Gains arising from foreign exchange fluctuations cannot be availed as a deduction under Section 80 HHC of the Income Tax Act : Supreme Court
In a recent case, Shah Originals v. Commissioner of Income Tax-24, Mumbai, the Supreme Court interpreted Section 80 HHC of the Income Tax Act. The Court held that profits from exchange fluctuation are independent of export earnings as per Section 80 HHC, which provides for the deduction of profits derived from exporting goods/merchandise. It emphasized that the deduction under this section is limited to the profits gained from the export of goods and merchandise.
The appellant, a 100% Export Oriented Unit (EOU) of garments, faced charges under the Prevention of Corruption Act and IPC sections. The case involved the appellant's claim for a deduction under Section 80 HHC for gains from foreign exchange fluctuations in the Exchange Earners Foreign Currency (EEFC) account. The Assessing Officer disallowed the deduction, and the High Court upheld this decision.
The appellant argued that the EEFC account is essential for an exporter, as per RBI notification, and the gain in foreign exchange fluctuation should be treated as business profits under Section 80 HHC. The Revenue contended that the EEFC account is an optional facility and not necessary for the export business of garments.
The Supreme Court, examining the relevant section, emphasized that opening and maintaining an EEFC account is not a mandatory requirement for export business. It referred to the decision in St. Aubyn v. A.G and held that the deduction under Section 80 HHC is restricted to profits derived directly from the export of goods. The Court concluded that gains from foreign exchange fluctuations in the EEFC account do not qualify as "derived from" the export of garments. The judgment affirmed the view that the scope of Section 80 HHC is limited to profits from the business of exporting goods and merchandise.