A non-resident had no contract in India for several years but kept trying for one. Had its business ceased, so that expenditure and unabsorbed depreciation fall away?
No. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward.
Decided by the Supreme Court (Manoj Misra J and Joymalya Bagchi J (judgment by Joymalya Bagchi J)) on 2025-10-17, reported as 2025 INSC 1247; Civil Appeal Nos. 4395-4397 of 2010. It bears on section 37, section 71, section 32 of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
Assessing Officers regularly treat a gap in revenue as closure and disallow everything in the interim years. This gives a Supreme Court answer keyed to conduct and intention, and it was applied to a non-resident with no permanent establishment during the gap.
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The appellant, a French company, held a ten-year drilling contract with ONGC which ran from 1983 to 1993. It had no contract in the interim years that followed, but continued to correspond with ONGC and submitted a bid in 1996 which was unsuccessful. A fresh contract was awarded in October 1998 and formalised in January 1999. For assessment years 1996-97, 1997-98 and 1999-2000 the Revenue treated the business as having ceased during the gap and disallowed the expenditure and the carry forward of unabsorbed depreciation. The Tribunal held there was only a lull in business; the High Court reversed the Tribunal and the assessee appealed.
The appeals were allowed. A temporary discontinuance where the business could be revived if proper circumstances arose is a lull in business and not a complete cessation, and the question is to be judged from the assessee's conduct viewed as a prudent businessman would view it (para 13). The business having continued, the expenditure was deductible under s.37(1) and could be set off against income under other heads by virtue of s.71, and unabsorbed depreciation was available to be carried forward under s.32(2). The judgment and order of the High Court was set aside, the orders of the Tribunal were revived, and the Assessing Officer was directed to pass fresh assessment orders for the relevant assessment years in terms of the Tribunal's orders (para 21).
The Court declined to make the existence of a subsisting contract, or of a permanent establishment during the gap years, the determinant of whether business was being carried on. What mattered was whether the conduct of the assessee evinced an intention to continue in business: it stayed in touch with the only customer for its services, bid when the opportunity came, and secured a fresh contract when one was awarded. Mere failure to obtain a contract in the interval is not by itself a determining factor. The Tribunal's characterisation of a lean period of transition capable of revival as a lull rather than a cessation was upheld as the correct approach.
Whether failure to procure the drilling contract with ONGC was owing to the appellant's disinterest to carry on business during relevant period and amounted to cessation of business or not must be construed from the appellant's conduct. If such conduct, from the standpoint of a prudent businessman, evinces intention to carry on business, mere failure to obtain a business contract by itself would not be a determining factor to hold the appellant had ceased its business activities in India.
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Handle my notice → Ask a CA on WhatsAppNo. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward. This was decided by the Supreme Court (Manoj Misra J and Joymalya Bagchi J (judgment by Joymalya Bagchi J)) and bears on section 37, section 71, section 32 of the Income Tax Act 1961. It is reported as 2025 INSC 1247; Civil Appeal Nos. 4395-4397 of 2010. Assessing Officers regularly treat a gap in revenue as closure and disallow everything in the interim years. This gives a Supreme Court answer keyed to conduct and intention, and it was applied to a non-resident with no permanent establishment during the gap. If it applies to you, the first step is this: Build the record of conduct for the quiet years: correspondence, tenders and bids submitted, staff and premises retained, licences kept alive, and steps taken to secure fresh work.
The appellant, a French company, held a ten-year drilling contract with ONGC which ran from 1983 to 1993. It had no contract in the interim years that followed, but continued to correspond with ONGC and submitted a bid in 1996 which was unsuccessful. A fresh contract was awarded in October 1998 and formalised in January 1999. For assessment years 1996-97, 1997-98 and 1999-2000 the Revenue treated the business as having ceased during the gap and disallowed the expenditure and the carry forward of unabsorbed depreciation. The Tribunal held there was only a lull in business; the High Court reversed the Tribunal and the assessee appealed. The matter was decided on 2025-10-17 by the Supreme Court (Manoj Misra J and Joymalya Bagchi J (judgment by Joymalya Bagchi J)). On those facts the Supreme Court held as follows. The appeals were allowed. A temporary discontinuance where the business could be revived if proper circumstances arose is a lull in business and not a complete cessation, and the question is to be judged from the assessee's conduct viewed as a prudent businessman would view it (para 13). The business having continued, the expenditure was deductible under s.37(1) and could be set off against income under other heads by virtue of s.71, and unabsorbed depreciation was available to be carried forward under s.32(2). The judgment and order of the High Court was set aside, the orders of the Tribunal were revived, and the Assessing Officer was directed to pass fresh assessment orders for the relevant assessment years in terms of the Tribunal's orders (para 21).
The Court declined to make the existence of a subsisting contract, or of a permanent establishment during the gap years, the determinant of whether business was being carried on. What mattered was whether the conduct of the assessee evinced an intention to continue in business: it stayed in touch with the only customer for its services, bid when the opportunity came, and secured a fresh contract when one was awarded. Mere failure to obtain a contract in the interval is not by itself a determining factor. The Tribunal's characterisation of a lean period of transition capable of revival as a lull rather than a cessation was upheld as the correct approach. In the words reproduced by the source cited on this page: "Whether failure to procure the drilling contract with ONGC was owing to the appellant's disinterest to carry on business during relevant period and amounted to cessation of business or not must be construed from the appellant's conduct. If such conduct, from the standpoint of a prudent businessman, evinces intention to carry on business, mere failure to obtain a business contract by itself would not be a determining factor to hold the appellant had ceased its business activities in India."
It was decided by the Supreme Court on 2025-10-17 and is reported as 2025 INSC 1247; Civil Appeal Nos. 4395-4397 of 2010. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37, section 71, section 32, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed. A temporary discontinuance where the business could be revived if proper circumstances arose is a lull in business and not a complete cessation, and the question is to be judged from the assessee's conduct viewed as a prudent businessman would view it (para 13). The business having continued, the expenditure was deductible under s.37(1) and could be set off against income under other heads by virtue of s.71, and unabsorbed depreciation was available to be carried forward under s.32(2). The judgment and order of the High Court was set aside, the orders of the Tribunal were revived, and the Assessing Officer was directed to pass fresh assessment orders for the relevant assessment years in terms of the Tribunal's orders (para 21). It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 37, section 71, section 32 of the Income Tax Act 1961, and was decided by Manoj Misra J and Joymalya Bagchi J (judgment by Joymalya Bagchi J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Argue the point as one of intention to carry on business, not of turnover; failure to win a contract is not by itself decisive. Claim the s.37(1) expenditure of those years and, where there is no business income, the set-off against other heads under s.71. Preserve the unabsorbed depreciation claim under s.32(2) on the footing that the business continued through the lull.
Validity check could not be completed. Decided 17 October 2025. Later treatment has not been searched. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The appeals were allowed. A temporary discontinuance where the business could be revived if proper circumstances arose is a lull in business and not a complete cessation, and the question is to be judged from the assessee's conduct viewed as a prudent businessman would view it (para 13). The business having continued, the expenditure was deductible under s.37(1) and could be set off against income under other heads by virtue of s.71, and unabsorbed depreciation was available to be carried forward under s.32(2). The judgment and order of the High Court was set aside, the orders of the Tribunal were revived, and the Assessing Officer was directed to pass fresh assessment orders for the relevant assessment years in terms of the Tribunal's orders (para 21).
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