Legal Review and Analysis of Pride Foramer S A vs Commissioner of Income Tax & Anr 2025 INSC 1247

1. Heading of the Judgment

Case Title: Pride Foramer S.A. vs Commissioner of Income Tax & Anr.
Citation: 2025 INSC 1247
Court: Supreme Court of India
Jurisdiction: Civil Appellate Jurisdiction
Civil Appeal Nos.: 4395-4397 of 2010
Judges: Hon'ble Mr. Justice Manoj Misra and Hon'ble Mr. Justice Joymalya Bagchi
Date of Judgment: October 17, 2025

2. Related Laws and Sections

The judgment authoritatively interprets the following provisions of the Income Tax Act, 1961:

• Section 37(1): Deduction for business expenditure not covered elsewhere, incurred wholly and exclusively for the purpose of business.

• Section 71: Set-off of loss from one head of income against income from another head.

• Section 32(2): Carry forward and set-off of unabsorbed depreciation.

• Section 4 & Section 5(2): Charging provisions for total income.

• Section 9(1)(i): Deemed accrual or arise of income in India, including through a "business connection".

3. Basic Judgment Details

This civil appeal was filed by Pride Foramer S.A., a French non-resident company engaged in oil drilling, against the judgment of the Uttarakhand High Court. The dispute pertained to the Assessment Years 1996-97, 1997-98, and 1999-2000. The core conflict was whether the appellant, during a period when it had no active drilling contract in India, could be considered as "carrying on business" to claim deductions for business expenses under Section 37(1) and to carry forward unabsorbed depreciation under Section 32(2) of the Income Tax Act, 1961.

4. Core Principle and In-Depth Analysis of the Judgment

The central legal issue was the interpretation of the phrase "carrying on business" for a non-resident assessee during a period of commercial inactivity, and whether the absence of a physical office or a live contract conclusively signifies a cessation of business.

A. The Fundamental Distinction: 'Lull in Business' vs. 'Cessation of Business'

The Supreme Court fundamentally disagreed with the High Court's approach, which had focused on the absence of a physical establishment and a subsisting contract. The Apex Court resurrected the crucial distinction, previously emphasized by the ITAT, between a "lull in business" and "going out of business".

• A Lull in Business: The Court defined this as a "temporary discontinuance" or a "lean period of transition" where the assessee's intention to continue business remains alive, and revival is anticipated under proper circumstances. This state preserves the continuity of the business.

• Cessation of Business: This signifies a complete and final termination of the business activities, with no intention to revive them.

The Court held that the failure to obtain a business contract, by itself, is not a determinative factor to conclude that a business has ceased.

B. Assessing Business Continuity: Intent and Conduct Over Form

The Supreme Court laid down a principled test for determining business continuity: the assessee's conduct must be examined "from the standpoint of a prudent businessman" to evince an intention to carry on business.

In applying this test to the facts, the Court found overwhelming evidence of such intent:

• The appellant had a long-standing business history in India, having executed a 10-year contract with ONGC from 1983-1993.

• During the interregnum (the relevant assessment years), the appellant maintained "continuous business correspondences" with ONGC regarding the supply of manpower for deep-water drilling.

• The appellant concretely demonstrated its intent by submitting a formal bid to ONGC in 1996.

• These efforts eventually culminated in a new contract awarded in 1998, formalized in 1999.

The Court concluded that these were not the actions of an entity that had ceased business, but of one actively striving to secure new business, thereby experiencing a "lull" rather than a cessation.

C. Expansive Interpretation of "Business" and "Purpose of Business"

The judgment provides an in-depth analysis of the term "business", citing precedent (Narain Swadeshi Weaving Mills) to state that it implies a "real, substantial and systemic or organised course of activity with a set purpose."

More significantly, the Court relied on CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) to elucidate that the expression "for the purpose of business" is wider than "for the purpose of earning profits". It encompasses not just profit-making activities but also "many other acts incidental to the carrying on of a business". The Court held that the appellant's correspondences and bid submissions were precisely such incidental acts aimed at carrying on its business, even if they did not immediately fructify into profits.

D. Rejecting the Archaic Requirement of a Physical Establishment

The Supreme Court strongly rebuked the High Court's reasoning that the absence of a permanent establishment in India precluded the appellant from being considered as carrying on business. The Court provided a clear legal analysis:

• The scheme of the Income Tax Act, particularly Sections 4, 5(2), and 9(1)(i), taxes non-residents on income deemed to accrue in India, including through a "business connection".

• None of these provisions make a "permanent establishment" a mandatory precondition for carrying on business in India. The concept of a permanent establishment is primarily relevant for claiming benefits under a Double Tax Avoidance Agreement (DTAA), which was not in question here.

• The Court termed the High Court's view as "wholly anachronistic" and contrary to India's commitment to globalisation and the ease of doing business across national borders. In the modern era, trans-national business is conducted through digital communications from foreign offices, and the law must adapt to this reality.

5. Final Outcome

The Supreme Court allowed the appeals filed by Pride Foramer S.A. The impugned judgment of the High Court was set aside. The orders passed by the Income Tax Appellate Tribunal (ITAT), which had allowed the deductions and carry-forward of depreciation, were revived. The Assessing Officer was directed to pass fresh assessment orders for the relevant years in terms of the ITAT's orders.

6. Multiple Choice Questions Based on the Judgment

1. In Pride Foramer S.A. vs. CIT (2025 INSC 1247), the Supreme Court allowed the deduction of business expenses during a period of no active income primarily because?
A. The company had a permanent establishment in India.
B. The company's conduct showed a temporary lull in business, not a cessation.
C. The company had already paid advance tax for the forthcoming contract.
D. The High Court had already allowed the deduction in part.

2. The Supreme Court, in its judgment, held that for a non-resident to be considered "carrying on business" in India?
A. It is mandatory to have a permanent office or establishment within the country.
B. The existence of a permanent establishment is irrelevant under the Income Tax Act for this purpose.
C. It must have earned profit in at least three preceding years.
D. It can only be considered so after signing a formal contract.