2019 (11) TMI 1143 - HC - Income Tax

Exemption u/s 10 (10AA) - leave encashment drawn retirement - HELD THAT - Merely because Public Sector Undertaking and Nationalised Banks are considered as State under Article 12 of the Constitution of India for the purpose of entrainment of proceedings under Article 226 of the Constitution and for enforcement of fundamental right under the Constitution, it does not follow that the employees of such Public Sector Undertaking, Nationalised Banks or other institutions which are classified as State assume the status of Central Government and State Government employees. It has been held in multiple decisions that employees of Public Sector Undertakings are not at par with government servants (Ref Officers Supervisors of I.D.P.L. v Chairman M.D. I.D.P.L 2003 (7) TMI 733 - SUPREME COURT . In the noted case of A.K.Bindal v Union of India 2003 (4) TMI 406 - SUPREME COURT while considering the issue of revision of the pay scales of employees of government companies/PSUs at par with government employees, it was held that the employees of government companies cannot claim the same legal rights as government employees. We therefore, reject the present petition, insofar as the petitioners challenge to the provisions of Section 10 (10AA) is concerned. We are however of the, prima facie, view that the grievances of the petitioner with regard to exemption limit under Clause (ii) of Section 10 (10AA) not being raised since 1998, appears to be justified. This is so because over the decades, the pay-scales admissible to government servants, and even employees of the Public Sector Undertaking and Nationalised Banks and all others have been upwardly revised, keeping in view, the financial growth in the country as well as on account of rising inflation. The last drawn salaries have increased manifold since time and notification issued under Clause (ii) of Section 10 (10AA) was lastly issued, as taken note of hereinabove, on 31.05.2002. We therefore, issue notice to the respondents limited to this aspect.

Summary

Issues Involved:
1. Discrimination in tax exemption on leave encashment between PSU retirees and government employees.
2. Validity of Section 10(10AA) of the Income Tax Act concerning discrimination.
3. Request for amendment or notification to increase the tax exemption limit on leave encashment for PSU retirees.

Detailed Analysis:

1. Discrimination in tax exemption on leave encashment between PSU retirees and government employees:
The petitioners, retired employees of various nationalized banks, argued that they face discriminatory treatment compared to Central and State Government employees regarding tax exemption on leave encashment. Government employees enjoy full tax exemption on leave encashment under Section 10(10AA)(i) of the IT Act, whereas PSU retirees are limited to a 10-month exemption with a cap of ?3 lakhs under Section 10(10AA)(ii). The petitioners contended this distinction is illegal, arbitrary, and violates Articles 12, 13, 14, 16, 19, 21, and 265 of the Constitution.

2. Validity of Section 10(10AA) of the Income Tax Act concerning discrimination:
The court found no merit in the challenge to Section 10(10AA) on discrimination grounds. It held that Central and State Government employees form a distinct class with a reasonable classification having a nexus to the object sought to be achieved. Government employees enjoy a "status" governed by different terms and conditions, as established in the case of Roshan Lal Tandon v Union of India AIR 1967 SC 1889. The court emphasized that the legal position of a government servant is more one of status than of contract, and government employees enjoy constitutional protections and privileges not available to PSU employees.

3. Request for amendment or notification to increase the tax exemption limit on leave encashment for PSU retirees:
The petitioners argued that the exemption limit for PSU retirees has remained static at ?3 lakhs since 1998, despite multiple Pay Commissions and upward revisions in pay scales for both government and PSU employees. The court acknowledged this grievance, noting that the financial growth and rising inflation over the decades justify a revision of the exemption limit. The court issued notice to the respondents on this aspect, directing them to file counter affidavits within six weeks.

Conclusion:
The court rejected the petition challenging the provisions of Section 10(10AA) concerning discrimination but found prima facie merit in the grievance regarding the static exemption limit. The case was listed for further hearing on 04.05.2020, with directions for the respondents to respond to the issue of revising the exemption limit.