The Supreme Court has ruled that a lull in operations does not amount to business activities of an organisation ceasing and the entity can continue to show on its books “business expenditure” and “unabsorbed depreciation costs”.
In a ruling on October 17, the court held that as long as the company concerned made efforts to revive the business and pursue its stated trade, it remained “in business” for tax purposes.
In its ruling, it upheld the plea of oil-drilling company Pride Foramer SA, which claimed business expenditure and unabsorbed depreciation for the assessment years 1996-97, 1997-98, and 1999-2000.
As a result of this judgment, it can set off business expenditure against income from other sources and carry forward unabsorbed depreciation for the relevant years.
“In an era of globalisation whose life blood is transnational trade and commerce, the (Uttarakhand) 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 goals relating to ‘ease of doing business’ across national borders,” the court said.
A two-judge Bench of Justice Manoj Misra and Justice Joymalya Bagchi set aside the Uttarakhand High Court’s decision that had disallowed the claims, and upheld the view of the Income Tax Appellate Tribunal (ITAT).
The Supreme Court held that a “mere failure to procure a business contract or maintain a permanent establishment in India is not a sine qua non to demonstrate the assessee’s intention to carry on business,” and that the facts of the case “evinced a clear intention to continue business operations”.
The company, a non-resident entity incorporated in France, had executed a 10-year drilling contract with Oil and Natural Gas Corporation (ONGC) between 1983 and 1993. After the contract expired, it failed to secure a new one until 1998. During this interim period, the firm maintained regular business correspondence with ONGC, bid for contracts, and incurred administrative and professional expenses.
The assessing officer and the commissioner (appeals) had disallowed deductions under Section 37 of the Income Tax Act, 1961, and denied carry-forward of depreciation under Section 32(2) on grounds that the company was not carrying on business in India at the time.
The ITAT, however, disagreed and held that the gap represented a “lull in business” rather than a permanent closure. The tribunal allowed the deduction of expenses and depreciation, a finding that the high court later overturned.
The Supreme Court has reiterated that the term “business” has a wide import, encompassing day-to-day operations and activities incidental to carrying on business.
“From the standpoint of a prudent businessman, if the conduct evinces an intention to carry on business, mere failure to obtain a contract by itself would not be a determining factor to hold the appellant had ceased business,” the court observed.
Manish Garg, lead at tax firm AKM Global, said: “The court has recognised that as long as an enterprise remains engaged in efforts to pursue its business objects, it continues to be ‘in business’ for tax purposes. The court further established that temporary inactivity or an absence of contracts did not terminate the business for the purpose of claiming a setoff under Section 71 (of the Income Tax Act).”
The ruling, he said, provides relief to entities with overseas operations that face project-based cycles. It ensures that business continuity even during non-operational phases, remains recognised under the Income-tax Act. The decision is likely to impact assessments where revenue authorities have disallowed setoffs citing “discontinuance of business”.
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