Supreme Court of India
SHASHIKANT LAXMAN KALE AND ANR.versusUNION OF INDIA AND ANR.
- Citation
- 1990 INSC 208
- Decided
- 20 July 1990
- Disposal
- Dismissed
- Bench
- M N VENKATACHALIAH
Holding
Clause 10‑C, which confers tax exemption on voluntary‑retirement payments only to public‑sector employees, is a valid classification and does not violate Article 14.
Summary
The petitioners, an employee of a private‑sector firm and a trade union, challenged the constitutional validity of clause 10‑C inserted by the Finance Act, 1987 into section 10 of the Income‑Tax Act, 1961, which grants tax exemption on voluntary‑retirement payments only to employees of public‑sector companies. They argued that the exclusion of private‑sector employees was arbitrary, discriminatory and violative of Article 14, and that the clause should be construed to apply to all employees because the explanatory memorandum described it as a "welfare measure". The Court examined the purpose of the provision, the distinction between public and private sector undertakings, and the principles of valid classification in a taxing statute. It held that public‑sector employees constitute a distinct class with an intelligible differentia linked to the economic viability of public enterprises, and that the classification is not palpably arbitrary. Consequently, clause 10‑C is constitutionally valid and the petition was dismissed.
Issues considered
- The constitutional validity of clause 10‑C of section 10 of the Income‑Tax Act, 1961 under Article 14.
- Whether the exclusion of private‑sector employees from the tax exemption is arbitrary or discriminatory.
- Whether the clause can be interpreted to extend the benefit to all employees based on the "welfare measures" heading in the explanatory memorandum.
- The proper test for classification in a taxing statute – intelligible differentia and rational nexus.
Legislation cited
- Finance Act, 1987s. Insertion of clause 10‑C in section 10
- Income Tax Act, 1961s. 10, s. 10‑C
- Industrial Disputes Acts. 25F
Subjects
Income TaxArticle 14ClassificationPublic sectorPrivate sectorVoluntary retirementTax exemptionConstitutional validityWelfare measures
Judgment
SHASHIKANT LAXMAN KALE AND ANR.
A
v.
UNION OF INDIA AND ANR.
JULY 20, 1990
[M.N. VENKATACHALIAH, N.D. OJHA AND B
J.S. VERMA, JJ.]
Income Tax Act, 1961: Chapter Ill-Section 10.-Clause (10-C)
-Scope and Constitutional validity of-Public Sector Companies-
Employees-Voluntary Retirement-"Golden hand-shake'' to emplo-
yees-Exemption from income-tax-Held clause ( 10-C) does not
include employees of a private sector company. c
Constitution of India, 1950: Article 14 Public Sector Com-
panies-Employees-Amount received at the time of voluntary retire-
ment-Exemption from tax under clause ( 10-C) of Section JO of Income
Tax Act, J96~Exclusion of non-public sector employees from clause D
( 10-C) and consequent denial of benefit of tax exemption-Held public
sector employees constitute a distinct class-Clause ( 10-C) is neither
arbitrary nor violative of Article J~Object of cluase ( 10-C) explained.
Taxing Statute-Constitutional validity of-Reasonableness of
classification-Determination of-Scope for classification in a taxing E
statute is greater-Court should look beyond obstensible classification
into purpose of law and apply the test of "palpable arbitrariness"
Statutory interpretation-Statute-Determination of object and
purpose-Permissible Aid-Statement of objects and reasons of the
Bill-Whether can be looked into. F
) Finance Bill-Explanatory Memorandum-Heading-Neither
determinative a/object nor can camouflage the object of the Act.
By Finance Act, 1987, clause (10-C) was inserted in section IO of
the Income-Tax Act, 1961. The effect of Ibis clause was to grant tax G
exemption to employees of the public sector in respect of the amount
received under the voluntary retirement scheme approved by the Cent-
ral Government.
The petitioners-an employee of a private sector company and the
trade-union of the said private company-filed a writ petition in this H
441
442 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
court challenging the validity of clause (10-C) contending; (i) the denial
A of benefit of tax exemption to employees of private sector company
being arbitrary and discriminatory, the impugned clause was uncon-
stitutional as violative of Article 14: (ii) the heading 'Welfare-Measures'
to the Memorandum explaining the provisions in the Finance Bill 1987
proposing insertion of clause (10-C) in section IO of the Income-Tax
B Act, 1961 was decisive of the object of its enactment; the tax benefit
being in the nature of welfare measure the Impugned clause must be so
construed as to apply to all employees equally, whether of the public
sector or private sector in order to uphold its validity.
Dismissing the petition, this Court,
c HELD: There is a distinction between the public and private
sectors. The Government or the public sector undertakings are 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
D which is of prime importance for the national economy. Thus, there
exists an intelligible diffcrentia between the two categories which bas 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
E scheme by the Central Government. This instrinsic element in the pro-
vision 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 of its employees. 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. Viewed in this
F perspective, the very foundation of the challenge to the impugned provi-
sion 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 argu-
G ment 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 bai;ed
on initial equality between the two classes alleging bifurcation there-
after between those wl!o stood integrated earlier as one class. This basic
assumption being fallacious, the question of any hostile discrimination
H by granting the benefit only to a few in the same class denying the same
to those left out does not arise. [4650-H; 466A-B]
S.L. KALE v. U.0.I. 443
2. The purposes of the impugned legislation include reduction in
the existing gap between the lower compensation package in public A
sector and the higher compensation package of the counterpart in
private sector in addition to preventing misuse of the benefit in private
sector which is not subject to the control of administration by Govern-
ment like that in the public sector. One of the purposes is streamlining
the public sector to cure it of one of its ailments of overstaff'mg. The B
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 retire-
ment and at any rate that is the effect of the provision or its fall-
out and not its true object. The real distinction between the true
object of an enactment and the effect thereof, even though appearing c
to be blurred at times, has to he borne in mind, particularly in a
situation like this, [466F-H; 467A:B]
2.1 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 D
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. The other clauses in
..-~· section 10 of the Act further show that the scheme of section 10 contemp-
lates a distinction between employees based on the category of their E
employer. This classification cannot, therefore, he faulted. 1467B-CJ
Hindustan Paper Corporation Ltd. v. Government of Kera/a &
Ors., [1986] 3 S.C.C. 398; M. JhanRir Bhatusha etc. etc. v. Union of
India & Ors. etc. etc., Judgments Today 1982 (2) SC 465;_ L.K. Jha
Memorial Lecture, delivered on the 6th December 1988, by Shri R.N. .F
Malhotra, Governor, Reserve Bank of India, on "Growth and Current
Fiscal Challenges", referred to.
Hindustan Antibiotics v. Workmen, [1967] 1 SCR 652 and S.K.
Dutta, I. T.O. v. Lawrence Singh lngty, [1968] 68 I.T.R. 272, disting-
uished and held inapplicable. G
R.D. Shetty v. International Airport Authority of India, [1979] 3
SCR 1014, cited.
2.2 In view of the simultaneous definition of 'public sector com-
pany' in the Income-Tax Act, there can he no occasion to construe this H
444 SUPREME COURT REPORTS . [1990] 3 S.C.R.
expression differently withOl!t which a private sei:tor company cannot
be included in it. It is, therefore, not possible to construe the impugned ;1
provision while upholding its validity in such a manner as to include a
private sector company also within its ambit. [468C-D I
3. The principles of valid classification are that those grouped
B 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
y
the object sought to be achieved by the enactment. [449DI
Re The Special Courts Bill, 1978, [1979] 2 S.C.R. 476, referred
C to.
4. The latitude for classification in a taxing 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 constitu-
tional validity of a taxing provision challenged on the ground of
D discrimination. l451C]
P.H. Ashwathanarayana v. State o[Kamataka, [1989] (Supp.) 1 S.C.C.
696; Federation of Hotel and Restaurant Association of India v. Union of
India, [1989] 178 I. T.R. 97; Kera/a Hotel and Restaurant Association &
Ors. v. State of Kera/a & Ors., A.I.R. 1990 SC 913 and I. T.O. v. N.
E Takin Roy Rymbai, (1976] 103 I.T.R; 82 SC, referred to.
East India Tobacco Co. v. Andhra Pradesh, A.I.R. 1962 SC
1733; Vivian Joseph Ferriera v. Municipal Corporation of Greater
Bombay, AIR 1972 S.C. 845 and Jaipur Hosiery Mills v. State of
Rajasthan, A.I.R. 1971 SC 1330, cited.
F
5. The Court should, therefore, look beyond the obstensible clas-
sification 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. [453B]
G
5.1 It is necessary to discern the true pufPOse or object of the
impugned enactment because it is only with reference to the true object
of the enactment that the existence of .a rational nexus of the differentia )-
on which the classification is based, with the object sought to be
achieved by the ena~tment, can be examined to test the validity of the
H classification. [453E-F]
S.L. KALE v. U.0.1. 445
5.2 There is a clear distinction between the legislative intention A
\- and the pnrpose or object of the legislation. While the purpose or object
of the legislation is to provide a remedy for the malady, the legislative
intention relates to the meaning or exposition of the remedy as enacted.
While dealing with the validity of a classification, the rational nexus of
the differentia on which the classification is based has to exist with the
B
purpose of object of the legislation, so determined. [453H; 454Ar
Francis Bennion's Statutory Interpretation, 1984 edition, page
"(. 237, referred to.
6. For determining the purpose or object of the legislation, it is
permissible to look into the circumstances which prevailed at the tbne c
when the law was passed and which necessitated the passing of that law.
For the limited purpose of appreciating the background and the antece-
). dent factual matrix leading to the legislation, it is permissible to took
into the statement of Objects and Reasons of the Bill which actuated the
step to provide a remedy for the then existing malady. [454B-C)
0
A. Thangal Kunju Musaliar v. M. Venkitachalam Patti & Anr.,
[1955) 2 S.C.R. 1196; State of West Bengal v. Union of India, [1964) 1
S.C.R. 371 and Pannalal Binjraj v. Union of India, [1957) S.C.R. 233,
referred to.
6.1 To sustain the presumption of constitutionality, consideration E
may be had even to matters of common knowledge; the history of the
times; and very conceivable state of facts existing at the tbne of legisla-
tion which can be assumed. Even though for the purpose of construing
the meaning of the enacted provision, it is not permissible to use these
aids, yet it is permissible to look into the historical facts and surround-
ing circumstances for ascertaining the evil sought to be remedied. The F
distinction between the purpose or object of the legislation and the
legislative intention is significant in this exercise to emphasise the
availability of larger material to the Court for reliance when determin-
ing the purpose or object of the legislation as distinguished from the
meaning of the enacted provision. [454F-H]
G
7. An explanatory memorand.um is usually 'not an accurate guide
of the final Act'. [455CT
Francis Bennion's Statutory Interpretation, 1984 Edn. page 529,
referred to.
H
446 SUPREME COURT REPORTS [1990) 3 S.C.R.
7.1 A catch-phrase possibly used as a populist measure 1<.
A
describe some provisions in the Finance Bill in the· explanatory_,,
memorandum while introducing the Bill in the Parliament can neither'
be determinative of, nor can it camouflage the true object of the legisla-
tion. It is not unlikely that the phrase 'welfare measures' was used to
emphasise more on the effect of the provisions thereunder on the tax-
B payer for populism. [457G)
ORIGINAL JURISDICTION: Writ Petition No. 136 of 1989.
(Under Article 32 of the Constitution of India).
Narayan B. Shatye, Mukul Mudgal, Venkatesh Rao, Sudhir
c Gopi for the Petitioners.
A.B. Divan, V. Gauri Shankar, S.C. Manchanda, Ashok Sagar,,.(
Ms. Amrita Mitra, Ms. A. Subhashini, Ravinder Narain, S. Sukuma-
ran, M.K. Shashidharan, S. Rajappa for the Respondents.
D
The Judgment of the Court was delivered by
VERMA, J. 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
E as 'the Act') by the Finance Act, 1987 with effect from 1.4.1987. Sec-'-....-
tion 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 .L .
public sector company at the time of his voluntary retirement in r
accordance with any scheme which the Central Government may,
having regard to the economic viability of such company and other J
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
G publi~ sector employees and private sector employees in the matter of
taxation and is arbitrary and unintelligible amounting to hostile
discrimination.
The initial submission on behalf of the petitioners was that the
aforesaid clause ( 10-C) of section 10 of the Act is constitutionally
H invalid for this reason. However, during the course of arguments the
S.L. KALE v. U.0.1. [VERMA, J.] 447
stand of the petitioners was modified to contend that the provtsion
A
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 ques-
tion, therefore, is whether there is any such hostile discrimination as
alleged by the petitioners and if so, is it possible to construe the provi-
sion in the manner suggested on behalf of the petitioners to apply it
equally to all employees of the public as well as private sectors? B
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 indi- c
cated that emplyees 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. D
Chapter III of the Indian Income Tax Act, 1961 relates to "in-
comes 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 E
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 taxa!lon but for such a provision. Clause (10-C) of
Section lU 1s as under:
"(10-C):-any payment received by an employee of a F
public sector company at the time of his voluntary retire-
ment 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."
G
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 H
448 SUPREME COUKf REPORTS I1990) 3 S.C.R.
benefit of a welfare measure for employees. His next conteu.tion is
A
that, if that be the only stated basis of the classification, it has no ;I
rational nexus with the object of the provision and it_ violates Article 14
of the Constitution. Learned counsel tor the__getitioners referred to
cenam other clauses in section 10 ot 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 strik-
ing down the provision as invalid which while denying the benefit to
the public sector employees would not also serve any useful purpose
c for the private sector employees, the c~urt should adopt a positive and
constructive approach and the provision so construed as to extend its
benefit to all employees irre_spective of the categ9ry of their employer
to uphold its validity.
D Shri Dewan for the secona respondent, a private sector com-
pany, 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
E benefit to all employees instead of confining it only to the public sector
employees.
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 undertakings have a
F 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 complica-
G tion 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
H economic status cannot be equated with their counterpart in the
S.L. KALE v. U.0.1. [VERMA. J.j 449
private sector. For this reason equating the two sets of employees for
A
-. 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 B
·--"'· personnel to seek voluntary retirement and thereby promote the real
object of streamlining the ailing public sector. To support his argu-
y meat, 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.
c
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 D
together in one class must possess a common characteristic which dis-
tinguishes 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. E
Some of the propositions are stated thus:
"2. The State, in the exercise of its governmental power,
has of necessity to make laws operating differently on diffe-
rent groups or classes of persons within its territory to
attain particular ends in giving effect to its policies, and it F
must possess for that purpose large powers of distinguish-
ing 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 G
invention and application of a precise formula. Therefore,
t classification need not be constituted by an exact or scien-
tific 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 H
arbitrary.
450 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
4. The principle underlying the guarantee of Article 14 is
A
not that the same rules of law should be applicable to all
persons within the Indian territory or that the same reme-
dies should be mad~ available to them irrespective of dif-
ferences of circumstances. It only means that all persons
similarly circumstanced shall be treated alike both in
B 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.
c 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.
D
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 reason-
able relation to the object of the legislation. In order to
E
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.
·F
8. The differentia which is the basis of the classification and
the object of the Act are distinct things and JVhat is necessary
is that there must be a nexus between them. In short, while
Article 14 forbids class discrimination by conferring pri-
vileges or imposing liabilities upon person arbitrarily
G 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.
H
S.L. KALE v. U.0.I. .!VERMA. J.] 451
11. Classification necessarily implied the making of a dis-
A
tinction 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 B
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 neces-
sary to tax everything. These basic postulates have to be borne in mind
c
while determining the constitutional validity of a taxing provision chal-
:o<Jenged on the ground of discrimination.
The scope for permissible classification in a taxing statute was
once again considered in a recent decision of this Court m P.H. 0
Ashwathanarayana v. State of Kamataka, [1989] Suppl. 1 SCC 696.
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 comp- E
lexity of these fiscal adjustments, courts give a larger dis-
cretion 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)
F
In Federation .of Hotel and Restaurant Association of India v.
Union of India, [ 1989] 178 ITR 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."
G
" ... 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."
H
(emp_liasis supplied)
452 SUPREME COURT REPORTS [ 1~90] 3 S.C.R.
This Court has held in Kera/a Hotel and Restaurant Assoczacwn
A
& Ors. v. State of Kera/a & Ors., A.LR. 1990 SC 913 as under: ,~
"The scope for classification permitted in taxation is grea-
ter and unless the classification made can be termed to be
palpably arbitrary, it must be left to the legislative wisdom to
B choose the yardstick for classification, in the background 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 arbitrari-
ness applied in the context of the felt needs of the times and
c societal exigencies informed by experience, and the courts
should not interefere with the legislative wisdom of making
the classification unless the classification is found to be >f'.
invalid by this test."
(emphasis supplied)
D
It is useful to refer also to the decision of this Court in/. T.O. v.
N. Takin Roy Rymbai, [1976] 103 l.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
E 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
F 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 flexi-
ble range by a taxing statute does not·transgress the funda-
mental principles unaerlying the doct,ine of equality, it is
G 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
H justified on the basis of a valid classification, that there
S.L. KALE v. U.0.1. [VERMA, J.] 453
would be a violation of Article 14. (see East India TobacC<f A
Co. v. Andhra Pradesh; Vivian Joseph Ferriera v. Munici-
pal Corporation of Greater Bombay; Jaipur Hosiery Mills
v. State of Rajasthan)"
(emphasis supplied)
We must, th~refore, look beyond the ostensible. classification B
and to the purpose of the law and apply the test of 'palpable arbitrari-
ness' 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 dispnte
c
that the impugned provision includes all employees of the public sector
and none not in the public sector. The qustion is whether those left out
are similarly situated for the purpose -0f the enactment to render the
classification palpably arbitrary. It is only if this test of palpable ar-
bitrariness applied in this manner is satisfied, that the provision can be D
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.
It is first necessary to discern the true purpose or object of the E
impugned enactment because it is only with reference to the true
object of the enactment that the existence of a rational nexus of the
diffemtia on which the classification is based, with the object sought to
be achieved by the ·enactment, can be examined to test the validity of
the classification. In Francis Bennion's Statutory Interpretation, 1984
edition, the distinction between the legislative intention and the F
~·· purpose or object of the legislation has been succinctly summarised at
p. 237 as under:
-
"The distinction between the purpose or object of an
enactment and the legislative intention governing it is that ·
the former relates to the mischief to which the enactment is G
directed and its remedy, while the latter relates to the legal
meaning of the enactment."
There is thus a clear distinction between the two. While the
purpose or object of the legislation is to provide a remedy for the
malady, the legislative intention relates to the meaning or exposition H
454 SUPREME COURT REPORTS [1990) 3 S.C.R.
of the remedy as enacted. While dealing with the validity of a classifi-
11\ cation, the rational nexus of \he differentia on which the classification
is based has to exist 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
t actuated the step to provide a remedy for the then existing malady. In
A. Thangal Kunju Musaliar v. M. Venkitachalam Patti & Anr., [1955]
2 S.C.R. 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
D for determining the question, even 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 pas-
sing of that law" was relied on. It was reiterated in State of West Bengal
v·. Union of India, [ 1964) 1 S.C.R. 371-that the Statement of Objects
and Reasons accompanying a Bill, when introduced in Parliament, can
E 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] SCR 233-a challenge to
the validity of classification was repelled placing reliance on an
affidavit filed on behalf of the Central Board of Revenue disclosing the
true object of enacting the impugned provision in the Income-Tax Act.
F
Not only this, to sustain the presumption of constitutionality,
consideration may be had even to matters of common knowledge; the
history of the times; and every conceivable state of facts existing at the
time of legislation which can be assumed. Even though for the purpose
of construing the meaning of the enacted provision, it is not permissi-
G hie to use these aids, yet it is permissible to look into the historical
facts and surrounding circumstances for ascertaining the evil sought to
be remedied. The distinction between the purpose or object of the
legislation and the legislative intention, indicated earlier, is significant
in this exercise to emphasise the availability of larger material to the
Court for reliance when determining the purpose or object of the
H legislation as distinguished from the meaning of the enacted provision.
S.L. KALE v. U.0.1. !VERMA, J.] 455
We propose to utilise these permissible aids for discerning the
A
purpose or object of the legislative provision in order to examine the
" validity of the classification made therein.
Strong reliance has been placed on behalf of the petitioners on
the Memorandum explaining the provisions in the Finance Bill, 1987,
__,,. wherein the explanatory note relating to clause 4(a) of the Bill propos-
ing insertion of clause ( 10-C) in Section 10 of the Income-tax Act, 1961
B
appears under the heading 'Welfare Measures'. It may be mentioned
" that this heading is only in the explanatory memorandum and not in
the 'Notes on Clauses' appended to the 'Statement of Objects and
Reasons' of the Bill. (See [1987] 165 ITR (Statutes) at pp. 119, 122 &
155). We would presently show that the petitioners cannot draw sup-
port from this heading in the explanatory memorandum. Moreover, an c
explanatory memorandum is usually 'not an accurate guide of the final
~
Act'. (See Francis Bennion' s Statutory Interpretation, 1984 Ed. at p.
529).
It was urged that the impugned provision being described as a D
welfare measure in the explanatory memorandum, the object of the
. enactment was the welfare of the 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
enactll'.ent. In our opinion, this cannot be accepted. The Statement of
.--.... Objects and Reasons (See (1987) 165 !TR (Statutes) at p. 119) is as E
under:
--I "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 provi-
- \
sions contained in the Bill."
Thereafter, the Notes on clauses in the Finance Bill, 1987 are from
pp. 119-151. The Note relating to this clause at p. 122 is as under:
F
"Clause 4 seeks to amend section 10 of the Income-Tax
Act. G
Sub-Clause (a) of this clause proposes to insert a new
clause ( 10-C) in this section. Under the proposed amend-
ment, 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 Govern- H
456 SUPREME COURT REPORTS [ 1990] 3 S.C.R.
ment may, having regard to the economic viability of the
A public sector company and other relevant circumstances, f
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
B 1987-88 and subsequent years." \
">--
No where in the 'Notes on Clauses' the proposal in the Bill is described
as a welfare measure. It is then in the memorandum explaining the
,..
provisions in the Finance Bill, 1987 that the provisions are divided
under different heads, one of which is 'welfare measures'. The sub-
heading relating to this proposal is mentioned as 'Exemption of com-
c pensation received by public sector employees on voluntary retire-
ment'. It is mentioned in p:iragraph 13 of the explanatory memoran-
dum that a number of public sector undertakings have fomulated ;>(
voluntary retirement schemes for their employees; that under section
10(10-B) of the Income-Tax Act any compensation received by a
D workman at the time of his retrenchment is exempt upto the specified
limit; and that this limit of exemption under section 10 (10-B) is,
however, not applicable in respect of compensation received under
certain schemes approved by the Central Government. By enacting
section 10 ( 10-C), the proposal obviously was to extend the same
benefit to the payment made under these approved schemes as was ._.....,.
E existing for compensation under approved scheme given by section 10
( lOB). The heading of 'welfare measures' applies also to paragraph 14
in the memorandum relating to modification of provisions relating to
deduction in respect of donations to certain funds etc. It is, therefore,
~
clear that in this explanatory memorandum the headings are fairly
wide and matters collected under the same heading may be diverse not
F giving a true indication of the object of the provision.
It is also significant that the proposal to amend section 10 by
~ -
.inserting a new clause ( 10-C) therein was contained in sub-clause (a) of
clause 4 of the Finance Bill, while sub-clause (b) of clause 4 of the
Finance Bill proposed to insert a new item in sub-clause (iv) of clause
G ( 15) of section 10 to provide that interest payable by the public sector
companies on certain specified bonds and debentures will not form
part of the tax-payer's total income subject to the specified conditions.
This was in pursuance of a series of public sector bonds being floated ~
which are intended to yield tax-free return to the holders of such
bonds. The effect of the amendment so made yielding tax-free return
H to the holders of public sector bonds is similar to the amendment by
S.L. KALE v. U.0.I. [VERMA, J.J 457
insertion of a new clause (10-C), the effect of which is to grant tax
A
~ 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, there- B
---< fore, mentioned under the same heading being of essentially the same
nature. It is interesting to note that the proposal in clause 4(b) was
'1' mentioned in paragraph 17 of the explanatory memorandum under the
heading 'Incentives for growth and modernisation' with the sub-head-
ing 'Measures for raising resources for the public sector'. Admittedly,
the effect of this provision was to grant a tax benefit to the.holders of
the public sector bonds by amending section 10 in this manner but the c
real object for giving that benefit to the tax-payer 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 D
Bill, both sub-clauses relating to amendment of section 10, can be
treated differently merely because in the explanatory memorandum
the two sub-clauses are under different headings. This distribution of
the sub-clauses of the same clause in the Finance Bill under different
- -- heads in the explanatory memorandum is sufficient to show that no
particular significance can be attached to the heading 'welfare
measures' under which the proposal to insert clause (10-C) in section
10 of the Act was placed in that memorandum. We see no reason why
E
insertion of clause (10-C) in section 10 cannot also be described as
incentive for growth and modernisation being a measure for improve-
ment of the public sector. Obviously the incentive given thereby is to
the employees of the public sector companies to resort more readily to F
\ the voluntary retirement scheme which would enable improvement of
).
public sector by streamlining its staff.
A catch-phrase possibly used as a populist measure to describe
some provis10ns in the Finance Bill in the explanatory memorandum
while introducing the Bill in the Parliament can neither be determina- G
tive of, nor can it camouflage the true object of the legislation. It is not
unlikely that the phrase 'welfare measures' was used to emphasise
more on the effect of the provisions thereunder on the tax-payer for
populism.
In view of the fact that the challenge is based on the initial Ji
458 SUPREME COURT REPORTS I1990] 3 S.C.R.
assumption of equality between all employees of the public sector and
A
the private sector, it will be useful to refer to the nature and role of the
public sector undertakings vis-a-vis those of the private sector along
with the historical background and surrounding circumstances leading
to enactment of the impugned provision. For this purpose, we would
first refer to the counter-affidavit of Shri S.K. Abrol, Officer-on-
B Special-Duty, Central Board of Direct Taxes, Department of
Revenue, Ministry of Finance, New Delhi, which states the reasons for
insertion of clause ( 10-C) in section 10 of the Income-Tax Act, 1961.
The counter-affidavit states with reference to some 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 employ-
c ment. It states further as follows:
"As submitted in the paragraph above, section 10 (10-C)
was introduced by the Finance Act, 1987 w.e.f. 1.4.1987
and the legislature in its wisdom sought to restrict these
D 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, relevant extract from which is
reproduced hereunder:
E '15.1. At present under section 10 (!OB) any com-
pensation received by a workmen at the time of his retire-
ment is exempted upto the amount calculated in accor-
-- -
dance with section 25F of the Industrial Disputes Act or
Rs.50,000, whichever is less. The limit is, however, flO/
applicable in respect of compensation received under certain
F schemes approved by the Central Government.
15.2 A number of public sector undertakings .have
formulated voluntary retirement schemes for their emplo-
yees. With a view to extend relief to such employees, the
Finance Act, 1987, by introducing new clause ( IOC) in
G 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 employee whether
H a workman or an executive.
S.L. KALE v. U.0.1. [VERMA, J.[ 459
15.3. This .amendment shall come into force w.e.f.
1.4.1987 and will, accordingly, apply to assessment year A
1987-88 and subsequent year.'
"It is submitted that for all purposes, the private sector and
the public sector have been treated differently and are
known to be different classes. The Industrial Policy Resol- B
ution, 1956, which reviewed the earlier Industrial Policy,
clearly distinguished industries in the public sector and
those in the private sector. The Industrial Policy Resolu-
tion mentioned that for adoption of socialist pattern of
society as the national objective, the requirement was that
industries of basic and strategic importance, or in the
nature of public utility service, should be in the public c
sector. The Industrial Policy Resolution placed the indus-
tries in three different categories; ..... Thus, this cate-
gorisation of industries into public sector, private sector
was on the basis of Articles 38 and 39 of the Constitution of .
India, as has been mentinoed in the Industrial Policy
D
Resolution, 1956.'.'
"The respondent submits .that there were certain
basic distinctions between the undertakings in the private
sector and in the public sector as has been observed by this
Hon'ble Court in the case of R.D. Shetty v. International
E
Airport Authority of India, [ 1979) 3 SCR 1014. A public
sector undertaking is either established by a statute or
incorporated under law. Public Sector Undertakings are
wholly controlled by Government not only in their policy
making but also in carrying out the functions entrusted to
them by law establishing it or by charter of their in corpora-
F
tion: As such public sector undertakings are bound by any
directions that may be issued by Government from time to
time in respect of policy matters. The entire share capital of
the public sector undertakings is held by the Government
and it is under the direct control and supervision of Govern-
ment. The pay scales of the employees in the public sector
G
are fixed by the administrative Ministry inconsultation with
the Bureau of Public Enterprises, who exercise complete
control over the actions of public sector undertakings. The
public sector undertakings are answerable to the Parlia-
ment through their administrative Ministries. The entire
budget of the public sector undertakings is controlled by the H
460 SUPREME COURT REPORTS [ 1990) 3 S.C.R.
administrative Ministries. The Comptroller and Auditor
A
General audits the accounts of the public sector undertak- ,1
ings 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 Govern-
ment through Bureau of Public Enterprises ..... "
B
'
" ..... Section 10 ( lOC), while extending the benefit >-
to employees of public sector has, as its basis, exempted
incomes received from Government through public sector 't
undertakings. The distinction is based on intelligent
differentiation and the object of this differentiation is to
promote ·the interests of the employees of public sector
c undertakings so as to bring this 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."
D "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
E section JO ( JOC) of the Income Tax Act to the employees of
the private sector is likely to be misused by way of frequent
payment to the employees in the garb of voluntary retirement
benefits and it will not be possible to provide necessary safe-
guards in law to check such practices. This would defeat the
very purpose of the Scheme of Voluntary Retirement,
F besides leading to large scale revenue loss."
(emphasis supplied)
The counter-affidavit filed on behalf of respondent No. 1 disclos-
ing the reasons which led to the insertion of clause ( lOC) in section 10
of the Act confining the benefit granted thereby only to employees of
G the public sector indicates that the purposes of the legislation include
reduction in the existing gap between the lower compensation package
in public sector and the higher compensation package of the counter-
part in private sector in addition to preventing misuse of the benefit in
private sector which is not subject to the control of administration by
Government like that in the public sector. It is evident from the mate-
H rial produced before us that the compensation package in the public
S.L. KALE v. U.0.1. [VERMA, J.] 461
sector, particularly at the higher levels, is much lower than that in the
private sector. A
Some insight into the existing state of the public sector undertak·
ings and their viability with suggestions for improvement are found in
the First Dr. L.K. Jha Memorial Lecture, delivered on the 6th
December, 1988, by Shri R.N. Malhotra, Governor, Reserve Bank of B
-rl India, on "Growth and Current Fiscal Challenges". While giving an
overview of the progress during the last four decades, the speaker
"f" referred to the 'performance of the public sector' as under:
"The public sector which now accounts for about half the
total national investment has made crucial contributions to
the development of the economy by expanding the c
infrastructure, establishing basic industries and producing
goods and services of strategic importance. The public
sector has, however, not been able to generate surpluses
commensurate with its share in plan outlays."
D
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 E
have been declining while reliance on borrowed funds has
been rising ..... "
t Therefore, he referred to the deterioration in the finances with
reference to the growing expenditure, as under:
F
" . . . . . 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 com·
mnsurate with the investment made in them. According to G
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 JOO 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 H
462 SUPRllME COURT REPORTS I19901 3 S.C.R.
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 I
is excluded, the rate of return would be negative ..... There
is imperative need for substantial improvement in the work-
ing and profitability ofpublic sector undertakigs."
B 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 finance the "'
budgetary outlays and had suggested containment of
domestic borrowings including those from the Reserve
Bank ..... In the event, the level of borrowings has been
c much higher than that envisaged in the Seventh Plan .....
This has happeneJ despite the fact that some public sector
enterprises, previously dependent on the budget, were ,...;
allowed to raise resources directly from the capital market
through bond floatations of the order of Rs.2,000 crores
each year from 1986-87 .....
Growing levels of borrowing by the Government and
public sector undertakings raise two major concerns. First,
whether the present level of Government borrowing is
sustainable? Unless there are adequate surpluses in the
E revenue account which can be utilised for debt servicing,
the budgetary deficit would widen. The increased borrow-
ings for debt servicing would create the vicious circle of
progressively higher interest burdens and still higher
botrowing. The second issue is whether the increasing level
of Government borrowing coupled with that of public
{ -
sector undertakings would result in crowding out of private
sector investments. Since the total investment in the
economy is shared about equally between the public and
private sectors, it is important to ensure that the require-
ments of the private sector are also adequately met so that
the overall growth targets of the national economy are
G achieved."
Dealing with the efficiency issues, he said as under:
"I shall now refer briefly to the efficiency issues with special
reference to the public sector ..... The persistence of a
H . high ICOR would, however, indicate considerable scope of
improvement in efficiency . . . . . •
S.L. KALE v. U.0.1. [VERMA, J.] 463
Cost and time over-runs are major contributors to the
A
high ICOR ........ ; . The public sector has rendered
great service in providing infrastructure and establishing
basic and strategic industries. Managerial ski'.ls in that
sector are generally of a high order. The aim should
therefore be to promote productivity and profitability of
this sector by introducing the requisite policy changes and B
improvements. One of the important aims of this sector
which needs reiteration is its financial viability. Efficjen.t
use of manpower is imperative. This is difficulty to ensure
if overmanning persists along with restrictive practices
which resist technological change and systems improve-
ment ..... "
c
(emphasis supplied)
The factual matrix and historical background appearing from the
above .material prove that the public sector needs toning up·. One of its
affliction is overmanning or surplus staff, the obvious remedy of which D
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 litiga-
tion and uncertain outcome. We cannot overlook this well known,
though unfortunate fact.
E
A safe mode. to relieve\ the public sector of its unproductive and
surplus manpower is to induce those persons to se.ek voluntary retire-
ment under a scheme providing some incentive or inducement for
seek_ing voluntary retirement.' Clause (10-B) of section 10 .of Income-
tax Act, 1961, does grant tax ·exemption in respect of any compensa-
tion recieved at the time of retrenchment upto the prescribed limit. p
That limit, however, does not apply to compensation received under
certain schemes approved by the Central Government. It is, therefore,
reasonable that same benefit be also extended in respect of any pay-
me.nt received by an employee of the public sector on his voluntary
retirement under a scheme similarly approved by the Central
Government. .G
The public sector's role visualised on advent of freedom was as
an 'instrument of development and national strength', a 'key to our
self-reliance', 'catalyst of social change' and for attaining 'command-
ing heights of the economy' in keeping with our national aim of
Welfare State and a socialist economy. Unfortunate.ly, inspite of a .H
464 SUPREME COURT REPORTS [1990] 3 S.C.R.
strong rationale for setting up and promoting public sector in the
A
national economy, it has not so far fully justified the legitimate expec-
tation and a large number of the public sector undertakings are losing
concerns. A study into the causes which all thf public sector has shown
that one of its drawbacks is overstaffing. Streamlining the public sector
to get rid of its unproductive and unwanted personnel is, therefore, a
B felt need. A scheme whereby such unwanted personnel can be induced
to leave voluntarily granting some incentive for doing so is, therefore,
ultimately beneficial to the health and prosperity of the public sector
and consequently to the national economy. These factors alone are
sufficient to provide an intelligible differentia between public and
private sectors and its rational nexus with the object of improving the
performance of public sector, promoting national economy.
c
It is useful to remember that the country having opted for mixed
economy, the healthy and vigorous functioning of the public sector
undertakings is conducive to the benefit of the private sector as well, in
additwn to promoting the well-being of the national economy. A point
D 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 or public sector undertakings
would ultimately benefit the consumers of the products of the public
sector undertakings. This is not an irrelevant circumstances 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
F exemption under Statutes.
In Hindustan Paper Corporation Ltd. v. Government of Kera/a &
Ors., [1986] 3 SCC 398, a provision granting exemption to Govern-
ment companies and cooperative societies alone for selling forest pro-
duce at less than selling price fixed under the Kerala Forest Produce
G (Fixation of Selling Price) Act, 1978 was held to be constitutionally
va,lid and not violative of Articles 14 and 19( l)(g) of the Constitution
of India. It was held that the Government or public sector underta-kings
formed a distinct class. In this context, it was held as under:
" .... .As far as Government undertakings and companies
H are concerned, it has to be held that they form a class by
S.L. KALE v. U.0.1. !VERMA, J.] 465
themselves since any profit that they may make would in the· A
end result in the benefit to the members of the general public.
The profit, if any, enriches the public c'offer 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 B
are available to the industries in the private sector ..... "
(emphasis supPJied)
Similarly, in M. Jhangir Bhatusha etc. etc. v. Union of India & Ors. etc.
etc., 1%i Judgments Today 2 SC 465, a concession ;n import duty
granted to tlie State Trading Corporatfon was upheld on the ground C
that public policy can support the differentiation.
It is clear that the Government or the public sector undertakings
have been treated as ·a di~t.inct 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 D
from the social point of view which is of prime importance for the
national economy. Thus, there exists an intelligible differentia bet-
ween 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 E
circumstance of grant of approval of the scheme by the Central
Government. This intrinsic element in the provision 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.
F
As already indicated, clause ( 10-C) of section 10 of the Act itself
mentions 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 G
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 rel~vant circumstances, the H
466 SUPREME COURT REPORTS [1990] 3 S.C.R.
argument based on equality does not survive. This is independent of
A
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 there-
after between those who stood integrated earlier as one class. This
basic assumption being fallacious, the question of any hostile discrimi-
B nation 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 person-
c nel and employees of a local authority. Sub-clause (i) of clause (10-A)
similarly confines the benefit to Government servants, defence per-
sonnel. 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
D removes the limit in respect of any payment as retrenchment compen-
sation 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
E clauses earlier enacted therein.
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
F or arbitrary. There is a defmite 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
G adopted to cure it of one of its ailments is undoubtedly a forward step
towards promoting the national economy. The provision is an incen-
tive 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
H rate that is the effect of the provision or its fall-out and not its true
S.L. KALE v. U.0.1. [VERMA, J.J 467
object. It is similar to the incentive given to the tax-payers to invest in
A
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 modernisa-
tion. 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 B
perspective, keeping in view the true object of the impugned enact-
ment, 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 can-
not render the classification invalid or arbitrary. This classification
cannot, therefore, be faulted. c
Some of the cases cited by the petitioners in suppprt of the con-
tention of equality of employees in the public and private sectors in the
present context also are inapplicable. The decision in Hindustan Anti-
biotics v. Workmen, [1967] 1 SCR 652 related to wage fixation and is D
distinguishable. S.K. Dutta, I. T.O. v. Lawrence Singh lngty, [1968] 68
ITR 272-was distinguished and explained in [1976] 103 !TR 82 relied
on by us. Moreover, [1976] 103 ITR 82 which also related to a provi-
sion in Section 10 of Income-tax Act, 1961 itself says as under:
"Classification for purpos.;'s of taxation or for exempting E
from tax with reference to the source of the income is integ-
ral 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 F
) income is integral to the basic scheme of the 1961 Act. It is
nobody's case that the entire scheme of the Act is irrat10nal
and violative of article 14 of the Constitution. Such an
extravagent 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 G
conforms to a well-recognised pattern. It is based on intel-
ligible differentia. The object of this differentiation bet-
ween income accruing or received from a source in the
specified areas and the income accruing or received from a
source outside such areas, is to benefit not only the
members of the Scheduled Tribes residing in the specified H
468 SUPREME COURT REPORTS [1990] 3 S.C.R.
A areas but also to benefit economically such areas ..... "
The other submission of the petitioners is to read the provision in
a manner which would cover all employees including employees of the
private sector within the ambit of the impugned provision. This further
question does not arise in view of our conclusion that there is no
B discrimination made out. We may, however, mention that the Finance
Bill, 1987 while inserting a new clause (10-C) in section 10 of the
Income-true Act simultaneously inserted a new clause (36-A) in section
2 of the Act with effect from 1.4.1987 defining 'public sector com-
pany', which expression has been used in the newly inserted clause
( 10-C) of section 10. In view of the simultaneous definition of 'public
c sector company' in the Act, there can be no occasion to construe this
expression differently without which a private sector company cannot
be included in it. It is, therefore, not possible to construe the
impugned provision while upholding its validity in such a manner as to
include a privat.e sector company also within its ambit.
D Consequently, the writ petition is dismissed, but in the facts and
circufnstances of the case, there shall be no order as to costs.
All the interim orders shall stand vacated.
T.N.A. Petition dismissed.
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