2023 (11) TMI 1006 - SC - Income Tax

Supreme Court denies Section 80HHC deduction for foreign exchange fluctuation gains from EEFC account appreciation

Shah Originals Versus Commissioner of Income Tax-24, Mumbai

SC upheld HC's decision disallowing deduction u/s 80HHC for foreign exchange fluctuation gains. Assessee, a 100% EOU, claimed gains from EEFC account ... Deduction u/s 80HHC - as per revenue gains from foreign currency fluctuation are not a profit derived from exporting goods/merchandise outside India, thus disallowed deduction - scope and meaning of the words “derived from” - assessee claims to be a 100% Export-Oriented Unit (EOU) - ITAT set aside the disallowance of the deduction claimed - HC allowed appeal of Revenue resulting in restoring the disallowance of the deduction u/s 80 HHC - HELD THAT:- The case at hand is of a credit of a certain percentage of foreign exchange earnings in an EEFC account, and the credited amount has appreciated in Rupee convertibility at the end of the financial year. The findings of fact on the nature of the investment and the circumstances in which gains are earned by the dealer, disallowing the deduction under Section 80 HHC, in the facts and circumstances of the case, are valid and tenable. The interpretation is by the strict legalistic method. With wisdom and experience, the Parliament used the words “derived from” in Section 80 HHC to indicate the extent to which the deduction is permitted. The expressions “derived from” and “since” are used in multiple instances in the Act. Unless the context does not permit, the construction of the expression “derived from” must be consistent. In interpreting Section 80 HHC, the expression “derived from” has a deciding position with the other expression viz., “from the export of such goods or merchandise”. While appreciating the deduction claimed as profits of a business, the test is whether the income/profit is derived from the export of such goods/merchandise. As we read the very relevant words in Section 80 HHC of the Act, namely, “derived by the assessee from the export of such goods or merchandise”, in the background of interpretation given to the said expression by this Court. The Section enables deduction to the extent of profits derived by the assessee from the export of such goods and merchandise and none else. The policy behind the deductions of profits from the business of exports is to encourage and incentivise export trade. Through Section 80HHC, the Parliament restricted the deduction of profit from the assessee's export of goods/merchandise. The interpretation now suggested by the assessee would add one more source to the sources stated in Section 80 HHC of the Act. Such a course is impermissible. The strict interpretation is in line with a few relative words, namely, manufacturer, exporter, purchaser of goods, etc. adverted to in Section 80 HHC of the Act. From the requirements of sub-sections (2) and (3) of Section 80 HHC, it can be held that the deduction is intended and restricted only to profits of the business of export of goods and merchandise outside India by the assessee. Therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80 HHC of the Act. In Topman Exports [2012 (2) TMI 100 - SUPREME COURT] a converse case is available, where a receipt, pursuant to or in terms of a statutory provision, is treated as income derived from the export business. The instant case is not proved or stated as falling within a statutory requirement/benefit. At foremost, by applying the meaning of the words “derived from”, as held in the catena of cases, we are of the view that profits earned by the assessee due to price fluctuation, in the facts and circumstances of this case, cannot be included or treated as derived from the business of export income of the assessee. The assessee can be correct that the computation shall be as per Sections 28 to 44 of the Act if the receipt or income is from an export business. As the controversy between the assessee and the Revenue is whether the profit earned on the foreign exchange falls under business income or income from other sources, the interpretation of Clause (baa) in Section 80 HHC is not attracted to the case on hand. Hence, for the above reasons, we hold that the gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export of garments by the assessee. The profit from exchange fluctuation is independent of export earnings, and the impugned judgment correctly answers the point. We agree with the reasoning and the view recorded in the Judgment under Appeal. Consequently, Civil Appeal fails Issues Involved:1. Whether the gain on foreign exchange fluctuation in the EEFC account of the assessee partakes the character of profits of the business of the assessee from exports.2. Whether the gain can be included in the computation of deduction under profits of the business of the assessee under Section 80 HHC of the Income Tax Act.Summary:Issue 1: Character of Gain on Foreign Exchange FluctuationThe primary issue is whether the gain on foreign exchange fluctuation in the EEFC account of the assessee, a 100% Export-Oriented Unit (EOU), can be considered as profits derived from the business of exports. The assessee argued that the foreign exchange credited to the EEFC account is a direct revenue from the export of garments and used for business purposes, thus qualifying for deduction under Section 80 HHC. The Revenue, however, contended that the EEFC account is merely a facility provided by the RBI and not a mandatory requirement for export business. Therefore, the gain from foreign exchange fluctuation is not derived from the business of exports but is a passive earning.Issue 2: Inclusion in Deduction Computation under Section 80 HHCThe court examined whether the gain from foreign exchange fluctuation could be included in the computation of deduction under Section 80 HHC of the Act. The court noted that Section 80 HHC provides for the deduction of profits derived from the export of goods or merchandise. The expression 'derived from' was interpreted strictly, requiring a direct nexus between the profits and the export activity. The court referred to several precedents, including Pandian Chemicals Ltd. v. Commissioner of Income Tax and Commissioner of Income Tax, Karnataka v. Sterling Foods, Mangalore, which emphasized that the term 'derived from' has a narrow meaning, indicating a direct derivation.The court concluded that the gain from foreign exchange fluctuation in the EEFC account does not have a direct nexus with the export activity and is not derived from the business of exports. Therefore, it cannot be included in the computation of deduction under Section 80 HHC.Judgment:The Supreme Court dismissed the appeals, holding that the gain from foreign exchange fluctuations in the EEFC account does not qualify as profits derived from the business of exports under Section 80 HHC of the Income Tax Act. The impugned judgment was upheld, and no costs were awarded.