as a populist measure to 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 legislation
It is not unlikely that the phrase welfare measures  was used to emphasise more on the effect of the provisions thereunder on the taxpayer 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 Gopi for the Petitioners
AB Divan V Gauri Shankar SC Manchanda Ashok Sagar Ms Amrita Mitra Ms A Subhashini Ravinder Narain section Sukumaran MK Shashidharan section Rajappa for the Respond ents
The Judgment of the Court was delivered by VERMA J
This petition under Article 32 of the Consti tution challenges the constitutional validity of clause 10 C inserted in section 10 of the Indian Income tax Act 1961 hereinafter referred to as the Act  by the Finance Act 1987 with effect from 141987
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 re ceived 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 cir cumstances 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 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 invalid for this reason
However during the course of arguments the 447 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 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 The first petitioner is an employee of second respond ent Peico Electronic and Electricals Limited a private sector company and the second petitioner is a registered trade union representing the employees of the second re spondent 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 Indian Income Tax Act 1961 relates to incomes 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 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 but for 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 any 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 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 448 benefit of a welfare measure for employees
His next conten tion is that if that be the only stated basis of the clas sification it has no rational nexus with the object of the provision and 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 bene fit 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 exclu sion of non public sector employees is not only discrimina tory 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 Dewan 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 ask is whether the Parliament intended to confine the benefit of this welfare measure only to employ ees 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 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 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 the unwanted personnel to leave voluntarily with a golden hand shake instead of resorting to retrenchment which involves several complication including protracted litigation which is not conducive to the wellbeing 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 diffi culties experienced in the public sector
This provision is meant essentially for employees at the higher levels in the public sector undertakings whose economic status cannot be equated with their counterpart in the 449 private sector
For this reason equating the two sets of employees for 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 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 perquisites ie compensation package of the private sector and the public sector employees particu larly at the higher levels
The main question for decision is the discrimination alleged by the petitioners
The principles of valid classi fication are long settled by a catena of decisions of this Court but their application to a given case is quite often a vexed question
The problem is more vexed in cases falling within the grey zone
The principles are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment
It is sufficient to cite the decision in Re The Special Courts Bill 1978 and to refer to the propositions quoted at p 534 537 therein
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 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 distin guishing and classifying persons or things to be subjected to such laws
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 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 classifi cation in any given case
Classification is justified if it is not palpably arbitrary
450 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 reme dies should be made available to them irrespective of dif ferences 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
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
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 rounded 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
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 person 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 legisla tion provided such classification is not arbitrary in the sense above mentioned
451 11
Classification necessarily implied 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 pub lic
Indeed the very idea of classification is that of inequality so that it goes without saying that the mere fact of inequality n no manner determines the matter of constitutionality emphasis supplied It is well settled that the latitude for classification in a taxing statute is much greater and in order to tax something it is not necessary to tax everything
These basic postulates have to be borne in mind while determining the constitutional validity of a taxing provision challenged on the ground of discrimination
The scope for permissible classification in a taxing statute was once again considered in a recent decision
of this Court in PH Ashwathanarayana vs State of Karnataka 1989 Suppl
1 SCC 696
After a review of earlier deci sions it was stated therein as under It is for the State to decide what economic and socialpoli cy it should pursue and what discriminations advance those social and economic policies
In view of the inherent com plexity of these fiscal adjustments courts give a larger discretion to the legislature in the matter of its prefer ences of economic and social policies and effectuate the chosen system in all possible and reasonable ways    emphasis supplied In Federation of Hotel and Restaurant Association of India vs Union of India  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 
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 emphasis supplied 452 This Court has held in Kerala Hotel and Restaurant Association  Ors
vs State of Kerala  Ors
  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 classifica tion is found to be invalid by this test emphasis supplied It is useful to refer also to the decision of this Court in 1
TO vs N Takin Roy Rymbai a similar question relating to validity of classification in another clause of section 10 of the In come Tax Act 1961 arose for consideration
This Court while upholding the validity of the classification summarised the 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 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 underlying the doctrine of equality it is not vulnerable on the ground of discrimination merely be cause 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 453 would be a violation of Article 14
see East India Tobacco Co vs Andhra Pradesh Vivian Joseph Ferriera vs Municipal Corporation of Greater Bombay Jaipur Hosiery Mills vs State of Rajasthan emphasis supplied We must therefore look beyond the ostensible
classi fication 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
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 dispute that the impugned provision includes all employees of the public sector and none not in the public 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 satis fied 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 differntia 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 Statu tory Interpretation 1984 edition the distinction between the legislative intention and the purpose or object of the legislation has been succinctly summarised at p 237 as under The distinction between the purpose or object of an enact ment 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 454 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 materi al which can be used for this exercise
For determining the purpose or object of the legisla tion 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 vs
M Venkitachalam Potti  Anr   the State ment of Objects and Reasons was used for judging the reason ableness 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 affidavit on behalf of the State of the circumstances which prevailed at the time when the law there under consideration had been passed and which necessitated the passing of that law was relied on
It was reiterated in State of West Bengal vs Union of India 1 that the Statement of Objects and Reasons accompanying a Bill when introduced in Parliament can be used for the limited purpose of under standing the background and the antecedent state of affairs leading up to the legislation  Similarly in Pannalal Binjraj vs Union of India  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 constitu tionality consideration may be had even to matters of common knowledge the history of the times and every con ceivable state of facts existing at the time of legislation which can be assumed
Even though for the purpose of con struing 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 mate rial to the Court for reliance when determining the purpose or object of the legislation as distinguished from the meaning of the enacted provision
455 We propose to utilise these permissible aids for dis cerning 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 peti tioners on the Memorandum explaining the provisions in the Finance Bill 1987 wherein the explanatory note relating to clause 4a 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 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 petition ers 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 1984 Ed
at p 529
It was urged that the impugned provision being described as a welfare measure in the explanatory memorandum the object of the enactment was the welfare of 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 enactment
In our opinion this cannot be accepted
The Statement of Objects and Reasons See 1987 165 ITR Stat utes at p 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 pp 119 151
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 accord ance with any scheme which the Central Govern 456 ment 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 assessment year 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 memo randum explaining the provisions in the Finance Bill 1987 that the provisions are divided under different heads one of which is welfare measures 
The subheading relating to this proposal is mentioned as Exemption of compensation received by public sector employees on voluntary retire ment 
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 1010 B of the Income Tax Act any com pensation received by a workman at the time of his retrench ment is exempt upto the specified limit and that this limit of exemption under section 10 10 B is however not ap plicable 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 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 there fore clear that in this explanatory memorandum the headings are fairly wide and matters collected under the same heading may be diverse not giving a true indication of the object of the provision
It is also significant that the proposal to amend sec tion 10 by inserting a new clause 10 C therein was con tained in sub clause a of clause 4 of the Finance Bill while sub clause b of clause 4 of the Finance Bill pro posed to insert a new item in sub clause iv of clause 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 in tended to yield tax free return to the holders of such bonds
The effect of the amendment so made yielding tax free return to the holders of public sector bonds is similar to the amendment by 457 insertion of a new clause 10 C the effect of which is to grant tax exemption to employees of the public sector in respect of the amount received under the voluntary retire ment scheme approved by the Central Government
Both these proposals relating to the amendment of section 10 were in sub clauses a and b of clause 4 of the Finance Bill
Ordinarily in the memorandum explaining the provisions in the Finance Bill both the sub clauses of clause 4 should have been therefore mentioned under the same heading being of essentially the same nature
It is interesting to note that the proposal in clause 4b was mentioned in paragraph 17 of the explanatory memorandum under the heading Incen tives for growth and modernisation  with the sub heading Measures for raising resources for the public sector 
Admittedly the effect of this provision was to grant a tax benefit to the holders of the public sector bonds by amend ing section 10 in this manner but the 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 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 Bill both sub clauses relat ing 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 insertion of clause 10 C in section10 cannot also be described as incentive for growth and modernisation being a measure for improvement of the public sector
Obviously the incentive given thereby is to the employees of the public sector companies to resort more readily to 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 provisions in the Finance Bill in the explana tory memorandum while introducing the Bill in the Parliament can neither be determinative 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 458 assumption of equality between all employees of the public sector and 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 histor ical background and surrounding circumstances leading to enactment of the impugned provision
For this purpose we would first refer to the counter affidavit of Shri SK Abrol Officer onSpecial 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 coun ter 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 employment
It states further as follows As submitted in the paragraph above sectionl 10 10 C was introduced by the Finance Act 1987 wef
141987 and the legislature in its wisdom sought to restrict these benefits to only the employees in the public sector
The reason for introducing this provision is contained in the Circular of the Central Board of Direct Taxes explaining the Finance Act 1987 relevant extract from which is reproduced hereun der 151
At present under section 10 10B any com pensation received by a workmen at the time of his retire ment is exempted upto the amount calculated in accordance with section 25F of the Industrial Disputes Act or Rs50000 whichever is less
The limit is however not applicable in respect of compensation received under certain schemes approved by the Central Government
152 A number of public sector undertakingshave formulated voluntary retirement schemes for their employees
With a view to extend relief to such employees the Finance Act 1987 by introducing new clause 10C in 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 a workman or an executive
459 153
This amendment shall come into force wef
141987 and will accordingly apply to assessment year 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 Resolu tion 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 sector
The Industrial Policy Resolution placed the indus tries in three different categories  
Thus this categorisation of industries into public sector private sector was on the basis of Articles 38 and 39 of the Consti tution of India as has been mentioned in the Industrial Policy 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 RD Shetry vs International Air port Authority of India  A public sector undertaking is either established by a statute or incorpo rated 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 corporation
As such public sector undertakings are bound by any directions that may be issued by Government from time to time in re spect 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 Government
The pay scales of the employees in the public sector 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 Parliament through their administrative Ministries
The entire budget of the public sector undertakings is controlled by the 460 administrative Ministries
The Comptroller and Auditor General audits the accounts of the public sector undertak 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      
Section 10 10C while extending the benefit to employees of public sector has as its basis exempted incomes received from Government through public sector undertakings
The distinction is based on intelligent differentiation and the object of this differentiation is to promote the interests of the employees of public sector 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 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 section 10 10C of the Income Tax Act to the employees of the private sector is likely to be misused by way of fre quent payment to the employees in the garb of voluntary retirement benefits and it will not be possible to provide necessary safeguards in law to check such practices
This would defeat the very purpose of the Scheme of Voluntary Retirement besides leading to large scale revenue loss emphasis supplied The counter affidavit filed on behalf of respondent No 1 disclosing the reasons which led to the insertion of clause 10C in section 10 of the Act confining the benefit granted thereby only to employees of 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 counterpart in private sector in addition to prevent ing 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 material produced before us that the compensation package in the public 461 sector particularly at the higher levels is much lower than that in the private sector
Some insight into the existing state of the public sector undertakings and their viability with suggestions for improvement are found in the First Dr LK Jha Memorial Lecture delivered on the 6th December 1988 by Shri RN Malhotra Governor Reserve Bank of India on Growth and Current Fiscal Challenges
While giving an overview of the progress during the last four decades the speaker 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 infrastruc ture 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
 On planning and resources and financing of public sector he said An analysis of the financing pattern of public sector plan expenditures indicates that over time the shares of balance from current revenues and additional resource mobilisation have been declining while reliance on borrowed funds has been rising    Therefore he referred to the deterioration in the finances with reference to the growing expenditure as under   
Interestingly about two thirds of the savings of these enterprises represent provisions for depreciation which are supposed to cover replacement costs Though sever al of these enterprises are operating efficiently The savings of public sector enterprises as a group are not commensurate with the investment made in them
According to the public enterprises survey the capital employed in the Central Public Sector Enterprises amounted to about Rs52000 crores at the end of 1986 87
About 100 of these units made losses amounting to Rs 1708 crores and 109 units were making after tax profit of Rs3478 crores of which Rs2142 crores came from the oil sector
The rate of 462 return was 60 per cent before tax and 34 per cent after tax
If the oil sector which benefits from the oil price policy is excluded the rate of return would be negative  
There is imperative need for substantial improvement in the working and profitability of public sector undertakings
 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 much higher than that envisaged in the Seventh Plan  This has happened de spite the fact that some public sector enterprises previ ously dependent on the budget were allowed to raise re sources directly from the capital market through bond float ations of the order of Rs2000 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 sus tainable Unless there are adequate surpluses in the revenue account which can be utilised for debt servicing the budge tary deficit would widen
The increased borrowings for debt servicing would create the vicious circle of progressively higher interest burdens and still higher borrowing
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 impor tant to ensure that the requirements of the private sector are also adequately met so that the overall growth targets of the national economy are 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 persist ence of a high ICOR would however indicate considerable scope of improvement in efficiency   463 Cost and time over runs are major contributors to the high ICOR  
The public sector has rendered great service in providing infrastructure and establishing basic and strategic industries
Managerial skills in that sector are generally of a high order
The aim should there fore be to promote productivity and profitability of this sector by introducing the requisite policy changes and improvements
One of the important aims of this sector which needs reiteration is its financial viability
Efficient use of manpower is imperative
This is difficulty to ensure if overmanning persists along with restrictive practices which resist technological change and systems improvement    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 is streamlining by removing the non productive and unwanted personnel if possible without any complication
Retrenchment is often an unsafe course to adoptsince it may lead to protracted litigation and uncertain outcome
We cannot overlook this well known though unfortunate fact
A safe mode to relieve the public sector of its unpro ductive and surplus manpower is to induce those persons to seek voluntary retirement under a scheme providing some incentive or inducement for seeking voluntary retirement
Clause 10 B of section 10 of Incometax Act 1961 does grant tax exemption in respect of any compensation received at the time of retrenchment upto the prescribed limit
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 payment received by an employee of the public sector on his voluntary retirement under a scheme similarly approved by the Central Government
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 commanding heights of the economy  in keeping with our national aim of Welfare State and a social ist economy
Unfortunately inspite of a 464 strong rationale for setting up and promoting public sector in the national economy it has not so far fully justified the legitimate expectation and a large number of the public sector undertakings are losing concerns
A study into the causes which all the 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 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 conse quently 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 pro moting national economy
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 addition to promoting the well being of the national economy
A point of view emerging currently is that just as public sector undertakings are outside the purview of the Monopolies and Restrictive Trade Practices Act by virtue of the exemption conferred on them the Income tax Act should confer similar exemption to it from tax liability by suitable amendment in section 10 of the Act as is given to local authorities housing boards etc
This view is supported on the ground that the exemption from tax liability or public sector undertakings would ultimately benefit the consumers of the products of the public sector undertakings
This is not an irrelevant cir cumstances to indicate that according to the general percep tion there is a distinction between the public and private sectors
In some earlier decisions of this Court the public sector has been treated as a distinct class for the purpose of exemption under Statutes
In Hindustan Paper Corporation Ltd vs Government of Kerala  Ors   a provision granting exemp tion to Government companies and cooperative societies alone for selling forest produce at less than selling price fixed under the Kerala Forest Produce Fixation of Selling Price Act 1978 was held to be constitutionally valid and not violative of Articles 14 and 191g of the Constitution of India
It was held that the Government or public sector undertakings formed a distinct class
In this context it was held as under   
As far as Government undertakings and companies are concerned it has to be held that they form a class by 465 themselves since any profit that they may make would in the end result in the benefit to the members of the generalpub lic
The profit if any enriches the public coffer 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 are available to the industries in the private sector    emphasis supplied Similarly in M Jhangir Bhatusha etc
vs Union of India  Ors etc
 1982 Judgments Today 2 SC 465 a concession in import duty granted to the State Trading Corporation was upheld on the ground that public policy can support the differentiation
It is clear that the Government or the public sector undertakings have been treated 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 which is of prime importance for the national economy
Thus there exists an intelligible differentia between the two categories which has a rational nexus with the main object of promoting the national econom ic 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 of grant of approval of the scheme by the Central Govern ment
This intrinsic element in the provision itself sup ports 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
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 sec tor
If this be the correct perspective as we think it is in the present 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 relevant circumstances the 466 argument based on equality does not survive
This is inde pendent of the disparity in the compensation package of employees in the private sector and the public sector
The argument of discrimination is based on initial equality between the two classes alleging bifurcation thereafter between those who stood integrated earlier as one class
This basic assumption being fallacious the question of any hostile discrimination by granting the benefit only to a few in the same class denying the same to those left out does not arise
We shall now refer to some other clauses of section 10 of the Act to which reference was made at the hearing in support of the rival contentions
Sub clause i of clause 10 of section 10 confines the benefit thereunder only to the Government servants defence personnel and employees of a local authority
Sub clause i of clause 10 A similarly confines the benefit to Government servants defence person nel and employees of a local authority or a corporation established by a statute
Clause 10 A also makes a dis tinction between the Government employees and other employ ees
Clause 10 B also removes the limit in respect of any payment as retrenchment compensation 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 con templates 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 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 or arbitrary
There is a definite 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 adopted to cure it of one of its ailments is undoubtedly a forward step towards promoting the national economy
The 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 retirement and at any rate that is the effect of the provision or its fall out and not its true 467 object
It is similar to the incentive given to the taX payers to invest in 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 re sources 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 perspective 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 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 cannot render the classification invalid or arbitrary
This classification cannot therefore be faulted
Some of the cases cited by the petitioners in support of the contention of equality of employees in the public and private sectors in the present context also are inapplica ble
The decision in Hindustan Antibiotics vs Workmen  related to wage fixation and is distin guishable
SK Dutta ITO vs Lawrence Singh Ingty distinguished and explained in relied on by us
Moreover which also related to a provision in Section 10 of Income tax Act 1961 itself says as under Classification for purposes of taxation or for exempting from tax with reference to the source of the income is integral to the fundamental scheme of the Income tax Act
Indeed the entire warp and woof of the 1961 Act has been woven on this pattern   
Suffice it to say that classification of sources of income is integral to the basic scheme of the 1961 Act
It is nobody s case that the entire scheme of the Act is irrational 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 un known
It conforms to a well recognised pattern
It is based on intelligible differentia
The object of this differentia tion between 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 468 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 in cluding 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 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 tax Act simultaneously inserted a new clause 36 A in section 2 of the Act with effect from 141987 defining public sector company  which expression has been used in the newly inserted clause 10 C of section 10
In view of the simultaneous definition of public sector compa ny  in the Act there can be no occasion to construe this expression differently without which a private sector compa ny 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 private sector company also within its ambit
Consequently the writ petition is dismissed but in the facts and circumstances of the case there shall be no order as to costs
All the interim orders shall stand vacated
TNA Petition dismissed


Summary:
The respondents in the civil appeals and the petitioner in the writ petition were landlords in Goa whose lands were in the possession of the cultivating tenants
Prior to the enactment of the Goa Daman and Diu Agricultural Tenancy 5th Amendment Act 1976 the nature of the rights of the landlords and tenants were governed by the Goa
Daman and Diu Agricultural Tenancy Act 1964
By Chapter III of the 1964 Act the landlord was permitted to resume his land for bona fide personal cultivation subject to a ceiling
Chap ter III however was to come into force only on a notifica tion for the purpose which was never issued
The impugned 5th Amendment omitted Chapter III from the 1964 Act and in its place included Chapter IIA
By the provisions of section 18A of Chapter IIA the land belonging to a landlord not in his cultivating possession on the tiller s day got trans ferred to the tenant in possession for a price to be paid to the landlord
The respondents filed writ applications in the Court of the Judicial Commissioner challenging the validity of the 5th Amendment Act
The writ petitions were allowed by the Judicial Commissioner who held that the Amendment Act vio lated Articles 14 and 19 of the Constitution and that the protection of Article 31A was not available as the scheme of the Amendment Act did not constitute agrarian reform
498 During the pendency of the present appeals the impugned Amendment Act along with the main Act were included in the 9th Schedule of the Constitution
The writ petition filed in this Court under Article 32 has challenged this constitu tional amendment as illegal and ultra vires
Before this Court it was contended on behalf of the respondentslandlords that fixation of ceiling was the heart and soul of agrarian reform that provisions regarding ceiling were essential for a statute enacted as a measure of agrarian reform and in their absence the same could not claim protection of Article 31A of the Constitution that in the absence of provisions for ceiling the impugned Amendment Act had bestowed undeserved benefit on the tenants at the cost of the landlords without reference to the respective areas in their possession
In this connection it was submit ted that in many a case a cultivating tenant in possession of lands under different landlords might be having far larger area of land than his landlords and there could not be any preference to clothing such a tenant with title to the land at the cost of his comparatively poor landlords
Allowing the appeals and dismissing the writ petition this Court HELD 1 It is well settled that the protection of Article 31A is limited to the laws which serve the purpose of agrarian reform
504D 2 It cannot be denied that the appropriately enacted statutes having provisions for fixing ceiling of holdings do fall in the category of legislation for agrarian reform but that proposition does not say and cannot be interpreted as holding that fixing ceiling areas is a basis and essential feature of agrarian reform without which a law cannot be included in the category
A proper statute even without including provisions regarding ceiling may be entitled to the protection of Article 31A provided it is otherwise a measure of agrarian reform
505C F Sri Ram Ram Narain Medhi vs The State of Bombay 1959 Supp 1 SCR 489 Godavari Sugar Mills Ltd vs SB Kamble  Ors  and Balmadies Plantations Ltd  Ant
vs State of Tamil Nadu   referred to
3 The title to the land shall vest in the tiller and the landlord shall get the compensation
Earlier also his right to resume the land for personal cultivation was con siderably restricted by the provisions of the 1964 Act
As a result of the impugned 5th Amendment Act he has been 499 divested of this limited right for a price and the tiller shall no more be under a threat of dispossession
The im pugned provisions must therefore be accepted as a measure of land reform
509G H 510A 4 The argument of the respondents that in absence of provisions fixing ceiling on the area of land which can be held by a person a statute cannot be accepted as a measure of land reform is accordingly rejected
The 5th Amendment Act is
therefore entitled to the protection of Article 31A and it cannot be struck down on the ground of violation of Articles 14 and 19 of the Constitution
510A B Sri Ram Ram Narain Medhi vs The State of Bombay 1959 Supp 1 SCR 489 Sonapur Tea Co Ltd vs Must
Mazirunnes sa   Purushothaman Nambudiri vs The State of Kerala 1962 Supp 1 SCR 753 Fida Ali  Ors
vs State of Jammu  Kashmir   Dattatraya Govind Mahajan vs State of Maharashtra   KK Kochuni vs The State of Madras and Sanjeev Coke Manufacturing Company vs Bharat Coking Coal Ltd  Anr   distinguished