TMI Blog1990 (7) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of the provision and that 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 the 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d classification for the purpose of legislation, provided such classification is not arbitrary in the sense above mentioned ... 11. Classification necessarily implies 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). 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 dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siderably 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 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. " ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 material which can be used for this exercise. For determining the purpose or object of the legislation, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory 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 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 insertion of a new clause (10C), the effect of which is 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. 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 "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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, section 10(10C) was introduced by the Finance Act, 1987, with effect from April 1, 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, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The pay scales of the employees in the public sector are fixed by the administrative Ministry in consultation with the Bureau of Public Enterprises, who exercise complete control over the actions of public sector undertakings. The public sector undertakings are answerable to Parliament through their administrative Ministries. The entire budget of the public sector undertakings is controlled by the administrative Ministries. 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surate 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 . . . " Thereafter, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ZS difficult to ensure if overmanning persists along with restrictive practices which resist technological change and systems improvement . . . " (emphasis supplied) The factual matrix 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the exemption from tax liability of public sector undertakings would ultimately benefit the consumers of the products of the public sector undertakings. This is not an irrelevant circumstance to indicate that, according to the general perception, 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 [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 inapplicable. The decision in Hindustan Antibiotics Ltd. v. Workmen [1966-67] 30 FJR 461 ; [1967] 1 SCR 652, 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 sche ..... X X X X Extracts X X X X X X X X Extracts X X X X
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