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Petitioner: LUCKY CEMENT LTD VS Respondent: COMMISSIONER INCOME TAX, ZONE COMPANIES, JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Mushir Alam, Mian Saqib Nisar, Sh. Azmat Saeed Title:LUCKY CEMENT LTD vs COMMISSIONER INCOME TAX, ZONE COMPANIES,
JUDGMENT
Reported As: 2015 P.C.T.L.R. 1147, 2015 PTD 2210, 2015 SCMR 1494, 2015 CLD 1482 Result: Appeals dismissed Judgment JUDGMENT MIAN SAQIB NISAR, J.---The main question involved in these matters is:- whether the income received by the appellant from the investment(s) made by it of its surplus money into various profitable ventures/schemes, and the amounts thus realized as profits thereupon amount to income from business or income from other sources. The facts relevant for the purposes of resolution of the noted question are:- the appellant is a public limited company (listed at the stock exchange). The main and primary object of the appellant was/is to setup/establish and run a cement factory, however, in its business prudence, the appellant decided to not seek and avail any financial support from outside (i.e. Financial institutions etc.), rather it relied upon its own resources (i.e. The deposits/contributions made by the shareholder etc). It may be pertinent to mention here that for the accomplishment of the above venture (cement factory), the appellant had collected and possessed in its reserves an amount of rupees 3.44 billion, which was not required to be used immediately (in one go) in lump sum and thus as the amount was lying unutilized with the appellant-company in banks or otherwise, it (appellant) decided to invest the said amount in certain profitable schemes through fund management process/ arrangements. In this manner, the investments were made and certain profits were earned by the appellant during the financial years 1994-95, 1995-96 and 1996-97. The assessing officer (Deputy Commissioner Income Tax) vide order dated 24-3-1997 assessed the income so received by the appellant as from other sources under section 30(2)(b) of the repealed Income Tax Ordinance, 1979 (note: the rate of tax on such income was different than the rate of tax on income generated from the business of the assessee). However, the Commissioner on appeal through its order dated 30-10-1997 reversed the aforesaid
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decision and considered the said amount as the business income of the appellant. The department challenged this decision before the Tribunal which appeal was accepted on 29-9- 2001, and by setting aside the order of the Commissioner Appeals, he order of the Assessing Officer was restored. The appellant unsuccessfully assailed the above (two) decisions vide tax references before the Peshawar High Court, which were dismissed through the impugned judgment dated 22- 11-2005. Leave in these cases was granted on 24-1-2006 to consider the following points:- "(i) Whether earning from investment of surplus money in the portfolio and fund management ventures and such other activities of the petitioner, would be income from the business as profit or interest? (ii) Whether learned Division Bench of the High Court has erred in law in failing to consider that the Tribunal has erred in law treating the net amount received by the petitioner from portfolio and fund management ventures and other activities as an interest? (iii) What would be the nature of relationship between the investor and the Bank when the latter is not responsible in case of any loss in case of investment? (iv) Whether learned Division Bench of the High Court failed to appreciate that the business undertaken by the petitioner of portfolio and fund management ventures/activities was inextricably linked to the construction of cement plant and such surplus funds earned from the said ventures were specifically earmarked for construction of cement plant." 2. Mr. Khalid Anwar, learned Senior Advocate Supreme Court, by relying upon Article III of the appellant-company's Memorandum of Association has argued that though the primary object and purpose of the company was to establish a cement factory and this would be the ultimate business of the appellant, however since the constitution i.e. The Memorandum of Association of the company permits investments to be made for the purposes of its (appellant) business to generate income, therefore any profits earned or income generated and received through such investments should be taxed as income from business, as opposed to income from other sources. For the ease of reference, he has referred to relevant clauses of Article III of the Memorandum of Association of the appellant-company; which are reproduced below. Clause 1 of Article III ibid reads as follows:- "To carry out the design, engineering, procurement, manufacturing, delivery, erection, installation, testing and commissioning at site of a new, state of the art, plant including all auxiliary and ancillary equipment, complete in all respects for the purpose of manufacturing PORTLAND CEMENT as per Pakistan/British standard specifications, including all mechanical and electrical equipment and controls to ensure a smooth and continuous production clinkers and corresponding quantity of ordinary PORTLAND CEMENT." Clause 6 of Article III ibid reads as follow:- "To invest or otherwise deal with the money of the Company in such manner as may from time to time be determined." Clause 36 of Article III ibid reads as under:- "It is expressly declared that the several sub-clauses of this clause and all the powers expressed therein are to be cumulative but in no case unless the context expressly so requires is the generality of any one sub-clause to be narrowed or restricted by the name of the Company or by the particularity of expression in the same sub-clause or by the application or any rule of construction such as the ejusdem generic rule, and accordingly none of such sub-clauses or the objects therein specified or the power thereby conferred shall be deemed subsidiary or auxiliary, merely to the objects mentioned in any other sub-clause of this clause and the Company shall have full power to exercise all or any of the powers conferred by any provisions of this clause in any part of the world."
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It is thus submitted that Clause 6 ibid specifically and independently provides and enables the company to make such investment in addition, the said clause when read in light of residuary Clause 36 ibid, makes the investments a permissible business activity of the appellant, notwithstanding its primary business of establishing the cement factory, therefore all such income received by the appellant shall be taxable as the income from business and not from any other source. It is also argued that the learned High Court has unnecessarily relied upon the judgment of this Court reported as The Commissioner of Income Tax, East Pakistan, Dacca v. The Liquidator, Khulna-Bagerhat Railway Company Ltd., Ahmadabad (PLD 1962 SC 128). Such decision is distinguishable on its own facts, and has no relevance and application to the proposition in hand. It is further urged that it is always the intention of the assessee which is germane and expedient for the purposes of deciding and determining whether the income generated by it (the assessee) is from the business of the assessee or from any other source. It is contended that even the earning of interest on investment(s) and the deposits as such, could also be a business of a company. And the apt example of this is, where investments are made by the banks etc. In certain treasury bonds etc. And the income is generated on that account, which for all intents and purposes shall be the income from business. In support of his plea(s), the learned counsel has made reference to the judgment of this Court reported as The Commissioner of Income Tax, West Zone, Karachi and another v. Messrs Khairpur Textile Mills Ltd. And others (1989 SCM R 61). It is also argued that since Clause 36 ibid is a residuary clause and on account of the interpretation assigned to such a clause (residuary stipulation/provision), the investment(s) made by the appellant undoubtedly were a business investment and therefore, the same cannot be termed to be investment(s) beyond the scope of appellant's business and thus the income from any other source. In this regard, the judgments cited are Commissioner of Income Tax, U.P. v. Basant Rai Takhat Singh ((1933) ITR 197), Commissioner of Income. Tax v. Govinda Choudhury and Sons ((1993) 200 ITR 881) and Asiatic Agencies Limited, Karachi v. Commissioner of Income Tax (1967 PTD 286). Learned counsel has further argued that even a single transaction can be taken as a business of the assessee and it is not necessary that there should be a series of transactions. Support is drawn from Kanwarlal Manoharwal v. Commissioner of Income Tax, Madras ((1975) 101 ITR 439) and K. Nallathambi Pillai v. Commissioner of Income Tax ((1975) 98 ITR 13) for the above submission. 3. Contrary to the above, learned counsel for the respondent has made reference to Clause 37 of Article III of the Memorandum of Association which reads as under:- "Notwithstanding anything contained in the foregoing object clauses of this Memorandum of Association, nothing 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." On the basis of above, it is argued that this being a prohibitory clause, no investments can be made by the appellant and the appellant cannot be said to have made the investment(s) under question in pursuit of its business venture and resultantly the amount of the profit accruing to the appellant is assessable as income from other sources. It is also argued that according to Clause 1 of Article III of the Memorandum of Association, the primary/main and key object of the appellant is to establish a cement factory and even if it is considered that the investment business is permissible, since the same is not ancillary to the main business object of the appellant-company, any income generated through such investment business is to be taxed as income from other sources. 4. Heard. Before resolving the proposition in hand, we find it expedient to briefly state the nature and legal status/position of Memorandum of Association (MOA) and Articles of Association (AOA) of a company, the purpose and object of the same, the rules of its application and the
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construction/interpretation of such a document. In this regard, several judgments of superior courts have shed light and from the gist thereof, it can be held that the MOA and Articles of Association when read as a whole are the constitution of the company. MOA provides and prescribes the object(s) and the purpose(s) for which the company has been established and constituted, with specific reference to the business and the avocations which it can conduct, carry on and undertake. While the AOA are the organizational and governance rules of the company which primarily deal with the management affairs. There are judgments of the superior Courts to the effect that anything done by a company (as the company is a juristic person and has to act through natural person i.e. Its management) which is beyond the scope of its MOA is ultra vires and thus cannot be given any legal sanctity. In other words, a company cannot engage in a business which is not fairly covered by any of its independent objects, or such objects which are ancillary and incidental to those for which a company has been created and such MOA is duly recognized and accepted, by the regulatory body(ies) meant for the incorporation of a company and oversight thereof. It has been noticed and experienced by us for various MOAs of different companies that in order to avoid any of its venture being declared as ultra vires of the object, besides the main object of the company and its ancillary purposes, the latest trend is that the company shall incorporate in the MOA certain other objects as well which are aloof and independent of its main object/business; this is also so because the company might at some point of time like to undertake some another or more business, but would be precluded from doing so, because of the lack of object and it is difficult to have the MOAs changed and altered frequently. A company thus may have a primary object and purpose, but still there may also be several other objects mentioned in the objects clause, and after proper construction of such objects, by resorting to the relevant rules of interpretation, it should be considered whether those are ancillary to the main object of the company or can be held to be independent of each other. It may be pertinent to mention here that MOA of a company in law should be read and construed liberally and be given a wide meaning through literal interpretation of the clause. Since objects are considered to be the permissive activities which a company can undertake in order to do its business, the same should not be given a restrictive meaning. In any case, rigid construction of the said document, unless and until inevitable and insurmountable, must be avoided. 5. In the context of the above, the question whether in the instant case, the investments made by the appellant-company are pursuant to its business or such investments and the profits derived therefrom are from other sources, now needs to be determined. But before doing that, we would like to reproduce the provisions of section 30(2)(b) of the Income Tax Ordinance, 1979, which are as follows:- (30) Income from other sources:- (2) In particular, and without prejudice to the generality of the provisions of subsection (1), the following incomes shall, save as otherwise provided in this Ordinance, be chargeable under the head "Income from other sources", namely: (b) "interest, royalties and fees for technical services" 6. From Clause 1 of Article III of the appellant-company's MOA, as reproduced above, it is clear that the primary and main object of the appellant-company is to install, establish and run a cement manufacturing plant. This, however, is not the only object of the appellant-company; rather there are numerous other ventures which are permissible under the objects clause of the company. Some are ancillary, but some are vividly and undoubtedly independent; and Clause 6 ibid amongst others falls within the latter category. According to Clause 6, it is unequivocally clear that the company is empowered to, and one of its purposes and objects is "To invest or otherwise deal with
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the money of the Company in such manner as may from time to time be determined". From a plain reading of this clause, it is manifest 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 MOA; the decision as to where, how and to what extent this money is to be invested, in which scheme and for what profit etc. Is left for the management to decide in its commercial prudence and in the best interest of the company. Notwithstanding the above clause, in clause 36 (supra), which is a residuary clause, it has been specifically stated that all the aforesaid clauses shall be held to be independent objects of the company and no objects stated in any sub-clause shall be deemed or construed to be subsidiary or auxiliary to any objects mentioned in any other sub-clause and that the Company shall have full power to exercise all or any of the powers conferred by any provisions of this clause in any part of the world. The only exception to this general rule of interpretation of the MOA of the appellant- company as envisaged by Clause 36 is where the scope of sub-clause or object is expressly narrowed down or made dependent on any other object/sub-clause. Therefore, while reading Clause 6 in light of Clause 36, it may be deduced that Clause 6 has been considered and held to be an independent E object of the company as well. 7. In light of the above, suffice it to say that section 30(2)(b) is only applicable where the investment of money by a person has not been made as part of his business activities. Where money has been invested by a person in his business and profit is 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. To elucidate the above, it may be mentioned that if a person is engaged in a business of sale and purchase of paintings and pursuant to his business activity, he buys a painting worth Rs.100, sells that out for Rs.150, and thus earns Rs.50 as profit, such profit of Rs.50 shall be considered to be part of the income generated from his business. On the contrary, if a person, merely interested in collecting paintings for his personal collection, purchases one but later sells it at a profit margin, the profit/income earned by such person shall be deemed to be income from other source as opposed to income from business. The reason for this being that his purchase of the property i.e. Paintings is only for the purposes of his private collection and not as part of any commercial/business activity he is engaged in. Therefore, it is the object/purpose for which investments are made which is relevant and the object, in the case of a company, has to be ascertained from its Memorandum of Association and in the case of any other individual, from the nature of his business activity. 8. As regards the judgment reported as The Commissioner of Income Tax, East Pakistan, Dacca v. The Liquidator, Khulna-Bagerhat Railway Company Ltd., Ahmadabad (PLD 1962 SC 128), the learned High Court has heavily relied upon this verdict, but to our consideration, the judgment is not germane to the facts and circumstances of the case in hand. The facts in which the aforesaid judgment was rendered were that the respondent was a railway company which had entered into an agreement with Secretary of State for India in-council in 1916 for construction and management of railway in what was previously East Pakistan. Later on in the year 1948, the railway was acquired by the Government of Pakistan. When the income tax return for the relevant period was filed by the respondent, exemption was claimed under subsections (3) and (4) of section 25 of the Income Tax Act. The question before the income tax officer was whether income from interest from monies kept in banks earned by the company during the relevant assessment year would be classified as income from business or from other sources. The income tax officer deemed such interest to be part of the legitimate business activities of the company. This decision however was reversed on appeal and the decision of the appellate authority was upheld throughout. The Supreme Court while hearing the matter held that per Articles 2 and 3 of 'Memorandum of Association of the
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respondent-company, main business was construction and upkeep of the Railway system and though Article 26 did authorize the company to lend or invest monies belonging to it, because such an activity was not company's (railways) normal business. The Supreme Court in that case concluded that each case must be decided on its own facts, and in that case the circumstances brought out in the evidence did not indicate that the receiving of interest on Invested moneys was really included in the business-income of the company. The supra case is distinguishable from the one in hand because in the instant case, when the various clauses of the MOA of the appellant- company are construed and applied specifically in the presence of Clause 36, it is clear that Clause 6 is an independent object of the company and not a mere authorization available with the appellant-company to make investments which may be narrowed down or confined or deemed auxiliary to Clause 1 ibid, which factor it seems was absent in the afore cited case (emphasis supplied). 9. Now attending to the question raised by the counsel for the respondent that the provisions of Clause 37 ibid of the MOA specifically prohibits the appellant-company from making any investment of its money and carrying on any activity having no nexus to its main object for generating income. It may be held that unambiguously and undoubtedly the aforesaid is a prohibitory clause, it is couched in the negative language and therefore under the law of interpretation of statutes, such a provision of law and/or a clause appearing in a document (such clause in the MOA) should be construed and applied strictly. It should be assessed and ascertained as to what is the real intent and object behind such a clause, what mischief it has to suppress, circumvent and curb. Besides, such prohibitory clause unless no other interpretation is possible cannot be used as a tool for obliterating any other specific and express provision of the statute or document, (in this case MOA) which provision/clause unequivocally, categorically and clearly provides a particular act and object of the company as its permissible business, which otherwise is also lawful. It should not be construed and interpreted that a prohibitory clause in a statute/document is prescribed and is designed to render any other specific provision/clause as nugatory, rather for all intents and purposes the rules of harmonious interpretation should be adhered and resorted to and all possible efforts should be made to save each and every provision of the statute/clauses of MOA (as the case may be). In this context we find that Clause 6 supra in very clear and in 1 unambiguous terms prescribes that the appellant-company can make an investment of its money. The precise words are "To invest or otherwise deal with the money of the Company in such manner as may from time to time be determined". The word "deal" appearing in the clause is disjunctive and notwithstanding the word invest (note: which shall be construed in the preceding part of this opinion not hit by Clause 37) by itself permits the company to administer and apportion its money by ways of putting it in any profit bearing scheme and venture and earn income thereupon. Anyhow while interpreting the two clauses, we ask a question to ourselves that if Clause 37 was not there in the MOA, whether the company could invest its monies as its business venture as per the force of Clause 6 ibid. The answer we find is in the affirmative i.e. YES. Thus the question for consideration and resolution now is if Clause 37 has made the otherwise permissible business of the company as impermissible, the reply is in the negative, NO. For the above reply, the intent and the object of Clause 37 needs some elaboration, and the relevant comments in this context are:- that regardless of the empowerment of the company to carry out its objects clearly mentioned in the preceding part of the MOA; Clause 37 when read independently and in isolation of other clause it does debar the company from undertaking and indulging in the business of banking finance, investment, leasing or insurance or any other unlawful business. Now for a moment excluding two words appearing in this clause from consideration i.e. Finance and investment, if the clause is read, it is very much clear that a company has been precluded and denuded of the authority to undertake (i.e. "to take on an obligation or task; to give a formal
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promise; to make oneself responsible for (a person, fact, or the like); a promise, pledge, or engagement" and indulge i.e. "to become involved in any activity"), and indulge with the business (this is an important word in the clause) of banking, leasing or insurance. The word business unmistakably is also directly relevant to the two other components of this clause i.e. Finance and investment, which connotes that the company shall not enter into any business of financing, meaning thereby to undertake and indulge into the business of financing i.e. Providing money to others which concept in the commercial parlance and sense is understood to act and function as a financing company, or a company indulged in the business of lending money. Likewise, there is a prohibition and a bar per this clause that the appellant shall not act as an investment entrepreneur, or an investment company, by attracting and calling upon the public or class of people to invest money with it and pay investors, the interest, profit etc. On such investment, so as to act as an investment institution. Clause 37 seemingly has been purposely added in the MOA with the clear intent, and as an extra precaution to eliminate any doubt that a company while misinterpreting any of its object clause might not undertake and indulge into such business which is expressly covered and falls within the prohibitory domain, thereof. But where a business of the company is covered expressly by anyone or more than one of its lawful objects, and do…
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