Parameters to be considered for transactions are in ordinary/normal course of the business

Generally the transactions which are considered in normal course of business includes any transaction carried out for promoting or in the line of achieving the business objective mentioned in the charter of the company i.e. Memorandum of Association of the company. To carry on a business, several activities are carried on by the company; all such activities will be considered to be in the ordinary course of business.

To decide whether an activity which is carried on by the business is in the ‘ordinary course of business’, the following factors may be considered:

  • Whether the activity is covered in the objects clause of the Memorandum of Association
  • Whether the activity is in furtherance of the business
  • Whether the activity is normal or otherwise routine for the particular business (i.e. activities like advertising, staff training, etc.)
  • Whether the activity is repetitive/frequent in nature
  • Whether the income, if any, earned from such activity/transaction is treated as business income in the company’s books of account
  • Whether the transactions are common in the particular industry
  • Whether there is any historical practice to conduct such activities business
  • Revenue generated by the activity
  • Resources committed to the activity

The above list is not exhaustive. Individually, none of the above parameters can amounts to the transactions being in the ordinary course of business.

In certain matter it was held that the Memorandum of Association is not conclusive for deciding whether an activity is in the ordinary course of business of the company. Frequency of the activity is also to be considered. It should be a continuous activity.

Further if any activity is included in the Memorandum of Association, the activity does not become an activity in the ordinary course of business of the company. However, the position will be different based on the facts of the case.

In other words, any activity which is routine and in accordance with the usual customs and practices of a particular business can be described to be ‘in the ordinary course of business’.  For a company, the interpretation needs to be considering the nature of the activity and its relevance in the overall context of the company’s businesses.

The Act does not clearly lay down tests for determining whether a transaction is in the ordinary course of business.

The Memorandum of Association of the company should be referred to for ascertaining whether the activity is covered in the objects clause therein. This is not a conclusive test but will assist in determining whether a transaction is in the ordinary course of business or not. Some business customs, transactions, nature etc is also to be considered for determining the normal course.

Disclaimer:-This material and the information contained herein are intended to provide general information on a particular subject. Before making any decision or taking any action you should consult a qualified professional adviser. Author shall not be responsible for any loss whatsoever sustained by any person who relies on this material.

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Qualification: CS
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Location: Ahmedabad, Gujarat, IN
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