# SHASHIKANT LAXMAN KALE AND ANR v. UNION OF INDIA AND ANR

- **Citation:** [1990] 3 S.C.R. 441
- **Court:** Supreme Court of India
- **Decided:** 1990-07-20
- **Case number:** Writ Petition No. 136 of 1989
- **Bench:** M.N. Venkatachaliah, N.D. Ojha, J.S. Verma
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shashikant-laxman-kale-and-anr-v-union-of-india-and-anr-10884
- **Pages:** 28

## Headnote

Income Tax Act, 1961: Chapter Ill-Section 10.-Clause (10-C)
-Scope and Constitutional validity of-Public Sector CompaniesEmployees-Voluntary Retirement-"Golden hand-shake'' to employees-Exemption from income-tax-Held clause ( 10-C) does not
include employees of a private sector company.
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 Section JO of Income
Tax Act, J96~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
arbitrary nor violative of Article J~Object of cluase ( 10-C) explained.
Taxing Statute-Constitutional validity of-Reasonableness of
classification-Determination of-Scope for classification 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 a/object nor can camouflage the object of the Act.
By Finance Act, 1987, clause (10-C) was inserted in section IO of
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the Income-Tax Act, 1961. The effect of Ibis clause was to grant tax
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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-filed a writ petition in this
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SUPREME COURT REPORTS
[ 1990] 3 S.C.R.
court challenging the validity of clause ( 10-C) contending; (i) the denial
A of benefit of tax exemption to employees of 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 IO of the Income-Tax
B 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.
c
Dismissing the petition, this Court,
HELD: There is a distinction between the public and private
sectors. The Government or the public sector undertakings 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
D which is of prime importance for the national economy. Thus, there
exists an intelligible diffcrentia between the two categories which bas 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
E scheme by the Central Government. This instrinsic 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 employees 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
F 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 differentiation is
rightly made between a public sector company and a priva

## Text

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SHASHIKANT LAXMAN KALE AND ANR.
v.
UNION OF INDIA AND ANR.
JULY 20, 1990
[M.N. VENKATACHALIAH, N.D. OJHA AND
J.S. VERMA, JJ.]
Income Tax Act, 1961: Chapter Ill-Section 10.-Clause (10-C)
-Scope and Constitutional validity of-Public Sector CompaniesEmployees-Voluntary Retirement-"Golden hand-shake'' to employees-Exemption from income-tax-Held clause ( 10-C) does not
include employees of a private sector company.
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 Section JO of Income
Tax Act, J96~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
arbitrary nor violative of Article J~Object of cluase ( 10-C) explained.
Taxing Statute-Constitutional validity of-Reasonableness of
classification-Determination of-Scope for classification 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 a/object nor can camouflage the object of the Act.
By Finance Act, 1987, clause (10-C) was inserted in section IO of
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the Income-Tax Act, 1961. The effect of Ibis clause was to grant tax
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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-filed a writ petition in this
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[ 1990] 3 S.C.R.
court challenging the validity of clause ( 10-C) contending; (i) the denial
A of benefit of tax exemption to employees of 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 IO of the Income-Tax
B 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.
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Dismissing the petition, this Court,
HELD: There is a distinction between the public and private
sectors. The Government or the public sector undertakings 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
D which is of prime importance for the national economy. Thus, there
exists an intelligible diffcrentia between the two categories which bas 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
E scheme by the Central Government. This instrinsic 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 employees 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
F 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 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 arguG ment 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 bai;ed
on initial equality between the two classes alleging bifurcation thereafter between those wl!o stood integrated earlier as one class. This basic
assumption being fallacious, the question of any hostile discrimination
H by granting the benefit only to a few in the same class denying the same
to those left out does not arise. [4650-H; 466A-B]
S.L. KALE v. U.0.I.
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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 preventing 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 streamlining
the public sector to cure it of one of its ailments of overstaff'mg. 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 fallout and not its true object. The real distinction between the true
object of an enactment and the effect thereof, even though appearing
to be blurred at times, has to he borne in mind, particularly in a
situation like this, [466F-H; 467A:B]
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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
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the ambit of the impugned provision do not fall in the same class as
employees of the public sector and the benefit of the fall-out of the
provision being available only to the public sector employees cannot
render the classification invalid or arbitrary. The other clauses in
..-~· section 10 of the Act further show that the scheme of section 10 contemplates a distinction between employees based on the category of their
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employer. This classification cannot, therefore, he faulted. 1467B-CJ
Hindustan Paper Corporation Ltd. v. Government of Kera/a &
Ors., [1986] 3 S.C.C. 398; M. JhanRir Bhatusha etc. etc. 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.
. F
Malhotra, Governor, Reserve Bank of India, on "Growth and Current
Fiscal Challenges", referred to.
Hindustan Antibiotics v. Workmen, [1967] 1 SCR 652 and S.K.
Dutta, I. T.O. v. Lawrence Singh lngty, [1968] 68 I.T.R. 272, distinguished and held inapplicable.
G
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 he no occasion to construe this
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[1990] 3 S.C.R.
expression differently withOl!t which a private sei:tor company cannot
be included in it. It is, therefore, not possible to construe the impugned
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provision while upholding its validity in such a manner as to include a
private sector company also within its ambit. [468C-D I
3. The principles of valid classification 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. [449D I
Re The Special Courts Bill, 1978, [1979] 2 S.C.R. 476, referred
y
C 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
D discrimination. l451C]
P.H. Ashwathanarayana v. State o[Kamataka, [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; Kera/a Hotel and Restaurant Association &
Ors. v. State of Kera/a & Ors., A.I.R. 1990 SC 913 and I. T.O. v. N.
E
Takin Roy Rymbai, (1976] 103 I.T.R; 82 SC, referred to.
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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 obstensible 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
classification. [453B]
5.1 It is necessary to discern the true pufPOse 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 ena~tment, can be examined to test the validity of the
H classification. [453E-F]
S.L. KALE v. U.0.1.
445
5.2 There is a clear distinction between the legislative intention
\- and the pnrpose 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 legislation, so determined. [453H; 454Ar
Francis Bennion's Statutory Interpretation, 1984 edition, page
"(. 237, referred to.
6. For determining the purpose or object of the legislation, it is
permissible to look into the circumstances which prevailed at the tbne
when the law was passed and which necessitated the passing of that law.
For the limited purpose of appreciating the background and the antece-
). dent factual matrix leading to the legislation, it is permissible to took
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 Patti & 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 knowledge; the history of the
times; and very conceivable state of facts existing at the tbne 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 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 memorand.um is usually 'not an accurate guide
of the final Act'. [455CT
Francis Bennion's Statutory Interpretation, 1984 Edn. page 529,
referred to.
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7.1 A catch-phrase possibly used as a populist measure 1<.
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.
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 Respondents.
The Judgment of the Court was delivered by
VERMA, J. This petition under Article 32 of the Constitution
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. Sec-'-....-
tion 10 deals with incomes not included in total income for the purpose
of taxation under the Act. The effect of clause (10-C) so inserted in
section 10 of the Act is that any payment received by an employee of a
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public sector company at the time of his voluntary retirement in
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accordance with any scheme which the Central Government may,
having regard to the economic viability of such company and other J
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
publi~ 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
H invalid for this reason. However, during the course of arguments the
S.L. KALE v. U.0.1. [VERMA, J.]
447
stand of the petitioners was modified to contend that the provtsion
must be so construed as to apply to all employees equally, whether of
the public or private sector, in order to uphold its validity. The question, therefore, is whether there is any such hostile discrimination as
alleged by the petitioners and if so, is it possible to construe the provision in the manner suggested on behalf of the petitioners to apply it
equally to all employees of the public as well as private sectors?
The first petitioner is an employee of second respondent-Peico
Electronic and Electricals limited, a private sector company-and the
second petitioner is a registered trade union representing the
employees of the second respondent-company. Counsel for the second
respondent-company sought to support the petitioners' case. Counsel
for the first respondent supporting the validity of the provision indicated that emplyees 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 taxa!lon but for such a provision. Clause (10-C) of
Section lU 1s 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
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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
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of public sector are in the same class and are entitled equally to the
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benefit of a welfare measure for employees. His next conteu.tion is
that, if that be the only stated basis of the classification, it has no
rational nexus with the object of the provision and it_ violates Article 14
of the Constitution. Learned counsel tor the _ _getitioners referred to
cenam other clauses in section 10 ot the Act which apply equally to all
employees irrespective of the category of their employer, to suggest
that all such measures being for benefit of employees, no further
classification of the employees is permissible with reference to the
category of their employer. It was further urged that consequently the
exclusion of non-public sector employees is not only discriminatory
but also arbitrary. On this basis it was contended that instead of striking down the provision as invalid which while denying the benefit to
the public sector employees would not also serve any useful purpose
for the private sector employees, the c~urt should adopt a positive and
constructive approach and the provision so construed as to extend its
benefit to all employees irre_spective of the categ9ry of their employer
to uphold its validity.
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Shri Dewan for the secona 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 employees of the public sector? He further contended
that it is possible to read the provision in such a manner as to extend its
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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
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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 streamlime 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 complicaG
tion 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 difficulties,
experienced in the public sector. This provision is meant essentially for
employees at the higher levels in the public sector undertakings whose
H economic status cannot be equated with their counterpart in the
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S.L. KALE v. U.0.1. [VERMA. J.j
449
private sector. For this reason equating the two sets of employees for
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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 arguy
meat, 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 particularly at the higher levels.
The main question for decision is the discrimination alleged by
the petitioners. The principles of valid classification are long settled by
a catena of decisions of this Court but their application to a given case
is quite often a vexed question. The problem is more vexed in cases
falling within the grey zone. The principles are that those grouped
together in one class must possess a common characteristic which distinguishes them from those excluded from the group; and this
characteristic or intelligible differentia must have a rational nexus with
the 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 distinguishing and classifying persons or things to be subjected to such
laws.
3. The Constitutional command to the State to afford
equal protection of its laws sets a goal not attainable by the
invention and application of a precise formula. Therefore,
classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts
should not insist on delusive exactness or apply doctrinaire
tests for determining the validity of classification in any
given case. Classification is justified if it is not palpably
arbitrary.
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4. The principle underlying the guarantee of Article 14 is
not that the same rules of law should be applicable to all
persons within the Indian territory or that the same remedies should be mad~ available to them irrespective of differences of circumstances. It only means that all persons
similarly circumstanced shall be treated alike both in
privileges conferred and liabilities imposed. Equal laws
would have to be applied to all in the same situation, and
there should be no discrimination between one person and
another if as regards the subject-matter of the legislation
their position is substantially the same.
6. The law can make and set apart the classes according to
the needs and exigencies of the society and as suggested by
experience. It can 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 the
persons grouped together and not in others who are left out
but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to
pass the test, two conditions must be fulfilled, namely, (1)
that the classification must be founded on 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 JVhat 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 legislation, provided such
classification is not arbitrary in the sense above mentioned.
\
S.L. KALE v. U.0.I. .!VERMA. J.]
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
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a classification that upon the class are cast duties and
burdens different from those resting upon the general
public. Indeed, the very idea of classification is that of'
inequality, so that it goes without saying that the mere fact
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of inequality in 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 chalc
:o<Jenged 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 m P.H.
Ashwathanarayana v. State of Kamataka, [1989] Suppl. 1 SCC 696.
After a review of earlier decisions, it was stated therein as under:
"It is for the State to decide what economic and social policy
it should pursue and what discriminations advance those
social and economic policies. In view of the inherent complexity of these fiscal adjustments, courts give a larger discretion to the legislature in the matter of its preferences of
economic and social policies and effectuate the chosen
system in all possible and reasonable ways ..... "
(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."
( emp_liasis supplied)
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This Court has held in Kera/a Hotel and Restaurant Assoczacwn
& Ors. v. State of Kera/a & Ors., A.LR. 1990 SC 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 interefere with the legislative wisdom of making
the classification unless the classification is found to be >f'.
invalid by this test."
(emphasis supplied)
It is useful to refer also to the decision of this Court in/. T.O. v.
N. Takin Roy Rymbai, [1976] 103 l.T.R. 82 (S.C.)-wherein a similar
question relating to validity of classification in another clause of
section 10 of the Income-Tax Act, 1961 arose for consideration. This
Court while upholding the validity of the classification summarised the
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principles applied, as under:
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" ..... 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 flexible range by a taxing statute does not·transgress the fundamental principles unaerlying the doct,ine of equality, it is
not vulnerable on the ground of discrimination merely
because it taxes or exempts from tax some incomes or objects
and not others. Nor is the mere fact that a tax falls more
heavily on some in the 'same category, by itself a ground to
render the law invalid. It is only when within the range of
its selection, the law operates unequally and cannot be
justified on the basis of a valid classification, that there
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S.L. KALE v. U.0.1. [VERMA, J.]
453
would be a violation of Article 14. (see East India TobacC<f
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Co. v. Andhra Pradesh; Vivian Joseph Ferriera v. Municipal Corporation of Greater Bombay; Jaipur Hosiery Mills
v. State of Rajasthan)"
(emphasis supplied)
We must, th~refore, look beyond the ostensible. classification
and to the purpose of the law and apply the test of 'palpable arbitrariness' in the context of the felt needs of the times and societal
exigencies informed by experience to determine 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 dispnte
that the impugned provision includes all employees of the public sector
and none not in the public sector. The qustion is whether those left out
are similarly situated for the purpose -0f the enactment to render the
classification palpably arbitrary. It is only if this test of palpable arbitrariness applied in this manner is satisfied, that the provision can be
faulted as discriminatory but not otherwise. Unless such a defect can
be found, the further question of construing the provision in such a
manner as to include all employees and not merely employees. of
public sector companies, does not arise.
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It is first necessary to discern the true purpose or object of the
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impugned enactment because it is only with reference to the true
object of the enactment that the existence of a rational nexus of the
diffemtia on which the classification is based, with the object sought to
be achieved by the ·enactment, can be examined to test the validity of
the classification. In Francis Bennion's Statutory Interpretation, 1984
edition, the distinction between the legislative intention and the
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purpose or object of the legislation has been succinctly summarised at
p. 237 as under:
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"The distinction between the purpose or object of an
enactment and the legislative intention governing it is that ·
the former relates to the mischief to which the enactment is
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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
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454
SUPREME COURT REPORTS
[1990) 3 S.C.R.
of the remedy as enacted. While dealing with the validity of a classifi11\
cation, the rational nexus of \he differentia on which the classification
is based has to exist with the purpose or object of the legislation, so
determined. The question next is of the manner in which the purpose
or object of the enactment has to be determined and the material
which can be used for this exercise.
For determining the purpose or object of the legislation, it is
permissible to look into the circumstances which- prevailed. at the time
when the law was passed and which necessitated the passing of that
law. For the limited purpose of appreciating the background and the
antecedent factual matrix leading to the legislation, it is permissible to
look into the Statement of Objects and Reasons of the Bill which
t
actuated the step to provide a remedy for the then existing malady. In
A. Thangal Kunju Musaliar v. M. Venkitachalam Patti & Anr., [1955]
2 S.C.R. 1196, the Statement of Objects and Reasons was used for
judging the reasonableness of a classification made in an enactment to
see if it infringed or was contrary to the constitution. In that decision
D 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. 371-that the Statement of Objects
and Reasons accompanying a Bill, when introduced in Parliament, can
E be used for 'the limited purpose of understanding the background and
the antecedent state of affairs leading up to the legislation.' Similarly,
in Pannalal Binjraj v. Union of India, [ 1957] 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.
F
Not only this, to sustain the presumption of constitutionality,
consideration may be had even to matters of common knowledge; the
history of the times; and every conceivable state of facts existing at the
time of legislation which can be assumed. Even though for the purpose
of construing the meaning of the enacted provision, it is not permissiG hie 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
H legislation as distinguished from the meaning of the enacted provision.
"
_ _,,.
"
~
.
.--....
--I
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S.L. KALE v. U.0.1. !VERMA, J.]
455
We propose to utilise these permissible aids for discerning the
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purpose or object of the legislative provision in order to examine the
validity of the classification made therein.
Strong reliance has been placed on behalf of the petitioners on
the Memorandum explaining the provisions in the Finance Bill, 1987,
wherein the explanatory note relating to clause 4(a) of the Bill proposB
ing 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 petitioners cannot draw supc
port 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
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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
enactll'.ent. In our opinion, this cannot be accepted. The Statement of
Objects and Reasons (See (1987) 165 !TR (Statutes) at p. 119) is as
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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."
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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.
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Sub-Clause (a) of this clause proposes to insert a new
clause ( 10-C) in this section. Under the proposed amendment, any payment received by an employee of a public
sector company at the time of his voluntary retirement in
accordance with any scheme which the Central GovernH
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456
SUPREME COURT REPORTS
[ 1990] 3 S.C.R.
ment may, having regard to the economic viability of the
public sector company and other relevant circumstances,
f
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 memorandum 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 retirement'. It is mentioned in p:iragraph 13 of the explanatory memorandum that a number of public sector undertakings have fomulated
;>(
voluntary retirement schemes for their employees; that under section
10(10-B) of the Income-Tax Act any compensation received by a
workman at the time of his retrenchment is exempt upto the specified
limit; and that this limit of exemption under section 10 (10-B) is,
however, not applicable in respect of compensation received under
certain schemes approved by the Central Government. By enacting
section 10 ( 10-C), the proposal obviously was to extend the same
benefit to the payment made under these approved schemes as was
._.....,.
existing for compensation under approved 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, therefore,
~
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.
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It is also significant that the proposal to amend section 10 by
.inserting a new clause ( 10-C) therein was contained in sub-clause (a) of
clause 4 of the Finance Bill, while sub-clause (b) of clause 4 of the
Finance Bill proposed 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
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which are intended 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
S.L. KALE v. U.0.I. [VERMA, J.J
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 retirement 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, there-
---<
fore, mentioned under the same heading being of essentially the same
nature. It is interesting to note that the proposal in clause 4(b) was
'1' mentioned in paragraph 17 of the explanatory memorandum under the
heading 'Incentives for growth and modernisation' with the sub-heading 'Measures for raising resources for the public sector'.