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TMI Blog1990 (7) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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 unreasonable, amounting to hostile discrimination. The initial submission on behalf of the petitioners was that the aforesaid clause (10C) of section 10 of the Act is constitutionally invalid for this reason. 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. The first petitioner is an employee of the second respondent, Peico Electronic and Electricals limited, a private sector company, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 provision so construed as to extend its benefit to all employees irrespective of the category of their employer to uphold its validity. Shri Divan, 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 be asked is : whether 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 public sector employees. In reply, Dr. Gauri Shankar, for the first respondent, contended that the employees o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic 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 In re The Special Courts Bill, 1978 [1979] 2 SCR 476 and to refer to the propositions quoted at pp. 534 to 537 therein. Some of the propositions are stated thus (at p. 509 of AIR 1979 SC) : "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 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 arbitrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 a permissible classification in a taxing statute was once again considered in a recent decision of this court in P. M. Ashwahanarayana Settee v. State of Karnataka [1989] Suppl. 1 SCC 696, 723. After a review of earlier decisions, it was stated therein as under : "It is for the State to decide what economic and social policy it should pursue and what discriminations advance those social and economic policies. In view of the inherent complexity of these fiscal adjustments, courts give larger discretion to the Legislature in the matter of its preferences of economic and social policies and effectuate the chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciples underlying the doctrine of equality, it ZS 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 violation of article 14. (See East India Tobacco Co. v. State of Andhra Pradesh, [1962] 13 STC 529 ; [1962] AIR 1962 SC 1733 ; [1963] 1 SCR 404 ; Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay [1972] AIR 1972 SC 845; Jaipur Hosiery Mills v. State of Rajasthan [1970] 26 STC 34[1971] AIR 1971 SC 1330. " (emphasis supplied) 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 the reasonableness of the classification. It is clear that the role of public sector in the sphere of promoting the national economy and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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 remedy for the then existing malady. In A. Thangal Kunju Musaliar v. M. Venkatachalam Potti [1956] 29 ITR 349 ; [1955] 2 SCR 1196, the Statement of Objects and Reasons was used for judging the reasonableness 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 an 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 SCR 371, that the Statement of Objects and Reasons accompanying a Bill, when introduced in Parliament, can be used for "the limited purpose of understanding the background and the antecedent state of affairs leading up to the legislation." Similarly, in Pannalal Binjraj v. Union of India [1957] 31 ITR 565 ; [1957] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be accepted. The Statement of Objects and Reasons 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 pages 119 to 151. The Notes 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 (10C) 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 accordance with any scheme which the Central Government 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." Nowhere in the "Notes on Clauses", is the proposal in the Bill described as a welfare measure. It is then in the memorandum explaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "Incentives 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 public sector bonds by amending section 10 in this manner but the real object for giving that benefit to the taxpayer 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 (b) 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 relating to amendment of section 10, can be treated differently merely because, in the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the relevant extract from which is reproduced hereunder : '15.1 At present, under section 10(10B), any compensation received by a workman at the time of his retirement is exempted up to 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Comptroller and Auditor General audits the accounts of the public sector undertakings 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 Government through the 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 an intelligent differentiation and the object of this differentiation is to promote the interests of the employees of public sector undertakings so as to bring them 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 empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 several 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x and the historical background appearing from the above material prove that the public sector needs toning up. One of its afflictions 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 unproductive 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 (10B) of section 10 of the Income-tax Act, 1961, does grant tax exemption in respect of any compensation received at the time of retrenchment up to 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 the 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 similarly app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption under statutes. In Hindustan Paper Corporation Ltd. v. Government of Kerala [1986] 3 SCC 398, a provision granting exemption to Government companies and co-operative societies alone for selling forest produce at less than the 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 (at p. 1545 of AIR 1986 SC) : ". . . As far as Government undertakings and companies are concerned, it has to be held that they form a class by themselves since any profit that they may make would in the end result in the benefit to the members of the general public. 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 sector . . ." (emphasis sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (10A) similarly confines the benefit to Government servants, defence personnel and employees of local authority or a corporation established by a statute. Clause (10A) also makes a distinction between the Government employees and other employees. Clause (10B) 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 the employees based on the category of their employer. Accordingly, clause (10C) therein is not a departure from the existing scheme but in conformity with some clauses earlier enacted therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, related to wage fixation and is distinguishable. S. K. Dutta, ITO v. Lawrence Singh Ingty [1968] 68 ITR 272 (SC) was distinguished and explained in ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 (SC) relied on by us. Moreover, ITO v. N. Takin Roy Rymbai [1976] 103 ITR 82 (SC) which also related to a provision in section 10 of the Income-tax Act, 1961, itself says as under (at pp. 89, 90) : "Classification or 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 extravagant 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 unknown. It conforms to a well-recognised pattern. It is based on intelligible differentia. The object of this differentiation between income accruing o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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