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2023 Supreme(SC) 1173
SUPREME COURT OF INDIA
B.V. NAGARATHNA, S.V.N. BHATTI, JJ.
Shah Originals - Appellant
Versus
Commissioner of Income Tax-24, Mumbai – Respondent
Civil Appeal No. 2664 Of 2011 with Civil Appeal No. 2665 Of 2011
Decided On : 21-11-2023
For the Appellant(s) : Mr. Jagdish Kumar Chawla, AOR
For the Respondent(s): Mr. Balbir Singh, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mr. Rupesh Kumar, Adv. Mr. Shyam Gopal, Adv. Mr. Samarvir Singh, Adv. Mr. Shashank Bajpai, Adv.
The gain from foreign exchange fluctuations in an EEFC account does not qualify as 'derived from' the export of goods/merchandise for the purpose of deduction under Section 80 HHC of the Income Tax Act.
Headnote:
Section 80 HHC of the Income Tax Act allows a deduction in respect of profits derived by an assessee from the export of goods or merchandise. The provision sets out the conditions and computation methods for claiming the deduction. The Court analyzed the language and purpose of Section 80 HHC to determine the eligibility of the gain from foreign exchange fluctuations for the deduction.
Fact of the Case:
The appellant, a 100% Export-Oriented Unit (EOU), claimed deduction under Section 80 HHC of the Income Tax Act for gains on account of foreign currency fluctuations. The Revenue disallowed the deduction, arguing that the gains were not derived from the export of goods/merchandise outside India. The High Court allowed the Revenue's appeal, resulting in the restoration of the disallowance. The appellant appealed to the Supreme Court.
Finding of the Court:
The Supreme Court analyzed the provisions of Section 80 HHC and the nature of the gains from foreign currency fluctuations. It held that the gain from foreign exchange fluctuations in the appellant's EEFC account did not fall within the meaning of 'derived from' the export of goods/merchandise. The Court interpreted the expression 'derived from' strictly and concluded that the gain was independent of the appellant's export earnings. The Court also considered the purpose and object of Section 80 HHC, which is to incentivize export trade, and held that including other income as an eligible deduction would be counter-productive to the scope of the provision.
Ratio Decidendi: The gain from foreign exchange fluctuations in an EEFC account does not qualify as 'derived from' the export of goods/merchandise for the purpose of deduction under Section 80 HHC of the Income Tax Act.
Result: The Supreme Court dismissed the appeals and upheld the disallowance of the deduction claimed by the appellant under Section 80 HHC.
JUDGMENT :
(S.V.N. Bhatti, J.)
I. FACTUAL BACKGROUND
1. Shah Originals/assessee is the appellant in the subject Civil Appeals. The Commissioner of Income Tax-24, Mumbai/Revenue, is the respondent. The appeals arise from the orders dated 22.04.2010 in Income Tax Appeal Nos 431 and 996 of 2008 in the High Court of Judicature at Bombay. The subject matter of the Civil Appeals relates to the assessment years 2000-01 and 2001-02. The appeals presented before this Court have a similar set of facts and a common question for the decision of this Court and, hence, are disposed of by this common judgment.
1.1 Civil Appeal No. 2664 of 2011 has been treated as the lead case. A reference to the circumstances, consideration and conclusions by the High Court and the authorities in the lead appeal is sufficient for disposing of both the appeals before this Court.
1.2 The assessee claims to be a 100% Export-Oriented Unit (EOU). The assessee for the assessment year 2000-01 filed returns declaring the total taxable income at Rs. 28,25,080/- (Rupees Twenty-Eight Lakhs Twenty-Five Thousand and Eighty). The assessee for the relevant assessment year had adopted export turnover at Rs. 8,27,15,688/- (Rupees Eight Crores Twenty-Seven Lakhs Fifteen Thousand Six Hundred and Eighty- Eight). The said turnover included an amount of Rs. 26,62,927/- (Rupees Twenty-Six Lakhs Sixty-Two Thousand Nine Hundred and Twenty-Seven) 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. The assessee claimed deduction under Section 80 HHC of the Income Tax Act, for short, “the Act”.
2. The Assessing Officer (AO), by the assessment order dated 10.02.2006, disallowed the deduction claim of Rs. 26,62,927/- and added it to the assessee's taxable income. The case of the Revenue is 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. The assessee has completed the export obligations and received the foreign exchange remittances from the buyers/importers of the assessee’s goods. The credit of the foreign currency in the EEFC account and positive fluctuation at the end of the financial year cannot be treated as the assessee’s income/receipt from the principal business, i.e., export of goods and merchandise outside India. It is pointed out by the Revenue that the Reserve Bank Notification No. FERA.159/94-RB dated 01.03.1994 permitted foreign exchange earners to open and operate an EEFC account by crediting a percentage of foreign exchange into the account. The guidelines issued in continuation of the Notification dated 01.03.1994 allow the units covered by the notification to credit twenty-five per cent or as permitted, in the EEFC accounts and operate in foreign currency. In other words, the credit of foreign exchange to the EEFC account facilitates the foreign exchange earners to use the foreign currency in the EEFC account depending upon the business necessities of the exporter.
2.1 In the case at hand, the assessee received the foreign exchange remittances and credited the foreign exchange in the EEFC account. At the end of the financial year, the convertible foreign exchange value was reflected in the assessee's balance sheet. The assessee has gained/earned from the fluctuation in foreign currency credited to its EEFC account. Therefore, the maintenance of an EEFC account is neither necessary nor incidental in any manner to the export activity of the assessee. Crediting remittances or maintaining a balance in an EEFC account is akin to any deposit held by an assessee in the Indian
