Shashikant Laxman Kale & Anr. Vs. Union of India & Anr.
Email(Under Article 32 of the Constitution of India)
(Under Article 32 of the Constitution of India)
Mr. A.B.Divan, Mr. V.Gauri Shankar and Mr. S.C.Manchanda, Senior Advocates, Mr. Ashok Sagar, Ms. Amrita Mitra, Ms.A.Subhashini, Mr.Ravinder Narain, Mr.S. Sukumaran, Mr. M.K.Shashidharan, Mr. S.Rajappa, Advocates with them for the Respondents.
Section 10(10-C) – Challenge to the constitutional validity of – Tax exemption on payment received by public sector employees on voluntary retirement – Benefit not available to the employees of a private sector company – Distinction between public and private sector – Employees of the private sector do not fall in the same class as employees of public sector – Benefit of the provision being available to the public sector employees cannot render the classification invalid or arbitrary – Validity of the provision up
Held –
(i) 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 economic 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 for grant of approval of the scheme by the Central Government. This intrinsic element in the proviso 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 to its employees. (Para 36)
(ii) … clause (10-C) of section 10 of the Act itself mention 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 sector. 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 argument based on equality does not survive. This is independent 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. (Para 37)
(iii) 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 personnel and employees of a local authority or a corporation established by a statute. Clause (10-A) also makes a distinction between the Government employees and other employees. 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 contemplates a distinction between employees based on the category of their employer. Accordingly, clause (10-C) therein is not a departure from the existing scheme but in conformity with some clauses earlier enacted therein. (Para 38)
(iv) 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 object. It is similar to the incentive given to the tax-prayers 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 resources of the public sector for its growth and modernisation. 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. (Para 39)
2. M.Jhangir Bhatusha etc. etc. v. Union of India & Ors. etc etc. JT 1989 (2) SC 465.
3. P.H.Ashwathanarayana v. State of Karnataka, 1989 Suppl. (1) SCC 696.
4. Federation of Hotel and Restaurant Association of India v. Union of India, JT 1989 (SUPP.) 168 = (1989) 179 ITR 97.
5. Hindustan Paper Corporation Ltd. v. Government of Kerala & Ors. 1986 (3) SCC 398.
6. R.D.Shetty v. International Airport Authority of India, 1979 (3) SCR 1014.
7. I.T.O. v. N.Takin Roy Rymbai (1976) 103 ITR 82 SC – Relied.
8. S.K.Dutta, ITO v. Lawrence Singh Ingty, 1968 (68) ITR 272 – Distinguished.
9. Hindustan Antibiotocs v. Workmen 1967 (1) SCR 652 – Distinguished.
10. State of West Bengal v. Union of India, 1964 (1) SCR 371.
11. Pannalal Binjraj v. Union of India, 1957 SCR 233.
12. A.Thangal Kunju Musaliar v. M.Venkitchalam Potti & Anr. 1955 (2) SCR 1196.
Books, Treatises and Articles Referred:
Bennion, Francis : Statutory Interpretation, 1984, p.237 and p.529
Malhotra, R.N. : “Growth and Current Fiscal Challenges”, First Dr.L.K. Jha Memorial Lecture delivered on 6-12-1988.
1. This petition under Article 32 of the Constitution 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 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, 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.
2. 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 reasons. However, during the course of arguments the 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 provision in the manner suggested on behalf of the petitioners to apply it equally to all employees of the public as well as private sectors?
3. The first petitioner is an employee of second respondent
Peico Electronic and Electricals Limited, a private sector company – and the second petitioner is a registered trade union representing the employees of the second respondent-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.
4. 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 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.”
5. 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 benefit of a welfare measure for employees. His next contention is that, if that be the only stated basis of the classification, 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 benefit 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 exclusion of non-public sector employees is not only discriminatory 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 provisions so construed as to extend its benefit to all employees irrespective of the category of their employer to uphold its validity.
6. 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 employees 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.
7. 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 under-takings 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 streamlime 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 complications including protracted litigation which is not conducive to the well-being 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 difficulties, 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 private sector. For this reason equating the two sets of 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 particularly at the higher levels.
8. The main question for decision is the discrimination alleged by the petitioners. The principles of valid classification 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 no 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 distinguishing 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 scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary.
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 remedies should be made available to them irrespective of differences 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 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 founded 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 legislation, provided such classification is not arbitrary in the sense above mentioned.
…. …. …. ….
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 public. Indeed, the very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality.”
(emphasis supplied)
9. 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.
10. The scope for permissible classification in a taxing statute was once again considered in a recent decision of this Court in P.H. Ashwathanarayana vs. State of Karnataka (1989 Suppl.) 1 SCC 696). After a review of earlier decision, it was stated therein as under :-
“It is for the State to decide what economic and social policy it should pursue and what discrimination advance those social and economic policies. In view of the inherent complexity of these fiscal adjustments, courts give a larger discretion to the legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in all possible and reasonable ways……..”
(emphasis supplied)
11. In Federation of Hotel and Restaurant Association of India vs. Union of India (1989) 178 I.T.R. 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)
12. This Court has held in Kerala Hotel and Restaurant Association & Ors. vs. State of Kerala & Ors. (A.I.R. 1990 SC 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 back-ground 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 classification is found to be invalid by this test.”
(emphasis supplied)
13. It is useful to refer also to the decision of this Court in I.T.O. vs. 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 Income-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 flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because 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 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)
14. We must, therefore, look beyond the ostensible 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 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 satisfied, 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.
