P L D 1967 Supreme Court 524 (PLP)

(i) whether in the facts and circumstances of the case the Income‑tax Appellate Tribunal is right in holding that the expenditure comes under section 10(2)(xvi); (ii) whether section 10(2)(xii) and section 10(2)(xiv) would apply in the case; and (iii) whether the allowance is held admissible under any clause of subsection (2) of section 10 of the Income‑tax Act or can some other clause or clauses of the same subsection be held to be applicable for the same purpose. The reference was not happily worded, but in substance it raised two questions of law: (i) whether the expenditure incurred by the assessee on the training of two of its engineer directors was for the purpose of clause (xvi) of section 10(2) a revenue expense, or capital expenditure; and (ii) whether clauses (xii), (xiv) and (xv) of section 10(2) excluded the application of clause (xvi) on the rule generalibus specialia derogant: Things special derogate from things general. The reference was answered against the Revenue on the finding that the expenditure incurred on the training abroad of the engineer directors of the assessee was wholly and exclusively in the interest of the company's business and of revenue nature and not capital expenditure. Likewise the application of clauses WO, (xiv) and (xv) was excluded on the view that no dispute was raised before the Tribunal that the particular kind of training received by the engineer directors of the assessee was of a scientific research nature or that the training abroad was under a scheme sanctioned by the Central Board of Revenue. It was, however, assumed that the sum of Rs. 7,700 allowed by the Appellate Assistant Commissioner was incurred as revenue expense and not as capital expenditure and in the result the principal point raised in the reference received little consideration in the High Court. Leave to appeal was granted to consider the question whether the expense incurred by the assessee on the further education of two of its directors was not relatable to capital expenditure for the purpose of levy of income‑tax. The point was of first impression in this Court and apart from the judgment; and order of the High Court from which leave was sought there was said to be no other decision on the point by any High Court fn Pakistan. In support of the appeal Mr. Afzal‑ul‑Haque, learned counsel for the Commissioner of Income‑tax, raised two grounds: (i) that the expense incurred on the training of the two engineer directors of the assessee was of capital nature and (ii) that as special provision is made in clause (xv) for expenditure laid out or expended on the training abroad of citizens of Pakistan, in connection with a scheme approved by the Central Board of Revenue and for expenditure of a capital nature on scientific research related to the business of the assessee in clause (xiv) the general provisions of clause (xvi) were not attracted in the case. Mr. Afzal‑ul‑Haque did not dispute that the expense incurred on the training of the two engineer directors of the assessee in the United Kingdom was wholly and exclusively for the purpose of the assessee's business. Indeed the decision of the Income‑tax Officer disallowing the expense rested on the view that it had resulted in an enduring benefit to the assessee. The learned counsel accordingly maintained that the expense incurred was in the nature of capital expenditure and as such not covered by clause (xvi) which is to the effect that allowance shall be given for "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation". In support of his submission Mr. Afzal‑ul‑Haque relied on the decision of this Court in Messrs Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax, East Pakistan (PLD1962SC295). It was held in that case that payment of Rs. 5,000, per annum, by the assessee‑company to the Government as `protection fee' under clause (4) of the lease‑deed, for securing from the Government covenant that the Government would not grant any lease permit or licence to another party in respect of limestone in another quarry without a condition attached that limestone quarried by such other party was not to be used by it for the manufacture and not covered by clause (xvf) of section 10(2), but at the same time it was found that the sum of Rs. 35,000 per annum, paid by the assessee as a further protection fee, was a revenue expense. The payment of the first sum protected the assessee against any competition in the field of manufacture of cement out of limestone prepared by quarry in the whole of the district and the clause ran with the lease. The clause also assured the assessee of further supplies of limestone from this area, not only by purchase from such other quarry‑holder, but also by extraction through its own agency. On the other hand, the payment of "further protection fee" was connected with the operation of the assessee's business and was related directly by an agreed formula with the volume of the operations of the assessee, so that when that formula reached a certain high figure, the payment would no longer be necessary. Further, the clause could be terminated by the Government if the company run by the assessee was not brought into full operation .within a specified time. In this respect a strict limit was imposed upon the extent to which the factory would be kept idle so long as the protection, described in clause (5) was in force. The first of the two sums, paid by the assessee to the Government under clause (4) of the agreement had thus resulted in an advantage for the enduring benefit of the trade and business of the assessee, and as such was a capital expense, while the second payment of Rs. 35,000, per annum, was a revenue expense, related to actual operations of the business of the assessee and liable to variation and even termination by the Government in the circumstances, mentioned in clause (5). It is well established that a payment for acquisition of mining and quarrying rights is in the nature of capital expense. The sum of Rs. 5,000 paid by Messrs Assam Bengal Cement Company Limited was, therefore, a part of the fee paid for the acquisition of mining rights to the exclusion of all others and in the nature of acquisition of a monopoly. In that it was an expenditure of capital nature and not a revenue expense. Reference may be made in this connection to the case of Golden Horse Shoe (New Co.) v. Thurgood (18 T C 280). The assessee company in that case was incorporated to acquire from another company its rights in certain dumps of tailings or residuals that remained after extraction of gold from ore taken from mines. The mines had been worked by the vendor company over a long period and the tailings were accumulated in dumps partly on lands comprised in that company's mining leases and partly on sites of which it held tailing leases. The vendor company sold its mines in February 1929, but retained for a specified period the sole right to treat the tailings dumps which were known to contain gold. In September 1929, it sold its rights in the dumps to the assessee company whose sole business was that of extracting gold from the tailings by a retreatment process and selling the gold so obtained. It was held that the purchase price of the tailings was an admissible deduction in computing the profits and gains of the assessee, because dumps were their raw material and gold the finished produce. In coming to this conclusion Romer, L. J., observed:‑ "The reason for this distinction being drawn between fixed and floating or circulating capital is not far to seek. 1n assessing a trader to income‑tax under Schedule `D' Case I, the Revenue authorities are only concerned with his annual gains and profits; that is, gains and profits in the year of assessment, or whatever may be the other material interval of time. They are not in the least concerned with his financial position as a whole at the end of the time, as compared with his financial position at the beginning. Changes in the value of his fixed capital are, therefore, disregarded except where it is otherwise expressly provided in the Act. On the other hand, changes in the floating or circulating capital must be taken into consideration in ascertaining his annual gains and profits. For profits or losses in a year of trading cannot be ascertained unless a comparison be made of the circulating capital as it existed at the beginning for the year with the circulating capital as it exists at the end of the year." In continuation Romer, L. J., cited the following instances which clearly bring out the difference between fixed and capital expenditure which `in turn' determines whether a sum laid out by an assessee is of capital nature or a revenue expense: "It depends in no way upon what may be the nature of the asset in fact or in law. Land may in certain circumstances be circulating capital. A chattel or a chose in action may be fixed capital. The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal, that a manufacturer of gas buys and from which he extracts his gas. For the purpose of ascertaining his profit in a year, it is clear that he must debit his profit and loss account with the purchase price of the coal that he treats in the course of that year, and that, too, whether he buys it in that year or buys it in advance. It is part of the cost of producing the gas that he sells. Such cases as these cause no difficulty. But now suppose that the gas manufacturer, instead of buying‑ his coal from outside sources, purchases a coal mine and produces the coal that he requires by mining. The cost of extracting from the mine the coal treated will, of course, be a permissible deduction in ascertaining the profits of his business in the year. But he may not debit his profit and loss account with the sum by which the value of his mine has depreciated in consequence of the extraction of that coal, for the mine is regarded as being. fixed capital." Keeping in view the distinction observed in Messrs Assam Bengal Co. Ltd. v. Commissioner of Income‑tax, East Pakistan and Golden Horse Shoe (New Co.) v. Thurgood between expenditure of capital nature and revenue expense it could not be disputed that the sum laid out by the assessee on the training abroad of two of its engineer directors was a revenue expense, such as, a covered by clause (xvi) of section 10(2). The second contention, raised by the learned counsel for the Commissioner of Income‑tax, that clause (xvi) was not applicable rested on the rule that a special provision in a statute excludes the application of a general provision of similar nature. This is a well established rule of construction of statutes, but is not attracted in the interpretation of clause (xvi). The relevant clauses read as follows:‑ "(xii) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business; (xiv) any expenditure of a capital nature on scientific research related to the business: (xv) any expenditure laid out or expended on the training abroad of citizens of Pakistan, in connection with a scheme approved by the (Central Board of Revenue) for the purposes of this clause; and (xvi) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation:" The scope of clause (xvi) which is of residuary nature is thus wholly different from the sums included in clauses (xii) (x:v) anu (xv). There being no similarity of subject‑matter between clauses (xii), (xiv), (xv) and (xvi) of section 10(2) the rule generalibus specialia derogant was clearly not attracted. On the facts and in the circumstances of the case the reference was correctly answered by the High Court. The appeal is accordingly dismissed but we make no order as to costs as the respondent has failed to put in appearance. S. Q. Appeal dismissed.