reasonable classification is. one which includes all
who are similarly situated and none who are not. In order to
ascertain whether persons are similarly placed, one must
look beyond the classification and to the purposes of the
law."
(emphasis supplied)
452
This Court has held in Kerala Hotel and Restaurant
Association & Ors. v. State of Kerala & Ors., A.I.R. 1990 SC
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913 as under:
"The scope for classification permitted in taxation is
greater and unless the classification made can be termed to
be palpably arbitrary, it must be left to the legislative
wisdom to choose the yardstick for classification, in the
background of the fiscal policy of the State to promote
economic equality as well ..... ’ ’
"Thus, it is clear that the test applicable for striking
down a taxing provision on this ground is one of palpable
arbitrariness applied in the context of the felt needs of
the times and societal exigencies informed by experience,
and the courts should not interfere with the legislative
wisdom of making the classification unless the classifica-
tion is found to be invalid by this test."
(emphasis supplied)
It is useful to refer also to the decision of this Court
in 1. T.O. v. N. Takin Roy Rymbai, [1976] 103 I.T.R. 82
(S.C.)--wherein a similar question relating to validity of
classification in another clause of section 10 of the In-
come-Tax Act, 1961 arose for consideration. This Court while
upholding the validity of the classification summarised the
principles applied, as under:
".... it must be remembered that the State has, in view of
the intrinsic complexity of fiscal adjustments of diverse
elements, a considerably wide discretion in the matter of
classification for taxation purposes. Given legislative
competence, the legislature has ample freedom to select and
classify persons, districts, goods, properties, incomes and
objects which it would tax, and which it would not tax. So
long as the classification made within this wide and flexi-
ble range by a taxing statute does not transgress the funda-
mental principles underlying the doctrine of equality, it is
not vulnerable on the ground of discrimination merely be-
cause it taxes or exempts from tax some incomes or objects
and not others. Nor is the mere fact that a tax falls more
heavily on some in the same category, by itself a ground to
render the law invalid. It is only when within the range of
its selection, the law operates unequally and cannot be
justified on the basis of a valid classification, that there
453
would be a violation of Article 14. (see East India Tobacco
Co. v. Andhra Pradesh; Vivian Joseph Ferriera v. Municipal
Corporation of Greater Bombay; Jaipur Hosiery Mills v. State
of Rajasthan)"
(emphasis supplied)
We must, therefore, look beyond the ostensible. classi-
fication and to the purpose of the law and apply the test of
’palpable arbitrariness’ in the context of the felt needs of
the times and societal exigencies informed by experience to
determine reasonableness of the classification. It is clear
that the role of public sector in the sphere of promoting
the national economy and the context of felt needs of the
times and societal exigencies informed by experience gained
from its functioning till the enactment are of significance.
There is no dispute that the impugned provision includes all
employees of the public sector and none not in the public
sector. The question is whether those left out are similarly
situated for the purpose of the enactment to render the
classification palpably arbitrary. It is only if this test
of palpable arbitrariness applied in this manner is satis-
fied, that the provision can be faulted as discriminatory
but not otherwise. Unless such a defect can be found, the
further question of construing the provision in such a
manner as to include all employees and not merely employees
of public sector companies, does not arise.
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It is first necessary to discern the true purpose or
object of the impugned enactment because it is only with
reference to the true object of the enactment that the
existence of a rational nexus of the differntia on which the
classification is based, with the object sought to be
achieved by the enactment, can be examined to test the
validity of the classification. In Francis Bennion’s Statu-
tory Interpretation, 1984 edition, the distinction between
the legislative intention and the purpose or object of the
legislation has been succinctly summarised at p. 237 as
under:
"The distinction between the purpose or object of an enact-
ment and the legislative intention governing it is that the
former relates to the mischief to which the enactment is
directed and its remedy, while the latter relates to the
legal meaning of the enactment."
There is thus a clear distinction between the two. While
the purpose or object of the legislation is to provide a
remedy for the malady, the legislative intention relates to
the meaning or exposition
454
of the remedy as enacted. While dealing with the validity of
a classification, the rational nexus of the differentia on
which the classification is based has to exist with the
purpose or object of the legislation, so determined. The
question next is of the manner in which the purpose or
object of the enactment has to be determined and the materi-
al which can be used for this exercise.
For determining the purpose or object of the legisla-
tion, it is permissible to look into the circumstances
which. prevailed at the time when the law was passed and
which necessitated the passing of that law. For the limited
purpose of appreciating the background and the antecedent
factual matrix leading to the legislation, it is permissible
to look into the Statement of Objects and Reasons of the
Bill which actuated the step to provide a remedy for the
then existing malady. In A. Thangal Kunju Musaliar v.M.
Venkitachalam Potti & Anr., [1955] 2 S.C.R. 1196, the State-
ment of Objects and Reasons was used for judging the reason-
ableness of a classification made in an enactment to see if
it infringed or was contrary to the constitution. In that
decision for determining the question, even affidavit on
behalf of the State of "the circumstances which prevailed at
the time when the law there under consideration had been
passed and which necessitated the passing of that law" was
relied on. It was reiterated in State of West Bengal v.
Union of India, [1964] 1 S.C.R. 37 1- that the Statement of
Objects and Reasons accompanying a Bill, when introduced in
Parliament, can be used for ’the limited purpose of under-
standing the background and the antecedent state of affairs
leading up to the legislation.’ Similarly, in Pannalal
Binjraj v. Union of India, [1957] SCR 233--a challenge to
the validity of classification was repelled placing reliance
on an affidavit filed on behalf of the Central Board of
Revenue disclosing the true object of enacting the impugned
provision in the Income-Tax Act.
Not only this, to sustain the presumption of constitu-
tionality, consideration may be had even to matters of
common knowledge; the history of the times; and every con-
ceivable state of facts existing at the time of legislation
which can be assumed. Even though for the purpose of con-
struing the meaning of the enacted provision, it is not
permissible to use these aids, yet it is permissible to look
into the historical facts and surrounding circumstances for
ascertaining the evil sought to be remedied. The distinction
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between the purpose or object of the legislation and the
legislative intention, indicated earlier, is significant in
this exercise to emphasise the availability of larger mate-
rial to the Court for reliance when determining the purpose
or object of the legislation as distinguished from the
meaning of the enacted provision.
455
We propose to utilise these permissible aids for dis-
cerning the purpose or object of the legislative provision
in order to examine the validity of the classification made
therein.
Strong reliance has been placed on behalf of the peti-
tioners on the Memorandum explaining the provisions in the
Finance Bill, 1987, wherein the explanatory note relating to
clause 4(a) of the Bill proposing insertion of clause (10-C)
in Section 10 of the Income-tax Act, 1961 appears under the
heading ’Welfare Measures’. It may be mentioned that this
heading is only in the explanatory memorandum and not in the
’Notes on Clauses’ appended to the ’Statement of Objects and
Reasons’ of the Bill. (See [1987] 165 ITR (Statutes) at pp.
119, 122 & 155). We would presently show that the petition-
ers cannot draw support from this heading in the explanatory
memorandum. Moreover, an explanatory memorandum is usually
’not an accurate guide of the final Act’. (See Francis
Bennion’s Statutory Interpretation, 1984 Ed. at p. 529).
It was urged that the impugned provision being described
as a welfare measure in the explanatory memorandum, the
object of the enactment was the welfare of the employees
and, therefore, no further classification of the employees
could be made. It was argued that the heading ’welfare
measures’ is, therefore, decisive of the object of its
enactment. In our opinion, this cannot be accepted. The
Statement of Objects and Reasons (See (1987) 165 ITR (Stat-
utes) at p. 119) is as under:
"The object of the Bill is to give effect to the financial
proposals of the Central Government for the financial year
1987-88. The Notes on Clauses explain the various provisions
contained in the Bill."
Thereafter, the Notes on clauses in the Finance Bill, 1987
are from pp. 119-151. The Note relating to this clause at p.
122 is as under:
"Clause 4 seeks to amend section 10 of the Income-Tax Act.
Sub-Clause (a) of this clause proposes to insert a new
clause (10-C) in this section. Under the proposed amendment,
any payment received by an employee of a public sector
company at the time of his voluntary retirement in accord-
ance with any scheme which the Central Govern-
456
ment may, having regard to. the economic viability of the
public sector company and other relevant circumstances,
approve in this behalf, shall be exempt from tax.
This amendment will take effect from 1st April, 1987, and
will, accordingly apply in relation to the assessment year
1987-88 and subsequent years."
No where in the ’Notes on Clauses’ the proposal in the Bill
is described as a welfare measure. It is then in the memo-
randum explaining the provisions in the Finance Bill, 1987
that the provisions are divided under different heads, one
of which is ’welfare measures’. The subheading relating to
this proposal is mentioned as ’Exemption of compensation
received by public sector employees on voluntary retire-
ment’. It is mentioned in paragraph 13 of the explanatory
memorandum that a number of public sector undertakings have
formulated voluntary retirement schemes for their employees;
that under section 10(10-B) of the Income-Tax Act any com-
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pensation received by a workman at the time of his retrench-
ment is exempt upto the specified limit; and that this limit
of exemption under section 10 (10-B) is, however, not ap-
plicable in respect of compensation received under certain
schemes approved by the Central Government. By enacting
section 10 (10-C), the proposal obviously was to extend the
same benefit to the payment made under these approved
schemes as was existing for compensation under approved
scheme given by section 10 (lOB). The heading of ’welfare
measures’ applies also to paragraph 14 in the memorandum
relating to modification of provisions relating to deduction
in respect of donations to certain funds etc. It is, there-
fore, clear that in this explanatory memorandum the headings
are fairly wide and matters collected under the same heading
may be diverse not giving a true indication of the object of
the provision.
It is also significant that the proposal to amend sec-
tion 10 by inserting a new clause (10-C) therein was con-
tained in sub-clause (a) of clause 4 of the Finance Bill,
while sub-clause (b) of clause 4 of the Finance Bill pro-
posed to insert a new item in sub-clause (iv) of clause (15)
of section 10 to provide that interest payable by the public
sector companies on certain specified bonds and debentures
will not form part of the tax-payer’s total income subject
to the specified conditions. This was in pursuance of a
series of public sector bonds being floated which are in-
tended to yield tax-free return to the holders of such
bonds. The effect of the amendment so made yielding tax-free
return to the holders of public sector bonds is similar to
the amendment by
457
insertion of a new clause (10-C), the effect of which is to
grant tax exemption to employees of the public sector in
respect of the amount received under the voluntary retire-
ment scheme approved by the Central Government. Both these
proposals relating to the amendment of section 10 were in
sub-clauses (a) and (b) of clause 4 of the Finance Bill.
Ordinarily in the memorandum explaining the provisions in
the Finance Bill both the sub-clauses of clause 4 should
have been, therefore, mentioned under the same heading being
of essentially the same nature. It is interesting to note
that the proposal in clause 4(b) was mentioned in paragraph
17 of the explanatory memorandum under the heading ’Incen-
tives for growth and modernisation’ with the sub-heading
’Measures for raising resources for the public sector’.
Admittedly, the effect of this provision was to grant a tax
benefit to the holders of the public sector bonds by amend-
ing section 10 in this manner but the real object for giving
that benefit to the tax-payer was to provide an incentive
for growth and modernisation by adopting a measure for
raising the resources for the public sector. If the proposal
in sub-clause of clause 4 of the Finance Bill fell in this
category, there is no reason why the proposal in sub-clause
(a) of the same clause of the Bill, both sub-clauses relat-
ing to amendment of section 10, can be treated differently
merely because in the explanatory memorandum the two sub-
clauses are under different headings. This distribution of
the sub-clauses of the same clause in the Finance Bill under
different heads in the explanatory memorandum is sufficient
to show that no particular significance can be attached to
the heading ’welfare measures under which the proposal to
insert clause (10-C) in section 10 of the Act was placed in
that memorandum. We see no reason why insertion of clause
(10-C) in section10 cannot also be described as incentive
for growth and modernisation being a measure for improvement
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of the public sector. Obviously the incentive given thereby
is to the employees of the public sector companies to resort
more readily to the voluntary retirement scheme which would
enable improvement of public sector by streamlining its
staff.
A catch-phrase possibly used as a populist measure to
describe some provisions in the Finance Bill in the explana-
tory memorandum while introducing the Bill in the Parliament
can neither be determinative of, nor can it camouflage the
true object of the legislation. It is not unlikely that the
phrase ’welfare measures’ was used to emphasise more on the
effect of the provisions thereunder on the tax-payer for
populism.
In view of the fact that the challenge is based on the
initial
458
assumption of equality between all employees of the public
sector and the private sector, it will be useful to refer to
the nature and role of the public sector undertakings
vis-a-vis those of the private sector along with the histor-
ical background and surrounding circumstances leading to
enactment of the impugned provision. For this purpose, we
would first refer to the counter-affidavit of Shri S.K.
Abrol, Officer-onSpecial-Duty, Central Board of Direct
Taxes, Department of Revenue, Ministry of Finance, New
Delhi, which states the reasons for insertion of clause
(10-C) in section 10 of the Income-Tax Act, 1961. The coun-
ter-affidavit states with reference to some other clauses of
section 10 of the Act that the legislature for purposes of
exemption from income-tax has always differentiated between
private sector employees and those in the public sector and
Government employment. It states further as follows:
"As submitted in the paragraph above, sectionl 10 (10-C) was
introduced by the Finance Act, 1987 w.e.f. 1.4.1987 and the
legislature in its wisdom sought to restrict these benefits
to only the employees in the public sector. The reason for
introducing this provision is contained in the Circular of
the Central Board of Direct Taxes explaining the Finance
Act, 1987, relevant extract from which is reproduced hereun-
der:
15.1. At present under section 10 (10B) any com-
pensation received by a workmen at the time of his retire-
ment is exempted upto the amount calculated in accordance
with section 25F of the Industrial Disputes Act or
Rs.50,000, whichever is less. The limit is, however, not
applicable in respect of compensation received under certain
schemes approved by the Central Government.
15.2 A number of public sector undertakings.have
formulated voluntary retirement schemes for their employees.
With a view to extend relief to such employees, the Finance
Act, 1987, by introducing new clause (10C) in section 10,
provides exemption in respect of any payment received by
them at the time of their voluntary retirement in accordance
with any scheme which the Central Government may approve,
having regard to the economic viability of the public sector
company and other relevant circumstances. This exemption
will be available to any employee whether a workman or an
executive.
459
15.3. This amendment shall come into force w.e,f.
1.4.1987 and will, accordingly, apply to assessment year
1987-88 and subsequent year.’
"It is submitted that for all purposes, the private sector
and the public sector have been treated differently and are
known to be different classes. The Industrial Policy Resolu-
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tion, 1956, which reviewed the earlier Industrial Policy,
clearly distinguished industries in the public sector and
those in the private sector. The Industrial Policy Resolu-
tion mentioned that for adoption of socialist pattern of
society as the national objective, the requirement was that
industries of basic and strategic importance, or in the
nature of public utility service, should be in the public
sector. The Industrial Policy Resolution placed the indus-
tries in three different categories; ..... Thus, this
categorisation of industries into public sector, private
sector was on the basis of Articles 38 and 39 of the Consti-
tution of India, as has been mentioned in the Industrial
Policy Resolution, 1956."
"The respondent submits that there were certain basic
distinctions between the undertakings in the private sector
and in the public sector as has been observed by this Hon’-
ble Court in the case of R.D. Shetry v. International Air-
port Authority of India, [1979] 3 SCR 1014. A public sector
undertaking is either established by a statute or incorpo-
rated under law. Public Sector Undertakings are wholly
controlled by Government not only in their policy making but
also in carrying out the functions entrusted to them by law
establishing it or by charter of their in corporation. As
such public sector undertakings are bound by any directions
that may be issued by Government from time to time in re-
spect of policy matters. The entire share capital of the
public sector undertakings is held by the Government and it
is under the direct control and supervision of Government.
The pay scales of the employees in the public sector are
fixed by the administrative Ministry inconsultation with the
Bureau of Public Enterprises, who exercise complete control
over the actions of public sector undertakings. The public
sector undertakings are answerable to the Parliament through
their administrative Ministries. The entire budget of the
public sector undertakings is controlled by the
460
administrative Ministries. The Comptroller and Auditor
General audits the accounts of the public sector undertak-
ings and any leakages etc. are brought to the notice of
Parliament. The recruitment and conduct rules of the public
sector employees are subject to overall control of Govern-
ment through Bureau of Public Enterprises ..... "
" ..... Section 10 (10C), while extending the
benefit to employees of public sector has, as its basis,
exempted incomes received from Government through public
sector undertakings. The distinction is based on intelligent
differentiation and the object of this differentiation is to
promote the interests of the employees of public sector
undertakings so as to bring this at par with the private
sector employees whose emoluments and other conditions of
service are not governed by any statute or are not under any
control."
"The respondent submits that the legislature is aware of the
differentiation between the public sector undertakings and
private sector undertakings. and in its wisdom. has chosen
to restrict the benefit only to the public sector
employees ..... "
"The respondent submits that the extension of the benefit of
section 10 (10C) of the Income Tax Act to the employees of
the private sector is likely to be misused by way of fre-
quent payment to the employees in the garb of voluntary
retirement benefits and it will not be possible to provide
necessary safeguards in law to check such practices. This
would defeat the very purpose of the Scheme of Voluntary
Retirement, besides leading to large scale revenue loss."
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(emphasis supplied)
The counter-affidavit filed on behalf of respondent No.
1 disclosing the reasons which led to the insertion of
clause (10C) in section 10 of the Act confining the benefit
granted thereby only to employees of the public sector
indicates that the purposes of the legislation include
reduction in the existing gap between the lower compensation
package in public sector and the higher compensation package
of the counterpart in private sector in addition to prevent-
ing misuse of the benefit in private sector which is not
subject to the control of administration by Government like
that in the public sector. It is evident from the material
produced before us that the compensation package in the
public
461
sector, particularly at the higher levels, is much lower
than that in the private sector.
Some insight into the existing state of the public
sector undertakings and their viability with suggestions for
improvement are found in the First Dr. L.K. Jha Memorial
Lecture, delivered on the 6th December, 1988, by Shri R.N.
Malhotra, Governor, Reserve Bank of India, on "Growth and
Current Fiscal Challenges". While giving an overview of the
progress during the last four decades, the speaker referred
to the ’performance of the public sector’ as under:
"The public sector which now accounts for about half the
total national investment has made crucial contributions to
the development of the economy by expanding the infrastruc-
ture, establishing basic industries and producing goods and
services of strategic importance. The public sector has,
however, not been able to generate surpluses commensurate
with its share in plan outlays."
On "planning and resources" and "financing of public
sector", he said:
"An analysis of the financing pattern of public sector plan
expenditures indicates that over time the shares of balance
from current revenues and additional resource mobilisation
have been declining while reliance on borrowed funds has
been rising ..... "
Therefore, he referred to the deterioration in the
finances with reference to the growing expenditure, as
under:
" ..... Interestingly, about two thirds of the savings of
these enterprises represent provisions for depreciation
which are supposed to cover replacement costs, Though sever-
al of these enterprises are operating efficiently, The
savings of public sector enterprises as a group are not
commensurate with the investment made in them. According to
the public enterprises survey, the capital employed in the
Central Public Sector Enterprises amounted to about
Rs.52,000 crores at the end of 1986-87. About 100 of these
units made losses amounting to Rs. 1,708 crores and 109
units were making after tax profit of Rs.3,478 crores of
which Rs.2,142 crores came from the oil sector. The rate of
462
return was 6.0 per cent before tax and 3.4 per cent after
tax. If the oil sector which benefits from the oil price
policy is excluded, the rate of return would be
negative ..... There is imperative need for substantial
improvement in the working and profitability of public
sector undertakings."
Referring to the existing state of "public debt", he said:
"The Long Term Fiscal Policy (LTFP) had raised concern about
increasing reliance on borrowings to finance the budgetary
outlays and had suggested containment of domestic borrowings
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including those from the Reserve Bank ..... In the event,
the level of borrowings has been much higher than that
envisaged in the Seventh Plan .....This has happened de-
spite the fact that some public sector enterprises, previ-
ously dependent on the budget, were allowed to raise re-
sources directly from the capital market through bond float-
ations of the order of Rs.2,000 crores each year from 1986-
87 .....
Growing levels of borrowing by the Government and
public sector undertakings raise two major concerns. First,
whether the present level of Government borrowing is sus-
tainable? Unless there are adequate surpluses in the revenue
account which can be utilised for debt servicing, the budge-
tary deficit would widen. The increased borrowings for debt
servicing would create the vicious circle of progressively
higher interest burdens and still higher borrowing. The
second issue is whether the increasing level of Government
borrowing coupled with that of public sector undertakings
would result in crowding out of private sector investments.
Since the total investment in the economy is shared about
equally between the public and private sectors, it is impor-
tant to ensure that the ’requirements of the private sector
are also adequately met so that the overall growth targets
of the national economy are achieved. ’ ’
Dealing with the efficiency issues, he said as under:
"I shall now refer briefly to the efficiency issues with
special reference to the public sector ..... The persist-
ence of a high ICOR would, however, indicate considerable
scope of improvement in efficiency .....
463
Cost and time over-runs are major contributors to
the high ICOR .......... The public sector has rendered
great service in providing infrastructure and establishing
basic and strategic industries. Managerial skills in that
sector are generally of a high order. The aim should there-
fore be to promote productivity and profitability of this
sector by introducing the requisite policy changes and
improvements. One of the important aims of this sector which
needs reiteration is its financial viability. Efficient use
of manpower is imperative. This is difficulty to ensure if
overmanning persists along with restrictive practices which
resist technological change and systems improvement .....
"
(emphasis supplied)
The factual matrix and historical background appearing
from the above material prove that the public sector needs
toning up. One of its affliction is overmanning or surplus
staff, the obvious remedy of which is streamlining, by
removing the non-productive and unwanted personnel, if
possible, without any complication. Retrenchment is often an
unsafe course to adopt.since it may lead to protracted
litigation and uncertain outcome. We cannot overlook this
well known, though unfortunate fact.
A safe mode to relieve the public sector of its unpro-
ductive and surplus manpower is to induce those persons to
seek voluntary retirement under a scheme providing some
incentive or inducement for seeking voluntary retirement.
Clause (10-B) of section 10 of Incometax Act, 1961, does
grant tax exemption in respect of any compensation received
at the time of retrenchment upto the prescribed limit. That
limit, however, does not apply to compensation received
under certain schemes approved by the Central Government. It
is, therefore, reasonable that same benefit be also extended
in respect of any payment received by an employee of the
public sector on his voluntary retirement under a scheme
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similarly approved by the Central Government.
The public sector’s role visualised on advent of freedom
was as an ’instrument of development and national strength’,
a ’key to our self-reliance’, ’catalyst of social change’
and for attaining ’commanding heights of the economy’ in
keeping with our national aim of Welfare State and a social-
ist economy. Unfortunately, inspite of a
464
strong rationale for setting up and promoting public sector
in the national economy, it has not so far fully justified
the legitimate expectation and a large number of the public
sector undertakings are losing concerns. A study into the
causes which all the public sector has shown that one of its
drawbacks is overstaffing. Streamlining the public sector to
get rid of its unproductive and unwanted personnel is,
therefore, a felt need. A scheme whereby such unwanted
personnel can be induced to leave voluntarily granting some
incentive for doing so is, therefore, ultimately beneficial
to the health and prosperity of the public sector and conse-
quently to the national-economy. These factors alone are
sufficient to provide an intelligible differentia between
public and private sectors and its rational nexus with the
object of improving the performance of public sector, pro-
moting national economy.
It is useful to remember that the country having opted
for mixed economy, the healthy and vigorous functioning of
the public sector undertakings is conducive to the benefit
of the private sector as well, in addition to promoting the
well-being of the national economy. A point of view emerging
currently is that just as public sector undertakings are
outside the purview of the Monopolies and Restrictive Trade
Practices Act by virtue of the exemption conferred on them,
the Income-tax Act should confer similar exemption to it
from tax liability by suitable amendment in section 10 of
the Act as is given to local authorities, housing boards,
etc. This view is supported on the ground that the exemption
from tax liability or public sector undertakings would
ultimately benefit the consumers of the products of the
public sector undertakings. This is not an irrelevant cir-
cumstances to indicate that according to the general percep-
tion, there is a distinction between the public and private
sectors. In some earlier decisions of this Court, the public
sector has been treated as a distinct class for the purpose
of exemption under Statutes.
In Hindustan Paper Corporation Ltd. v. Government of
Kerala & Ors., [1986] 3 SCC 398, a provision granting exemp-
tion to Government companies and cooperative societies alone
for selling forest produce at less than selling price fixed
under the Kerala Forest Produce (Fixation of Selling Price)
Act, 1978 was held to be constitutionally valid and not
violative of Articles 14 and 19(1)(g) of the Constitution of
India. It was held that the Government or public sector
undertakings formed a distinct class. In this context, it
was held as under:
" ..... As far as Government undertakings and companies
are concerned, it has to be held that they form a class by
465
themselves since any profit that they may make would in the
end result in the benefit to the members of the generalpub-
lic. The profit, if any, enriches the public coffer and not
the private coffer. The role of industries in the public
sector is very sensitive and critical from the point of view
of national economy. Their survival very often depends upon
the budgetary. provision and not upon private resources
which are available to the industries in the private
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sector ..... "
(emphasis supplied)
Similarly, in M. Jhangir Bhatusha etc. etc. v. Union of
India & Ors. etc. etc., 1982 Judgments Today 2 SC 465, a
concession in import duty granted to the State Trading
Corporation was upheld on the ground that public policy can
support the differentiation.
It is clear that the Government or the public sector
undertakings have been treated as a distinct class separate
from those in the private sector and the fact that the
profit earned in the former is for public benefit instead of
private benefit, provides an intelligible differentia from
the social point of view which is of prime importance for
the national economy. Thus, there exists an intelligible
differentia between the two categories which has a rational
nexus with the main object of promoting the national econom-
ic policy or the public policy. This element also appears in
the impugned enactment itself wherein ’economic viability of
such company’ is specified as the most relevant circumstance
of grant of approval of the scheme by the Central Govern-
ment. This intrinsic element in the provision itself sup-
ports the view that the main object thereof is to promote
and improve the health of the public sector companies even
though its effect is a benefit to its employees.
As already indicated, clause (10-C) of section 10 of the
Act itself mentions economic viability of a public sector
company as the most relevant circumstance to attract the
provision. The economic status of employees of a public
sector company who get the benefit of the provision is also
lower as compared to their counterpart in the private sec-
tor. If this be the correct perspective as we think it is in
the present case, the very foundation of the challenge to
the impugned provision on the basis of economic equality of
employees in both sectors is non-existent. Once the stage is
reached where the differentiation is rightly made between a
public sector company and a private sector company and that
too essentially on the ground of economic viability of the
public sector company and other relevant circumstances, the
466
argument based on equality does not survive. This is inde-
pendent of the disparity in the compensation package of
employees in the private sector and the public sector. The
argument of discrimination is based on initial equality
between the two classes alleging bifurcation thereafter
between those who stood integrated earlier as one class.
This basic assumption being fallacious, the question of any
hostile discrimination by granting the benefit only to a few
in the same class denying the same to those left out does
not arise.
We shall now refer to some other clauses of section 10
of the Act to which reference was made at the hearing in
support of the rival contentions. Sub-clause (i) of clause
(10) of section 10 confines the benefit thereunder only to
the Government servants, defence personnel and employees of
a local authority. Sub-clause (i) of clause (10-A) similarly
confines the benefit to Government servants, defence person-
nel and employees of a local authority or a corporation
established by a statute. Clause (10-A) also makes a dis-
tinction between the Government employees and other employ-
ees. Clause (10-B) also removes the limit in respect of any
payment as retrenchment compensation under a scheme approved
by the Central Government. Some other clauses in section 10
of the Act further show that the scheme of section 10 con-
templates a distinction between employees based on the
category of their employer. Accordingly, clause (10-C)
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therein is not a departure from the existing scheme but in
conformity with some clauses earlier enacted therein.
Once the impugned provision contained in the newly
inserted clause (10-C) of section 10 of the Income-Tax Act,
1961 is viewed in the above perspective keeping in mind the
true object of the provision, there is no foundation for the
argument that it is either discriminatory or arbitrary.
There is a definite purpose for its enactment. One of the
purposes is streamlining the public sector to cure it of one
of its ailments of overstaffing which is realised from
experience of almost four decades of its functioning. In
view of the role attributed to the public sector in the
sphere of national economy, improvement in the functioning
thereof must be achieved in all possible ways. A measure
adopted to cure it of one of its ailments is undoubtedly a
forward step towards promoting the national economy. The
provision is an incentive to the unwanted personnel to seek
voluntary retirement thereby enabling the public sector to
achieve the true object indicated. The personnel seeking
voluntary retirement no doubt get a tax benefit but then
that is an incentive for seeking voluntary retirement and at
any rate that is the effect of the provision or its fall-out
and not its true
467
object. It is similar to the incentive given to the taX-
payers to invest in the public sector bonds by non-inclusion
of the interest earned thereon in the tax-payer’s total
income which promotes the true object of raising the re-
sources of the public sector for its growth and modernisa-
tion. The real distinction between the true object of an
enactment and the effect thereof, even though appearing to
be blurred at times, has to be borne in mind, particularly
in a situation like this. With this perspective, keeping in
view the true object of the impugned enactment, there is no
doubt that employees of the private sector who are left out
of the ambit of the impugned provision do not fall in the
same class as employees of the public sector and the benefit
or the fall-out of the provision being available only to the
public sector employees cannot render the classification
invalid or arbitrary. This classification cannot, therefore,
be faulted.
Some of the cases cited by the petitioners in support of
the contention of equality of employees in the public and
private sectors in the present context also are inapplica-
ble. The decision in Hindustan Antibiotics v. Workmen,
[1967] 1 SCR 652 related to wage fixation and is distin-
guishable. S.K. Dutta, I.T.O. v. Lawrence Singh Ingty,
[1968] 68 ITR 272--was distinguished and explained in [1976]
103 ITR 82 relied on by us. Moreover, [1976] 103 ITR 82
which also related to a provision in Section 10 of Income-
tax Act, 1961 itself says as under:
"Classification for purposes of taxation or for exempting
from tax with reference to the source of the income is
integral to the fundamental scheme of the Income-tax Act.
Indeed, the entire warp and woof of the 1961 Act has been
woven on this pattern."
" ..... Suffice it to say that classification of sources
of income is integral to the basic scheme of the 1961 Act.
It is nobody’s case that the entire scheme of the Act is
irrational and violative of article 14 of the Constitution.
Such an extravagent contention has not been canvassed before
us. Thus, the classification made by the aforesaid sub-
clause (a) for purposes of exemption is not unreal or un-
known. It conforms to a well-recognised pattern. It is based
on intelligible differentia. The object of this differentia-
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tion between income accruing or received from a source in
the specified areas and the income accruing or received from
a source outside such areas, is to benefit not only the
members of the Scheduled Tribes residing in the specified
468
areas but also to benefit economically such areas ..... "
The other submission of the petitioners is to read the
provision in a manner which would cover all employees in-
cluding employees of the private sector within the ambit of
the impugned provision. This further question does not arise
in view of our conclusion that there is no discrimination
made out. We may, however, mention that the Finance Bill,
1987 while inserting a new clause (10-C) in section 10 of
the Income-tax Act simultaneously inserted a new clause
(36-A) in section 2 of the Act with effect from 1.4.1987
defining ’public sector company’, which expression has been
used in the newly inserted clause (10-C) of section 10. In
view of the simultaneous definition of ’public sector compa-
ny’ in the Act, there can be no occasion to construe this
expression differently without which a private sector compa-
ny cannot be included in it. It is, therefore, not possible
to construe the impugned provision while upholding its
validity in such a manner as to include a private sector
company also within its ambit.
Consequently, the writ petition is dismissed, but in the
facts and circumstances of the case, there shall be no order
as to costs.
All the interim orders shall stand vacated.
T.N.A. Petition
dismissed.
469