Supreme Court rules temporary business lull doesn't mean cessation - claim expenses & losses during inactive periods
IF A FOREIGN COMPANY TEMPORARILY HAS NO ACTIVE PROJECTS OR PHYSICAL OFFICE IN INDIA, BUT IS ACTIVELY TRYING TO SECURE NEW BUSINESS, CAN THE TAX DEPARTMENT DENY ITS CLAIMS FOR BUSINESS EXPENSES AND PAST LOSSES, STATING IT HAS "CEASED OPERATIONS"?
NO. The Supreme Court has ruled that a "lull in business" is not the same as "cessation of business." If a company can demonstrate a genuine intention to continue its business activities—such as through ongoing bids and correspondence—it is considered to be "carrying on business." This allows it to claim deductions for legitimate business expenses and carry forward unabsorbed depreciation from previous years, even during a period with no active income.
10-Year Contract: Appellant awarded 10-year drilling contract with ONGC
Continuous business operations in India during this period
Interregnum Period: No active drilling contracts but continuous business correspondence
Submitted bid in 1996 and maintained business relationships
New Contract Awarded: Appellant awarded new drilling contract
Formalized in January 1999, proving business continuity
Supreme Court Ruling: "Lull in business" not same as "cessation of business"
Allowed business expense claims and unabsorbed depreciation carry forward
| Legal Provision | What It Allows | Application in This Case |
|---|---|---|
| Section 37(1) Income Tax Act |
Deduction for business expenses wholly and exclusively for business | Administrative charges, audit fees during lean period are deductible |
| Section 32(2) Income Tax Act |
Carry forward of unabsorbed depreciation | Allowed as business for which depreciation computed continued |
| Section 71 Income Tax Act |
Set off of loss from one head against income from another | Business expenses can be set off against "Income from Other Sources" |
A temporary period of low or no business activity, during which the intention to continue the business remains alive.
The permanent stopping of all business activities with no intention to resume.
A loss on account of depreciation that could not be fully set off against the income of the previous year due to insufficient profits, which can be carried forward to future years.
A commercial relationship between a non-resident and a person in India that constitutes a business activity. Basis for taxing non-resident's income in India without physical office.
"The spirit of a business lies in its enduring intent, not merely in its momentary transactions. A temporary lull, punctuated by efforts to revive and secure new ventures, is a natural rhythm of commerce, not its death knell. The law must discern between the silence of cessation and the pause of preparation, protecting the latter to foster a realistic and progressive business environment."
This judgment provides crucial protection for businesses, especially those with project-based cycles, against a rigid and technical interpretation of "business" by tax authorities. It affirms that the essence of business is continuity of intention, which can be demonstrated through ongoing efforts, even in the absence of current revenue.
This content is for informational purposes only and does not constitute legal advice. Consult a qualified legal professional for specific legal guidance. The information provided is based on judicial interpretation and may be subject to changes in law.
Making Supreme Court judgments accessible and actionable for every Indian citizen navigating legal challenges.
This roadmap decodes a complex tax law judgment to help taxpayers and businesses understand their rights to claim expenses and carry forward losses during temporary periods of low activity, ensuring they are not unfairly penalized by the tax system.