In a recent ruling on November 21, the Supreme Court shed light on the interpretation of Section 80 HHC of the Income Tax Act, emphasizing that profits arising from exchange rate fluctuations are distinct from export earnings. Section 80 HHC allows for deductions concerning the profits derived by the assessee from the export of goods or merchandise.

The Court, while meticulously examining the language of Section 80 HHC, clarified that it permits deductions exclusively concerning profits from the export of goods or merchandise and nothing beyond that.

Highlighting the underlying policy behind the provision, the Court stressed that the purpose of granting deductions from export businesses is to incentivize and encourage the export trade. Section 80HHC was specifically formulated by Parliament to confine deductions to the profits directly derived from the export of goods or merchandise.

Refusing the interpretation proposed by the assessee, the Court dismissed the notion that profits stemming from price fluctuations could be considered as part of the assessee’s export income.

The case, presented before the bench of Justices B.V. Nagarathna and SVN Bhatti, centered on determining whether gains from foreign exchange fluctuations in the Exchange Earners Foreign Currency (EEFC) account could be included in deductions under Section 80 HHC of the Act.

The factual backdrop of the case involved an assessee, a 100% Export-Oriented Unit (EOU) dealing in garments. The assesseehad recorded substantial turnover and profits from exporting goods outside India. Instead of immediately converting foreign exchange earnings into Indian currency, a portion was credited to the EEFC account. Subsequently, due to an upward revision in exchange rates, the assessee gained Rs. 26,62,927 from the EEFC account. The assessee sought to claim this gain as a deduction under Section 80 HHC.

However, the Assessing Officer (AO) disallowed the deduction claim and added it to the taxable income, contending that the foreign exchange fluctuation gain couldn’t be considered as earnings from the export of goods or merchandise. The Revenue cited a Reserve Bank of India notification (FERA.159/94-RB) dated 01.03.1994, permitting foreign exchange earners to operate an EEFC account.

Upon appeal to the High Court by the Revenue, the decision favored the Revenue’s stance, prompting the assessee to approach the Supreme Court.

The crux of the assessee’s argument was that the EEFC account served as an enabling account for exporters as per the aforementioned RBI notification. They asserted that the account holders were authorized to use their EEFC account to meet overseas financial commitments and, thus, the gain from foreign exchange fluctuations should be deemed part of business profits for deduction under Section 80 HHC.

Contrarily, the Revenue contended that the EEFC account, though a facility for exporters, wasn’t necessarily connected to the assessee’s garment export business. It was portrayed as an optional facility unrelated to the primary export activities.

In its analysis, the Court reviewed the language of Section 80 HHC and referred to the case law precedent. Citing St. Aubyn(LM) v. A.G, the Court highlighted that tax provisions, including deductions, are to be interpreted strictly.

The Court emphasized that Section 80 HHC permits deductions solely for profits derived from the export of goods or merchandise. Any attempt to include other incomes within its scope would contradict the legislative intent and the purpose of the section.

Considering the provisions of sub-sections (2) and (3) of Section 80 HHC, the Court conclusively held that deductions were intended and limited to profits from the business of exporting goods and merchandise. Therefore, gains from foreign exchange fluctuations in the EEFC account couldn’t be construed as “derived from” the export of garments by the assessee.

The Supreme Court affirmed the lower court’s view that gains from foreign exchange fluctuations in the EEFC account do not qualify as profits derived from the export of goods, as specified under Section 80 HHC.

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