Supreme Court: Temporary Commercial Lull Cannot Deny Income Tax Deductions to Non-Resident Company

Pride Foramer S.A., a French non-resident drilling company, had carried out offshore drilling operations for ONGC from 1983 to 1993. After completion of the earlier contract, the company did not secure a new drilling contract until October 1998. During the intervening years, the company remained in communication with ONGC from Dubai and France, submitted a bid in 1996, incurred administrative and consultancy expenses, and pursued tax refunds before the Income Tax Department. In its returns for AYs 1996-97, 1997-98 and 1999-2000, it declared only interest on tax refunds as income and claimed deduction of business expenditure and set-off of unabsorbed depreciation carried forward from prior years.

The Assessing Officer and CIT(A) disallowed the claims, holding that the business had ceased in India during those years since the assessee had no drilling contract or permanent establishment. The ITAT reversed these findings, ruling that the company’s activities amounted to only a temporary lull and not a cessation of business, and therefore allowed expenditure under Section 37 and carry-forward of depreciation under Section 32(2).

HC Held: The High Court, however, reinstated the disallowance on the ground that the absence of a contract and permanent establishment meant no business was being carried on.

Issue Before Court: Whether, in the absence of an active drilling contract or permanent establishment during the relevant assessment years, the assessee could still be considered to be carrying on business so as to claim business expenditure under Section 37 and carry forward unabsorbed depreciation under Section 32(2).

Supreme Court Held: The Hon’ble Supreme Court held that the assessee was indeed carrying on business during the relevant period. The Court emphasised that business includes all organised activities undertaken with a commercial intent, and that a temporary lull, due to commercial circumstances, does not amount to cessation. Continuous correspondence with ONGC, pursuit of tenders, follow-up consultancy payments, and participation in the 1996 bid all showed a clear intention to keep business operations in India. The Tribunal’s factual findings were upheld as consistent with established principles under Vikram Cotton Mills and Malayalam Plantations.

The Court also rejected the High Court’s view that the absence of a permanent establishment precluded business activity. It clarified that the Income Tax Act does not require a non-resident to maintain a physical office in India to be treated as carrying on business; a business connection under Section 9(1)(i) is sufficient. Holding the High Court’s reasoning as overly restrictive and inconsistent with modern cross-border commerce, the Supreme Court restored the ITAT orders and directed fresh assessments in accordance with those findings.

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