Employees of public sector undertakings and nationalised banks not deemed government servants for Section 10(10AA) exemption; challenge dismissed

HC held that employees of Public Sector Undertakings and nationalised banks do not acquire the status of Central or State Government employees merely because such entities are treated as "State" under Article 12; therefore the challenge to Section 10(10AA) claiming parity with government servants was rejected. The petition was dismissed insofar as it sought classification of those employees as government servants for exemption purposes. However, HC found a prima facie case that the exemption limit under clause (ii) of Section 10(10AA) has become outdated since the last revision in 2002 and issued notice to respondents limited to that aspect.

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Issues Involved:
1. Discrimination in tax exemption on leave encashment between PSU retirees and government employees.
2. Validity of Section 10(10AA) of the Income Tax Act concerning discrimination.
3. Request for amendment or notification to increase the tax exemption limit on leave encashment for PSU retirees.

Detailed Analysis:

1. Discrimination in tax exemption on leave encashment between PSU retirees and government employees:
The petitioners, retired employees of various nationalized banks, argued that they face discriminatory treatment compared to Central and State Government employees regarding tax exemption on leave encashment. Government employees enjoy full tax exemption on leave encashment under Section 10(10AA)(i) of the IT Act, whereas PSU retirees are limited to a 10-month exemption with a cap of Rs. 3 lakhs under Section 10(10AA)(ii). The petitioners contended this distinction is illegal, arbitrary, and violates Articles 12, 13, 14, 16, 19, 21, and 265 of the Constitution.

2. Validity of Section 10(10AA) of the Income Tax Act concerning discrimination:
The court found no merit in the challenge to Section 10(10AA) on discrimination grounds. It held that Central and State Government employees form a distinct class with a reasonable classification having a nexus to the object sought to be achieved. Government employees enjoy a "status" governed by different terms and conditions, as established in the case of Roshan Lal Tandon v Union of India AIR 1967 SC 1889. The court emphasized that the legal position of a government servant is more one of status than of contract, and government employees enjoy constitutional protections and privileges not available to PSU employees.

3. Request for amendment or notification to increase the tax exemption limit on leave encashment for PSU retirees:
The petitioners argued that the exemption limit for PSU retirees has remained static at Rs. 3 lakhs since 1998, despite multiple Pay Commissions and upward revisions in pay scales for both government and PSU employees. The court acknowledged this grievance, noting that the financial growth and rising inflation over the decades justify a revision of the exemption limit. The court issued notice to the respondents on this aspect, directing them to file counter affidavits within six weeks.

Conclusion:
The court rejected the petition challenging the provisions of Section 10(10AA) concerning discrimination but found prima facie merit in the grievance regarding the static exemption limit. The case was listed for further hearing on 04.05.2020, with directions for the respondents to respond to the issue of revising the exemption limit.

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