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ARTICLE 4
RESIDENT
(1) For the purpose of this Convention, the term "resident
of a Contracting State" means any person who, under the laws of that State, is liable
to tax therein by reason of his domicile, residence, place of management or any other
criterion of a similar nature.
(2) Where by reason of the provision of paragraph (1) an individual is a resident of both
Contracting States, then his status shall be determined as follows:
(a) He shall be deemed to be a resident of the State is which he has a permanent home
available to him; if he has a permanent home available to him in both States, he shall be
deemed to be a resident of the State with which his personal and economic relations are
closer (centre of vital interests).;
(b) If the State in which he has his centre of vital interests cannot be determined, or if
he has not a permanent home available to him either State, he shall be deemed to be a
resident of the State in which he has an habitual abode;
(c) If he has an habitual abode in both States or in neither of them, he shall be deemed
to be a resident of the State of which he is a national;
(d) If he is a national of both States or of neither of them, the competent authorities of
the Contracting States shall settle the question by mutual agreement.
(3) Where by reason of the provisions of paragraph (1) a person other than individual is a
resident of both Contracting States, then it shall be deemed to be a resident of the
States in which its place of effective management is situated.
28. Scope
The scheme of double tax avoidance applies only to a person who is resident in each of the
Contracting States and this is emphasised in the agreements. Since the relief under the
agreements is available to resident alone, the determination of residential status assumes
great significance. there could be possibility for a person being taken simultaneously
resident of both the Contracting States. The quality of the status would make difficult
the determination of the jurisdiction where the income would be assessed, each State
pressing its claim, and the result would be opposite to what the agreement aims to
achieve, namely, avoidance of taxing the same person for the same income doubly by both
States. Each agreement thus contains an article on the pattern of OECD Convention Model or
the UN Model providing for answers to various situations where a person is resident of
both States, so that he could be regarded resident of any of the two. This Chapter deals
with the determination of status of the person who is subject to the agreement. What is
meant by the expressions ‘residence’, ‘domicile’,
‘citizenship’ and ‘fiscal domicile’ and what are the distinguishing
features of each, are some of the relevant questions associated with the moot question
relating to determination of the fiscal domicile. All these are also dealt with here. This
article defines ‘resident of a Contracting State’ by reference to the liability
to tax of a person under domestic law.
Paragraph (1) of the Article fixes the residential status on the basis of criteria such as
domicile, residence, place of management as laid down under the domestic laws of a State
to fasten the tax liability on the person. That liability is also dependent on the
location of the source of income in that State. Subsequent paras are the tie-breaking
rules in a case when a person is liable to tax in respect of the same income in both the
States as he qualifies for the residential status of both according to their respective
domestic laws.
Under the Pakistan Income Tax Law, the criterion for fixing the residential status is laid
on the basis of the stay in Pakistan in case of an individual and on the basis of the
location of the effective management in the case of other entities such as firms,
association of person, Hindu undivided family and the company.
- Individual - An individual can be (i) resident, or (ii) non-resident.
- Resident - An individual could be said resident in any income year if he has been
in Pakistan in that year -
(a) for a period or periods amounting to 182 days or more; or
(b) for a period of 90 days or more and has also been in Pakistan within the preceding
four years for a period or periods amounting to 365 days or more.
Non-resident - A person who is not a resident. The criteria for other entities are
as follows:
- Firms, association of persons, Hindu undivided family - A firm or an association
of persons, or Hindu undivided family is said to be resident in Pakistan in any income
year if the control and management of its affairs is not situated wholly outside Pakistan,
in that year.
- Company - A company is said to be resident if it is a Pakistan company - or the
control and management of its affairs is situated wholly in Pakistan.
29. Residence rules in case of an individual
The word ‘residence’ has different meaning in different branches of law. For
some purposes it is sufficient to describe a person resident where he works, while for
other purposes this is not sufficient. For some purposes, a person is resident where his
family lives, while for others he can only be resident where he is himself physically
present; for some purposes residence connotes some degree of permanence, while for others
it may be transitory.
The agreement applies to ‘resident’ of one or both of the contracting countries.
The fiscal domicile of a person may be different from political domicile. By domicile is
meant a permanent home. A person may be said to
have his home in country if he resides in it without any intention of at present removing
from it permanently or for an indefinite period.
It is necessary to bear in mind the distinction between the kinds of status viz.,
citizenship, residence and domicile. "Citizenship’ has reference to the
political status of a person. ‘Residence’ has reference to the physical
connection of a person with a particular territory and ‘domicile’ has reference
to his civil rights. Thus when a person is having domicile of, or is domiciled in, a
particular country he is governed by the law of that country. The domicile has reference
to the system of law by which a person is governed. The domicile may have reference to the
system of law by which a person is governed. The domicile may have reference to a part of
the country, as in the case of Great Britain, where a person having a Scotch domicile has
a different system of law applicable to him while if he were to have an English domicile,
another system of law applies to him.
29.1 Domicile of origin/choice - The law attributes to every
person of a birth domicile which is called a domicile of origin. This domicile may be
changed and a new domicile which is called a domicile of choice, may be acquired. But
these two kids of domicile differ in one respect. the domicile of origin is determined by
operation of law at birth, the domicile of origin is acquired later by the actual removal
of an individual to another country accompanied by his animus manendi. The domicile of
origin is determined by the domicile, at the time of the child’s birth of that person
upon whom he is legally dependent. A legitimate child born in a wedlock to a living father
receives the domicile of the father at the time of the birth.
As regards change of domicile, any person not under disability may at any time change his
existing domicile and acquire for himself a domicile of choice by the fact of residing in
a country other than that of his domicile of origin with the intention of continuing to
reside their indefinitely. For this purpose residence is a mere physical fact, and means
no more than a personal presence in a locality, regarded apart from any of the
circumstances attending to it. If this physical fact is accompanied by the required state
of mind, neither its character nor its duration is in any way material. The state of mind
or animus manendi demands that the person whose domicile is the object of the enquiry
should have formed a fixed and settled purpose of making his principal or sale permanent
home in the country of his residence or, in effect, he should have formed a deliberate
intention to settle there.
29.2 Domicile for tax purposes - Criterion for determination of -
For tax purposes, domicile has a more practical meaning, in the sense of residence, the
physical presence in a country. In a majority of cases, domicile and residence coincide.
The question what ‘resident’ means is one of law to be decided according to the
meaning of the provisions of the tax laws of Contracting States and the question where a
person is resident within that meaning is one of fact. The criterion for determination of
residence may differ substantially from State to State and a person may be resident of one
State according to the criterion contained in its tax laws, may also be resident of
another State in terms of the other criterion of latter’s tax laws. Dual residence
may be the consequence resulting in taxation of global income in more than one country.
Modern agreements for avoidance of double taxation mostly, therefore, contain a special
provision to avoid dual residence by listing a number of precise criteria.
30. Tie-breaking rules for determination of residence in the case of
individual
The double taxation agreements which Pakistan have negotiated with other countries contain
tie-breaking rules for the determination of residence when the concerned person is
resident (fiscal status) of both the Contracting States in terms of the respective
income-tax laws. Such determination is made with reference to the following principles in
the same order as given below in terms of paragraph (2) of Article 4 of the UN Model:
- Situation of permanent home
- Situation of personal and economic relations (centre of vital interests)
- Situation of habitual abode
Nationality
30.1 ‘Permanent home’ - Home is something different
from domicile, being simply the location for the time being, which constitutes the centre
of gravity or the centre of vital interests of the domestic life of a person. In the case
of a married man, the home would generally be the place where his wife and children
reside, and in that of a single person it is the place where the centre of the
individual’s interests and affairs lay.
The expression ‘residence’, ‘abode’, ‘home’ or
‘dwelling place’ means a place where a individual usually lives and sleeps.
There should be some territorial connection amounting to residence must subsist between
the person and the place which must be a house or a portion of the house which could be
regarded as an abode or home. The test is that when you go to a house you should be really
going home, irrespective of whether such a dwelling place is maintained by you or by
someone else, or the house be in your or someone else’s name or belongs to you or to
that someone else. In other words with regard to that house where you go and live, you
must be able to say that it is your abode or home.
Onwership of any interest in property is not necessarily determinative of ‘home’
nor does the temporary return of a person from the country of his residence to the country
of his origin, on holidays or compassionate purpose. The determinative factor is the
existence of the centre of vital interests which gravitates a person towards it. An
intention to return to one’s country of domicile after an indefinite stay overseas
does not mean that a permanent place of abode is retained in the country of domicile. The
intention to return is but one of the factors for consideration in determining the
individual’s permanent place of abode. Even
though a person retains his home in a country (because he is not able to sell it), and has
not formed an intention to retain indefinitely in another country, the fact that he agreed
to go overseas for a three-year period is not enough to make his stay only temporary.
A person may be said to have his home in a country if he resides in it without any
intention of at present removing from it permanently or for an indefinite period. But a
person does not cease to have his home in a country merely because he is temporarily
resident elsewhere, and a person who has formed the intention of leaving a country does
not cease to have his home in it until he acts according to that intention.
30.2 Habitual abode - Mere temporary residence or residence by
compulsion at a place, however, long cannot be equated to or to be treated as a place of
ordinary residence. There should be habitual
abode. The expression ‘habitually’ means ‘respectively’ or
‘persistently’. It implies a thread of continuity stringing together similar
acts. Repeated persistent and similar, but not isolated, individual and similar acts are
necessary to justify an inference of habit. It connotes frequent commission of acts or
omission of the same king. The idea of ‘habit’ involves an element of
persistence and a tendency to repeat the acts of same class or kind.
If a person is persistently and repeatedly live at a place he can be said to be habitually
residing in that place.
How a person’s intention be gathered if that intention alone determines the permanent
home. There are not set formulae or principles which could be applied in finding out that
intention. The existence of such intention could be inferred from various circumstances
surrounding the person’s acts, through such circumstances may vary from person to
person. A circumstance which is treated decisive in one case may be relied on in the case
still another.
Long residence or purchase of land or taking of a lease or residence in furnished lodgings
or hotels, marriage with a native of the country or the presence of a man’s wife or
children in a country or the existence of a business interests or the ownership of a
properly, have been relied upon in some cases to support a finding of animus manendi,
while in others, such circumstances have been discarded. Other countless circumstances have been taken into account to
determine a person’s intention. Such circumstances though not exhaustive as pointed
out in Dicey’s Conflict of Laws are: the form and contents of a will, the exercise of
political right, the fact of neutralization the education of children, the membership of
religious and charitable associations the relations between a man and his family, his
character his social habits, and even the way in which he spells his name. A person’s
tastes, habits, conduct, actions, ambitions, health, hopes and projects are all regarded
as keys to his intentions.
Intentions cannot have a formal expression unless the conduct, the acts, and circumstances
of a person’s case point it out. Sometimes such intention is expressed in a statement
or document by that person. Declarations as to the intention are regarded in determining
the question of domicile, but they must be examined by considering the persons to whom,
the purpose for which and the circumstances in which they are made, and they must further
be fortified and carried into effect by conduct and action consistent with the declared
intention.
To sum up factors which should be taken into account in determining a permanent home are:
- Length of residence.
- Accommodation arrangement, viz. purchase of a property or taking one on lease, hiring a
furnished lodging or staying in a hotel.
- Existence of a business interests.
- Ownership of property.
- Presence of a person’s family.
- Financial ties such as bank accounts, investments, superannuation arrangements.
30.3 Nationality - Domicile, as aforesaid, means one’s
connection with territory. It does not mean connection with the membership of the
community which is at the root of the notion of citizenship or
nationality. The word ‘nationality’ means the place of bith.
The fundamental basis of a man’s nationality is by membership of an independent
political community. A man’s nationality is a continuing relationship between the
sovereign State on the one hand and the citizen on the other. This legal relationship
involves rights and corresponding duties upon both, the citizen and the State. Nationality
is, therefore, a factor to be taken it no consideration for determining the residence of a
person.
31. Residence of an entity other than individual
Section 2(40) of the Ordinance deals with residence of an individual at one end and of
a corporation like the company at the other .It also deals with residence of three
entities, viz., Hindu undivided family, firm and association of persons. The tests for the
three categories are different. Special tests have been provided for individuals, based on
residence for a certain number of days. Two alternative tests have been provided for
companies; the first being that the company is Pakistani and the other, that the control
and management of its affairs is situated wholly within Pakistan. The tests for the Hindu
undivided family, etc., is reversed which is non-resident only if the whole of its control
and management is situated without Pakistan.
31.1 Control and management - The words ‘control and
management’ have been figuratively described as ‘the head and brain’. In
case of individual this test is not necessary because his residence for a certain period
is enough; it being clear that within the taxable territories he would necessarily bring
his ‘head and brain’ with him. The ‘head and brain’ of a company is
the board of directors, and if the board of directors excercises complete local control,
then the company is also deemed to be resident. In the case of Hindu undivided family,
firm, association of persons, the control and management can be exercised by one or more
of the group. So long as control and management (even partly) is found, such person may be
treated as resident. The expression ‘control and management’ means de facto
control and management and not merely the right or power to control and manage.
31.1-1 Necessity for the test of control and management - The
necessity for the test is obvious. The income-tax law anticipated that the control and
management of the affairs of a group of persons might easily be in two or more places, one
or more members being within Pakistan and the other or others, without. To prevent the
escapement of tax and to get at the income of such persons having multiple places of
control and management, it was provided that the whole of the control and management must
be without Pakistan to avoid the implication of residence. Otherwise, different members
can manage different business in Pakistan and the person, say a Hindu undivided family
cannot be regarded as resident if the karta lived outside, an anomaly which does not
arise.
31.1-2 Meaning of the expression ‘affairs’ - The
word ‘affairs’ must mean affairs which are relevant for the purposes of Income
Tax Ordinance, 1979 and which have some relation to income." It refers to an activity
resulting in the making of income The word ‘wholly’ suggests that a Hindu
undivided family may have more than one ‘residence’ in the same way as
corporation may have.
If the control and management is wholly or partly situated in Pakistan, the assessee
should be treated as resident of Pakistan. Even if a pat of the control and management be
it even very small a part, it exercised in Pakistan, the provision is satisfied. It is
difficult to locate the situs of the control and management. the expression ‘its
affairs’ calls for an attempt to trace the assessee’s place of control and
management.
31.2 Hindu undivided family - Control and management of its affairs
In case where the Hindu undivided family or its karta controls and manages business in
the territories of Pakistan no difficulty arises. But where the family is represented by
one of its coparceners as partner in a firm, one faces some difficulty. Two questions may
arise:
- Is there any ‘affair’ of the Hindu undivided family in Pakistan in such
circumstances?
- Is the fact that the copparcener control and manages the partnership wholly or partly,
sufficient to enable one to say that the control and management of the family is located
in Pakistan?
It is settled law that a Hindu undivided family cannot be partner under the law of
partnership. Such of the coparceners who join the partnership are regarded quoad the other
partners, as individuals in their own names and rights. Yet, the benefit that arises to
them form the partnership belong to the family, and their rights are assets of family. In such a situation the matter has to be
looked at in the light of three separate and independent branches of law. They are the law
of partnership, the Hindu law and the law relating to income-tax. The implications of a
coparcener joining as partner with strangers are different when one views the matte from
the angle of the law of partnership or form the angle of the Hindu law or from the law of
income-tax. In so far as the law of partnership is concerned, the caparcenary has no place
in the partnership and the coparcener partner is everything. But, viewed from the angle of
Hindu law, the position is entirely different. Two principles have to be borne in mind
this regard. The one is, according to true notion of an undivided family in Hindu law, no
individual member of that family whilst it remains undivided can predicate of the joint
and undivided property, that he, that particular member, has a certain definite share. The
proceeds of an undivided property must be brought, according to the theory of an undivided
family, to the common chest or purse, and then dealt with according to the modes of
enjoyment by the members of an undivided family. And the second is; there is community of
interest and unity of possession between all the members of the family, and upon the death
of any one of them the other may will take the survivorship that in which they had during
the deceased’s lifetime a common interest and a common possession.
There are other principles also as, for example, the right of a coparcener to claim a
partition, or where such usage obtains, the alienate his interest, which gives rise to the
expression that a coparcener has a share. In point of Hindu law, however, a coparcener
cannot claim any item of property or even a share of it as his own, and his dealings with
the assets are, in so far as he is concerned, for the benefit of the family. The law of
income-tax makes the sole test for purpose of residence of a Hindu undivided family the
existence of ‘affairs’ and its control and management even partly in Pakistan.
It is thus plan that whilst in the eye of the law of partnership the coparcener who is
co-partner is everything, in the eye of the Hindu law he is no more than a member of a
body of owners. The word ‘affairs’ means the affairs of a Hindu undivided family
which are capable of being controlled and managed by the family as such and so where a
coparcener enters into partnership with strangers, the Hindu undivided family exercises no
controlling power of the management over the partnership.
31.3 Company - Residence of - A company normally resides at a
place where the central management and control actually abides, irrespective of the fact where business operations are carried on. The
place of business operations and the place of central management and control may or may
not be coincidental. The place of registration or incorporation of a company is not
conclusive of the place of residence, though the
place of registration may be a factor in deciding where the control is. In order to determine whether a company is resident in one place or in
another the registered office is an incident of evidence, but one has to find out what is the chief seat of management and the
centre of trading of the company in order to ascertain what is the real residence. The
real test for residence of the company is, therefore, where the ‘control and
management’ abides and the question which abets is, where does it reside.
31.3-1 Meaning of ‘control’ - The
‘control’ does not mean control of the company by means of voting power, but
control in relation to company’s business. The shareholders can, no doubt, by virtue
of their votes, control the corporation. They can compel the directors to do their will.
It does not, however, follow that the corporators are managing the corporation. the
contrary is the truth, they are not. It is the directors who are managing the affairs of
the corporation. The real business is carried
where the directors exercise their control over the company’s affairs.
However, even the dictum that the real business is carried on where
the central control and management abides, is not free from doubt. The House of Lords in
Bullock v. Unit Construction Co. Ltd held that
the place of central management and control is to be determined on the facts of each
particular case and the location of the directors and the directors’ meetings would
only be conclusive where they actually exercise the highest level of control of the
business of the company. In this case the residence of the subsidiary company was
determined by reference to the residence of the parent company which took over the
management and control of the subsidiaries from the locally based (overseas) directors.
31.3-2 Residence of company under the Income Tax Ordinance-
The Income Tax Ordinance, 1979 provides in section 2(40)(c) that a company is said to be
resident in Pakistan in any previous year if (a) it is a Pakistani company, or (b) during
that year the control and management of its affairs is situated wholly in Pakistan. The
expression ‘Pakistani company’ has been defined in section 2(26). It means a
company formed and registered under the Companies Act, 1913 (now replaced by the Companies
Ordinance, 1984).
If a company is registered in Pakistan or is otherwise a Pakistani company, it is always
to be deemed resident of Pakistan even if its control and management abides abroad. The
doctrine of the ‘control and management’ and the criterion is laid in De Beers
Consolidated Mines Ltd. v. Hawe (Surveyor of Taxes). What
is given the statutory recognition, for determination of the residential status,
becomes applicable’ only if a company is not a Pakistani company within the meaning
of the Pakistani Companies Ordinance. As a result of the provisions of the Companies
Ordinance and the Income Tax Ordinance, a company must inevitably and always be resident
at its registered office. Thus a company regulated by the Companies Ordinance has a
residence (though not necessarily a sole residence) analogous to the residence of an
individual, at its registered office. This, however, does not mean that there are two
tests for establishing the residential status, one, for the foreign companies, i.e., the
place of incorporation. The same principle should be applied to all companies, namely they
are residents where central control is situate. If this test is uniformly applied, a
company registered in Pakistan could yet be non-resident.’ The Legislature
contemplated this situation and therefore gave residential status statutorily, if a
company is registered in Pakistan.
There could be a situation that a Pakistani company could be resident abroad (because of
the existence of its control and management there) as well as resident of Pakistan
(because of its incorporation here). Such a company enjoys dual residence. The concept of
dual residence as applicable to companies is analogous to the concept as applicable to
individual. like an individual, the company could reside in two place at the same time.
In applying the conception of residence to a company, one should proceed as nearly as we
can upon the analogy of an individual. A company cannot eat or sleep, but it can keep
house and do business. It is, therefore, necessary to see whether it really keeps house
and does business. An individual may be of foreign nationality, and yet reside in
Pakistan. So may a company. Otherwise, it might have its chief seat of management and its
centre of trading in Pakistan under the protection of Pakistani law, and yet escape the
appropriate taxation by the simple expedient of being registered abroad and distribution
its dividends abroad. A company resides for purposes of income-tax where its real business
is carried on. The real business is carried on where the central management and control
actually abides, which sometimes has been stated
in the form ‘;head, seat and directing power’. The question depends on the fact
of the management and not on the physical situation of the thing that is managed A company
is managed by the board of directors and if the meetings of the board of directors are
held with Pakistan, it may be said that the central control and management is situated
here. The direction, management and control ‘the head and seat and directing
power’ of a company’s affairs is, therefore, situate at the place where the
directors’ meetings are held and, consequently, a non-Pakistani company would be
resident in this country if the meetings of the directors who manage and control the
business are held here. the word ‘affairs’ means affairs which are relevant for
the purpose of the Income tax Ordinance and which have some relation to the income sought
to be assessed. It is not the bare possession of powers by the directors, but their taking
part in or controlling the affairs relating to the trading, that is of importance in
determining the question of the place where the control is exercised. They must exercise
their power of control in relation to business or activity wherefrom the profit is derived.
31.3-3 Dual residence of a foreign company, effective control -
In case of foreign companies, there could be quality of residence. A limited company can
contemporaneously have more than on residence. The control and management can be divided. A company be controlled in two places. A company
may do such acts within one country as causes it to be liable as resident to income-tax
without excluding the possibility that it may also be held resident in another country for
the same or another purpose the criterion for
determination of the residence is to explore where the central management and control
abides. The place to be searched for that purpose be not only where final and supreme
authority over the company’s affairs resides. The central management and control of a
company does not depend upon the power of the supreme command or final arbitrament alone
but could be found if some substantial business operations exist in a given country. Thus the company may be incorporated in a foreign
country where its general meetings are held and its accounts kept and audited. The real
and ultimate control over its activities and general policy is decided by the majority of
directors in another country, say Pakistan, where they reside. The minority may meet in
the foreign country who have such final control. Since some part of superior and directing
authority is found in the meetings of the directors (minority) in foreign country, the
company can be said to have dual residence as its central management and control is
divided.
The control and management could be divided and may abide in more than one place, could
also be inferred form a reading of section 2(40) (c) of the Income tax Ordinance, 1979. It
says, inter alia, that a company could be said to resident in Pakistan in the income year,
if during that year, the control and management of its affairs is situated wholly in
Pakistan. When the section refers to the control and management being wholly situated in
Pakistan, it implies that the control and management can be situated in more places than one.
The word ‘wholly’ used in section 2(40)(c) or in section 2(40)(b) does not mean
‘exclusively’. When the section referes to the control and management of its
affairs being situated wholly in Pakistan, it may mean power of the supreme command or
final arbitratment.
There are three-tires of the control of a company:--
Policy
Management
Administration
It is mainly with reference to the first that the control and management of the
company’s affairs is spoken of. But some decisions and directions are also needed for
the management and administration of the company’s day-to-day affairs and for that
matter superior and directing authority has been vested in some of the minority of
directors who reside at the place of business operations of the company, who have no final
control, the exercise of such authority cannot be equated with the controlling and the
directing power, the head and brain of the company.
As for Pakistan, in terms of section 2(40)(c) the principles which could be culled up from
those as established in England as enunciated in Swedish Central Railway Co. Ltd. v. Thompson, are as follows.
- The conception of residence in the case of fictitious person, such as a company, is a
artificial as the company itself and the locality of the residence can only be determined
by analogy, by asking where is the head and seat and directing power of the affairs of the
company. Control and management signify the controlling and the directing power, the head
and the brain as it s sometimes called, and ‘situated implies the functioning of such
power at a particular place with some degree of permanence, while ‘wholly would seem
to recognise the possibility of the seat of such power being divided into two distinct and
separate places. As a general rule, the control and management of a business remains in
the hands of a person or group of persons and the question to be asked is wherefrom the
person or group of persons controls or directors the business.
- Mere activity by the company in a place does not create residence with the result that a
company may be ‘residing’ in one place and doing a great deal of business in
another.
- The central management and control of a company may be divided and it may keep house and
do business in more than one place, and if so, it may have more than one residence.
In case of dual residence it is necessary to show that the company performs some of the
vital organic functions incidental to its existence as such in both the places, so that in
fact there are two centres of management.
31.3-4 Residence of a foreign company in liquidation - The
test to be applied for determination of the residence of a foreign company in liquidation
is the same as for others, namely, where control and management of its affairs abide. The
word ‘affairs’ means affairs which are relevant for the purposes of the Income
tax Ordinance, 1979 and which have some relation to the income sought to be assessed.
Under section 321 of the Companies Ordinance, on a winding up order being made in respect
of a company, the official liquidator shall, by virtue of his office, become the
liquidator of the company. Under section 76 of the Income Tax Ordinance, 1979, every
liquidator of a company which is being wound up, whether official liquidator, provisional
liquidator or others, must within 30 days of his becoming a liquidator give notice of his
appointment to the income-tax authority who is entitled to assess the income of the
company. Section 330 of the Comapneis Ordinance, 1984 provides that upon the appointment
of a liquidator, he becomes the custodian of the company’s property. the
company’s assets are to be treated as being in the custody of the court. Section 333
of that Ordinance enumerates the powers of the official liquidator. Section 338 of the
Companeis ordinance, 1984 provides that on the appointment of a liquidator, all the powers
of the board of directors, and of the managing or whole-time directors and manager, if
there be any of these, shall cease. The position of the official liquidator is essentially
that of an agent employed for the purpose of the winding-up of the company. the Indian
Supreme Court in the case of Hari Prasad Jayantilal & Co. V. V.S. Gupta, ITO has observed that the property of the company does
not vest in the liquidator; it continues to remain vested in the company. On the
appointment of a liquidator; all the powers of the board of directors and of the managing
or whole-time directors, managing agents, secretaries and treasurers cease (section 338)
and the liquidator may exercise the powers mentioned in section 333, including the power
to do such things as may be necessary for winding-up the affairs of the company and
distributing its assets. The liquidator appointed in a members’ winding-up is merely
an agent of the company to administer the property of the company for purposes prescribed
by the statute. In distributing the assets including accumulated profits, the liquidator
acts merely as an agent or administrator for and on behalf of the company.
For the purpose of winding-up, foreign companies are treated as unregistered companies.
Section 443 of the Companies Ordinance, 1984 provides that an unregistered company will
include companies incorporated outside Pakistan. Section 444 of the Companies Ordinance
provides for the winding-up of an unregistered company. All the provisions of the
Companies Ordinance with respect to winding-up shall apply to an unregistered company with
the exceptions and additions of section 446. Therefore, upon the winding-up of the foreign
company, the board of directors ceases to exist in terms of section 378 of the Companies
Ordinance. The liquidator exercises the powers and discharges the duties as enumerated in
section 333.
The liquidator exercises certain powers with the sanction of the court, but all the powers
exercisable by him under section 333 of the Companies Ordinance, 1984 are subject to the
control of the court. Sanction of the court may be obtained before or after the exercise
of power. If the court, however, does not accord sanction, the exercise of the power by
the liquidator will have no effect at all. The Court exercises control over the acts and
deeds of the liquidator and the method and manner of exercise of power by the liquidator.
The control and management of the affairs of the company in liquidation vests in the
liquidator, who is only empowered to do all acts and deeds for winding-up the affairs of
the company subject to sanction and/or control of the court.
If a foreign company has sources of income situated in Pakistan, and has undergone in
liquidation, the affairs relating to earning of such income is controlled and managed in
Pakistan by the official liquidator. By virtue of the provisions of the Companies
Ordinance, 1984, the liquidator has not the right or power to control and manage the
affairs of the foreign company in liquidation. Thus, a company in liquidation must be
deemed to be resident in Pakistan, in terms of section 2(40)(c).
