The Supreme Court held that a temporary lull in business activities does not amount to cessation of business. The absence of a permanent establishment or a subsisting contract is not determinative; continuous business efforts, such as correspondence and bidding, suffice to constitute “carrying on business” for claiming deductions under Sections 37 and 71 and carry-forward of depreciation under Section 32(2) of the Income Tax Act.
Facts Of The Case:
The appellant, Pride Foramer S.A., a French non-resident company engaged in oil drilling, was awarded a 10-year contract by ONGC in 1983, which concluded in 1993. A subsequent drilling contract was awarded only in October 1998, formalized in January 1999. During the interregnum assessment years (1996-97, 1997-98, 1999-2000), the company had no active drilling contract in India. However, it maintained continuous business correspondence with ONGC from its offices in Dubai and France regarding manpower supply for deep-water drilling and submitted a bid in 1996. The company filed ‘Nil’ income returns for these years, showing only interest income from tax refunds under the head ‘Income from Business’. It claimed deductions for administrative expenditures and sought to set off unabsorbed depreciation carried forward from earlier years. The Assessing Officer and CIT(A) disallowed these claims, holding the company was not carrying on any business in India during this period. The ITAT reversed this, concluding it was merely a “lull in business.” The High Court, however, set aside the ITAT’s order, ruling that without a permanent office or an executing contract in India, the company was not carrying on business.
Procedural History:
The procedural history of the case commenced with the Assessing Officer and the Commissioner of Income Tax (Appeals) disallowing the appellant’s claims for business expenditure and carry-forward of unabsorbed depreciation for the assessment years in question. The Income Tax Appellate Tribunal (ITAT) subsequently reversed these findings, holding that the appellant was in a period of business lull, not cessation. The Revenue Department then appealed to the High Court of Uttarakhand, which set aside the ITAT’s orders and restored the findings of the CIT(A). The appellant’s further appeal to the Supreme Court culminated in the impugned judgment, wherein the Apex Court allowed the appeals, set aside the High Court’s order, and revived the orders passed by the ITAT.
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Court Observation:
The Supreme Court made several key observations. It emphasized the distinction between a temporary “lull in business” and a complete “cessation of business,” noting that a lean period with efforts to revive operations does not terminate business continuity. The Court held that the absence of a subsisting contract or a permanent establishment in India is not determinative of whether a business is being carried on. It found that the appellant’s continuous correspondence with ONGC and submission of a bid constituted genuine business activities aimed at securing work, even if unsuccessful. Furthermore, the Court rejected the High Court’s restrictive interpretation, stating that in an era of globalization, a non-resident company can carry on business in India through communications from a foreign office without a physical presence, and the concept of a permanent establishment is relevant primarily for Double Tax Avoidance Agreements, not for establishing business existence under the Income Tax Act.
Final Decision & Judgement:
The Supreme Court allowed the appeals, setting aside the judgment of the High Court of Uttarakhand. It held that the appellant was carrying on business during the relevant assessment years, as evidenced by its continuous business efforts and correspondence with ONGC, which constituted a mere lull and not a cessation. Consequently, the Court revived the orders of the Income Tax Appellate Tribunal, entitling the appellant to claim deductions for business expenditure under Section 37(1) read with Section 71 of the Income Tax Act, 1961, and to carry forward unabsorbed depreciation under Section 32(2). The Assessing Officer was directed to pass fresh assessment orders in terms of the Tribunal’s decision.
Case Details:
Case Title: Pride Foramer S.A. vs. Commissioner of Income Tax & Anr. Citation: 2025 INSC 1247 Appeal Number: Civil Appeal Nos. 4395-4397 of 2010 Date of Judgement: October 17, 2025 Judges/Justice Name: Justice Manoj Misra and Justice Joymalya Bagchi