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

Citation: [1990] 3 S.C.R. 441

Court: Supreme Court of India

Bench: M.N. VENKATACHALIAH, N.D. OJHA, J.S. VERMA

Case summary

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.

Judgment text

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 . L . public sector company at the time of his voluntary retirement in r 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 invalid for this reason. However, during the course of arguments the 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 --\ enacting clause (10-C) as indicated in the memorandum explaining provisions of the Finance Bill, 1987 is that the tax benefit is given as 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 SUPREME COUKf REPORTS I1990) 3 S. C. R. 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 ;I 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. 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 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 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 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 difficulties, 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 S. L. KALE v. U. 0. 1. [VERMA. J. j 449 private sector. For this reason equating the two sets of employees for -. the tax benefit was urged to be unjustified, there being an intelligible differentia between them. Dr. Gauri Shankar also contended that the real object of the enactment was to streamline the public sector by reducing overstaffing at the higher level and the consequent tax exemption to the retiring employee was merely the effect or fall-out of the real object.

The provision was meant to induce the unwanted ·--"'· personnel to seek voluntary retirement and thereby promote the real object of streamlining the ailing public sector. To support his 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 scient 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 classification in any given case. Classification is justified if it is not palpably arbitrary. 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. ·F 8. The differentia which is the basis ofthe 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 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 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 chal- :o 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 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 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 would be a violation of Article 14. (see East India TobacC -- 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. ~ - 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 ~ 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- --- to employees of public sector has, as its basis, exempted incomes received from Government through public sector 't 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 JO (JOC) of the Income Tax Act to the employees of the private sector is likely to be misused by way offrequent payment to the employees in the garb ofvoluntary retirement benefits and it will not be possible to provide necessary safeguards in law to check such practices. This would defeat the very purpose of the Scheme of Voluntary Retirement, besides leading to large scale revenue loss. " (emphasis supplied) The counter-affidavit filed on behalf of respondent No.

1 disclosing the reasons which led to the insertion of clause (lOC) 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 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. It is evident from the material produced before us that the compensation package in the public 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 undertak· ings 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 -rl India, on "Growth and Current Fiscal Challenges". While giving an overview of the progress during the last four decades, the speaker "f" 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 infrastructure, 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 .....

" t 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 several of these enterprises are operating efficiently, The savings ofpublic sector enterprises as a-group are not com· mnsurate 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 JOO 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 SUPRllME COURT REPORTS I19901 3 S. C. R. 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 I is excluded, the rate ofreturn would be negative ..... There is imperative need for substantial improvement in the working and profitability ofpublic sector undertakigs. " Referring to the existing state of "public debt", he said: "The Long Term Fiscal Policy (LTFP) had raised ·concern about increasing reliance on borrowings to finance the "' budgetary outlays and had suggested containment of domestic borrowings including those from the Reserve Bank ..... In the event, the level of borrowings has been much higher than that envisaged in the Seventh Plan ..... This has happeneJ despite the fact that some public sector enterprises, previously dependent on the budget, were ,... ; allowed to raise resources directly from the capital market through bond floatations 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 sustainable? Unless there are adequate surpluses in the revenue account which can be utilised for debt servicing, the budgetary deficit would widen. The increased borrowings for debt servicing would create the vicious circle of progressively higher interest burdens and still higher botrowing. 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 important 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 persistence of a .

high ICOR would, however, indicate considerable scope of improvement in efficiency . . . . . • 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 ski'. ls in that sector are generally of a high order. The aim should therefore 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. Efficjen. t 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 unproductive and surplus manpower is to induce those persons to se. ek voluntary retirement under a scheme providing some incentive or inducement for seek_ing voluntary retirement. ' Clause (10-B) of section 10 . of Incometax Act, 1961, does grant tax ·exemption in respect of any compensation recieved at the time of retrenchment upto the prescribed limit. p 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 payme.

nt received by an employee of the public sector on his voluntary retirement under a scheme similarly approved by the Central Government. . G 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 socialist economy. Unfortunate. ly, inspite of a . H 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 thf 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 consequently 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, promoting 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 additwn 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 circumstances to indicate that according to the general perception, there is a distinction between the public and private sectors. In some earlier decisions of this Court, the public sector has been treated as a distinct class for the purpose of exemption under Statutes. In Hindustan Paper Corporation Ltd. v. Government ofKera/a & Ors.

, [1986] 3 SCC 398, a provision granting exemption 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 va,lid and not violative of Articles 14 and 19( l)(g) of the Constitution of India. It was held that the Government or public sector underta-kings 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 themselves since any profit that they may make would in the· end result in the benefit to the members ofthe general public. The profit, if any, enriches the public c'offer and not. the private coffer. The role of industries in the public sector is very sensitive and critical from the point of view ofnational economy.

Their survival very often depends upon the budgetary provision and not upon private resources which are available to the industries in the private sector ..... " (emphasis supPJied) Similarly, in M. Jhangir Bhatusha etc. etc. v. Union ofIndia & Ors. etc. etc. , 1%i Judgments Today 2 SC 465, a concession ;n import duty granted to tlie State Trading Corporatfon 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 di~t. inct class separate from those in the private sector and the fact that the profit earned in the former is for public benefit instead of private benefit, provides an intelligible differentia from the social point of view which is of prime importance for the national economy. Thus, there exists an intelligible differentia between the two categories which has a rational nexus with the main object of promoting the national economic policy or the public policy.

This element also appears in the impugned enactment itself wherein 'economic viability of such company' is specified as the most relevant circumstance of grant of approval of the scheme by the Central Government. This intrinsic element in the provision itself supports the view that the main object thereof is to promote and improve the health of the public sector companies even though its effect is a benefit to its 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 sector. If this be the correct perspective as we think it is in the present case, the very foundation of the challenge to the impugned provision on the basis of economic equality of employees in both sectors is non-existent.

Once the stage is reached where the differentiation is rightly made between a public sector company and a private sector company and that too essentially on the ground of economic viability of the public sector company and other rel~vant circumstances, the argument based on equality does not survive. This is independent of ,. ,, the disparity in the compensation package of employees in the private sector and the public sector. The argument of discrimination is based on initial equality between the two classes alleging bifurcation thereafter between those who stood integrated earlier as one class. This basic assumption being fallacious, the question of any hostile discrimination by granting the benefit only to a few in the same class denying the same to those left out does 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 personnel. and employees of a local authority or a corporation established by a statute. Clause (10-A) also makes a distinction between the Government employees and other employees. 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 contemplates a distinction between employees based on the category of their employer. Accordingly, clause (10-C) therein is not a departure from the existing scheme but in conformity with some clauses earlier enacted therein.

Once the impugned provision contained in the newly inserted clause (10-C) of section 10 of the Income-Tax Act, 1961 is viewed in the above perspective keeping in mind the true object of the provision, there is no foundation for the argument that it is either discriminatory or arbitrary. There is a defmite 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 S. L. KALE v. U. 0. 1. [VERMA, J. J 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 resources of the public sector for its growth and modernisation. 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 suppprt of the contention of equality of employees in the public and private sectors in the present context also are inapplicable. The decision in Hindustan Antibiotics v. Workmen, [1967] 1 SCR 652 related to wage fixation and is distinguishable. S. K. Dutta, I. T. O. v. Lawrence Singh lngty, [1968] 68 ITR 272-was distinguished and explained in [1976] 103 ! TR 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 purpos. ;'s 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 irrat10nal 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 unknown. It conforms to a well-recognised pattern. It is based on intelligible differentia.

The object of this differentiation 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 areas but also to benefit economically such areas ..... " The other submission of the petitioners is to read the provision in manner which would cover all employees including employees of the private sector within the ambit of the impugned provision. This further question does not arise in view of our conclusion that there is no discrimination made out. We may, however, mention that the Finance Bill, 1987 while inserting a new clause (10-C) in section 10 of the Income-true 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 company' in the Act, there can be no occasion to construe this expression differently without which a private sector company cannot be included in it. It is, therefore, not possible to construe the impugned provision while upholding its validity in such a manner as to include a privat. e sector company also within its ambit. Consequently, the writ petition is dismissed, but in the facts and circufnstances of the case, there shall be no order as to costs. All the interim orders shall stand vacated. T. N. A. Petition dismissed.