Civil Appeal No 1969 of 1986 From the Judgment and order dated 2691984 of the Delhi High Court in Civil Writ Petition No 2329 of 1984
Govinda Mukhoty KG Bhagat and Mahabir Singh for the Appellant
GB Pai OC Mathur Miss Meera Mathur DN Mishra and section Sukumaran for the Respondents
The Judgment of the Court was delivered by THAKKAR J
A CAT scan of this appeal reveals three problems viz I
Whether a rule or regulation framed by a public sector undertaking which is an authority under the control of Government of India and is a State  within the parameters 927 of Article 12 of the Constitution of India empowering the employer to terminate the services of an employee by giving notice of the prescribed period or payment of salary for the notice period in lieu of such notice is constitutional II
If it is unconstitutional whether the employee whose services are terminated under the said rule or regulation is always and invariably entitled to reinstatement Whether option to pay compensation in lieu of reinstatement can be given to the employer in fit cases III
What would be the appropriate amount to be reason ably awarded in lieu of reinstatement These are the questions which call for answers in this appeal  Undisputed are the following facts the same being incapable of being disputed 1 The respondent Corporation ITDC is State  within the parameters of Article 12 of the Constitution of India it being an instrumentality of the State as per the law enunciated by this Court in Central Inland Water Transport Corporation Limited  Anr
vs Brojo Nath Ganguly and Anr
and Central Inland Water Transport Corporation Limited  Anr
vs Taran Kanti Sengupta  Anr 2 Appellant was an employee of the Respondent Corporation holding the post of Manager of Hotel Ranjit New Delhi at the material time when his services were terminated by the impugned order2 3 Services of the Appellant were terminated in exercise of powers under Rule 31 v of the ITDC Conduct Discipline and Appeal Rules 1978 ITDC rules by 1By Special Leave arising out of WP No 2329 of 1984 dismissed by the High Court of Delhi summarily by its order dated 2691984
Annexure P 10 Memorandum No P BOP 22 dated 18th September
928 giving pay for 3 months in lieu of 3 months  notice3 under the said rule
Rule 31 v of the ITDC Rules the constitutional validity of which is questioned from the platform of Articles 14 and 16 1 of the Constitution of India provides 31
Termination of services The services of an employee may be terminated by giving such notice or notice pay as may be prescribed in the contract of service in the following manner i X X X X ii X X X X iii X X X X iv X X X X v of an employee who has completed his probationary period and who has been confirmed or deemed to be confirmed by giving him 90 days  notice or pay in lieu thereof
 This rule cannot co exist with Articles 14 and 16 1 of the Constitution of India
The said rule must therefore die so that the fundamental rights guaranteed by the aforesaid constitutional provisions remain alive
For otherwise the guarantee enshrined in articles 14 and 16 of the constitution can be set at naught simply by framing a rule authorizing termination of an employee by merely giving a notice
In order to uphold the validity of the rule in question it will have to be held that the tenure of service of a citizen who takes up employment with the 3
Memorandum No P B OP 22 dated 18th September 1984
Please be advised that your services are no longer required hence stand terminated with immediate effect
In accordance with rule No 31v of ITDC Conduct Discipline and Appeal Rule 1978 you are hereby paid three months pay in lieu of notice and a cheque No 089988 dated 18984 drawn on State Bank of India New Delhi representing a sum of Rs7950 Rupees Seven Thousand Nine Hundred and Fifty only is enclosed
 929 State will depend on the pleasure or whim of the competent authority unguided by any principle or policy
And that the services of an employee can be terminated even though there is no rational ground for doing so even arbitrarily or capriciously
To uphold this right is to accord a magna carta to the authorities invested with these powers to practise uncontrolled discrimination at their pleasure and caprice on considerations not necessarily based on the welfare of the organisation but possibly based on personal likes and dislikes personal preferences and prejudices
An employee may be retained solely on the ground that he is a sycophant and indulges in flattery whereas the services of one who is meritorious but who is wanting in the art of sycophancy and temperamentally incapable of indulging in flattery may be terminated
The power may be exercised even on the unarticulated ground that the former belongs to the same religious faith or is the disciple of the same religious teacher or holds opinions congenial to him
The power may be exercised depending on whether or not the concerned employee belongs to the same region or to the same caste as that of the authority exercising the power of course without saying so
Such power may be exercised even in order to make way for another employee who is a favourite of the concerned authority
Provincialism casteism nepotism religious fanatism and several other obnoxious factors may in that case freely operate on the mind of the competent authority in deciding whom to retain and whom to get rid of
And these dangers are not imaginary ones
They are very much real in organisations where there is a confluence of employees streaming in from different states
Such a rule is capable of robbing an employee of his dignity and making him a supine person whose destiny is at the mercy of the concerned authority whom he must humour notwithstanding the constitutional guarantee enshrined in Articles 14 and 16 of the Constitution of India
To hold otherwise is to hold that the fundamental right embedded in Articles 14 and 16 1 is a mere paper tiger and that it is so ethereal that it can be nullified or eschewed by a simple device of framing a rule which authorizes termination of the service of an employee by merely giving a notice of termination
Under the circumstances the rule in question must be held to be unconstitutional and void
This Court has struck down similar rules in similar situations
In State Electricity Board vs DB Ghosh 1985 2 SCR 1014 Chinnappa Reddy J speaking for a three Judge Bench of this Court has observed
that a similar regulation4 authorizing the 4
Regulation 34 of Regulations framed by West Bengal State Electricity Board reading the 930 termination of the services of a permanent employee by serving three months  notice or on payment of salary for the corresponding period in lieu thereof was ex facie totally arbitrary  and capable of vicious discrimination 
And that it was a naked hire and fire  rule and parallel of which was to be found only in the Henary VIII clause which deserved to be banised altogether from employer employee relationship
The regulation thus offended Article 14 of the Constitution of India and deserved to be struck down on that account
In Central Inland Water Transport Corporation Limited and Anr
vs Brojo Nath Ganguly and Another AND Central Inland Water Transport Corporation Limited  Anr
vs Tarun Kanti Sengupta and Anr
Supra a Division Bench of this Court has struck down a similar rule5 in so far as it authorized termination of employment by serving a notice thereunder as being violative of article 14 of the Constitution of India inter alia in as much as it was capable of being selectively applied in a vicious manner by recourse to pick and choose  formula
There is under the circumstances no escape from the conclusion that Rule 31v of the aforesaid ITDC rules which provides for termination of the services of the employees of the respondent corporation simply by giving 90 days  notice or by payment of salary for the notice period in lieu of such notice deserves to be quashed
As the occasion so demands we feel constrained to place in focus and highlight an important dimension of the matter
The impugned regulation is extremely wide in its coverage in the sense that it embraces the blue collar  workmen the white collar  employees as also the gold collar  managerial cadre employees of the Undertaking
In so far as the blue collar  and white collar  employees are concerned the quashing does not pose any problem
In so far as the gold collar  managerial cadre employees are concerned the consequence of quashing of the 34
In case of a permanent employees his services may be terminated by serving three months  notice or on payment of salary for the corresponding period in lieu thereof
Rule 9 i of Service Discipline and Appeal Rules of 1979 of Central Inland Water Transport Corporation Ltd reading 9
Termination of employment for Acts other than misdemeanour
i The employment of a permanent employee shall be subject to termination on three months  notice on either side
The notice shall be in writing on either side
The company may pay the equivalent of three months  basic pay and dearness allowance if any in lieu of notice or may deduct a like amount when the employee has failed to give due notice
 931 regulation calls for some reflection
In the private sector the managerial cadre of employees is altogether excluded from the purview of the Industrial Disputes Act and similar labour legislations
The private sector can cut the dead wood and can get rid of a managerial cadre employee in case he is considered to be wanting in performance or in integrity
Not so the public sector under a rule similar to the impugned rule
Public sector undertakings may under the circumstances be exposed to irreversible damage at the hands of a gold collar  employee belonging to a high managerial cadre on account of the faulty policy decisions or on account of lack of efficiency or probity of such an employee
The very existence of the undertaking may be endangered beyond recall
Neither the capitalist world nor the communist world where an employee has to face a death sentence if a charge of corruption is established feels handicapped or helpless and countenances such a situation
Not being able to perform as per expectation or failure to rise to the expectations or failure to measure up to the demands of the office is not misconduct
Such an employee cannot thus be replaced at all
If this situation were to be tolerated by an undertaking merely because it belongs to the public sector it would be most unfortunate not only for the undertaking but also for the Nation
The public sector is perched on the commanding heights of the National Economy
Failure of the public sector might well wreck the National Economy
On the other hand the success of the public sector means prosperity for the collective community and not for an individual Industrial House
The profits it makes in one unit can enable it to run a losing unit as also to develop or expand the existing units and start new units so as to the generate more employment and produce more goods and services for the community
The public sector need not therefore be encumbered with unnecessary shackles or made lame
It is wondered whether such a situation can be remedied by enacting a regulation permitting the termination of the employment of employee belonging to higher managerial cadre if the undertaking has reason to believe that his performance is unsatisfactory or inadequate or there is a bonafide suspicion about his integrity these being factors which cannot be called into aid to subject him to a disciplinary proceeding
If termination is made under such a rule or regulation perhaps it may not attract the vice of arbitrariness or discrimination condemned by Articles 14 and 161 of the Constitution of India inasmuch as the factor operating in the case of such an employee will place him in a class by himself and the classification would have sufficient nexus with the object sought to be achieved
Of course it is for the concerned authorities to tackle the sensitive problem after due deliberation
We need say no more
932 Time is now ripe to turn to the next question as to whether it is obligatory to direct reinstatement when the concerned regulation is found to be void
In the sphere of employer employee relations in Public Sector Undertakings to which Article 12 of the Constitution of India is attracted it cannot be posited that reinstatement must invariably follow as a consequence of holding that an order of termination of service of an employee is void
No doubt in regard to blue collar  workmen and white collar  employees other than those belonging to the managerial or similar high level cadre reinstatement would be a rule and compensation in lieu thereof a rare exception
In so far as the high level managerial cadre is concerned the matter deserves to be viewed from an altogether different perspective a larger perspective which must take into account the demands of National Interest and the resultant compulsion to ensure the success of the public sector in its competitive co existence with the private sector
The public sector can never fulfil its life aim or successfully vie with the private sector if it is not managed by capable and efficient personnel with unimpeachable integrity and the requisite vision who enjoy the fullest confidence of the policy makers  of such undertakings
Then and then only can the public sector undertaking achieve the goals of 1
maximum production for the benefit of the community 2
social justice for workers consumers and the people and 3
reasonable return on the public funds invested in the undertaking
It is in public interest that such undertakings or their Board of Directors are not compelled and obliged to entrust their managements to personnel in whom on reasonable grounds they have no trust or faith and with whom they are in a bonafide manner unable to function harmoniously as a team working arm in arm with success in the aforesaid three dimensional sense as their common goal
These factors have to be taken into account by the Court at the time of passing the consequential order for the Court has full discretion in the matter of granting relief and the Court can sculpture the relief to suit the needs of the matter at hand
The Court if satisfied that ends of justice so demand can certainly direct that the employer shall have the option not to reinstate provided the employer pays reasonable compensation as indicated by the Court
So far as the facts of this case are concerned we are satisfied that 933 this is a fit case for granting compensation in lieu of reinstatement instead of granting reinstatement 
For it cannot be said that the apprehension voiced by the respondent Corporation as regards the negative consequences of reinstatement is unreasonable
We do not propose to pronounce on the validity or otherwise of the allegations and counter allegations made by the parties in their respective affidavits
Suffice it to say that the relations between the parties appear to have been strained beyond the point of no return
The Trade Union of the employees has lodged a strong protest and even held out a threat of strike in the context of some acts of the Appellant
Such unrest among the workmen is likely to have a prejudicial effect on the working of the undertaking which would prima facie be detrimental to the larger National interest not to speak of detriment to the interest of concerned undertaking
We are not impressed by the submission that the Union is virtually a company s Union
In any case such disputed questions of facts cannot be resolved in this forum
We are prima facie satisfied that the apprehension is not ill founded
What is more reinstatement is perhaps not even in the interest of the appellant as he cannot give his best in the less than cordial atmosphere and it will also result in misery to him let alone the other side
Neither the undertaking nor the appellant can improve their image or performance or achieve success
In fact it appears to us that both sides will be unhappy and miserable
These are valid reasons for concluding that compensation in lieu of reinstatement and not reinstatement is warranted in the circumstances of the present case
Counsel for the appellant having forcefully pressed the claim for reinstatement has contended that in case the Court is disinclined to order reinstatement the appellant ought to be awarded the full salary and allowances which would have accrued to him till the date of his superannuation which is more than 8 years away
We think it would be unreasonable to award 8 years  salary and allowances as lump sum compensation in lieu of reinstatement
We consider it unreasonable because i To do so would tantamount to paying to the appellant EVERY MONTH 20 OVER AND ABOVE what he would have earned if he was continued in service WITHOUT DOING ANY WORK as the lump sum payment of 8 years  salary invested at 15 interest it being the current rate of interest would yield a monthly recurring amount equivalent to his current monthly salary plus  20 934 ii To do so would be tantamount to paying to him his present salary etc
plus 20 more every month not only till his date of retirement but till his death if he lives longer and also to his heirs thereafter IN PERPETUITY
iii Besides the corpus of the lumpsum amount so paid as compensation would remain with him in tact
Obvious it is therefore that the Court would be conferring a bonanza  on him and not compensating him by accepting this formula
The submission accordingly deserves to be repelled unhesitatingly
In our considered opinion compensation equivalent lo 333 years  salary including allowances as admissible on the basis of the last pay and allowances drawn by the appellant would be a reasonable amount to award in lieu of reinstatement taking into account the following factors viz 1
The corpus if invested at the prevailing rate of interest 15 will yield 50 of the annual salary and allowances
In other words every year he will get 50 of what he would have earned by way of salary and allowances with four additional advantages i He will be getting this amount without working
ii He can work somewhere else and can earn annually whatever he is worth over and above getting 50 of the salary he would have earned
iii If he had been reinstated he would have earned the salary only upto the date of superannuation upto 55 58 or 60 as the case may be unless he died earlier
As against this 50 he would be getting annually he would get not only beyond the date of superannuation for his  lifetime if he lives longer but even his heirs would get it in perpetuity after his demise
iv The corpus of lump sum compensation would re main intact in any event
No doubt he will not have the advantage of further promotion but 935 then what are his prospects given the present relationship Besides the chances of promotion can be set off against the risk of a departmental disciplinary proceeding
Factors i ii iii and iv are of such great significance that compensation on the basis of 50 of his annual salary and allowances is much more to his advantage
We are thus satisfied that compensation in lieu of reinstatement on the aforesaid basis is more than reasonable
therefore
direct that I The Respondent Corporation shall reinstate the appellant with full back wages including usual allowances or at its option II The Respondent Corporation shall pay to the appellant 1 Salary including usual allowances for the period commencing from the date of termination of his service under the impugned order till the date of payment of compensation equivalent to 333 years  salary including usual allowances to him
2 Provident Fund amount payable to the appellant and retirement benefits computed as on the date of payment as per clause 1 shall be paid to him within 3 months from the said date
III The appellant shall vacate and make over possession of the premises provided to the appellant by the respondent company before the expiry of 3 months from the date of this order or within one month of the day on which payment under clause II is made whichever is later
IV Respondent shall pay the costs to the Appellant
V Interim order shall stand vacated subject to the direction embodied in Clause III
VI Since the amount is being paid in one lump sum it is likely that the employer may take recourse to Section 192 of the Income tax Act 1961 which provides that any person responsible for paying any income chargeable under the head Salaries  shall at the time of payment deduct income tax on the amount payable at the average rate of 936 income computed on the basis of the rates in force for the financial year in which the payment is made on the estimated income of the assessee under this head for that financial year
If therefore the employer proceeds to deduct Income tax as provided by Section 192 we would like to make it abundantly clear that the appellant would be entitled to relief under Section 89 of the Income tax Act which provides that where by reason of any portion of asses see s salary being paid in arrears or in advance by reason of his having received in any one financial year salary for more than 12 months or a payment which under the provisions of clause 3 of Section 17 is a profit in lieu of salary his income is assessed at a higher rate than that it would otherwise have been assessed the Income tax officer shall on an application made to him in this behalf grant such relief as may be prescribed
The prescribed relief is set out in Rule 21 A of the Income tax Rules
The appellant is entitled to relief under Section 89 because compensation herein awarded includes salary which has been in arrears as also the compensation in lieu of reinstatement and the relief should be given as provided by Section 89 of the Income tax Act read with Rule 21 A of the Income tax Rules
The appellant is indisputably entitled to the same
If any application is required to be made the appellant may submit the same to the competent authority and the Corporation shall through its Tax Consultant assist the appellant for obtaining the relief
The appeal is allowed
The order of the High Court is set aside
Order in the aforesaid terms is passed
PSS Appeal allowed


Summary:
Rule 31v of the Indian Tourism Development Corporation Conduct Discipline and Appeal Rules 1978 provides that the services of an employee who had completed his probationary period and who has been confirmed or deemed to be confirmed may be terminated by giving him 90 days  notice or pay in lieu thereof
The services of the appellant who was an employee of the respondent Corporation holding the post of Manager of a Hotel at the material time were terminated by Memorandum No P BOP 22 dated 18th September 1984 in exercise of the powers under the said rule by giving him pay for three months in lieu of notice
Aggrieved by the said order the appellant filed a writ petition in the High Court assailing the constitutional validity of r 31v of the said Rules which was summarily dismissed
Allowing the appeal by special leave the Court  HELD 1
The Indian Tourism Development Corporation is an 924 instrumentality of the State and therefore State  within the parameters of Article 12 of the Constitution of India
927D E Central Inland Water Transport Corporation Ltd  Anr
vs Brojo Nath Ganguly  Anr applied
21 Rule 31v of the Indian Tourism Development Corporation Conduct Discipline and Appeal Rules 1978 is unconstitutional and void for such a rule which provides for termination of the services of the employees of the respondent Corporation simply by giving ninety days  notice or by payment of salary for the notice period in lieu of such notice cannot co exist with Articles 14 and 161 of the Constitution of India
The fundamental right embedded in these Articles is not a mere paper tiger nor is it so ethereal that it can be nullified or eschewed by a simple device of framing a rule which authorises termination of the services of an employee by merely giving a notice of termination
930D E928F929F 22 The tenure of service of a citizen who takes up employment with the State cannot be made to depend on the pleasure or whim of the competent authority unguided by any principle or policy nor his services allowed to be terminated on an irrational ground arbitrarily or capriciously
The authorities cannot be invested with uncontrolled discriminatory power to practise on considerations not necessarily based on the welfare of the organisation but possibly based on personal likes and dislikes personal preferences and prejudices
Provincialism casteism nepotism religious fanaticism and several other obnoxious factors may in that case freely operate on the mind of the competent authority in deciding whom to retain and whom to get rid of
And these dangers are not imaginary ones
They are very much real in organisations where there is a confluence of employees streaming in from different States
Such a rule as in the instant case is capable of robbing an employee of the dignity and making him a supine person whose destiny is at the mercy of the concerned authority
The impugned rule therefore deserves to be quashed
928H 929A B D F Central Inland Water Transport Corporation Limited  Anr
vs Brojo Nath Ganguly  Anr  State Electricity Board vs D B Ghosh 1985 2 SCR 1014 referred to
31 The Court has full discretion in the matter of granting relief to suit the needs of the matter at hand
If satisfied that ends of justice so demand the Court can certainly direct that the employer shall have the 925 option not to reinstate provided the employer pays reasonable compensation as indicated by it
932G 32 In the sphere of employer employee relations in public sector undertakings to which Article 12 of the Constitution of India is attracted it cannot be posited that reinstatement must invariably follow as a consequence of holding that an order of termination of service of an employee is void
Though in regard to workmen and employees reinstatement would be a rule and compensation in lieu thereof a rare exception as regards the high level managerial cadre the matter deserves to be viewed from an altogether different perspective
932A C 33 The public sector needs to be managed by capable and efficient personal with unimpeachable integrity and the requisite vision who enjoy the fullest confidence of the policy makers
It is but in public interest that such undertakings or their Board of Directors are not compelled and obliged to entrust their managements to personnel in whom on reasonable grounds they have no trust or faith and with whom they are in a bonafide manner unable to function harmoniously as a team
These factors have to be taken into account by the Court at the time of passing the consequential order
932E G In the instant case it cannot be said that the apprehension voiced by the respondent Corporation as regards the negative consequences of reinstatement is unreasonable
The relations between the parties appear to have been strained beyond the point of no return
The Trade Union of the employees has lodged a strong protest and even held out a threat of strike in the context of some acts of the appellants
Such unrest among the workmen is likely to have a prejudicial effect on the working of the undertaking which would prima facie be detrimental to the larger National Interest
In such a situation neither the undertaking nor the appellant can improve their image or performance
It is therefore a fit case for granting compensation in lieu of reinstatement
933A C 4
In the private sector the managerial cadre of employees is altogether excluded from the purview of the Industrial Disputes Act and similar labour legislations
It can cut the dead wood and can get rid of a managerial cadre employee in case he is considered to be wanting in performance or in integrity
Not so in the public sector under a rule similar to r 31v
Public sector undertakings may under the circumstances be exposed to irreversible damage at the hands of an employee belonging to a high managerial cadre on account of the faulty policy 926 decisions or on account of lack of efficiency or probity of such an employee
The very existence of the undertaking may be endangered beyond recall
Such a situation can be remedied by enacting a regulation permitting the termination of the employment of employee belonging to higher managerial cadre if the undertaking has reason to believe that his performance is unsatisfactory or inadequate or there is a bonafide suspicion about his integrity these being factors which cannot be called into aid to subject him to a disciplinary proceeding
If termination is made under such a rule or regulation perhaps it may not attract the vice of arbitrariness or discrimination condemned by Articles 14 and 161 of the Constitution of India inasmuch as the factors operating in the case of such an employee will place him in a class by himself and the classification would have sufficient nexus with the object sought to be achieved
931A H Taking into account various factors compensation equivalent to 333 years  salary including allowances as admissible on the basis of the last pay and allowances drawn by the appellant was determined to be a reasonable amount to award in lieu of reinstatement with statutory relief under section 89 of the Income tax Act 1961 read with r 21 A of the Income tax Rules 1961 934C D 936D E