Supreme Court on Business Continuity During Period of Inactivity: “Temporary Lull” Does Not Mean Cessation of Business.

Headnote:

The Supreme Court held that a temporary lull or suspension in business activities does not amount to cessation of business for the purpose of claiming deductions under Sections 37(1), 71, and 32(2) of the Income Tax Act, 1961. The Court ruled that a non-resident company may still be “carrying on business” in India even without a permanent establishment, provided its conduct reflects an intent to continue business operations. The judgment clarifies that business continuity can be inferred from efforts to obtain contracts and maintain commercial engagement, even during inactive periods.

Background:

Appellant: Pride Foramer S.A., a French company engaged in offshore oil drilling.

Facts:

Held a 10-year drilling contract with ONGC from 1983–1993.

No active drilling contract between 1993–1998 but maintained correspondence and bid submissions with ONGC, including a 1996 tender.

In 1999, secured a new drilling contract with ONGC.

Claimed business expenditure and set-off of unabsorbed depreciation during the interim period.

Dispute: The Assessing Officer and CIT (Appeals) disallowed the deductions, holding the company was not carrying on business in India during those years.

ITAT’s View: Reversed the disallowance, treating the period as a “temporary lull” and not cessation of business.

High Court’s View: Set aside ITAT’s order, holding absence of contracts or permanent establishment meant no business was being carried on in India.

Court’s Observations:

1. A business may experience a temporary discontinuance without implying complete cessation.
2. The appellant’s continuous correspondence with ONGC and submission of bids demonstrated intent to carry on business.
3. The absence of a permanent establishment in India does not preclude a finding that a foreign company is carrying on business in India.
4. The High Court erred by adopting an unduly narrow interpretation inconsistent with global trade practices and India’s economic commitments.
5. Cited CIT v. Vikram Cotton Mills and Malayalam Plantations Ltd. to underline that “for the purpose of business” extends beyond immediate profit-making to include activities incidental to maintaining and preserving business interests.

Legal Provisions Discussed:

1. Section 37(1), Income Tax Act, 1961: Deduction for business expenditure wholly and exclusively for business purposes.
2. Section 32(2): Carry forward and set-off of unabsorbed depreciation, subject to business continuity.
3. Section 71: Set-off of loss from one head against income from another.
4. Sections 4, 5(2), and 9(1)(i): Taxation of income deemed to accrue or arise in India for non-resident entities.

Decision:

1. Appeals allowed;
2. Judgment of the Uttarakhand High Court set aside;
3. Orders of the ITAT restored;
4. Assessing Officer directed to pass fresh assessment orders consistent with ITAT’s findings.

Citation: 2025 INSC 1247

Case: Pride Foramer S.A. v. Commissioner of Income Tax & Anr.

Court: Supreme Court of India

Coram: Justice Manoj Misra & Justice Joymalya Bagchi

Civil Appeal Nos.: 4395–4397 of 2010