Patna High Court: Differentiation In Leave Encashment Exemption Between Government Employees And Others Does Not Violate Article 14

Patna High Court: Differentiation In Leave Encashment Exemption Between Government Employees And Others Does Not Violate Article 14

The Patna High Court has ruled that distinguishing between government employees and other employees regarding leave encashment exemption is not discriminatory or violative of Article 14 of the Constitution of India.

Chief Justice K. Vinod Chandran and Justice Rajiv Roy bench have noted that the legislature should have the freedom to choose and categorize individuals, properties, and income for taxation purposes. Therefore, the distinction drawn by the state between employees of the central and state governments, on the one hand, and other employees, on the other hand, in Section 10 (10 AA) of the Income Tax Act, 1961, does not amount to discrimination or a violation of Article 14 of the Constitution of India.

The petitioner commenced his employment with the State Bank of India in 1981 and served for over 36 years, retiring on August 31, 2017.

The petitioner argued that upon retirement, he was entitled to receive Rs. 6,70,000. However, due to income tax deductions, he would only receive approximately Rs. 4,70,000, as the remaining amount would be subject to taxation. The petitioner further contended that had he been employed in the State or Central Government Services, no income tax deductions would have been applied to his leave salary at the time of retirement, allowing him to receive the entire sum without any deductions.

The petitioner contended that the financial disparity he faced was solely due to the implementation of Section 10(10AA) of the Income Tax Act, 1961, which, in his view, discriminates among groups of employees in similar circumstances. The petitioner highlighted that Section 10(10AA) imposes no restrictions on the duration of leave or the amount of leave salary exempt from income tax for government employees, whether in Central or State Services. In contrast, for employees in other establishments, the period of leave is restricted to 10 months, and the maximum tax-exempted amount is subject to a limit set by the Central Government. In the year 2017, this limit was Rs. 3 lakh, implying that any amount exceeding this limit would be subject to taxation.

The petitioner argued that Section 10(10AA) of the Income Tax Act does not impose any restrictions on the duration of leave or the amount of leave salary exempt from income tax for government employees, regardless of whether they serve in Central or State Services. In contrast, employees of other establishments are subject to a cap of 10 months on the period of leave, and the maximum tax-exempted amount is determined by the Central Government. In 2017, this limit was set at Rs.3 lakh, meaning that any leave salary exceeding this amount would be taxable.

Furthermore, the petitioner highlights that leave salary rules are established according to various service rules applicable to employees of different organizations. For instance, under the Central Civil Services (Leave) Rules, 1972, government employees are entitled to encash earned leave up to a maximum of 300 days, equivalent to ten months, upon retirement. However, personnel retiring from bank services are only entitled to encash leave up to a maximum of 240 days.

The petitioner emphasizes that their concern lies not with the duration specified in the Act but with the cap on the maximum tax-exempted amount, which adversely affects their interests.

The petitioner argued that the differentiation drawn between government employees and non-government employees does not constitute a legitimate classification to confer specific benefits on one group while denying them to others.

The petitioner maintained that employees of banks and public sector undertakings should not be subjected to disparate treatment under the equality clause outlined in Article 14 of the Constitution of India.

The court upheld the differentiation between employees of banks and public sector undertakings compared to employees of the central and state governments under Article 14 of the Constitution of India, ruling the petitioner's contention as unfounded. It stressed that employees in different sectors are not equally situated and therefore cannot be equated under Article 14.

Acknowledging that taxation laws are subject to the equality clause, the court noted the state's discretion in classification for taxation purposes due to the intricate nature of fiscal adjustments. It reaffirmed the legislature's authority to select and classify persons, properties, and income subject to taxation.

Regarding the specific differentiation made in Section 10(10AA) of the Income Tax Act, the court found it non-discriminatory and compliant with Article 14 of the Constitution of India. Consequently, the court dismissed the writ petition.