Memorandum of Association

2015 PTD 2210 SUPREME-COURT Judicial Precedent

Ss. 15 to 25-Company-Memorandum of AssociationScope

­Anything done by a company which was beyond the scope of its Memorandum of Association was ultra vires and thus could not be given any legal sanctity-Company could not engage in a business which was not fairly covered by any of its independent objects, or such objects which were ancillary and incidental to those for which a company had been created and its Memorandum of Association was duly recognized and accepted by the regulatory bodies meant for the incorporation of a company and oversight thereof.

2015 PTD 2210 SUPREME-COURT Judicial Precedent

Ss. 30(2)(b), 15(d), (f), 22 & 30Companies Ordinance (XLVII of 1984), Ss. 15 to 25Public limited company-Income from business' or 'income from other sources', determination ofMemorandum of AssociationObjects of a company, interpretation of

Public Limited Company (before commencing its business activities) using its surplus money/reserves to invest in various profitable schemes/banks-Question as to whether income/interest generated from such schemes/banks amounted to 'income from business' or 'income from other sources'

Main and primary object of the appellant-public limited company, in the present case, was to set up and run a cement factory

When the cement plant was under construction, and the business of the company had not yet commenced, the company used money lying in its reserves to invest in certain profitable schemes/banks through fund management arrangements-Company earned income/interest through the said schemes/banks-Assessing officer (Deputy Commissioner, Income Tax) assessed such income/interest so received by the company as 'income from other sources' under S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

Appellate Tribunal upheld the decision of the Assessing Officer-Contention of company was that though the primary object and purpose of the company was to establish a cement factory, however since the Memorandum of Association of the company permitted investments to be made for the purposes of its (company's) business to generate income, therefore any income or interest earned and received through such investments should be taxed as 'income from business', as opposed to 'income from other sources'-Validity­[Per Sh. Azmat Saeed, J] Main object of the company in the present case as mentioned in its Memorandum' of Association was to install, establish and run a cement manufacturing plant

One of the clauses mentioned in the Memorandum of Association provided that company's object and purpose was also "to invest or otherwise deal with the money of the company in such manner as may from time to time be determined"

However a prohibitory clause was also mentioned in the Memorandum of Association which stated that "notwithstanding anything contained in the .... object clauses of .... Memorandum of Association, nothing [t]herein shall be construed as empowering the Company to undertake or indulge in the business of banking, finance, investment, leasing or insurance, directly or indirectly or any unlawful operations"

Said prohibitory clause stated in unequivocal terms that in spite of anything contained in any of the object clauses in the Memorandum of Association, nothing therein shall continue to empower the company to undertake or indulge in the business of inter alia investment-Such was the clear and unambiguous import and meaning of said prohibitory clause

Company, in the present case, could, thus, invest its money but such a transaction could not be deemed to be business of the company

Consequently, the income derived from such investment could not qualify as income from business and therefore must fall in the category of "income from other sources" in terms of S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

[Per Mushir Alam, J] During the period or course of setting up of a factory or plant by the company, activity of investing surplus funds of the company and generating any sum, return or interest on such investment, could not be considered as "income from business" under S. 15(d) of the Income Tax Ordinance, 1979 [since repealed]

Company claimed that its surplus funds were employed in a proactive manner in order to generate additional fund by way of portfolio, fund and cash management venture

Such activity was carried out during the period when cement plant/factory was under construction, therefore, the company , could not be said to be carrying on any business at that point of time within the contemplation of S.22 of the Income Tax Ordinance, 1979 [since repealed]

In such circumstances the Appellate Tribunal was right in holding that such income/interest yielded from the investment of the surplus funds of the company fell under "income from other sources" i.e. S. I5(f) of the Income Tax Ordinance, 1979 [since repealed]

Such income was rightly assessed as 'income from other sources" under S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

[Per Mian Saqib Nisar, J] [Minority view] Primary and main object of the company, in the present case, was to install, establish and run a cement manufacturing plant

Such object, was, however not the only object of the company, rather there were numerous other ventures which were permissible under the objects clause of the company (mentioned in the Memorandum of Association)

Some objects clauses mentioned in the Memorandum of Association were ancillary, but some were vividly and undoubtedly independent

One such independent object clause mentioned in the Memorandum of Association was that the company was empowered to, and one of its purposes and objects was "to invest or otherwise deal with the money of the company in such manner as may from time to ante be determined"

Said independent object clause made it clear that investment of the money of the company, surplus or otherwise, for the purpose of earning income, would be within the pail of permissible business activities detailed in the Memorandum of Association

Memorandum of Association of the company in the present case contained a prohibitory clause too which provided that "notwithstanding anything contained in the....object clauses of .... Memorandum of Association, nothing Wherein shall be construed as empowering the Company to undertake or indulge in the business of banking, finance, investment, leasing or insurance, directly or indirectly or any unlawful operations"

Said prohibitory clause did not prohibit the company from making any investment of its money and carrying on any activity having no nexus to its main object for generating income

Said prohibitory clause had been seemingly added purposely in the Memorandum of Association, as an extra precaution to eliminate any doubt that the company while misinterpreting any of its object clause might not undertake and indulge into such business which was expressly covered and fell within the prohibitory domain, thereof; but where business of the company was covered expressly by one or more than one of its lawful objects, and did not clearly and unambiguously fall within the prohibitory clause, it would be beyond the pail of the said prohibitory clause

Section 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed] which dealt with 'income from other sources' was only applicable where the investment of money by a company had not been made as part of its business activities

Where money had been invested by a company in its business, as in the present case, and profit was generated on such an investment, that profit shall, for all intents and purposes, be considered to be the profit earned from business and not from other sources

In the present case, amount of profit earned by the company from the investment made in the various schemes/banks was pursuant to its business activities and, therefore, such profit could not be termed to have been accrued from any other source so as to attract the application of S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed] i.e. income from other sources

Appeal was dismissed accordingly.

2015 PTD 2210 SUPREME-COURT Judicial Precedent

Ss. 15 to 25-Company-Memorandum of AssociationMain object of a company, interpretation of

Liberal interpretation by the court-Company may incorporate in its Memorandum of Association, besides the main object of the company and its ancillary purposes, certain other objects as well which may be independent of its main object/business-Company thus may have a primary object and purpose, but still there may also be several other objects mentioned in the objects clauses, and after proper construction of such objects, by resorting to the relevant rules of interpretation, it should be considered whether those were ancillary to the main object of the company or could be held to be independent of each other-Memorandum of Association of a company should be read and construed liberally and be given a wide meaning through literal interpretation of the clause

Since objects were considered to be the permissive activities which a company could undertake in order to do its business, the same should not be given a restrictive meaning

In any case, rigid construction of the Memorandum of Association, unless and until inevitable and insurmountable, must be avoided.

2015 PTD 2210 SUPREME-COURT Judicial Precedent

Ss. 15 to 28Constitution of a company-Scope-Memorandum of Association

Articles of Association-Memorandum of Association and Articles of Association when read as a whole were the constitution of the company-Memorandum of Association provided and prescribed the object(s) and the purpose(s) for which the company had been established and constituted, with specific reference to the business and the avocations which it could conduct, carry on and undertake-While the Articles of Association were the organizational and governance rules of the company which primarily dealt with the management affairs.

2015 CLD 1482 SUPREME-COURT Judicial Precedent

Ss. 15 to 25CompanyMemorandum of AssociationMain object of a company, interpretation ofLiberal interpretation by the court

Company may incorporate in its Memorandum of Association, besides the main object of the company and its ancillary purposes, certain other objects as well which may be independent of its main object/business

Company thus may have a primary object and purpose, but still there may also be several other objects mentioned in the objects clauses, and after proper construction of such objects, by resorting to the relevant rules of interpretation, it should be considered whether those were ancillary to the main object of the company or could be held to be independent of each other

Memorandum of Association of a company should be read and construed liberally and be given a wide meaning through literal interpretation of the clause

Since objects were considered to be the permissive activities which a company could undertake in order to do its business, the same should not be given a restrictive meaning

In any case, rigid construction of the Memorandum of Association, unless and until inevitable and insurmountable, must be avoided.

2015 CLD 1482 SUPREME-COURT Judicial Precedent

Ss. 15 to 25CompanyMemorandum of AssociationScope

Anything done by a company which was beyond the scope of its Memorandum of Association was ultra vires and thus could not be given any legal sanctity

Company could not engage in a business which was not fairly covered by any of its independent objects, or such objects which were ancillary and incidental to those for which a company had been created and its Memorandum of Association was duly recognized and accepted by the regulatory bodies meant for the incorporation of a company and oversight thereof.

2015 CLD 1482 SUPREME-COURT Judicial Precedent

Ss. 15 to 25Income Tax Ordinance (XXXI of 1979) [since repealed], Ss. 30(2)(b), 15(d), (f), 22 & 30Public limited company'Income from business' or 'income from other sources', determination ofMemorandum of AssociationObjects of a company, interpretation of

Public Limited Company (before commencing its business activities) using its surplus money/reserves to invest in various profitable schemes/banks

Question as to whether income/interest generated from such schemes/banks amounted to 'income from business' or 'income from other sources'

Main and primary object of the appellant-public limited company, in the present case, was to set up and run a cement factory

When the cement plant was under construction, and the business of the company had not yet commenced, the company used money lying in its reserves to invest in certain profitable schemes/banks through fund management arrangements

Company earned income/interest through the said schemes/banks

Assessing Officer (Deputy Commissioner, Income Tax) assessed such income/interest so received by the company as 'income from other sources' under S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

Appellate Tribunal upheld the decision of the Assessing Officer

Contention of company was that though the primary object and purpose of the company was to establish a cement factory, however since the Memorandum of Association of the company permitted investments to be made for the purposes of its (company's) business to generate income, therefore any income or interest earned and received through such investments should be taxed as 'income from business', as opposed to 'income from other sources'

Validity

[Per Sh. Azmat Saeed, J] Main object of the company in the present case as mentioned in its Memorandum of Association was to install, establish and run a cement manufacturing plant

One of the clauses mentioned in the Memorandum of Association provided that company's object and purpose was also "to invest or otherwise deal with the money of the company in such manner as may from time to time be determined"

However a prohibitory clause was also mentioned in the Memorandum of Association which stated that "notwithstanding anything contained in the …. object clauses of …. Memorandum of Association, nothing [t]herein shall be construed as empowering the Company to undertake or indulge in the business of banking, finance, investment, leasing or insurance, directly or indirectly or any unlawful operations"

Said prohibitory clause stated in unequivocal terms that in spite of anything contained in any of the object clauses in the Memorandum of Association, nothing therein shall continue to empower the company to undertake or indulge in the business of inter alia investment

Such was the clear and unambiguous import and meaning of said prohibitory clause

Company, in the present case, could, thus, invest its money but such a transaction could not be deemed to be business of the company

Consequently, the income derived from such investment could not qualify as income from business and therefore must fall in the category of "income from other sources" in terms of S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

[Per Mushir Alam, J] During the period or course of setting up of a factory or plant by the company, activity of investing surplus funds of the company and generating any sum, return or interest on such investment, could not be considered as "income from business" under S. 15(d) of the Income Tax Ordinance, 1979 [since repealed]

Company claimed that its surplus funds were employed in a proactive manner in order to generate additional fund by way of portfolio, fund and cash management venture

Such activity was carried out during the period when cement plant/factory was under construction, therefore, the company , could not be said to be carrying on any business at that point of time within the contemplation of S.22 of the Income Tax Ordinance, 1979 [since repealed]

In such circumstances the Appellate Tribunal was right in holding that such income/interest yielded from the investment of the surplus funds of the company fell under "income from other sources" i.e. S. 15(f) of the Income Tax Ordinance, 1979 [since repealed]

Such income was rightly assessed as 'income from other sources" under S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed]

[Per Mian Saqib Nisar, J] [Minority view] Primary and main object of the company, in the present case, was to install, establish and run a cement manufacturing plant

Such object, was, however not the only object of the company, rather there were numerous other ventures which were permissible under the objects clause of the company (mentioned in the Memorandum of Association)

Some objects clauses mentioned in the Memorandum of Association were ancillary, but some were vividly and undoubtedly independent

One such independent object clause mentioned in the Memorandum of Association was that the company was empowered to, and one of its purposes and objects was "to invest or otherwise deal with the money of the company in such manner as may from time to time be determined"

Said independent object clause made it clear that investment of the money of the company, surplus or otherwise, for the purpose of earning income, would be within the pail of permissible business activities detailed in the Memorandum of Association

Memorandum of Association of the company in the present case contained a prohibitory clause too which provided that "notwithstanding anything contained in the …. object clauses of …. Memorandum of Association, nothing [t]herein shall be construed as empowering the Company to undertake or indulge in the business of banking, finance, investment, leasing or insurance, directly or indirectly or any unlawful operations"

Said prohibitory clause did not prohibit the company from making any investment of its money and carrying on any activity having no nexus to its main object for generating income

Said prohibitory clause had been seemingly added purposely in the Memorandum of Association, as an extra precaution to eliminate any doubt that the company while misinterpreting any of its object clause might not undertake and indulge into such business which was expressly covered and fell within the prohibitory domain, thereof; but where business of the company was covered expressly by one or more than one of its lawful objects, and did not clearly and unambiguously fall within the prohibitory clause, it would be beyond the pail of the said prohibitory clause

Section 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed] which dealt with 'income from other sources' was only applicable where the investment of money by a company had not been made as part of its business activities

Where money had been invested by a company in its business, as in the present case, and profit was generated on such an investment, that profit shall, for all intents and purposes, be considered to be the profit earned from business and not from other sources

In the present case, amount of profit earned by the company from the investment made in the various schemes/banks was pursuant to its business activities and, therefore, such profit could not be termed to have been accrued from any other source so as to attract the application of S. 30(2)(b) of the Income Tax Ordinance, 1979 [since repealed] i.e. income from other sources

Appeal was dismissed accordingly.