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PETITIONER: SHASHIKANT LAXMAN KALE AND ANR.

       Vs.

RESPONDENT: UNION OF INDIA AND ANR.

DATE OF JUDGMENT20/07/1990

BENCH: VERMA, JAGDISH SARAN (J) BENCH: VERMA, JAGDISH SARAN (J) VENKATACHALLIAH, M.N. (J) OJHA, N.D. (J)

CITATION:  1990 AIR 2114            1990 SCR  (3) 441  1990 SCC  (4) 366        JT 1990 (3)   267  1990 SCALE  (2)71

ACT:     Income  Tax Act, 1961: Chapter  III--Section  10--Clause (10-C) --Scope and Constitutional validity of--Public Sector Companies--Employees-Voluntary   Retirement--"Golden   hand- shake"to  employees-Exemption from  income-tax--Held  clause (10-C) does not include employees of a private sector compa- ny.     Constitution  of India,  1950: Article 14 Public  Sector Companies-Employees-Amount received at the time of voluntary retirement--Exemption  from tax under clause (10-C) of  Sec- tion  10  of Income Tax Act, 1961--Exclusion  of  non-public sector employees from clause (10-C) and consequent denial of benefit  of  tax  exemption--Held  public  sector  employees constitute a distinct class--Clause (10-C) is neither  arbi- trary  nor violative of Article 14  Object of cluase  (10-C) explained.     Taxing Statute--Constitutional validity  of--Reasonable- ness of classification--Determination of--Scope for  classi- fication  in a taxing statute is greater--Court should  look beyond  obstensible classification into purpose of  law  and apply the test of "palpable arbitrariness"     Statutory   interpretation--Statute--Determination    of object  and purpose--Permissible Aid--Statement  of  objects and reasons of the Bill--Whether can be looked into.     Finance  Bill--Explanatory   Memorandum--Heading-Neither determinative of object nor can camouflage the object of the Act.

HEADNOTE:     By  Finance  Act, 1987, clause (10-C)  was  inserted  in section  10 of the Income-Tax Act, 1961. The effect of  this clause was to grant tax exemption to employees of the public sector in respect of the amount received under the voluntary retirement scheme approved by the Central Government.     The petitioners-an employee of a private sector  company and the trade-union of the said private company-flied a writ petition in this 442 court challenging the validity of clause (10-C)  contending; (i)  the denial of benefit of tax exemption to employees  of

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private  sector company being arbitrary and  discriminatory, the  impugned  clause was unconstitutional as  violative  of Article  14:  (ii)  the heading  ’Welfare-Measures’  to  the Memorandum  explaining  the provisions in the  Finance  Bill 1987  proposing insertion of clause (10-C) in section 10  of the  Income-Tax Act, 1961 was decisive of the object of  its enactment;  the tax benefit being in the nature  of  welfare measure the impugned clause must be so construed as to apply to  all employees equally, whether of the public  sector  or private sector in order to uphold its validity. Dismissing the petition, this Court,     HELD:  There  is a distinction between  the  public  and private sectors. The Government or the public sector  under- takings  are as a distinct class separate from those in  the private  sector and the fact that the profit earned  in  the former  is  for public benefit instead of  private  benefit, provides  an intelligible differentia from the social  point of view which is of prime importance for the national econo- my.  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  compa- ny’ 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 of its employees. The economic status  of  em- ployees  of a public sector company who get the  benefit  of the provision is also lower as compared to their counterpart in the private sector. Viewed in this perspective, 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  differen- tiation 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  dis- parity  in  the  compensation package of  employees  in  the private  sector and the public sector. The argument of  dis- crimination  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.  [465D-H; 466A-B] 443     2.  The  purposes of the  impugned  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. One of the purposes is streamlin- ing  the public sector to cure it of one of its ailments  of overstaffing. 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  provi- sion  or its fallout and not its true object. The real  dis-

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tinction  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. [466F-H; 467A-B]     2.1  Keeping  in view the true object  of  the  impugned enactment,  there is no doubt that employees of the  private sector who are left out of the ambit of the impugned  provi- sion  do  not  fall in the same class as  employees  of  the public sector and the benefit of the fall-out of the  provi- sion  being  available only to the public  sector  employees cannot  render the classification invalid or arbitrary.  The other  clauses in section of the Act further show  that  the scheme  of  section 10 contemplates  a  distinction  between employees  based  on the category of  their  employer.  This classification cannot, therefore, be faulted. [67B-C]     Hindustan Paper Corporation Ltd. v. Government of Kerala JUDGMENT: v. Union of India & Ors. etc. etc., Judgments Today 1982 (2) SC  465;  L.K. Jha Memorial Lecture, delivered  on  the  6th December 1988, by Shri R.N. Malhotra, Governor, Reserve Bank of  India,  on "Growth and Current Fiscal  Challenges",  re- ferred to.     Hindustan  Antibiotics v. Workmen, [1967] 1 SCR 652  and S.K.  Dutta,  1.  T.O. v. Lawrence Singh  Ingty,  [1968]  68 I.T.R. 272, distinguished and held inapplicable.     R.D. Shetty v. International Airport Authority of India, [1979] 3 SCR 1014, cited.     2.2  In view of the simultaneous definition  of  ’public sector  company’  in  the Income-Tax Act, there  can  be  no occasion to construe this 444 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. [468C-D]     3. The principles of valid classification are that those grouped together in one class must possess a common  charac- teristic  which distinguishes them from those excluded  from the group; and this characteristic or intelligible differen- tia must have a rational nexus with the object sought to  be achieved by the enactment. [449D] Re  The  Special  Courts Bill, 1978, [1979]  2  S.C.R.  476, referred to.     4.  The latitude for classification in a taxing is  much greater;  and in order to tax something it is not  necessary to  tax everything. These basic postulates have to be  borne in  mind while determining the constitutional validity of  a taxing provision challenged on the ground of discrimination. 1451C]     P.H.  Ashwathanarayana  v. State  of  Karnataka,  [1989] (Supp.)  1  S.C.C. 696; Federation of Hotel  and  Restaurant Association  of India v. Union of India, [1989]  178  I.T.R. 97; Kerala Hotel and Restaurant Association & Ors. v.  State of Kerala & Ors., A.I.R. 1990 SC 913 and 1. T.O. v. N. Takin Roy Rymbai, [1976] 103 I.T.R. 82 SC, referred to.     East India Tobacco Co. v. Andhra Pradesh, A.I.R. 1962 SC 1733;  Vivian  Joseph Ferriera v. Municipal  Corporation  of Greater  Bombay, AIR 1972 S.C. 845 and Jaipur Hosiery  Mills v. State of Rajasthan, A.I.R. 1971 SC 1330, cited.     5. The Court should, therefore, look beyond the  obsten- sible classification and to the purpose of the law and apply the  test of ’palpable arbitrariness’ in the context of  the felt needs of the times and societal exigencies informed  by experience  to determine reasonableness of  the  classifica-

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tion. [453B]     5.1  It  is  necessary to discern the  true  purpose  or object  of  the impugned enactment because it is  only  with reference  to  the  true object of the  enactment  that  the existence  of a rational nexus of the differentia  on  which the  classification is based, with the object sought  to  be achieved  by  the  enactment, can be examined  to  test  the validity of the classification. [453E-F] 445     5.2 There is a clear distinction between the legislative intention  and  the purpose or object  of  the  legislation. While the purpose or object of the legislation is to provide a  remedy for the malady, the legislative intention  relates to the meaning or exposition of the remedy as enacted. While dealing with the validity of a classification, the  rational nexus  of  the differentia on which  the  classification  is based has to exist with the purpose of object of the  legis- lation, so determined. [453H; 454A]     Francis  Bennion’s Statutory Interpretation,  1984  edi- tion, page 237, referred to.     6. 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  pur- pose  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. [454B-C]     A.  Thangal Kunju Musaliar v. M. Venkitachalam  Potti  & Anr., [1955] 2 S.C.R. 1196; State of West Bengal v. Union of India, [1964] 1 S.C.R. 371 and Pannalal Binjraj v. Union  of India, [1957] S.C.R. 233, referred to.     6.1  To  sustain the presumption  of  constitutionality, consideration  may be had even to matters of  common  knowl- edge;  the history of the times; and very 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  ascer- taining  the  evil sought to be  remedied.  The  distinction between  the  purpose or object of the legislation  and  the legislative  intention  is significant in this  exercise  to emphasise  the availability of larger material to the  Court for  reliance when determining the purpose or object of  the legislation as distinguished from the meaning of the enacted provision. [454F-H]     7. An explanatory memorandum is usually ’not an accurate guide of the final Act’. [455C] Francis  Bennion’s Statutory Interpretation, 1984 Edn.  page 529,referred to. 446     7.1  A catch-phrase possibly used 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]

&

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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.     A.B.  Divan,  V. Gauri Shankar,  S.C.  Manchanda,  Ashok Sagar, Ms. Amrita Mitra, Ms. A. Subhashini, Ravinder Narain, S. Sukumaran, M.K. Shashidharan, S. 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 1.4.1987. Section 10 deals  with incomes  not  included in total income for  the  purpose  of taxation  under  the  Act. The effect of  clause  (10-C)  so inserted  in section 10 of the Act is that any  payment  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

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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

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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, i.e., 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 [1979]  2 SCR 476--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. 3.  The Constitutional command to the State to afford  equal protection  of  its laws sets a goal not attainable  by  the invention  and application of a precise formula.  Therefore, classification need not be constituted by an exact or 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. 6.  The law can make and set apart the classes according  to the needs and exigencies of the society and as suggested  by experience.  It can recognise even degree of evil,  but  the classification  should  never be  arbitrary,  artificial  or evasive. 7.  The  classification must not be arbitrary  but  must  be rational, that is to say, it must not only be based on  some qualities  or characteristics which are to be found  in  all

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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. 8. The differentia which is the basis of the  classification and  the object of the Act are distinct things and  what  is necessary  is  that there must be a nexus between  them.  In short,  while  Article 14 forbids  class  discrimination  by conferring  privileges or imposing liabilities  upon  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 P.H. Ashwathanarayana v. 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  v. Union of India, [1989] 178 ITR 97, it was said  as under: "...  The test could only be one of  palpable  arbitrariness applied  in the context of the felt needs of the  times  and societal exigencies informed by experience." "... 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. v. State of Kerala & Ors., A.I.R. 1990 SC

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913 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.  T.O. v. N. Takin Roy Rymbai, [1976]  103  I.T.R.  82 (S.C.)--wherein  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.  v. Andhra Pradesh; Vivian Joseph Ferriera v.  Municipal Corporation of Greater Bombay; Jaipur Hosiery Mills v. 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.

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   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  v.M. Venkitachalam Potti & Anr., [1955] 2 S.C.R. 1196, 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  v. Union of India, [1964] 1 S.C.R. 37 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  v. Union of India, [1957] SCR 233--a  challenge  to the validity of classification was repelled placing reliance on  an  affidavit filed on behalf of the  Central  Board  of Revenue disclosing the true object of enacting the  impugned provision in the Income-Tax Act.     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

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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 4(a) of the Bill proposing insertion of clause (10-C) in Section 10 of the Income-tax Act, 1961 appears under  the heading  ’Welfare Measures’. It may be mentioned  that  this heading is only in the explanatory memorandum and not in the ’Notes 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 10(10-B) of the Income-Tax Act any  com-

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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 4(b) 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

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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  S.K. 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 w.e.f. 1.4.1987 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:           15.1.  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 Rs.50,000,  whichever  is less. The limit is,  however,  not applicable in respect of compensation received under certain schemes approved by the Central Government.           15.2  A number of public sector  undertakings.have 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     15.3.  This  amendment  shall  come  into  force  w.e,f. 1.4.1987  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-

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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 R.D. Shetry v. International  Air- port Authority of India, [1979] 3 SCR 1014. 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."

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(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. L.K.  Jha  Memorial Lecture,  delivered on the 6th December, 1988, by Shri  R.N. 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 Rs.52,000  crores at the end of 1986-87. About 100 of  these units  made  losses amounting to Rs. 1,708  crores  and  109 units  were  making after tax profit of Rs.3,478  crores  of which Rs.2,142 crores came from the oil sector. The rate of 462 return  was 6.0 per cent before tax and 3.4 per  cent  after tax.  If  the oil sector which benefits from the  oil  price policy   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

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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 Rs.2,000 crores each year from  1986- 87  .....          Growing  levels of borrowing by the Government  and public sector undertakings raise two major concerns.  First, whether  the present level of Government borrowing  is  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  adopt.since 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

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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. v.  Government  of Kerala & Ors., [1986] 3 SCC 398, 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 19(1)(g) 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

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sector  .....  " (emphasis supplied) Similarly,  in  M. Jhangir Bhatusha etc. etc.  v.  Union  of India  &  Ors. etc. 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)

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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  v.  Workmen, [1967]  1  SCR 652 related to wage fixation and  is  distin- guishable.  S.K.  Dutta,  I.T.O. v.  Lawrence  Singh  Ingty, [1968] 68 ITR 272--was distinguished and explained in [1976] 103  ITR  82 relied on by us. Moreover, [1976]  103  ITR  82 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-

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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  1.4.1987 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. T.N.A.                                              Petition dismissed. 469