Gain On Foreign Exchange In EEFC Account Cannot Be Included In Computation Of Deduction Under Business Profits U/S 80HHC Income Tax Act: SC

The Supreme Court held that a gain on foreign exchange in Exchange Earners Foreign Currency (EEFC) account cannot be included in computation of deduction under profits of business of the assessee under Section 80HHC of the Income Tax Act, 1961.

The Court was deciding a batch of two appeals preferred by the assessee against the orders of the Bombay High Court in which the subject matter was related to the assessment years 2000-02 and 2001-02.

The two-Judge Bench of Justice B.V. Nagarathna and Justice S.V.N. Bhatti observed, "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."

The Bench further observed that including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80 HHC of the Act.

Advocate V.P. Gupta appeared for the appellant/assessee while Senior Advocate Arijit Prasad appeared on behalf of the respondent/Commissioner of Income Tax.

In this case, the assessee claimed to be a 100% Export-Oriented Unit (EOU) and for the assessment year 2000-01, it filed returns declaring the total taxable income at Rs. 28,25,080/-. The assessee for the relevant assessment year had adopted export turnover at Rs. 8,27,15,688/- and the said turnover included an amount of Rs. 26,62,927/- being gains on accounts of foreign currency fluctuations in the assessment year 2000-01. The assessee treated the said earning from foreign currency as income earned by the assessee in the course its export of goods/merchandise out of India, i.e., profits of business from exports outside India. It claimed deduction under Section 80 HHC of the Income Tax Act and the Assessing Officer (AO), by the assessment order, disallowed the deduction claim of Rs. 26,62,927/- and added it to the assessee's taxable income.

The case of the Revenue was that gain/profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency (EEFC) account cannot be attributed as an earning from the export of goods/merchandise outside India by the assessee. It opposed the deduction under Section 80 HHC stating that the gains from foreign currency fluctuation are not a profit derived from exporting goods/merchandise outside India. The assessee, aggrieved by the disallowance, filed an appeal before the Commissioner of Income Tax (Appeals), who dismissed the appeal and then the assessee approached the Income Tax Appellate Tribunal (ITAT). The ITAT set aside the disallowance of the deduction, aggrieved by which the Revenue filed an appeal under Section 260(A) of the Act, and the same was allowed, resulting in restoring the disallowance of the deduction.

The question that arose for consideration before the Supreme Court was, 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 and can the gain be included in the computation of deduction under profits of the business of the assessee under Section 80 HHC of the Act.

The Court while considering the above issue said, “Section 80 HHC provides for the deduction of profits the assessee derives from exporting such goods/merchandise. The operation of Section 80 HHC is substantially dependent on two sets of expressions, viz., (a) is engaged in the business of export outside India of any goods/merchandise; (b) a deduction to the extent of profits defined in sub-section (1B) derived by the assessee from the export of such goods/merchandise. The main point of discussion is on the gain in foreign exchange vis-à-vis the export business of the assessee.”

The Court further noted that it is not the function of a court of law to give words a strained and unnatural meaning to cover loopholes through which the evasive taxpayer may find escape or to tax transactions which, had the Legislature thought of them, would have been covered by appropriate words.

“A taxing provision, including a deduction/exemption, is interpreted strictly. In other words, 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. … We have taken note of the construction/interpretation of the expression “derived from” adopted by this Court and a few High Courts as stated in the above-mentioned table—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”, also noted the Court.

The Court observed that under Section 80 HHC, the expression “derived from” has a deciding position with the other expression viz., “from the export of such goods or merchandise” and 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.

“The Section enables deduction to the extent of profits derived by the assessee from the export of such goods and merchandise and none else. … 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”, added the Court.

The Court, therefore, concluded by holding 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 and that the profit from exchange fluctuation is independent of export earnings.

"“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.”

Accordingly, the Apex Court dismissed the appeals.

Cause Title- Shah Originals v. Commissioner of Income Tax-24, Mumbai (Neutral Citation: 2023 INSC 1014)

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