Non‑resident company is in business despite lull; SC revives ITAT holdings on deductions and depreciation

A Bench of Justices Joymalya Bagchi and Manoj Misra heard appeals arising out of Income Tax assessments for the years 1996‑97, 1997‑98 and 1999‑2000 challenging a Uttarakhand High Court order which had set aside the Income Tax Appellate Tribunal’s findings and disallowed business expenditure deductions under Section 37 and carry forward of unabsorbed depreciation under Section 32(2) of the Income Tax Act.

The Court allowed the appeals, set aside the High Court judgment and restored the ITAT orders which had found that the appellant, a non‑resident French drilling company, had not ceased business in India despite an interregnum between contracts and was entitled to claim the contested deductions and carry forward depreciation. The Court observed that whether a failure to procure a contract amounted to cessation of business “must be construed from the appellant’s conduct” and that a temporary discontinuance could amount only to a “lull in business” and not termination. The Court, in its reasoning, observed: Background: The appellant, Pride Foramer S.A., was a non‑resident company incorporated in France engaged in oil‑drilling activities and had executed a ten‑year contract with ONGC from 1983 to 1993. No fresh contract was in force until a new contract was awarded in October 1998 and formalised in January 1999. In the intervening years the company maintained correspondence with ONGC from its Dubai office and France, submitted a bid in 1996, and incurred administrative, audit and consultancy expenses while declaring nil business income (save interest on tax refunds). The Assessing Officer and the CIT(A) held that the appellant was not carrying on business in India and disallowed deductions and carry forward of unabsorbed depreciation. The ITAT reversed, concluding that the facts evidenced an intention to continue business and that a temporary lull did not amount to cessation; it held that expenses could be set off under Section 71 against income from other sources and allowed carry forward of depreciation under Section 32(2). As the Tribunal put it, there was “a marked distinction between ‘lull in business’ and ‘going out of business’.” The High Court, however, remanded and ultimately concluded that absence of a permanent office or subsisting contract precluded a finding of business in India.

The Supreme Court analysed Sections 37(1), 71 and 32(2) and rejected the High Court’s restrictive approach that a non‑resident must maintain a permanent establishment or an ongoing contract in India to be “in business.” It held that liability to tax and the characterisation of income depended on the Act’s charging provisions (Sections 4, 5(2) and 9(1)(i)) and that absence of a permanent establishment for DTAA purposes did not preclude a finding of business activity in India. The Court concluded that the appellant’s conduct — continuous bids, correspondence and expenditure aimed at securing contracts — showed acts incidental to carrying on business and that the High Court erred in disallowing the claims. The appeals were allowed, the High Court order was set aside, the ITAT orders were restored, and the Assessing Officer was directed to pass fresh assessment orders in terms of the ITAT.

Case No.: Civil Appeal Nos. 4395‑4397/2010; 2025 INSC 1247 Case Title: Pride Foramer S.A. v. Commissioner of Income Tax & Anr. Appearances: For the Petitioner(s): [Not indicated in the judgment] For the Respondent(s): [Not indicated in the judgment]