Case: Shashikant Laxman Kale and Another Vs. Union of India and Others (And Others Petitions)

This petition under article 32 of the Constitution challenges the constitutional validity of clause (10C) inserted in section 10 ofthe Income-tax Act, 1961 (hereinafter referred to as "the Act"), bythe Finance Act, 1987, with effect from April 1, 1987. Section 10 deals with incomes not included in total income for the purpose of taxation under the Act. The effect of clause (10C) 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

Reasoning: 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 remedy for the then existing malady. In A. Thangal Kunju Musaliar v. M. Venkatachalam Potti 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 necessitated the passing of that law" was relied on. It was reiterated in State of West Bengal v. Union of India 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 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 ActNot 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 enactedis 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 of public sector undertakings would ultimately benefit the consumers of the products of the public sector undertakings. This is not an irrelevant circumstance to indicate that, according to the general perception, there is a distinction between the public and private sectors. In some earlier decisions of this court, the public sector has been treated as a distinct class for the purpose of exemption under statutesIn Hindustan Paper Corporation Ltd. v. Government of Kerala a provision granting exemption to Government companies and co-operative societies alone for selling forest produce at less than the 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 19(1)(g) of the Constitution of India. It was held that the Government or public sector undertakings formed a distinctis clear that Government or 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 economic policy or the public policy. This element also appears in the impugned enactment itself wherein "economic viability of such company" is specified as the most relevant circumstance for grant of approval of the scheme by the Central Government. This intrinsic element in the provision itself supports the view that the main object thereof is to promote and improve the health of the public sector companies even though its effect is a benefit to its employeesAs already indicated, clause (10C) 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 counterparts in the private sector. 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 argument based on equality does not survive. This is independent of the disparity in the compensation package of employees in the private sector and the public sector. The argument of discrimination is 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 notother submission of the petitioners is to read the provision in manner which would cover all employees including employees of the private sector within the ambit of the impugned provision. This further question does not arise in view of our conclusion that there is no discrimination made out. We may, however, mention that the Finance Bill, 1987, while inserting a new clause (10C) in section 10 of the Income-tax Act simultaneously inserted a new clause (36A) in section 2 of the Act with effect from April 1, 1987, defining "public sector company", which expression has been used in the newly inserted clause (10C) of section 10. In view of the simultaneous definition of "public sector company" in the Act, there can be no occasion to construe this expression differently without which a private sector company cannot be included in it. It is, therefore, not possible to construe the impugned provision while upholding its validity in such a manner as to include a private sector company also within its