Summary
| Category | Data |
|---|---|
| Court | Supreme Court of India |
| Case Number | C.A. No.-004395-004397 – 2010 |
| Diary Number | 27446/2009 |
| Judge Name | HON’BLE MR. JUSTICE SURYA KANT |
| Bench |
HON’BLE MR. JUSTICE SURYA KANT HON’BLE MR. JUSTICE JOYMALYA BAGCHI |
| Concurring or Dissenting Judges | HON’BLE MR. JUSTICE MANOJ MISRA (concurring) |
| Precedent Value | Binding on all courts |
| Overrules / Affirms |
|
| Type of Law | Income Tax – Business expenditure deductions and depreciation carry-forward |
| Questions of Law | Whether a non-resident company can be deemed to carry on business in India, despite a gap in contracts and absence of a permanent establishment, so as to claim deductions under Sections 37(1) and 32(2) read with Section 71 of the Income Tax Act. |
| Ratio Decidendi (3–8 sentences) | The Court held that a temporary suspension of contracts (a “lull in business”) does not equate to cessation of business where correspondence, bids and preparatory steps demonstrate an intention to resume operations. “Business” under Section 37(1) is broadly defined and includes acts incidental to carrying on a trade. A non-resident need not have a permanent establishment in India to be treated as carrying on business under Sections 4, 5(2) and 9(1)(i). Consequently, expenses wholly and exclusively incurred during the lull and unabsorbed depreciation are deductible under Section 37(1)/Section 71 and carry-forward under Section 32(2). |
| Judgments Relied Upon |
|
| Logic / Jurisprudence / Authorities Relied Upon by the Court | The Court distinguished “lull in business” from “cessation of business,” applied the wide meaning of “business” in tax law, and undertook a combined reading of charging provisions (Sections 4, 5(2), 9(1)(i) & 28). It stressed that DTAA concepts of permanent establishment are irrelevant to domestic charging provisions. |
| Facts as Summarised by the Court | The appellant, a France-incorporated oil-drilling company, held an ONGC contract until 1993, then secured a new contract only in 1998/99. Between 1993–98 it maintained correspondence and submitted a 1996 bid, incurring administrative and professional expenses and claiming carry-forward of unabsorbed depreciation. The AO and CIT(Appeals) disallowed deductions for lack of business activity; ITAT reversed; High Court reinstated disallowance; Supreme Court restored the ITAT view. |
Practical Impact
| Category | Impact |
|---|---|
| Binding On | All subordinate courts |
| Overrules | Uttarakhand High Court’s orders disallowing deductions on lull-in-business grounds |
| Follows | ITAT’s finding that a temporary lull does not amount to cessation; Hindustan Chemical Works |
What’s New / What Lawyers Should Note
- Clarifies that gaps in contracts and foreign-office correspondence can still constitute carrying on business in India for Sections 37(1) and 32(2) claims.
- Reaffirms the distinction between a “lull in business” and a complete cessation of business activity.
- Holds that absence of a permanent establishment is not determinative of business carry-on for domestic taxation purposes under Sections 4, 5(2) and 9(1)(i).
- Confirms that evidence of ongoing bids, correspondence and preparatory expenditures suffices to demonstrate business intent.
- Establishes a binding precedent for assessing tax deductions and depreciation carry-forward for non-resident entities.
Summary of Legal Reasoning
- Reviewed Sections 37(1), 71 and 32(2): entitlement to deduct expenses and carry forward depreciation requires demonstrating carrying on business.
- Analyzed ITAT’s application of Hindustan Chemical Works Ltd. distinguishing “lull” vs “cessation.”
- Interpreted “business” broadly—acts incidental to trade, including bids and correspondence, qualify.
- Examined charging provisions (Sections 4, 5(2), 9(1)(i) & 28): a non-resident is taxed on income from any business connection in India, irrespective of a permanent establishment.
- Concluded that continuous correspondence and bids during the interregnum evidence ongoing business and justify the claimed deductions and depreciation carry-forward.
Arguments by the Parties
Petitioner (Appellant):
- Maintained business intent through continuous correspondence and a 1996 bid with ONGC.
- “Lull” in securing a contract does not equate to business cessation.
- Expenses incurred were wholly and exclusively for business and depreciation carried forward was in compliance with Section 32(2).
- Absence of a permanent establishment in India does not preclude carrying on business under the Income Tax Act.
Respondent (Department):
- No subsisting contract or permanent office in India during relevant years.
- Lack of business activity disentitles the appellant from claiming deductions under Section 37(1) and carry-forward under Section 32(2).
Factual Background
Between 1993 and 1998 the appellant—a French oil-drilling contractor—had no active drilling contract in India but maintained ongoing correspondence and submitted a tender to ONGC, incurring administrative and professional expenses and carrying forward unabsorbed depreciation. It filed returns claiming these deductions against NIL business income (other than interest on tax refunds). The AO and CIT(A) disallowed the claims for lack of business activity, the ITAT allowed them as a “lull in business,” the Uttarakhand High Court reversed, and the Supreme Court restored the ITAT’s view.
Statutory Analysis
- Section 37(1): allows deduction of expenditure wholly and exclusively for business or profession.
- Section 71: permits set-off of business losses against other heads of income.
- Section 32(2): authorizes carry-forward of unabsorbed depreciation if the business continues.
- Sections 4 & 5(2): charge domestic tax on global income as per residential status.
- Section 9(1)(i): deems income through or from any business connection in India to accrue in India.
- The judgment clarifies that none of these provisions mandate a permanent establishment for non-resident carry-on status.
Alert Indicators
- ✔ Precedent Followed – Affirms established principle distinguishing temporary business lulls from cessation.