Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: SHASHIKANT LAXMAN KALE and another VS Respondent: UNION OF INDIA. and another
Court Name: Supreme Court of India Judge(s): M. N. Venkatachaliah, N. D. Ojha, J. S. Verma Title: SHASHIKANT LAXMAN KALE and another vs UNION OF INDIA. and another Case No.: Writ Petition No. 136 of 1989 Date of Judgment:1990-07-20 Reported As: 1991 PTD 1109 Result: Petition dismissed
JUDGMENT
JUDGMENT J. S. VERMA, J.---This petition under Article 32 of the Constitution challenges the constitutional validity of clause (10-C) inserted in section 10 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), by the Finance Act, 1987, with effect from 1st April, 1987. Section 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 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 (10-C) of section 10 of the Act is constitutionally invalid for this reason. However, during the course of arguments, the stand of the petitioners was modified to contend that the provision must be so construed as to apply to all employees equally, whether of the public or private sector, in order to uphold its validity. The question, therefore, is whether there is any such hostile discrimination as alleged by the petitioners and, if so, is it possible to construe the provision in the manner suggested on behalf of the petitioners to apply it equally to all employees of the public as well as private sectors.
---
## Page 2
The first petitioner is an employee 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, indicated that employees 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. Chapter III of the Income-tax Act, 1961, relates to "incomes which do not form part of 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 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 taxation such a provision. Clause(10-C) of section 10 is as under: "(10-C) any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with and scheme which the Central Government may, having regard to the economic viability of such company and other relevant circumstances, approve in this behalf." We may now summarise the arguments advanced before us. Shri Shatye for the petitioners first contended that the reason given for enacting clause (10-C) as indicated in the memorandum explaining the provisions of the Finance Bill 1987, is that the tax benefit is given as a welfare measure. He argued, if so, that all employees, whether of the private or of the public sector, are in the same class and are entitled equally to the benefit of a welfare measure for employees. His next contention is that, if that be the only stated basis of the classification, it has no rational nexus with the 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: whether Parliament intended to confine the benefit of this welfare measure only to employees of the public sector? He further contended that it is possible to read the provision in such a manner as to extend its benefit to all employees instead of confining it only to public sector employees. In reply, Dr. Gauri Shankar, for the first respondent, contended that the employees of the public sector constitute a distinct class for this purpose in view of the fact that public sector undertakings have a 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 streamline and trim the higher echelons by inducing unwanted personnel to leave voluntarily with a "golden hand-shake" instead of resorting to retrenchment which involves several complications 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
---
## Page 3
the corresponding difficulties experienced in the public sector. This provision is meant essentially for the employees as the higher levels in the public sector undertakings whose economic status cannot be equated with their counter-parts in the private sector. For this reason, equating the two sets of employees for 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 an effect or fall-out of the real object. The provision was meant to induce the unwanted personnel to seek voluntary retirement and thereby promote the real object of streamlining the ailing public sector. To support his argument, he produced material indicating the historical background and factual matrix including material to show the great disparity in the emoluments and perquisities, i.e., compensation package of the private sector and the public sector employees particularly at the higher levels. 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 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 C object sought to be achieved by the enactment. It is sufficient to cite the decision in In re: The Special Courts Bill, 1978 (1979) 2 SCR 476 and to refer to the propositions quoted at pp. 534 to 537 therein. Some of the propositions are stated thus (at p. 509 of AIR 1979 SC): "2. The State, in the exercise of its governmental power, has of necessity to make laws operating differently on different groups or classes of persons within its territory to attain particular ends in giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws. 3. The Constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any oven case. Classification is justified if it is not palpably arbitrary. 4. The principle underlying the guarantee of Article 14 is not that the same rules of law should be applicable to all persons within the Indian territory or that the same remedies should be made available to them irrespective of differences of circumstances. It only means that all persons similarly circumstanced shall be treated alike both in 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 ..... 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 recognize even degree of evil, but the classification should never be arbitrary, artificial or evasive. 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 reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on intelligible differentia which distinguishes those that are grouped together from others, and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act.
---
## Page 4
8. The differentia which is the basis of the classification and the object of the Act are distinct things and what is necessary is that there must be a nexus between them.--In short, while Article 14 forbids class discrimination by conferring privileges or imposing liabilities upon persons arbitrarily 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 ..... 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." 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. Ashwathanarayana Setty v. State of Karnataka (1989) Suppl. 1 SCC 696, 723. After a review of earlier decisions, it was stated therein as under: "It is for the State to decide what economic and social policy it should pursue and what discriminations advance those social and economic policies. In view of the inherent complexity of these fiscal adjustments, Courts give larger discretion to the Legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in all possible and reasonable ways ...." In Federation of Hotel and Restuarant Association of India v. Union of India (1989) 178 I T R 97 (SC), it was said as under (at page 122): -------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:" " ....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." This Court has held in Kerala Hotel and Restaurant Association v. State of Kerala, AIR 1990 SC 913; (1990) 77 STC 253 at P. 264, 267 as under: "The scope for classification permitted in taxation is greater and unless the classification made can be termed to be palpably arbitrary, it must be left to the legislative wisdom to 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 arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience', and the Courts should not interfere with the legislative wisdom of making the classification unless the classification is found to be invalid by this test." It is useful to refer also to the decision of this Court in I T O v. N. Takin Roy Rymbai (1976) 103 I T R 82, wherein a similar question relating to the 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 principles applied, as under (at page 89): "-----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
---
## Page 5
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 unequally and cannot be justified on the basis of a valid classification, that there would be a 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 341 and (1971) AIR 1971 SC 1330." We must, therefore, look beyond the ostensible classification and to the purpose of the law and apply the test of "palpable arbitrariness" in the context of the felt needs of the times and societal exigencies informed by experience to determine the reasonableness of the classification. It is clear that the role of public sector in the sphere of promoting the national economy and 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, It is first necessary to discern the true purpose 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 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 purpose or object of the legislation has been succinctly summarised at page 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 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 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 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 a remedy for the then existing malady. In A. Thangal Kunju Musaliar v. M. Venkatachalam Potti (1956) 29 I T R 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
---
## Page 6
necessitated the passing of that law" was relied on. It was reiterated in State of West Bengal v. Union of India (1964) 1 SCR 371, that the Statement of Objects and Reasons accompanying a Bill, when introduced in Parliament, can be. Used for "the limited purpose of understanding the background and the antecedent state of affairs leading up to the legislation". Similarly, in Pannalal Binjraj v. Union of India (1957) 311 T R 565; (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. 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 permissible 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 legislation as distinguished from the meaning of the enacted provision. We propose to utilise these permissible aids for discerning the 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 proposing insertion of clause (10-C) in section 10 of the Income-tax Act, 1961, appears under the heading "Welfare measures". It may be mentioned that this heading is only in the explanatory memorandum and not in the "Notes and Clauses" appended to the "Statement of Objects and Reasons" of the Bill. (See (1987).165 I T R (St.) 119, 122 and 155). We would presently show that the petitioners cannot draw support from this heading in the explanatory memorandum. Moreover, an explanatory memorandum is usually "not an accurate guide of the final Act". (See Francis Bennion's Statutory Interpretation 984 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 (See (1987) 165 I T R (St.) 119) 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 Note 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 (10-C) in this section. Under the proposed amendment, any payment received by an employee of a public sector company at the time of his voluntary retirement in accordance with any scheme which the Central Government may, having regard to the economic viability of the public sector company and other relevant circumstances, approve in this behalf, shall be exempt from tax. This amendment will take effect from 1st April, 1987, and will, accordingly, apply in relation to the assessm ent year 1987-88 and subsequent years." Nowhere in the "Notes on Clauses", is the proposal in the Bill described as a welfare measure. It is then in the memorandum explaining the provisions ill 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 compensation received by public sector employee on
---
## Page 7
voluntary retirement". It is mentioned in paragraph 13 of the explanatory memorandum that a number of public sector undertakings have formulated voluntary retirement schemes for their employees; that under section 10(10-B) of the Income-tax Act, any compensation received by a workman at the time of his retrenchment is exempt up to 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 existing for compensation under approved schemes given by section 10(10-B). The heading of…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.