The appeals arise from the orders dated 22.04.2010 in Income Tax Appeal No 431 and 996 of 2008 in the High Court of Judicature at Bombay. 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. 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. 1
In the case at hand, the assessee received the foreign exchange remittances and credited the foreign exchange in the EEFC account.
On 25.10.2007, the Appellate Tribunal, by the common order dated 25.10.2007, set aside the disallowance of the deduction claimed under Section 80 HHC of the Act of the gains earned on account of foreign exchange fluctuations. The combined reading of sub-sections (1) and (3) of Section 80 HHC would bring the gain from foreign exchange within the fold of profits from the business of exports outside India.
Clause (baa) of the Explanation to Section 80 HHC clearly states that the profit of the business, as computed under the head “profits and gains of business or profession”, is reduced by ninety percent of the items mentioned therein, including interest. He argues that a direct nexus exists between the gain from foreign exchange fluctuation and the assessee’s business income from exports. The exchange fluctuation is incidentally attributable to the business of the assessee, and necessarily, the deduction under Section 80 HHC is available. The case on hand deals with profit or gain earned by the assessee on the fluctuation of foreign currency maintained in the EEFC account. Before appreciating the effect of gain or loss of foreign exchange fluctuation on profits of business from exports, this Court could consider the scheme under which the assessee is allowed to credit the foreign currency in EEFC accounts. According to the learned senior counsel, an EEFC account is an adjunct/facility provided by the RBI to the 100% EOUs to credit foreign exchange earnings in the EEFC account and transact in foreign exchange on overseas commitments from the said account. The earned foreign exchange appreciation is not a derived income from the business activity of the assessee, namely, the export of goods/merchandise outside India. In the above narrative, the question that falls for our consideration is “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?” (2003) 5 SCC 590.
Therefore, the EEFC account is used for the assessee’s business; hence, the gain in foreign exchange fluctuation is treated as profits of business while computing the permissible deduction under Section 80 HHC of the Act. Therefore, the gains earned from foreign exchange fluctuation of the amount credited in the EEFC account cannot be treated as profit from the export business of garments for deduction under Section 80 HHC of the Act.
The guidelines show how the amounts in foreign exchange are credited and the bonafide use of amounts separately credited or parked in the EEFC account. The case considers a situation, viz., statutory flair/character of the revenue receipt and treatment, as eligible for deduction under Section 80HHC. … that where an assessee has an export turnover exceeding Rs 10 crores and has made profits on transfer of DEPB under clause (iii-d) of Section 28, he would not get the benefit of addition to export profits under the third or fourth proviso to sub-section (3) of Section 80-HHC, but he would get the benefit of exclusion of a smaller figure from “profits of the business” under Explanation (baa) to Section 80-HHC of the Act and there is nothing in Explanation (baa) to 15 Section 80-HHC to show that this benefit of exclusion of a smaller figure from “profits of the business” will not be available to an assessee having an export turnover exceeding Rs 10 crores. The High Court, therefore, was not right in coming to the conclusion that as the assessee did have the export turnover exceeding Rs 10 crores and as the assessee did not fulfil the conditions set out in the third proviso to Section 80-HHC(3), the assessee was not entitled to a deduction under Section 80-HHC on the amount received on transfer of DEPB and with a view to get over this difficulty the assessee was contending that the profits on transfer of DEPB under Section 28(iii- d) would not include the face value of DEPB.”
8.
A combined reading of sub-sections (1), (2) and (3) of Section 80 HHC of the Act, read with Clause (baa) of the Explanation to Section 80 HHC, would include the gain from foreign exchange fluctuation. Interpreting literally, it is contended that the words “derived from” mentioned in sub-sections (1) and (3) would be the deciding factor whether the gain from the foreign exchange fluctuation forms a part of the business income of the assessee or not. The learned senior counsel argues that if the foreign currency fluctuation gain is included in Section 80 HHC, all the incomes earned by the assessee will come under the head “profit or gain from business or profession”, and no other head under Section 14 of the Act is attracted. Deduction in respect of profits retained for export business.- Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India 18 of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise. xxx xxx
xxx xxx xxx xxx (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; 19 (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export. 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. In other words, when the competent legislature mandates taxing certain persons/certain objects in certain circumstances, it cannot be expanded/interpreted to include those, which were not intended by the legislature. In the genealogical tree of the, interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non- payment. A catena of decisions deals with the construction of the expression “derived from”, especially in the context of the Act. Commissioner of Income Tax, Karnataka v. Commissioner of Income Tax, Madurai The words “derived from” in Section 80-HH of the Income Tax Act, 1961 must be understood as something which has direct or immediate nexus with the appellant’s industrial undertaking. Commissioner of Income- Tax, Bombay City-I The word “derived” as far as income tax law is concerned has been given a narrow meaning.
Commissioner of Income- Tax v. Deputy Commissioner of Income-Tax The term ‘derived from’ has a definite but narrow meaning.
Case Title: SHAH ORIGINALS Vs. COMMISSIONER OF INCOME TAX 24 MUMBAI
Case Number: C.A. No.-002664-002664 / 2011
