Foreign currency as trading goods supports export deduction under section 80HHC; limited expense disallowance was upheld on facts.

Foreign currency exported and sold abroad can be treated as goods or merchandise for section 80HHC where it is bought and sold as a commercial commodity; on that basis, deduction was available on export profits from foreign currency. The commentary also notes that a limited disallowance of tea, tiffin and telephone expenses was upheld because such items could partly reflect non-business or personal use and the disallowance was considered nominal and reasonable on the facts.

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Issues: (i) Whether foreign currency notes exported and sold abroad constitute goods or merchandise so as to qualify the assessee for deduction under section 80HHC. (ii) Whether the disallowance of a part of tea and tiffin expenses and telephone expenses was justified.

Issue (i): Whether foreign currency notes exported and sold abroad constitute goods or merchandise so as to qualify the assessee for deduction under section 80HHC.

Analysis: The expression "goods" or "merchandise" was not specifically defined in the Income-tax Act, so its ordinary meaning had to be applied. Foreign currency was treated as a commodity capable of being bought and sold in business, and support was drawn from the accepted view that dollars can be regarded as a commodity. The distinction between manufactured or processed goods and trading goods was also relevant, because section 80HHC(3)(b) covers export of trading goods. On that basis, foreign currency was held to fall within the concept of trading goods or merchandise.

Conclusion: The issue was decided in favour of the assessee. Deduction under section 80HHC was held allowable on profits from export of foreign currency.

Issue (ii): Whether the disallowance of a part of tea and tiffin expenses and telephone expenses was justified.

Analysis: The expenses were examined on the footing that tea and tiffin expenses were partly self-vouched and could include non-business expenditure, while telephone facilities could also have been used for personal purposes by the partners. The disallowance was considered nominal and reasonable in the facts.

Conclusion: The issue was decided against the assessee. The disallowance was upheld.

Final Conclusion: The assessee succeeded on the principal claim for deduction on export profits from foreign currency, but failed on the challenge to the limited disallowance of expenses, resulting in a partly favourable outcome overall.

Ratio Decidendi: For section 80HHC, foreign currency can be treated as trading goods or merchandise where it is bought and sold as a commercial commodity and the export proceeds are received in convertible foreign exchange.

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