TMI Blog1993 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... lary" to be used in the above sections of the Income-tax Act. The petitioner retired from service in the Indian Airlines on super-annuation at the close of work on January 31, 1991. He received the terminal benefits like gratuity and leave encashment. As per the regulations, the petitioner was entitled to the maximum amount of gratuity at 16 1/2 months of provident fund pay (basic pay, variable dearness allowance, special compensatory allowance and additional pay) and similarly leave encashment calculated on provident fund pay last drawn. The petitioner wrote a letter on September 26, 1990, to the Director, Finance, Indian Airlines, stating that he was entitled to get exemption from income-tax under section 10(10) of the Income-tax Act in respect of the gratuity payment and under section 10(10AA) in respect of leave encashment on superannuation. He referred to a circular issued by the Central Board of Direct Taxes under Circular No. 46 F. No. 194/9/70 I.T. (Al), dated September 14, 1970. He claimed that the meaning of "salary" as defined under rule2(h) of Part A of the Fourth Schedule to the Act should not be made applicable to the employees who were members of the Employees' Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion given by the Chief Commissioner of Income-tax, Madras. The present writ petition was filed on March 6, 1992, with the prayer set out earlier. The contention raised in the writ petition is that section 10(10) and section 10(10AA) of the Income-tax Act make a discrimination between the Central and State Government employees on the one hand and the employees of the statutory corporations and the private sector on the other. According to the petitioner, the classification is arbitrary and there is no nexus between the same and the object of the enactment. Thus, the petitioner contends that the sections are unconstitutional as they offend article 14 of the Constitution of India so far as they make discrimination between the two sets of employees. Another contention of the petitioner is that the term "salary" found in the sections should be interpreted to mean and include all the allowances received by the employee including provident fund, gratuity and leave encashment. According to him, the expression should have the same meaning as it had under section 58F of the old Income-tax Act of 1922 and should not be restricted by the definition found in clause (h) of rule 2 of Part A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act were considered. It was held that the sections offended article 14 of the Constitution to the extent to which they excluded the Government servants from the benefit of the exemption given therein. The court observed (at page 277 of 68 ITR and at page 662 of AIR 1968 SC) : "We know of no legislative practice or history treating Government servants as a separate class for the purpose of income-tax. The Government servants' income has all along been treated in the same manner as the income of other salaried officers. We do not know under what circumstances the notifications dated June 6, 1890, and March 21, 1922, referred to earlier, came to be issued. But they are insufficient to prove a well-established legislative practice. At the time those notifications were issued the power of the legislature to grant or withhold any exemption from tax was not subject to any constitutional limitation. Hence the validity of the impugned provisions cannot be tested from what our Legislatures or Governments did or omitted to do before the Constitution' came into force. If that should be considered as a true test then article 13(1) would become otiose and most, if not all, of our consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly question for decision was, whether the exclusion of the Government servants from the exemptions given in section 4(3)(xxi) of the Indian Income-tax Act, 1922, and later on in section 10(26) of the Income-tax Act, 1961, was violative of article 14 of the Constitution. Although sub-clause (a) was very much there, its validity was not even indirectly questioned. The contention of the Revenue, there, was that the exemption from income-tax was given to members of certain scheduled tribes, due to their economic and social backwardness ; that it was not possible to consider Government servants as socially and economically backward and hence the exemption was justly denied to the assessee, who was a Government servant having income from salary. It was further urged by the Revenue that once a tribal becomes a Government servant, he is lifted out of his social environment and assimilated into forward Sections of society and, therefore, he needs no more any crutch to lean on. These arguments were found to be irrelevant and unsustainable. In that context, the court observed : 'The exemption in question was not given to individuals either on the basis of their social status or economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sification for the purpose of imposing a tax or for granting exemption. It said (at page 89) : "While it is true that a taxation law cannot claim immnunit from the equality clause in article 14 of the Constitution, and has to pass, like any other law, the equality test of that article, 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 une ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the public sector in the sphere of promoting the national economy and the context of the felt needs of the times and societal exigencies informed by experience gained from its functioning till the enactment is of significance. There is no dispute that the impugned provision includes all employees of the public sector and none in the private 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. " The court also considered the reasons for making a distinction between Government employees and other employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate sectors and a rational nexus with the object of improving the performance of the public sector, promoting national economy. It is useful to remember that the country having opted for mixed economy, the healthy and vigorous functioning of 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 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 tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 of 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." Thus, all the contentions raised by the petitioner in this case have been considered and refuted by the apex court in the above case. We have no hesitation to hold that the said ruling of the Supreme Court applies on all fours to the present case and that there is no substance in the contention that sections 10(10) and 10(10AA) of the Income-tax Act are unconstitutional and void. We hold that the classification found in the sections is valid and based on sound reasoning. The next contention of the petitioner is equally without any substance. According to him, the expression "salary" found in section 10(10) and section 10(10AA) of the Income-tax Act should have a wider meaning so as to include all the allowances and amounts received by the employee in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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