2024 (3) TMI 313 - HC - Income Tax

Government employees get unlimited tax exemption on leave encashment while others face caps under Section 10(10AA)

Purnendu Shekhar Sinha Versus The Union Of India, The Secretary, Department of Revenue, Ministry of Finance, The Chairman, Central Board of Direct Taxes, The Chief General Manager, State Bank of India.

The Patna HC dismissed a writ petition challenging Section 10(10AA) of the Income Tax Act, which provides unlimited tax exemption on leave encashment for ... Exemption u/s 10(10AA) - exemption from income tax from the leave encashment amount at the time of retirement of the employees other than government employees - as argued employees of the Bank as also the Public Sector Undertakings cannot be treated differently holding the equality clause of Article 14 of the Constitution of India - contention of the petitioner is that the impugned section 10(10AA) of ‘the Act’ does not place any cap on the period of leave and amount of leave salary which will be out of income tax net at the time of retirement in the case of government employees whether they are in Central or State Services HELD THAT:- Petitioner contention is unfounded and fit to be rejected as two different set of employees who are not situated equally and form a class different cannot be equated under Article 14 of the Constitution of India. The distinction made between the Central and State Government employees vis-a-vis others is/are definitely a reasonable classification which having been found to be proper in various cases decided by Hon’ble the Apex Court. Though we accept that a taxation law cannot claim immunity from the equality clause that finds enshrined in Article 14 of the Constitution of India and it has to pass the test, this Court is also conscious of the fact that considering the intrinsic complexity of fiscal adjustments of diverse elements, the State has wide discretion in the matter of classification for the taxation purposes. The legislature must have the freedom to select and classify persons, properties and income which it would tax and/or not tax. Thus, the differentiation made by the State between the employees of the Central and State Governments on the one hand and the other employees on the other in Section 10 (10 AA) in our view is neither discriminating nor violative of the Article 14 of the Constitution of India. Even in the case of Union of India and others [2015 (8) TMI 97 - SUPREME COURT] cited by the learned counsel for the petitioner do not come to his rescue as in the said case too, Hon’ble Apex Court held that the State undoubtedly enjoys greater latitude in the matter of taxing statute. It may impose a tax on a class of people whereas it may not do so in respect of the other class.2003 (4) TMI 406 - SUPREME COURT] We are guided by the decision of the Hon’ble Apex Court in A.K. Bindal & Anr. (2003 (4) TMI 406 - SUPREME COURT) wherein it was held that identity of government company remains distinct from the government. It is not identified with the Union but has been placed under a special system of Centre and conferred certain privileges. It further held that since the employees of government companies are not government servants, they have absolutely no right to claim parity. This Court also takes note of the case of S.K. Dutta, ITO (1967 (11) TMI 2 - SUPREME COURT) in which the Hon’ble Supreme Court held that State has wide discretion in selecting persons or objects it will tax and that a statute is not open to attack on the ground that it taxes some persons or objects and not others. Hon’ble Apex Court further held that the State is allowed to prefer and choose districts, objects, persons, methods and even rates of taxation if it does so reasonably. Again in the case of Government of Andhra Pradesh (2001 (8) TMI 1396 - SUPREME COURT] the Hon’ble Apex Court observed that if there is equality and uniformity in each group, the law will not become discriminatory, though due to some fortuitous circumstance arising out of peculiar situation, some included in a class get an advantage over others so long as they are not singled out for special treatment. We are thus of the view that classification made in the Section 10 (10AA) of ‘the Act’ has withstood the judicial scrutiny again and again and there is no need to give a re-look to it. The petitioner, a retired employee of the State Bank of India cannot claim parity with the employees of the Central and State Government and in that background, the deductions so made cannot be interfered with. We have taken note of the fact that subsequently the amount/limit of leave encashment has been raised to Rs. 25,00,000/- effective 01.04.2023. We must record that it has been a belated exercise as the last revision took place in the year 2002. However, this does not benefit the petitioner as he has already retired in the year 2017. WP dismissed. Issues Involved:1. Constitutionality of Section 10(10AA) of the Income Tax Act, 1961.2. Classification between government and non-government employees for tax exemption on leave encashment.3. Application of Article 14 of the Constitution of India.Summary:Issue 1: Constitutionality of Section 10(10AA) of the Income Tax Act, 1961The petitioner challenged the constitutionality of Section 10(10AA) of the Income Tax Act, 1961, arguing that it discriminates between government employees and non-government employees regarding tax exemption on leave encashment at retirement. The petitioner contended that the cap on exemption for non-government employees is unconstitutional and should be removed by applying the Doctrine of Severability.Issue 2: Classification between government and non-government employees for tax exemption on leave encashmentThe petitioner argued that Section 10(10AA) discriminates against non-government employees by capping the tax-exempt leave encashment amount, unlike for government employees. The petitioner cited precedents to argue that such classification violates Article 14 of the Constitution, which guarantees equality before the law.The respondents, including the State Bank of India, contended that the classification is reasonable and has been upheld by the Supreme Court. They argued that government employees form a distinct class with different terms and conditions, justifying the differential treatment under the Income Tax Act.Issue 3: Application of Article 14 of the Constitution of IndiaThe court examined whether the differential treatment under Section 10(10AA) violates Article 14. It was noted that the State has wide discretion in tax matters and can classify persons or objects for taxation purposes. The court cited multiple Supreme Court decisions that upheld the reasonableness of such classifications.The court held that the classification between government and non-government employees in Section 10(10AA) is reasonable and does not violate Article 14. The court rejected the petitioner's claim for parity with government employees, emphasizing that employees of government companies do not enjoy the same legal rights as government servants.The court also noted that the limit for leave encashment exemption has been raised to Rs. 25,00,000 effective from April 1, 2023, but this change does not benefit the petitioner, who retired in 2017.ConclusionThe writ petition was dismissed, and the court upheld the constitutionality of Section 10(10AA) of the Income Tax Act, 1961, affirming the reasonable classification between government and non-government employees for tax exemption purposes.