The Supreme Court today clarified that mere failure to obtain a business contract by itself would not be a determining factor to hold that a non-resident entity had ceased its business activities in India, if its conduct, from the standpoint of a prudent businessman, evinces intention to carry on business. The Court therefore backed the opinion of the ITAT that a business going through a lean period of transition, which could be revived if proper circumstances arose, must be termed as a lull in business and not a complete cessation of the business.
The Court found that the appellant, a non-resident company, had been awarded 10 10-year drilling contract by ONGC in 1983, which continued till 1993, and thereafter, the appellant failed to procure another contract till October 1998. However, during the interregnum, the appellant had continuous business correspondence with ONGC concerning the hiring of manpower services for drilling in deep waters, leading to even unsuccessful submission of a bid in 1996. The Court therefore allowed unabsorbed depreciation from previous years as allowable under Section 32(2) of the Income Tax Act.
The Court also negated the action of the High Court in holding that the appellant was not carrying on business as it had no subsisting contract with ONGC during the relevant period. Reference was made to the continuous correspondence between the appellant and ONGC with regard to the supply of manpower for oil drilling purposes, and its unsuccessful bid in 1996 demonstrates various acts aimed at carrying on business in India, which unfortunately did not fructify in procuring a contract.
A Two-Judge Bench of Justice Manoj Mishra and Justice Joymalya Bagchi observed that the Income Tax Act does not require a non-resident company to have a permanent office within the country to be chargeable to tax on any income accruing in India. Referring to Section 5(2) read with Section 9(1)(i) of the Income Tax Act, the Court observed that a non-resident person shall be liable to pay taxes on income which is deemed to accrue or arise in India.
The Apex Court also criticised the High Court’s restrictive interpretation of construing a non-resident company making business communications with an Indian entity from its foreign office, as not carrying on business in India, to be wholly anachronistic with India’s commitment to Sustainable Development Goal relating to ‘ease of doing business’ across national borders.
Briefly, the dispute arose when the appellant, a company incorporated in France and engaged in oil drilling activities, filed its NIL return, and the only income credited was under the head ‘Income from Business’ on account of interest received on income tax refunds amounting to Rs. 1.69 crores, Rs. 5.49 lacs, and Rs. 11.29 lacs, respectively. Against this, business expenditures aggregating to Rs. 2.50 lacs, Rs. 5.55 lacs, and Rs. 11.29 lacs, respectively, were claimed as deductions, and the appellant had claimed a set-off against unabsorbed depreciation on furniture and fixtures brought forward from earlier years.
The AO disallowed the deduction of business expenditure as well as carry forward of unabsorbed depreciation on the ground that the appellant was not carrying on any business during the relevant assessment years. The ITAT, however, reversed those findings, holding that a temporary lull in business for whatever reason cannot be termed as cessation of business.
The ITAT, though holding income on account of interest on tax refunds, was chargeable under the head ‘Income from Other Sources’ and not ‘Income from Business’, allowed set off of the expenses on account of administrative charges, legal professional fees undertaken by the appellant as business expenses from ‘income from other sources’ under Section 71 of the Income Tax Act. For similar reasons, unabsorbed depreciation from previous years was allowed under Section 32(2) of the Act.
The findings of the ITAT was reversed by the High Court, by holding that when the appellant has neither a permanent office, nor any other office in India, nor any contract was in execution during the relevant period, it cannot be said that they were in business in India, as such, it cannot be said that appellant was entitled to set off claimed by it under Section 71 of the Act.
Appearances:
AOR Geetanjali Mohan, along with Advocates Vaibhav Kulkarni, Rohit Jain, K.K. Mohan, and Saumya Tiwar, for the Appellant/ Taxpayer
ASG N. Venkatraman, Senior Advocate Arijit Prasad, AOR Raj Bahadur Yadav, along with Advocates Vivek Narayan Sharma, V. Chandrashekhar Bharathi, Abishek R., Shashank Bajpai, and Udai Khanna, for the Respondent/ Revenue
