PETITIONER: <ORG> Vs. RESPONDENT: THE OFFICIAL LIQUIDATOR AND ORS. DATE OF JUDGMENT04/01/1978 BENCH: FAZALALI, SYED MURTAZA BENCH: FAZALALI, SYED MURTAZA SINGH, JASWANT CITATION: 1978 AIR 476 1978 SCR (2) 499 1978 SCC (1) 490 ACT: Sick Textile Undertakings (Taking over of Management) Act , 1972--S. 8, Scope of-Construction of the words "winding up" occurring in Sec. 8-- Sick Textile Undertakings (Nationalisation) Act , 1974 S. 35 , r/w S. 2(1)(a) , Scope of- Effect of the interim order` of this <ORG> dt. 28-9-1973 explained. HEADNOTE: The appellant <ORG> had taken a lease of the original company known as <ORG>, Hinganghat (Maharashtra). The said company was ordered to be wound up by an order dated 1-10- 1965 and an official Liquidator was appointed. On 3-2-1967, a lease for the running of the mill was taken by the government of Maharashtra which was handed over to the appellant for running the mill on behalf of the state. At the time of taking over, the appellant did not take possession of all materials which it considered unnecessary as it did not want to pay higher compensation. Consequently several items were segregated and handed over to the official Liquidator. On 31-12-1972 the Sick Textile Undertakings (Taking over of Management) Act , 1972 was passed and was given retrospective operation w.e.f. 31-10- 1972 the date of its earlier ordinance. In January 1973, a Writ Petition was filed in this <ORG> challenging the cons- titutional validity of the Management Act of 1972 and while the Writ Petition was pending an interim order dated 28-9- 1973 was passed viz.; "Upon hearing Counsel, the <ORG> directed that the maintenance of status quo shall continue pending disposal of the Writ Petition except that the liquidation proceedings will go on, but there will be no distribution of money amongst creditors or contributors until further orders." On 16-11-73 meetings were held before the official liquidator to consider the effect of the interim order and ultimately the official liquidator, with the concurrence of the representatives of the erstwhile directors of the Company, decided that the assets of the company may be realised by the official liquidator. On 19-4-74 the official Liquidator reported to the court for granting permission for sale of certain moveable such as furniture duplicating machines and machinery scrap etc. on which the company 'court directed notice to the Additional Government Pleader. On 30-4-1974, the appellant appeared and wanted time for filing objections but no objections were filed and the company judge by its order dated 25-6-1974 directed the official liquidator to sell the said assets and realise the price thereon. On 28-6-1974, certain directors were sought by the official liquidator for approving the proposed purchasers which was granted and the items were sold for Rs. 72,501/-. On 3-7-1974 the court accepted the offer of respondents 2 and 3 and nine days later, the court granted permission for removal of the materials by the purchasers, but because of some labour troubles, the materials could not be taken physical possession of by the purchasers. <ORG> of <ORG> dismissed the appeal filed by the appellant against the order of the court directing the sale of the articles on the ground that as this court by virtue of its interim order dt. 28-9-1973 had authorised the sale of the articles, the court was fully justified in ordering the sale of these articles. Allowing the appeal by special leave, the <ORG>, HELD : 1. The High <ORG> has not properly construed the interim order ,of this <ORG> and was under an erroneous impression of law that this <ORG> by itsinterim order had in fact authorised the sale which in law is invalid. [503-B] 2.The interpretation put upon the interim order by the High <ORG> is not ,correct. The order of this <ORG> directing the, maintenance of status quo did clot impliedly amount to suspension of the provisions of the Management Act . [503-D] 500 3.Though S. 8(1) of the Management Act does not place an absolute embargo on the continuance of the proceedings for the winding up of a textile company, it imposes an important condition for the continuance of the proceedings, namely, that the consent of <ORG> should be obtained. [503F] 4.When this <ORG> passed the interim order dt. 28-9-1973 and 'allowed the liquidation proceedings to continue it, it only meant that the proceedings should continue in accordance with law and if the law enjoined any condition the same must be complied with. in view of the provisions of S. 8 of the Management Act , the consent of <ORG> was necessary, so the order of this <ORG> would be interpreted as meaning that the proceedings. could continue after the official liquidator obtained the consent of <ORG> u/s 8 of the Management Act . [503F-G] 5.The order passed by this <ORG> did not given any free licence to the parties to act in disobedience of the mandatory provisions of the Act and continue the proceedings without complying with the conditions enjoined by S. 8 of the Management Act. Without the consent of <ORG> the liquidation proceedings could not continue and the Company Judge was not legal,, justified in ordering the sale of the moveables without obtaining the sanction of <ORG>. [503G-H, 504A] 6.The words " winding up" in S. 8 of the Management Act must be given the widest possible amplitude in order to serve the purpose of the Act, namely, to control the proceedings of a textile company which is in liquidation, by <ORG>. Whether the company had been wound up or whether the proceedings for the 'winding up of the company had been continuing would make no difference so far as the application of Section 8 of the Management Act is concerned. It is not possible, therefore to construe the words "winding up" in such a narrow sense, viz. that it applies merely to proceedings for the winding up of a textile company, so as to defeat the very object of the Management Act . [504B-D] 7.On a proper construction of S. 35 of the Nationalisation Act, which reproduced the provisions of S. 8 of the Management Act in a different form the permission of the company judge given to official liquidator to sell the moveables would fall within the mischief of S. 35 of the Act. [504-G] 8.In view of the definition of the word "Appointed day" in Sections 2(1)(a) of the Nationalisation Act, it is clear that the Act, after being passed' would by virtue of its statutory fiction, take effect from the 1st day of April' 1974 and all proceedings taken after this day without the permission of <ORG> would become void ab initio. The High <ORG> was in error in not giving effect to the statutory fiction contained in S. 2(1)(a) of the Nationalisation Act , by explaining away that as the Nationalisation Act was in fact passed after the court had granted permission to sell, it could not affect the sale at all. Even though the Nationalisation Act may have come in force on a later date, the statutory fiction contained in the Act must be fully given effect to by the court even if the effect of the same is to nullify anorder passed prior to the passing of the Act. [504G-14, 505A-B, F] <ORG> v. <ORG> 1952 A.C.109' quoted with approval; <CITATION> A.I.R. 1975 S.C. 164 applied; 9.The express provision of S. 35 of the Nationalisation Act clearly voided the sale which took place under the orders of the company judge after the Act would be deemed to have come into force. The order by which the articles were sold was void in law and completely destitute of any legal effect. The Interim order passed by this <ORG> on 28-9-1973 could not have had the, effect of authorising the sale which was void under the statute. [505 F-G] 501 JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 777 of 1975. Appeal by Special Leave from the Judgment and Order dated the 27th Feb., 1975 of <ORG> (<ORG>) in Company Appeal No. 4 of 1974 in Company Petition No. 12 of 1965.

<NAME>, Sol. General of India, <NAME> for the Appellant.

<NAME>, <NAME>, <NAME> for <NAME>, <NAME> for Respondents 2 and 3 The Judgment of <ORG> was delivered by <NAME> J : This appeal by special leave turns upon the interpretation of an interim order passed by this Court on 28th September, 1973 in a writ petition challenging the validity of the Sick Textile undertakings (Taking over of Management) Act , 1972 as also the impact of the Sick Textile Undertakings (Nationalisation) Act , 1974 on the proceedings taken in this case both before and after, the passing of the interim order by this Court.

For short we shall refer to the appellant <ORG> as M.S.T.C., the Official Liquidator as O.L., the Sick Textile Undertakings (Taking Over of Management) Act of 1972 as the Munagement Act and in case of the Ordinance which ha preceded that Act as the Management Ordinance. The Sick Textile Undertakings (Nationalisation) Act 1974 will be referred to as the Nationalisation Act . The point involved lies within a very narrow compass and <ORG> appears to have travelled unnecessarily into the wealth of details regarding the history of the proceedings and has entered into meticulous detail$ regarding the provisions of the Acts concerned although for the purposes of this case it was necessary to refer only to a few provisions of the Management Act and the Nationalisation Act .

In order to appreciate the point in controversy in the instant case it may be'necessary to, give a brief survey of, the facts leading up to the impugned order. The appellant <ORG> had taken a lease of the original company known" as. <ORG> Bansilal Abhir Chund Spinning and Weaving Mills (P) Ltd. Hingangbat (Maharashtra). By an order dated 1.

10. 1965 the said company was ordered to be wound up and an Official Liquidator of the company was appointed. On 3rd February, 1967 a lease for the running of the mill was taken by <ORG> which was handed over to <ORG> for running the mill on behalf of the State. At the time of taking over the appellant <ORG> did not take possession of all the materials which it considered unnecessary as it did not want to pay higher compensation. Consequently several items were segregated and handed over to the O.L. but the rest of the assets were taken over by the appellant <ORG> Some times in 1971 <ORG> sold 16 lots of store items, out of which three lots were not taken. delivery of by the purchasers <ORG> who had to pay Rs. 67,000/-. We would like to mention here that we are not concerned with this item of three lots in the instant case and the equities of the same will have to be worked out between the purchasers and <ORG>. On 31.10.1972 the Management Ordinance was promulgated by the President of India which was followed by the Management Act which was passed on 31.12.1972 and was given retrospective operation with effect from 31.10.1972. In January, 1973 a writ petition wag filed in this Court challenging the constitutionality of the Management Act and while, the writ petition was pending, an interim order dated 28.9.1973 was passed in the following terms "Upon hearing counsel, the Court directed that maintenance of status quo shall continue pending disposal of the Writ Petition except that the liquidation proceedings will go on, but there will be no distribution of money amongst the creditors or contributors until further orders".

On 16.11.1973 meetings were held before the Official Liquidator 'to consider the effect of the interim order and ultimately the Official Liquidator with the concurrence of the representatives of- the erstwhile directors of the company decided that the assets of the company may be realised by the Official Liquidator. It was further decided that the three lots of which delivery was not taken by M/s Akash Traders should be sold. In pursuance of this decision the Official Liquidator reported to the court for permission to sell the three lots and the court granted the said permission as a result of which the said three lots we're sold on 14-2-1974, and were purchased by <ORG> the second respondent. An appeal was filed against the order of the court dated 12.2.1974 to <ORG> but the same was dismissed.

On 19-4-1974 another report was made by <ORG> for sale of certain moveables such as furniture, duplicating machine and machinery scrap etc. The <ORG> directed notice to the Additional Government Pleader on the aforesaid report of <ORG>. On 30th April, 1974 the appellant <ORG> appeared and wanted time for filing objections but no objections were filed and the Company Judge by its order dated 25th June, 1974 directed <ORG> to sell the aforementioned assets and realise the price thereon. No appeal against this order was filed by the appellant <ORG> On the 28th June, 1974 certain directions were sought by <ORG> for approving the proposed purchasers which was granted. The items mentioned above were sold for Rs. 72,501/-. On 3-7-74 the <ORG> accepted the offer of respondents 2 and 3 and 9 days later on 12-7- 1974 the <ORG> granted permission for removal of the materials by the purchasers, but unfortunately because of some labour trouble the materials could not be taken physical possession of by the purchasers. The appellant <ORG> filed an appeal before <ORG> against the order of the <ORG> directing the sale, of the articles which was however dismissed by <ORG> of the Bombay High <ORG> mainly on the ground that as this <ORG> by virtue of its interim order dated 28-9-1973 had authorised the sale of the articles the <ORG> was fully justified in ordering the sale of those articles. It is against this order of the High <ORG> that the appellant has come up in appeal by special leave.

This is therefore in a nutshell the sequence of events leading to the passing of the impugned order passed by <ORG> dated 27-2-1975. We have heard counsel for the parties and have also perused the judgment of <ORG> and we feel that <ORG> has not properly construed the interim order of this <ORG> and was tinder an erroneous impression of law 'that this <ORG> by its interim order had in fact authorised the sale which in law was invalid. It is common ground that at the time when this <ORG> passed the interim order dated 28-9-1973 the Management Act 1972 had already come into force. In the writ petition in which the interim order of this <ORG> was passed the vires of The Management Act was challenged and it would appear from the reliefs sought ill the petition that there was an express prayer for suspending the provisions of the Act. Despite this fact this <ORG> did not at all suspend any of the provisions of the Act, but merely allowed the liquidation proceedings to go on and the only condition imposed was that there would be no, distribution of money amongst the creditors or contributors until further orders. The High <ORG> was of the view that the order of this <ORG> directing the maintenance of status quo impliedly amounted to suspension of the provisions of the Management Act . We are however unable to agree with the interpretation put upon the interim order by <ORG>.

Section 8(1) of the Management Act runs thus "No proceeding for the winding up of a textile company, within the meaning of this Act, shall lie in any <ORG> or be continued whether by or under the supervision of any <ORG> or voluntarily, except with the consent of <ORG>".

Analysing this provision it is manifest that though the section does not contain an absolute embargo on the continuance of the proceedings it imposes an important condition for the continuance of the proceedings; namely, that the consent of <ORG> should be obtained. When this Court passed the interim order dated 28-9-1973 and allowed the liquidation proceeding to continue it only meant that the proceedings should continue in accordance with law and if the law enjoined any condition the same must be complied with. In view of the provisions of section 8 of the Management Act the consent of <ORG> was necessary, so the order of this Court would be interpreted as meaning that the proceedings could continue after the Official Liquidator obtained the consent of <ORG> under section 8 of the Management Act. The order passed by this Court did not give any free licence to the parties to act in disobedience of the mandatory provisions of the Act and continue the proceedings without complying with the conditions enjoined by section 8 of the Management Act. In these circumstances, therefore, the inference is irresistible that without the consent of <ORG> the liquidation proceedings could not continue and the company Judge was not legally justified in ordering the sale of the moveables without obtaining the sanction of <ORG>.

It was however suggested on behalf of the respondents that section 8 would have no application to the facts of the present case inasmuch as that section applied merely to proceedings for the winding up of a textile company. In the instant case, the company had already been wound up and the proceedings had however passed beyond the scope contemplated by section 8 of the Management Act. A delicate and ingenious distinction was sought to be drawn by counsel for the respondents between "the winding up" proceedings and the proceedings which started after a company had been wound up. In our opinion. it is not possible to construe, the words "winding up" in such a narrow sense as to defeat the very object of the Management Act . In our opinion, the words "winding up" must be given the widest possible amplitude in order to serve the purpose of the Act namely, to control the proceedings of a textile company which is in liquidation, by <ORG>. Whether the company bad been wound tip or whether the proceedings for the winding up of the, company lad been continuing would make no difference so far as the, application of section 8 of the Management Act is concerned. In these circunstances, we are unable to accede to the argument put forward by the counsel for the respondents.

It was rightly submitted by counsel for the appellant that <ORG> appears to have completely lost sight of the effect of the Nationalisation Act which bad been given retrospective effect. in this connection, our attention was drawn to section 35 of the Nationalisation Act which runs thus :-

"No proceeding for the, winding up of a textile the right, title. and interest in relation to the sick textile undertaking owned by which have vested in <ORG> under this, Act or for the appointment of a receiver in respect of the business of the sick textile undertaking shall lie or be proceeded with in any court except with the consent of the Central Government".

This section reproduced the provisions of section 8 of the Management Act in a different form. The, Nationalisation Act was passed oil 21-12-1974 and was, given retrospective effect from 1-4-1974. Thus, if the Act was to be properly construed the permission of the Company Judge given to the Official Liquidator to sell the moveables would fall within the mischief of section 35 of the Act.

Section 2 (1) (a) of the Nationalisation Act runs thus " "Appointed day" means the 1st day of April, 1974". It is, therefore, clear that the Art after being passed would, by virtue, of its statutory fiction, take effect from the 1st day of April, 1974 and all proceedings taken after this day without the permission of the <ORG> ,<ORG> would become void ab-initio. <ORG> seems to have explained away this aspect of the matter on the ground that as the Nationalisation Act was in fact passed after the <ORG> had (ranted permission to sell, it could not affect the sale at all. We are of the opinion that the High <ORG> was in error in not giving effect to the statutory fiction contained in section 2(1) (a) of the Nationalisation Act .

In the case of <ORG> v. Finsbury Borough ,Council(1) Lord Asquith observed as follows :-

"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it......... Tile Statute says that you must imagine a; certain state of affairs it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs".

These observations were quoted with approval by this <ORG> in the case ,of <CITATION> (2) where <NAME>, J. speaking for the <ORG> observed as "It is now well settled law that where a legal fiction is created, full effect must be given to it and it should be carried to its logical conclusion".

In view of the decision of this Court it is manifest that even though the Nationalisation Act may have come, into force oil a later date the statutory fiction contained in the Act must be fully given effect to by the Court even if the effect of the same is to nullify an order passed prior to: the passing of the Act. For these reasons, therefore, we are clearly of the opinion that the express provisions of section 35 clearly voided the sale which took place under orders of the Company Judge after the Act would be deemed to, have, come into force.

Thus whichever way we look at this case; the position is clear that the, order by which the articles were sold was void in law and completely ,destitute of any legal effect. The interim order passed by this Court on 28-9-1973 could not have had the effect of authorising the sale which was void under the statute,. For these reasons, therefore, the observations of <ORG> while interpreting the interim order of this Court which may be extracted thus "In other words, <ORG> by its interim order has suspended the operation of section 8 of the Management (1)  A.C. 109.

(2) A..'.R. 1975 S.C. 164.

Act, but subject to the provisions that the vesting in management and the possession of the respective parties will be preserved undisturbed".

are uncalled for as they are, based on a misconstruction of the interim order passed by this Court.

For the reasons given above the appeal is allowed, the order of <ORG> is set aside and the sale held by the Official Liquidator in pursuance of the order of the Company Judge is annulled. In case, the concerned respondents have deposited the purchase money in <ORG> they would be entitled to refund of the same according to law as the sale made under the orders of the Company Judge has been held by us to be invalid and void. The decision of this appeal would not govern the order of three lots of items of movable property which had been sold earlier and which do not form the subject matter of the, present appeal. In the peculiar facts and circumstances of the case there will be no order as to costs, S. R.

Appeal allowed..


PETITIONER: SHASHIKANT LAXMAN KALE AND <NAME>. Vs. RESPONDENT: UNION OF INDIA AND <NAME>. DATE OF JUDGMENT20/07/1990 BENCH: <NAME>, JAGDISH SARAN (J) BENCH: <NAME>, 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--<ORG> 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 <ORG>. 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 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 <ORG>, HELD: There is a distinction between the public and private sectors. The <ORG> 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 <ORG>. 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 <ORG> 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- 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] <ORG> v. <ORG> of Kerala JUDGMENT:

v. <ORG> etc. etc., Judgments Today 1982 (2) SC 465; <NAME> Memorial Lecture, delivered on the 6th December 1988, by <NAME>, Governor, <ORG>, on "Growth and Current Fiscal Challenges", re- ferred to.

<CITATION> ,  1 SCR 652 and S.K. Dutta, 1. T.O. v. <NAME>,  68 I.T.R. 272, distinguished and held inapplicable. <CITATION> ,  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 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] <CITATION> ,  (Supp.) 1 S.C.C. 696; <CITATION> ,  178 I.T.R. 97; <CITATION> ., A.I.R. 1990 SC 913 and 1. T.O. v. <NAME>,  103 I.T.R. 82 SC, referred to. <CITATION> , A.I.R. 1962 SC 1733; <CITATION> , AIR 1972 S.C. 845 and <CITATION> , 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- 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] 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- <CITATION> .,  2 S.C.R. 1196; <CITATION> ,  1 S.C.R. 371 and <CITATION> ,  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 <ORG> 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.

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 <ORG> 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). <NAME>, <NAME>, <NAME>, <NAME> for the Petitioners.

<NAME>, <NAME>, <NAME>, <NAME>, Ms. <NAME>, Ms. <NAME>, <NAME>, <NAME>, <NAME>, <NAME> for the Respond- ents.

The Judgment of the Court was delivered by <ORG> 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 <ORG> 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 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--<ORG>, a private sector company--and the second petitioner is a registered trade union representing the employees of the second re- spondent-company. Counsel for the second respondent-company sought to support the petitioners' case. Counsel for the first respondent supporting the validity of the provision indicated that employees of the public sector constituted a distinct class for the purpose of taxation so that there was no discrimination between employees of the same class if the real object of the provision is borne in mind. We shall refer to the arguments of the two sides in some detail later.

Chapter III of the Indian Income Tax Act, 1961 relates to "incomes which do not form part of the total income". Section 10 in Chapter III deals with "incomes not included in total income". It provides that in computing the total income of a previous year of any person, any income falling within any of the clauses therein shall not be included. The several clauses in section 10 specify different incomes which would ordinarily be included in the total income of the assessee for the purpose of taxation but for such a provision. Clause (10-C) of Section 10 is as under: "(10-C):--any payment received by an employee' of a public sector company at the time of his voluntary retirement in accordance with any scheme which <ORG> 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. <NAME> 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 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. <NAME> for the second <ORG>, 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 <ORG> 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. <NAME> 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 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. <NAME> 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 <ORG> 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.

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 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.

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 <CITATION> ,  Suppl. 1 SCC 696. After a review of earlier deci- sions, it was stated therein as under:

"It is for the <ORG> 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) <CITATION> ,  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) This Court has held in <CITATION> ., A.I.R. 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 <ORG> 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 <ORG> in 1. T.O. v. <NAME>, [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 <ORG> while upholding the validity of the classification summarised the principles applied, as under:

".... it must be remembered that the <ORG> 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 would be a violation of Article 14. (see <CITATION> ; <CITATION> ; <CITATION> )"

(emphasis supplied) We must, therefore, look beyond the ostensible. classi- fication and to the purpose of the law and apply the test of 'palpable arbitrariness' in the context of the felt needs of the times and societal exigencies informed by experience to determine reasonableness of the classification. It is clear that the role of public sector in the sphere of promoting the national economy and the context of felt needs of the times and societal exigencies informed by experience gained from its functioning till the enactment are of significance. There is no dispute that the impugned provision includes all employees of the public sector and none not in the public sector. The question is whether those left out are similarly situated for the purpose of the enactment to render the classification palpably arbitrary. It is only if this test of palpable arbitrariness applied in this manner is satis- fied, that the provision can be faulted as discriminatory but not otherwise. Unless such a defect can be found, the further question of construing the provision in such a manner as to include all employees and not merely employees of public sector companies, does not arise. It is first necessary to discern the true purpose or object of the impugned enactment because it is only with reference to the true object of the enactment that the existence of a rational nexus of the differntia on which the classification is based, with the object sought to be achieved by the enactment, can be examined to test the validity of the classification. In <NAME> 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 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 <ORG>ment of Objects and Reasons of the Bill which actuated the step to provide a remedy for the then existing malady. <CITATION> .,  2 S.C.R. 1196, the <ORG>- 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 <ORG> 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 <CITATION> ,  1 S.C.R. 37 1- that the <ORG>ment of Objects and Reasons accompanying a Bill, when introduced in <ORG>, 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 <CITATION> ,  SCR 233--a challenge to the validity of classification was repelled placing reliance on an affidavit filed on behalf of <ORG> disclosing the true object of enacting the impugned provision in the Income-Tax Act .

Not only this, to sustain the presumption of constitu- tionality, consideration may be had even to matters of common knowledge; the history of the times; and every con- ceivable state of facts existing at the time of legislation which can be assumed. Even though for the purpose of con- struing the meaning of the enacted provision, it is not permissible to use these aids, yet it is permissible to look into the historical facts and surrounding circumstances for ascertaining the evil sought to be remedied. The distinction between the purpose or object of the legislation and the legislative intention, indicated earlier, is significant in this exercise to emphasise the availability of larger mate- rial to the <ORG> for reliance when determining the purpose or object of the legislation as distinguished from the meaning of the enacted provision.

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  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 <NAME> 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. <NAME> (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 <ORG> 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 <ORG>

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- 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 <ORG>. 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 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 <ORG>. 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 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 <ORG> 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 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 <NAME>, Officer-onSpecial-Duty, <ORG>, <ORG>, <ORG>, 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 <ORG> 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 <ORG> 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 <ORG>. 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 <ORG> 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.

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 <ORG> Resolu- tion, 1956, which reviewed the earlier <ORG>, clearly distinguished industries in the public sector and those in the private sector. The <ORG> 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 <ORG> 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 <ORG> 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 <ORG> in the case of <NAME> v. <ORG>, [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 <ORG> 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 <ORG> from time to time in re- spect of policy matters. The entire share capital of the public sector undertakings is held by the <ORG> and it is under the direct control and supervision of <ORG>. The pay scales of the employees in the public sector are fixed by the administrative Ministry inconsultation with <ORG>, who exercise complete control over the actions of public sector undertakings. The public sector undertakings are answerable to the <ORG> through their administrative Ministries. The entire budget of the public sector undertakings is controlled by the 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 <ORG>. The recruitment and conduct rules of the public sector employees are subject to overall control of Govern- ment through <ORG> ..... "

" ..... Section 10 (10C), while extending the benefit to employees of public sector has, as its basis, exempted incomes received from <ORG> through public sector undertakings. The distinction is based on intelligent differentiation and the object of this differentiation is to promote the interests of the employees of public sector undertakings so as to bring this at par with the private sector employees whose emoluments and other conditions of service are not governed by any statute or are not under any control."

"The respondent submits that the legislature is aware of the differentiation between the public sector undertakings and private sector undertakings. and in its wisdom. has chosen to restrict the benefit only to the public sector employees ..... "

"The respondent submits that the extension of the benefit of section 10 (10C) of the Income Tax Act to the employees of the private sector is likely to be misused by way of fre- quent payment to the employees in the garb of voluntary retirement benefits and it will not be possible to provide necessary safeguards in law to check such practices. This would defeat the very purpose of the Scheme of Voluntary Retirement, besides leading to large scale revenue loss." (emphasis supplied) The counter-affidavit filed on behalf of respondent No. 1 disclosing the reasons which led to the insertion of clause (10C) in section 10 of the Act confining the benefit granted thereby only to employees of the public sector indicates that the purposes of the legislation include reduction in the existing gap between the lower compensation package in public sector and the higher compensation package of the counterpart in private sector in addition to prevent- ing misuse of the benefit in private sector which is not subject to the control of administration by Government like that in the public sector. It is evident from the material produced before us that the compensation package in the public 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. <NAME> Memorial Lecture, delivered on the 6th December, 1988, by <NAME>, Governor, <ORG>, 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 <ORG> 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 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 including those from <ORG> ..... 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 <ORG> and public sector undertakings raise two major concerns. First, whether the present level of <ORG> 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 <ORG> 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 .....

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 <ORG>. It is, therefore, reasonable that same benefit be also extended in respect of any payment received by an employee of the public sector on his voluntary retirement under a scheme similarly approved by <ORG>. 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 <ORG> and a social- ist economy. Unfortunately, inspite of a 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.

<CITATION> .,  3 SCC 398, a provision granting exemp- tion to <ORG> 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 <ORG> 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 themselves since any profit that they may make would in the end result in the benefit to the members of <ORG>. The profit, if any, enriches the public coffer and not the private coffer. The role of industries in the public sector is very sensitive and critical from the point of view of national economy. Their survival very often depends upon the budgetary. provision and not upon private resources which are available to the industries in the private sector ..... "

(emphasis supplied) Similarly, in <ORG> etc. v. <ORG> etc., 1982 Judgments Today 2 SC 465, a concession in import duty granted to <ORG> was upheld on the ground that public policy can support the differentiation.

It is clear that the <ORG> 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 <ORG>. 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 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 <ORG> servants, defence personnel and employees of a local authority. Sub-clause (i) of clause (10-A) similarly confines the benefit to <ORG> 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 <ORG> 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 <ORG>. Some other clauses in section 10 of the Act further show that the scheme of section 10 con- templates a distinction between employees based on the category of their employer. Accordingly, clause (10-C) therein is not a departure from the existing scheme but in conformity with some clauses earlier enacted therein. Once the impugned provision contained in the newly inserted clause (10-C) of section 10 of the Income-Tax Act, 1961 is viewed in the above perspective keeping in mind the true object of the provision, there is no foundation for the argument that it is either discriminatory or arbitrary. There is a definite purpose for its enactment. One of the purposes is streamlining the public sector to cure it of one of its ailments of overstaffing which is realised from experience of almost four decades of its functioning. In view of the role attributed to the public sector in the sphere of national economy, improvement in the functioning thereof must be achieved in all possible ways. A measure adopted to cure it of one of its ailments is undoubtedly a forward step towards promoting the national economy. The provision is an incentive to the unwanted personnel to seek voluntary retirement thereby enabling the public sector to achieve the true object indicated. The personnel seeking voluntary retirement no doubt get a tax benefit but then that is an incentive for seeking voluntary retirement and at any rate that is the effect of the provision or its fall-out and not its true 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 <CITATION> ,  1 SCR 652 related to wage fixation and is distin- guishable. <CITATION> ,  68 ITR 272--was distinguished and explained in  103 ITR 82 relied on by us. Moreover,  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- 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 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.