FOR DEDUCTION OF BUSINESS EXPENDITURE AND CARRY FORWARD UNABSORBED DEPRECIATION, WHETHER A NON-RESIDENT COMPANY IS TO PROVE ITS CONTINUITY ITS BUSINESS IN INDIA?

Section 37(1) of the Income Tax Act, 1961 (‘Act’ for short) inter alia, provides any expenditure (not being an expenditure in the nature described in Section 30 to 36 or in the nature of capital expenditure or personal expenses of the assessee) which is undertaken wholly and exclusively for the purpose of business and profession shall be allowed to be deducted in computing income chargeable under the head ‘Profits and Gains from Business and Profession’ and consequently, may be set off as loss against income under any other head subject to the conditions provided in Section 71 of the Act.

Section 32(2) of the Act provides unabsorbed depreciation allowance of a previous year may be carried forward and set off against income of the following assessment years in the manner and subject to the conditions provided therein.

The issue to be discussed in this article is as to whether a non-resident company is to prove its continuity of business in India to avail business expenditure and unabsorbed depreciation, with reference to a decided case law by the Supreme Court.

In ‘Pride Foramer S.A. v. Commissioner of Income Tax and another’- 2025 (10) TMI 964 - Supreme Court, the appellant is a non-resident company operating in France. The appellant is engaged in oil drilling activities. The appellant, during the year 1983 got a 10 years contract for drilling operations in offshore Mumbai for 10 years. After that the appellant was awarded another contract in the year 1998 which came into effect from January 1999. The appellant, for the period from 1993 to 1998, had not drilling operations. Yet the appellant made business correspondences with the ONCG from its office at Dubai and headquarters at France. During this period the appellant incurred expenditures such as administrative expenditure, audit fee etc. with the intention of carrying out its business.

For the relevant assessment years, the appellant filed income tax return showing NIL income. The only credit is the refund of income tax from the income tax department as detailed below-

• Assessment year 1996 – 97 – Rs.1,69,57,395/-;
• Assessment year 1997 – 98 – Rs. 5,49,628/-;
• Assessment year 1999 – 2000 – Rs.11,29,957/-

The appellant claimed business expenditure for all the three years to the extent of Rs. 2,50,000/- Rs. 5,55,152/- Rs. 11,29,957/- respectively. The appellant also claimed set off against the unabsorbed depreciation on furniture and fixtures of the previous years.

Since the appellant was not engaging in business, the Assessing Officer disallowed the expenditure and the unabsorbed depreciation. Against the said order the appellant filed an appeal before the Commissioner of Income Tax (Appeals) who upheld the order of the lower authority. Since not satisfied with the order of appellate authority the appellant filed an appeal before the Income Tax Appellant Tribunal (‘ITAT’ for short).

The ITAT reversed the order of First Appellate Authority. The ITAT observed that the appellant during the relevant period was not carrying any business. But the appellant has not gone out of the business completely. The appellant made correspondences with ONCG for the supply of expert key personnel for the purpose of deep-water drilling. For this purpose, the appellant submitted a tender form during September 1996. The appellant got contract during the year 1998 which was formalised in the year 1999. The appellant was never intended to completely out of the business. Therefore, it could not be said that the appellant discontinued the business. Since the appellant claimed tax concession the Department inferred that there was a permanent establishment of the appellant in India. Therefore, the appellant was to file an affidavit indicating that it has no permanent establishment in India. The Assessing Officer and the First Appellate Authority were in same line of decision that the appellant was out of its business since it has no permanent establishment in India. The ITAT considered that it could not be said that the appellant was out of business based on the affidavit that they had no permanent establishment in India. The ITAT held that the appellant was in business during the relevant assessment years, in question. 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’. The ITAT 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 Act. For similar reason unabsorbed depreciation from previous years was allowed under Section 32(2) of the Act.

The Department challenged the orders of ITAT for the assessment years 1996 – 1997 and 1999 – 2000 before the High Court. The High Court reversed the order of ITAT. An appeal was filed before the Supreme Court against the order of High Court. The Supreme Court remanded the matter to the High Court for its consideration. The High Court reheard the appeals of all assessment years, in question and set aside the order of the ITAT. The High Court held that when the assessee has neither 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 assessee was entitled to set off claimed by it under Section 71 of the Act.

Therefore, the appellant filed the present appeals before the Supreme Court. The Supreme Court considered the submissions of the appellant and the Department. The Supreme Court considered the question as to whether the appellant can be said to have been carrying on business during the relevant period, so as to avail deduction of business expenditure under Section 37(1) read with Section 71 of the Act, and carry forward unabsorbed depreciation of previous years under Section 32(2) of the Act.

The Supreme Court analysed the provisions of Section 37(1) and Section 32(2) of the Act. The Supreme Court was of the view that appellant had to demonstrate that it was carrying on business in India during the relevant period. The documents on record shows that the appellant had continuous business correspondences with ONGC with regard to hiring of manpower services in respect of expert key personnel for drilling in deep waters and had even unsuccessfully submitted a bid in 1996.

The Supreme Court further considered the findings of ITAT in which ITAT held that a business going through a lean period of transition which could be revived if proper circumstances arose, must be termed as lull in business and not a complete cessation of the business. The Supreme Court held that the High Court erred in holding that the appellant was not carrying on business as it had no subsisting contract with ONGC during the relevant period. The view of the High Court is wholly fallacious and contrary to the very scheme of the Act which 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. None of these provisions make it mandatory for a non-resident assessee to have a permanent establishment in India to carry on business or have any business connection in India.

The Supreme Court allowed the appeal and set aside the impugned order of the High Court and restored the order passed by the ITAT. The Supreme Court further directed the Assessing Officer to pass fresh assessment orders for the relevant assessment orders in terms of ITAT orders.