The Supreme Court of India, in a significant ruling on corporate tax law, has held that a temporary lull in business activity, during which a company continues its efforts to secure new contracts, does not amount to a cessation or discontinuance of its business. A bench comprising Justice Manoj Misra and Justice Joymalya Bagchi also clarified that it is not mandatory for a non-resident assessee to have a permanent establishment in India to be considered as “carrying on business” for the purposes of the Income Tax Act, 1961.
The Court set aside a judgment of the Uttarakhand High Court and allowed the appeals filed by Pride Foramer S.A., a non-resident French company. The decision permits the company to claim deductions for business expenditure under Section 37 and carry forward unabsorbed depreciation under Section 32(2) of the Act for a period when it had no active drilling contract in India.
Background of the Case
The appellant, Pride Foramer S.A., is a non-resident company based in France engaged in oil drilling activities. The company had a 10-year contract for drilling operations with ONGC in offshore Mumbai from 1983 to 1993. After this contract ended, there was an interregnum period until the company was awarded another contract in October 1998, which was formalized in January 1999.
During the relevant assessment years (1996-97, 1997-98, and 1999-2000), which fell within this interregnum, the appellant had no active drilling contract. However, it maintained business correspondence with ONGC from its offices in Dubai and France and submitted a bid for oil exploration in 1996. For these years, the appellant filed ‘NIL’ income tax returns, with the only credited income being interest received on income tax refunds. Against this, the company claimed deductions for business expenditures such as administrative charges and audit fees, and also sought to set off unabsorbed depreciation from previous years.
Decisions of Lower Tax Authorities
The Assessing Officer (AO) disallowed the deductions, reasoning that the appellant was not carrying on any business in India during the relevant period. This finding was upheld by the Commissioner of Income Tax (Appeals).
However, the Income Tax Appellate Tribunal (ITAT) reversed these orders. The ITAT held that a “temporary lull in business for whatever reason cannot be termed as cessation of business.” It observed that the evidence, including correspondence with ONGC and a tender submission in 1996, proved the company’s intention to continue its business. The ITAT noted, “there is a marked distinction between ‘lull in business’ and ‘going out of business’. A temporary discontinuance of business may, in certain circumstances, give rise to an inference that a business is going through a lean period of transition and it could be revived if proper circumstances arise.”
The ITAT also dismissed the revenue authorities’ contention that the absence of a permanent establishment in India meant the business had been discontinued, stating that a company can be in business “de hors’ the permanent establishment.”
High Court’s Ruling
The Income Tax Department appealed the ITAT’s decision to the High Court of Uttarakhand. The High Court reversed the ITAT’s findings. While agreeing with the general proposition that a mere lull does not mean cessation of business, the High Court concluded, “…when the assessee has neither permanent office, nor any other office in India, nor any contract was in execution during the relevant period, it cannot be said that they were in business in India, as such, it cannot be said that assessee was entitled to set off claimed by it under Section 71 of the Act.”
Supreme Court’s Analysis and Decision
The Supreme Court framed the central issue as: ‘Whether, in the facts of the case, the appellant can be said to have been carrying on business during the relevant period, so as to avail deduction of business expenditure under Section 37(1) read with Section 71 of the Act, and carry forward unabsorbed depreciation of previous years under Section 32(2) of the Act?’
The bench, authored by Justice Bagchi, observed that to avail these benefits, the appellant had to demonstrate it was carrying on business in India. The Court found that ample materials, including continuous business correspondences with ONGC and an unsuccessful bid in 1996, showed the appellant’s intent to continue its business activities.
The Court stated, “If such conduct, from the standpoint of a prudent businessman, evinces intention to carry on business, mere failure to obtain a business contract by itself would not be a determining factor to hold the appellant had ceased its business activities in India.”
The judgment affirmed the ITAT’s view, noting, “The Tribunal rightly noted a business going through a lean period of transition which could be revived if proper circumstances arose, must be termed as lull in business and not a complete cessation of the business.”
Critically, the Supreme Court held that the High Court had misdirected itself by inferring that the absence of a permanent establishment in India meant the appellant was not carrying on business. The bench explained that a combined reading of Sections 4, 5(2), and 9(1)(i) of the Income Tax Act makes it clear that a non-resident is liable to pay tax on income deemed to accrue or arise in India from any “business connection,” and none of these provisions mandate the existence of a permanent establishment.
The Court termed the High Court’s view as “wholly fallacious” and “anachronistic,” stating, “In an era of globalisation whose life blood is trans-national trade and commerce, the High Court’s restrictive interpretation that a non-resident company making business communications with an Indian entity from its foreign office cannot be construed to be carrying on business in India is wholly anachronistic with India’s commitment to Sustainable Development Goal relating to ‘ease of doing business’ across national borders.”
For these reasons, the Supreme Court allowed the appeals, set aside the judgment of the High Court, and revived the orders passed by the ITAT. The Assessing Officer was directed to pass fresh Assessment Orders in accordance with the ITAT’s decision.
