2009 (6) TMI 9 - HC - Income Tax

1. Whether, the assessee, a non-resident company, was entitled to claim deduction for expenses incurred by it between the period 1993-1999, particularly, when according to the Department there was no permanent establishment in existence in India during the relevant period? Held No. - 2. Whether, the Income Tax Appellate Tribunal has erred in law in holding that the expenses claimed by the assessee were allowable and constitute business loss to be set off under Section 71 of the Income Tax Act, 1961? Held Yes. Order of ITAT set aside.

Summary

Issues Involved:
1. Whether the non-resident company was entitled to claim deduction for expenses incurred between 1993-1999 without a permanent establishment in India.
2. Whether the Income Tax Appellate Tribunal (ITAT) erred in law by allowing the expenses claimed by the assessee as business loss to be set off under Section 71 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Entitlement to Claim Deduction for Expenses

Facts and Arguments:
- The respondent/assessee, a non-resident company, had contracts with ONGC for drilling operations which ended in 1993. The company did not secure a new contract until 1999.
- The assessee filed returns showing income from interest received on income tax refunds and claimed various expenses and depreciation.
- The Assessing Officer (A.O.) disallowed these expenses, arguing that the assessee did not conduct any business in India during the relevant period and thus was not entitled to set off under Section 71 of the Income Tax Act.
- The CIT(A) upheld the A.O.'s decision, but the ITAT allowed the appeal, leading to the Revenue's appeal to the High Court.

Court's Analysis:
- The Court examined Article 5 of the Double Taxation Avoidance Agreement (DTAA) between India and France, which defines "permanent establishment" as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
- The Court noted that the assessee did not have a permanent establishment in India during the relevant period and had ceased business activities after the contract expired.
- The Court rejected the argument that mere correspondence from Dubai to ONGC constituted doing business in India.
- The Court concluded that without a permanent establishment or ongoing business activities in India, the assessee was not entitled to claim deductions for expenses incurred during the period in question.

Issue 2: ITAT's Error in Allowing Expenses as Business Loss

Facts and Arguments:
- The ITAT had allowed the expenses claimed by the assessee, considering it as business loss to be set off under Section 71 of the Income Tax Act.
- The Revenue argued that the ITAT erred in law by allowing these expenses, as the assessee was not conducting any business in India during the relevant period.

Court's Analysis:
- The Court emphasized that the assessee had admitted to stopping business in India and had no permanent office or ongoing contracts during the relevant period.
- The Court referred to various case laws cited by the respondent/assessee but found them inapplicable as they involved companies that were actively conducting business in India.
- The Court held that the ITAT erred in law by considering the assessee to be in business during the relevant period and allowing the set off of expenses.
- The Court stated that the finding of fact by the ITAT was incorrect and that the A.O. and CIT(A) had rightly disallowed the expenses and claims of depreciation.

Conclusion:
- The High Court allowed all three appeals by the Revenue, setting aside the ITAT's orders and upholding the CIT(A)'s decisions.
- The Court concluded that the assessee was not entitled to claim deductions for expenses incurred during the period when it had no permanent establishment or ongoing business activities in India.