1. JUDGMENT [The judgment of the Court was delivered by Fakhruddin G. Ebrahim J-]-This judgment will dispose of Civil Appeal Nos. 32-P. 33-P and 34-P of 1972 in which the common question of law raised is whether the interest paid by the respondent-assessee on the amounts in question which they had received from minor relations, when held not to be admissible for exemption under Section 10(2)(iii) of the Income Tax Act could properly fall within the scope of Section 10(2)(xvi) of the same Act.
2. Respondent-assessee firm consisting of three partners, namely, H. Bahar Ahmad his son Iqbal Ahmad and the grandson Shaukat Usman was at the relevant time assessed to income tax. In proceedings for assessm ent of tax for the years 1964-65, 1965-66 and 1966-67 the assessee claimed that partner Haji Bahar Ahmad had in the year 1952 gifted a sum of Rs.8,000/- to his wife Nawab Begum and that he made a further gift of Rs. 30,000/- to each of his three minor grandsons, namely, Khalid Usman, Tariq Usman and Shahid Usman during the years 1960-61 and 1961-62. It was asserted that these amounts had been duly credited to the accounts of the donees from year to year in their firms' accounts books. In the years under assessment the assessee in the interest account claimed interest at the rate of 7 per cent per annum on the said total Sum of Rs. 38,000/-.
3. The Income Tax Officer held the gifts as invalid as the minors were not capable of accepting the same and there was no acceptance on their behalf in accordance with law. He further held that the donor did not divest himself of the amounts in question and that mere book entries could not constitute a valid gift. He further observed that through these two gifts, the assessee wanted to reduce his income by showing payment of interest. The Income Tax Officer consequently disallowed the interest to the minors. Interest was also disallowed to Mst. Nawab Begum on the ground that the amounts allegedly belonging to her was in the nature of an old voluntary deposit on which no interest was payable. The assessee filed an appeal before the appellate Assistant Commissioner. It was additionally pleaded in the appeal that if the sum of Rs. 98,000/- was taken out of the business, it would have adversely affected the business and as such the firm decided to pay interest at the rate of 7 per cent per annum to the donees. The Appellate Assistant Commissioner accepted the factum of gifts but disallowed the interest on the ground that the assessee case was not covered by Section 10(2) (iii) of the Income Tax Act as the amount in question was not borrowed capital. He also observed that the capital held by the donor had- simply been transferred to the donees who were the beneficiaries of the business itself as it was being run by the father and the grandfather of the donees. The assessee then preferred a second appeal before the Income Tax Appellate Tribunal, Peshawar, where the plea was repeated that the credits and deposits made in the names of the donees amounting to Rs. 98,000/- were needed by the firm for business purposes and that if these amounts were withdrawn by the donees, the assessee would have to borrowed money from the bank at the usual rate of compound interest and, therefore, the assessee was justified in paying the interest to the donees. The Tribunal took the view that there was no relationship of lender and borrower in the strict sense of the term and the credits and deposits in question could not be capital borrowed and the instant case, therefore, was not covered by Section 10(2) (iii) of the Income Tax Act but went on to hold that the assessee was entitled to the deduction of the interest claimed on the credits and deposits under Section 10(2)
(xvi) as a sum of Rs. 98,000/- was used for the purpose of assessee business on which usual interest was payable. It was further observed that if money in question was advanced to outsiders or even kept as deposits in bank it would have brought usual interest to the minors. The deduction of interest was therefore, allowed as "expenditure incurred wholly and exclusively for the purposes of assessee business" under Section 10(2) (xvi) of the Act. The Commissioner of Income Tax filed a reference application under Section 66(A) of Income Tax Act requiring the Tribunal to refer the following question of law: "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the interest paid by the assessee was an admissible expense under Section 10(2) (xvi) when it had already held that it was not admissible under Section 10(2)(iii)."
4. The Tribunal disallowed this application on the ground that the reference did not give rise to any question of law. The Commissioner of Income Tax then moved the High Court under Section 66(2) of the Income Tax Act for issue of a direction to Income Tax Tribunal requiring it to refer to the High Court the aforesaid question of law but the High Court vide judgment dated 4-10-1971 dismissed the three separate applications for each year of assessment in question in limine.
5. Leave was granted by this Court vide order dated 17-4-1972 to consider the contention on behalf of the appellant that clause (iii) of sub-section (2) of Section 10 being a special provision dealing with payment of interest, excludes the application of Section 10(2) (xvi) which is a provision of a general nature and that if an allowance on account of interest was not admissible under clause (iii), it was not admissible at all.
6. The High Court, it may be noticed, in rejecting the reference wholly relied on a decision of the Supreme Court of India in Bombay Steam Navigation Company v. Commissioner of Income Tax.
7. Bombay (1965) P.T.D. 624. The High Court was further of the view that the Tribunal has rightly come to the conclusion that the question now sought to be raised was a question of fact and that the case of the assessee Company was covered by sub-clause (xvi) of sub-section (2) of Section 10 of the Income Tax Act.
8. As aforesaid, the controversy in this appeal revolves around clauses (iii) and (xvi) of sub-section
(2) of Section 10 of income Tax Act 1922, which two clauses read as follows:- "10(2). Subject to the provisions of this Act such profits or gains shall be computed after making the following allowances, namely: -
(iii) in respect of capital borrowed for the purposes of the business, profession or vocation, the amount of the interest paid;
(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".
9. (Provisos to clause (iii) not reproduced as unnecessary)
10. Mr. Amirzada Khan, learned counsel for the appellant, contended that clause (xvi) was of residuary nature, while clause (iii) was a special provision, and if what the assessee had sought by way of deduction was interest paid on capital borrowed by the assessee for their business, the deduction sought would be permissible, if at all, under the special provision contained in clause (iii), and if the assessee failed to make out a case under the special provision, it will not be open to them to fall back upon the residuary general clause (xvi), for the rule of interpretation is generalise specialists non derogant-Things special derogate from things general. In support of this contention, the learned counsel invited our attention to a D.B. Judgment of the Lahore High Court in the case of Commissioner of Income Tax v. Attock Oil Company Ltd. (PLD 1975 Lahore 1181) in which the question before the Court was whether educational expenses incurred by the assessee, which were admittedly not admissible under the specific provision contained in clause (xiv-a) of sub-section
(2) of Section 10 of the Act, were admissible under the general clause (xvi) as expenditure wholly and exclusively incurred for the purposes of business. The Court examined the scheme of the entire sub-section (2) of Section 10 of the Act which lays down that for the purpose of income tax, the profits or gains of a business shall be computed after making- due allowance for the expenditure incurred under clauses (i) to (xviii) enumerated thereunder. The expenditure enumerated in sub- section (2) of Section 10 is admissible subject to the conditions laid down in the respective clauses.
11. The Court came to the conclusion that excepting clause (xvi) the remaining clauses are sufficiently specific and restrictive in laying down the limits within which deduction was permissible while clause (xvi) was of a general nature, which allows for any expenditure laid out or expended wholly and exclusively for the business and therefore, for the interpretation of this clause it was necessary to apply the rule generalise specialists non derogant, for any other construction would mean that the general and more comprehensive clause (xvi) will not only be overlapping, but also destructive of most of the other special clauses. The two competing clauses of sub-section (2) of Section 10 around which the controversy in this case revolved, read as follows: "any expenditure (not being in the nature of capital expenditure) laid out or expended on any educational institution or hospital established for the benefit of employees, their families and dependents or on the training of industrial workers: Provided that no deduction under this clause shall be allowed where any charge is made for the services rendered by such institution or hospital." (clause xiv-a) "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". (clause xvi)
12. And the Court held that since the assessee was charging fees from the employees children in the educational institution the educational expenses could not be allowed under the residuary clause (xvi), for the reduction claimed was inadmissible under the special provision, namely clause (xiv-a) of sub-section (2) of section 10 of the Act.
13. Learned counsel next argued that the reliance by the High Court in the impugned judgment on the decision of the Supreme Court of India in the case of Bombay Steam Navigation Co v.
14. Commissioner of Income Tax, Bombary (1965 PTD 624) was misplaced inasmuch as in that case interest paid by the assessee was allowed under the general clause of sub-section (2) of section 10 of the Act, on the finding that the transaction between the assessee and the Company, to whom the interest was payable, was not a loan transaction, but interest on deferred payment of part consideration due from the assessee for purchasing certain assets.
15. For the proper understanding of sub-section (2) of section 10 of the Income Tax Act, 1 may, with advantage, refer to this Court's decision in the case of Commissioner of Income Tax v. Engineers Ltd, (PLD 1967 SC 524), in which the assessee had claimed by way of expenditure a sum of Rs.
16. 7709/- spent on the training abroad of two Engineer Directors as deductible item under clause (xvi) as a sum wholly laid out in the interest of the assessee business. The Department had contended that such an expenditure was deductible if at all under specific clauses (xii) (xiv) or (xv), and since the assessee case was not covered by any of these clauses, the assessee was not entitled to fall back upon the residuary clause (xvi).
17. The clauses in controversy 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."
(xvi) reproduced above.
18. The Court repelled the contention of the Department holding:- "The scope of clause (xvi) which is of residuary nature is thus wholly different from the sums included in clauses (xii) (xiv) and (xv). There being no similarity of subject-matter between clauses (xii), (xiv) (xv) and (xvi) of section 10 (2) of the rule 'general is specialists non derogant' was clearly not attracted."
19. Thus, it will be noticed that the Courts will have to examine the scope of each clause and the occasion to apply the rule 'things special derogate from things general' will arise only if the scope between the special and general clauses was the same. If these are parallel clauses, or if in its application there was no conflict between the two clauses, it will be immaterial if deduction is granted under the general clause while it may more appropriately fall under the specific clause.
20. There will be then no occasion to have recourse to this rule of construction. Let me illustrate. Clause
(iii) speaks of interest on capital borrowed by the assessee for the purposes of its business and if in a given case none of the provisos to this clause is attracted, the interest paid will be equally an expenditure incurred exclusively for the purposes of business. In such an event, it will in substance, make no difference if deduction is granted under clause (xvi), though it would be more appropriate to mention clause (iii).
21. Applying the above rule to the facts of the present case, we find that the Tribunal took the view that there was no relationship of lender and borrower in the strict sense of the term and the credits and deposits in question could not be said to be capital borrowed', notwithstanding the fact that if the money which was credited in the name of the creditors had not been used for the assessee' business, the assessee would have been obliged to obtain advance from outsider to whom interest would have been payable by the assessee, and if the depositors had advanced the money elsewhere, they would have also received interest. The reasons given in fact prove a loan transaction between the depositor and the assessee, and this was quite candidly conceded by the learned counsel for the Department.
22. We, therefore, are of the view that the interest paid was more appropriately deductible under clause (iii) and the fact that this deduction was allowed by the Department as falling under clause
(xvi) is, for the reason afore-mentioned, irrelevant, for, in the present case, the expenditure incurred can also be said to fall under general clause (xvi) of sub-section (2) of section 10 of the Income Tax Act.
23. The resuit, therefore, is that these appeals are dismissed, though for different reasons. There will* however, be no order as to costs.