JUDGMENT
B.P. Saraf, J.
1. By this writ petition, the petitioner, which is a trade union of the employees of respondent No. 4-company, seeks to challenge the validity of the provisions of Clause (10C) of Section 10 of the Income-tax Act, 1961 (the “Act”), and Rule 2BA of the Income-tax Rules, 1962 (the “Rules”), on the ground of violation of articles 14 and 21 of the Constitution of India. The petitioners also seek to challenge the
approval granted by the Chief Commissioner of Income-tax, Mumbai, to the voluntary retirement scheme of respondent No. 4-company.
2. To deal with the challenge of the petitioner, it would be expedient to set out the provisions of Clause (10C) of Section 10 of the Act and Rule 2BA of the rules. Section 10 contains various clauses, income falling under which do not form part of the total income. Clause (10C) was inserted in that Section for the first time with effect from April 1, 1987, by the Finance Act, 1987, to extend the benefit of exemption to the employees of public sector undertakings in respect of any payment received by them at the time of their voluntary retirement in accordance with any scheme approved by the Central Government having regard to the economic viability of the public sector company and other relevant circumstances. It reads thus ;
“(10C) 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 ;”
3. To extend the benefit of this clause also to the employees of companies other than public sector companies, this clause was substituted by the Finance Act, 1992, with effect from April 1, 1993, by the following : “(10C) any amount received by an employee of a public sector company or of any other company at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement :
4. Provided that the schemes of the said companies governing the payment of such amount are framed in accordance with such guidelines as may be prescribed for the public sector companies or for other companies and such guidelines may, inter alia, include criteria of economic viability and such schemes in relation to companies (other than public sector companies) are approved by the Chief Commissioner or, as the case may be, Director-General in this behalf ;”
5. With a view to extending the benefit of exemption under this clause to authorities established under the Central and State Acts and to local authorities it was again substituted by the Finance Act, 1993, by the following with effect from April 1, 1993 :
“(10C) any amount received by an employee of —
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ;
at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement, to the extent such amount does not exceed five lakhs rupees :
Provided that the schemes of the said companies or authorities, as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed and such schemes in relation to companies referred to in Sub-clause (ii) are approved by the Chief Commissioner or, as the case may be, Director-General in this behalf:
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year ;”
6. The benefit of this exemption was extended with effect from April 1, 1995, to the employees of co-operative societies, universities, I.I.T. and institutes of management notified by the Central Government in this behalf of amending this clause by the Finance Act, 1994. Clause (10C), as amended by the Finance Act, 1994, which is operative with effect from April 1, 1995, reads as follows :
“(10C) any amount received by an employee of–
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ; or
(v) a co-operative society ; or
(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under Section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of Clause (g) of Section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf, at the time of his voluntary retirement in accordance with any scheme or schemes of voluntary retirement, to the extent such amount does not exceed five lakhs rupees :
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in Sub-clauses (vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including, inter alia,
criteria of economic viability) as may be prescribed and such schemes in relation to companies referred to in Sub-clause (ii) or co-operative societies referred to in Sub-clause (v) are approved by the Chief Commissioner or, as the case may be, Director-General in this behalf :
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year ;”
7. The guidelines contemplated by the first proviso to Clause (10C) of Section 10 were prescribed by incorporating Rule 2BA in the rules with effect from August 18, 1992. This rule was amended with effect from February 26, 1993. However, by the Income-tax (Twentieth Amendment) Rules, 1993, (see [1993] 204 ITR (St.) 163), Rule 2BA was substituted with retrospective effect from the date of its insertion, viz., August 18, 1992. Certain amendments were made therein thereafter from time to time. Rule 2BA, as amended, reads as follows :
“2BA. The amount received by an employee of–
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority, or
(v) a co-operative society ; or
(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under Section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of Clause (g) of Section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf ;
at the time of his voluntary retirement shall be exempt under Clause (10C) of Section 10 only if the scheme of voluntary retirement framed by the aforesaid company or authority, or co-operative society or University or institute, as the case may be, is in accordance with the following requirements, namely :–
(i) it applies to an employee who has completed 10 years of service or completed 40 years of age ;
(ii) it applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society ;
(iii) the scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees ;
(iv) the vacancy caused by the voluntary retirement is not to be filled up ;
(v) the retiring employee of a company shall not be employed in another company or concern belonging to the same management ;
(vi) the amount receivable on account of voluntary retirement of the employee, does not exceed the amount equivalent to three months’ salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.
Explanation.–In this rule, the expression ‘salary’ shall have the same meaning as is assigned to it in Clause (h) of Rule 2 of Part A of the Fourth Schedule.”
8. In the instant case, respondent No. 4, Blue Star Ltd., framed a voluntary retirement scheme. The scheme was drawn to reduce the surplus and unproductive manpower in order to reduce cost, improve productivity and increase operational efficiency. It was made applicable to all workmen. This scheme was approved by the Chief Commissioner of Income-tax. The petitioner union is aggrieved by the approval given by the Chief Commissioner of Income-tax (the “Chief Commissioner”), to the above voluntary retirement scheme of respondent No. 4 company. The petitioner union also seeks to challenge the constitutional validity of Section 10(10C) of the Act and Rule 2BA of the Rules on the ground of violation of articles 14 and 21 of the Constitution of India.
9. Mr. Grover, learned counsel for the petitioner-union, submits that Clause (10C) of Section 10 of the Act is violative of articles 14 and 21 of the Constitution as it does not provide for an opportunity of hearing to the employees or their union before granting approval to the voluntary retirement scheme of the employee. He also submits that Rule 2BA does not take into consideration the economic viability which is one of the essential requirements for approval of a scheme for the purposes of Section 10(10C) of the Act. His contention is that Section 10(10C) of the Act and Rule 2BA of the Rules should be struck down as unconstitutional as they encourage reduction in the existing strength of employees of a company. According to Mr. Grover, the benefit of this provision should be made available only to the companies which are suffering losses and that too after hearing the employees.
10. On behalf of the Union of India and the Chief Commissioner of Income-tax an affidavit has been filed by Smt. Leela Ramachandran, ITO, (HQ) Technical, Mumbai. It is pointed out in the said affidavit that the
order dated October 7, 1997, passed by the Chief Commissioner is strictly in conformity with law and has been passed after being satisfied that the scheme meets the requirements of Section 10(10C) and Rule 2BA. It is contended that the criteria laid down in Rule 2BA, in particular clauses (iii) and (v) thereof, is to ensure that the scheme is formulated with a view to reducing the existing strength of the employees and that the posts becoming vacant on account of the scheme are not filled up by any other dubious method. Mr. Deodhar, learned counsel for the respondents, drew our attention to a decision of the Supreme Court in Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104, wherein the challenge to the validity of Clause (10C) of Section 10 of the Act, as originally inserted by the Finance Act, 1987, was repelled by the Supreme Court.
11. We have perused the above decision of the Supreme Court. In that case the validity of Section 10(10C) was challenged on the ground that the denial of the benefit to an employee of a private sector company at the time of his voluntary retirement which amounted to an invidious distinction between public sector and private sector employees in the matter of taxation was arbitrary. Repelling this challenge, the Supreme Court observed thus (page 124 of 185 ITR) :
“Once the impugned provision contained in the newly inserted Clause (10C) 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 taxpayers to invest in the public sector bonds by non-inclusion of the interest earned thereon in the taxpayer’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 of 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.”
12. We have carefully considered the provisions of Clause (10C) of Section 10 of the Act and Rule 2BA of the rules and the decision of the Supreme Court referred to above. It is clear from the provisions of Clause (10C) of Section 10 of the Act that it is intended to give benefit to the employees who seek voluntary retirement. Sub-clauses (iii) and (v) of Rule 2BA are intended to streamline the industry to cure it of one of its ailments of overstaffing. Care has been taken to ensure that in the garb of voluntary retirement scheme to deal with the problem of overstaffing, the employers do not resort to some dubious means to retrench the existing workmen with a view to employing some new workers. The provisions in these two clauses are intended to ensure that the voluntary retirement scheme is really used to deal with the problem of overstaffing. This provision is an incentive to unwanted personnel to seek voluntary retirement thereby enabling the public sector or the private sector or the cooperative sector to achieve the true objective of dealing with the problem of overstaffing. It is an incentive for growth and modernisation. We also do not find any merit in the contention of learned counsel for the petitioner that Rule 2BA of the rules which contains guidelines for approval of the scheme for voluntary retirement, does not take into consideration the criterion of economic viability. Item (iii) of Rule 2BA specifies that the scheme of voluntary retirement should be drawn up to result in overall reduction in the existing strength of the employees of a company. This requirement is the criterion of economic viability for framing the schemes of voluntary retirement. A scheme which does not result in overall reduction in the existing strength of the employees of a company, will thus not be in accordance with the guidelines prescribed for the purposes of Clause (10C) of Section 10 of the Act. This section, therefore, cannot be regarded in any manner, as violative of articles 14 and 21 of the Constitution. In fact, the challenge to the validity of this clause had been repelled by the Supreme Court in Shashikant Laxman Kale’s case [1990] 185 ITR 104 as far back as in the year 1990. The only change made by the Legislature in this clause thereafter is that the benefit conferred by this clause has been extended to the private sector, co-operative societies,
Central and State Governments, etc. In Shashikant Laxman Kale’s case , the validity of this clause was challenged on the ground that its benefit was confined to public sector undertakings only. The case of the petitioner in that case was that this clause should have covered all the employees including private sector employees. Its validity was, therefore, challenged on the ground of discrimination between the public sector and the private sector. It was contended that this clause must be so construed as to apply to all the employees, equally whether of the public or private sector in order to uphold its validity. The Supreme Court repelled the challenge to the constitutional validity of this clause on the ground that it was not necessary to extend the benefit to all the employees including those of private sector companies. The Supreme Court held that this clause provides an incentive to the employees who resorted to voluntary retirement scheme which would help in turn to overcome the problem of overstaffing. In view of the above decision of the Supreme Court, we do not find any merit in the challenge to the provisions of Clause (10C) of Section 10 of the Act and Rule 2BA of the Rules in this writ petition on the ground of violation of articles 14 and 21 of the Constitution of India.
13. We also do not find any merit in the submissions of learned counsel for the petitioner that the petitioner union or the workmen should be heard by the Chief Commissioner before giving approval to the voluntary retirement scheme because, in our opinion, the approval given by the Chief Commissioner to the voluntary retirement scheme is in no way detrimental to the employees who seek voluntary retirement under such scheme. On the other hand, the very object of this provision is to give the benefit of tax exemption to such employees in respect of the amounts received by them under the voluntary retirement scheme.
14. For the reasons set out above, we do not find any merit in this writ petition. This petition, is therefore, dismissed at the admission stage itself.