Apex court says firms remain ‘in business’ for tax purposes even during temporary inactivity if efforts to continue operations are evident
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The company, a non-resident entity incorporated in France, had executed a ten-year drilling contract with Oil and Natural Gas Corporation (ONGC) between 1983 and 1993. (Photo:PTI)
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The Supreme Court of India has ruled that a temporary lull in business does not amount to cessation of business activities and that a company can therefore claim business expenditure and unabsorbed depreciation costs.
In a ruling on October 17, the apex court held that as long as the company remains engaged in efforts to revive the business and pursue its stated trade, it remains “in business” for tax purposes. The court ruled in favour of oil drilling company Pride Foramer SA, which sought to claim business expenditure and unabsorbed depreciation for the assessment years 1996–97, 1997–98, and 1999–2000.
“In an era of globalisation whose lifeblood 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 the Sustainable Development Goal relating to ‘ease of doing business’ across national borders,” the court said.
Bench sets aside High Court order, upholds ITAT’s view
A two-judge Bench of Justices Manoj Misra and 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 court held that “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 ten-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.
Court reaffirms wide interpretation of ‘business’ under tax law
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), reasoning 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 deduction of expenses and depreciation, a finding that the High Court later overturned.
Reversing the High Court, the Supreme Court reiterated that the term “business” has a wide import, encompassing day-to-day operations and activities incidental to carrying on business.
“If conduct, from the standpoint of a prudent businessman, evinces 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.
Transitional phase not business closure, rules Supreme Court
The judgment also underlined that a transitional phase cannot be equated with business closure. As a result, Pride Foramer can set off business expenditure against income from other sources under Section 71 and carry forward unabsorbed depreciation for the relevant years.
“The Supreme Court’s ruling underscores a vital principle that a mere halt in commercial activity does not mean a business has ceased to exist. 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 Supreme Court further established that temporary inactivity or absence of contracts does not terminate the business for the purpose of claiming a set-off under Section 71,” said Manish Garg, lead at tax firm AKM Global.
This ruling, he said, provides important relief to entities with overseas operations that face project-based cycles. It ensures that genuine 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 set-offs citing “discontinuance of business.”
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