Differentiation Between Government Employees And Other Employees For Leave Encashment Exemption Not Violative Of Article 14: Patna High Court

The Patna High Court has held that differentiation between government employees and other employees for leave encashment exemption is neither discriminatory nor violative of Article 14 of the Constitution of India.

The bench of Chief Justice K. Vinod Chandran and Justice Rajiv Roy has observed that the legislature must have the freedom to select and classify persons, properties, and income that 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) of the Income Tax Act, 1961, is neither discriminatory nor violative of Article 14 of the Constitution of India.

The petitioner joined the State Bank of India in 1981 and, after putting in more than 36 years of service, retired on August 31, 2017.

The petitioner filed the writ petition prior to his retirement. He made a case that once retired, he was entitled to Rs. 6,70,000, but after deduction of income tax, he will be getting only a sum of Rs. 4,70,000, approximately, as the rest of the amount will be liable to tax. However, had he been in the State or Central Government Services, no deduction on account of income tax would have been made from the leave salary payable to the petitioner at the time of his retirement, and he would have been entitled to receive the entire sum.

The petitioner submitted that it is only because of the operation of Section 10(10AA) of the Income Tax Act, 1961, which discriminates between similarly placed groups of employees, that he would lose so much money. Section 10(10AA) 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, whereas in the case of employees of other establishments, the period of leave is capped at 10 months, and the maximum amount exempted from income tax is subject to such a limit as the Central Government may notify in the Official Gazette, the same being in the year 2017, to be Rs. 3 lakh, which means that any amount that is in excess of Rs. 3 lakh will be liable to tax.

The petitioner contended that the leave salary rules are framed as per different service rules applicable to employees of different organizations, whereas as per the Central Civil Services (Leave) Rules, 1972, the encashment of earned leave standing at the credit of a retiring government employee is admissible on the date of retirement, subject to a maximum of 300 days, i.e., ten months, whereas in the case of personnel retiring from bank services, the leave encashment is admissible subject to a maximum of 240 days only. The petitioner is not concerned with the period specified in the Income Tax Act, 1961, but with the cap on the maximum amount exempted from tax, which adversely affects his interests, which led him to file the present writ application.

The petitioner urged that in the Income Tax, which is a personal tax, the distinction made between government employees and non-government employees is not a valid classification to bestow certain benefits on one class while depriving the others of them.

The petitioner contended that the employees of the bank as well as the public sector undertakings cannot be treated differently under the equality clause of Article 14 of the Constitution of India.

The court rejected the petitioner's contention that two different sets of employees who are not situated equally and form a different class cannot be equated under Article 14 of the Constitution of India. The distinction made between the Central and State Government employees vis-à-vis others is definitely a reasonable classification that has been found to be proper.

“A taxation law cannot claim immunity from the equality clause that is 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 taxation purposes,” the court said.

The court held that the petitioner, a retired employee of the State Bank of India, cannot claim parity with the employees of the Central and State Governments, and in that background, the deductions so made cannot be interfered with.

Counsel For Petitioner: Kundan Kumar Sinha

Counsel For Respondent: K.N. Singh

Case Title: Purnendu Shekhar Sinha Versus The Union Of India

LL Citation: 2024 LiveLaw (Pat) 23

Case No.: Civil Writ Jurisdiction Case No.12326 of 2017

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