A two-judge bench of the Supreme Court of India has held that no deduction under Section 80HHC of the Income Tax Act is allowable for gains from foreign exchange fluctuations.
Section 80HHC allows deductions for profits derived specifically from the export of goods/merchandise.
Section 80HHC of the Income Tax Act lays down provisions for deduction in respect of export turnover.— Where the assessee, being an Indian company or a person (other than a company) who is resident in India, experts out of India during the previous year relevant to an assessment year 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, the following deductions, namely: —
(a) a deduction of an amount equal to one per cent of the export turnover of such goods or merchandise during the previous year; and
(b) a deduction of an amount equal to five per cent. of the amount by which the export turnover of such goods or merchandise during the previous year exceeds the export turnover of such goods or merchandise during the immediately preceding previous year.
Notably, This section applies to all goods or merchandise [other than those specified in clause (b)] if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange.
(b) The goods or merchandise referred to in clause (a) are the following, namely: —
(i) agricultural primary commodities, not being produce of plantations;
(ii) mineral oil;
(iii) minerals and ores; and
(iv) such other goods or merchandise as the Central Government may, by notification in the Official Gazette, specify on this behalf.
Further, no deduction under clause (b) of sub-section (1) shall be allowed unless the assessee had, during the immediately preceding previous year, exported out of India goods or merchandise to which this section applies.
The Court highlighted that the deduction under Section 80 HHC is limited to the profits directly derived from the export of goods and merchandise. The purpose behind this deduction is to promote and incentivize export trade, as outlined by the Parliament.
The case involved a 100% Export Oriented Unit (EOU) of garments, which credited a percentage of foreign exchange from exports to an Exchange Earners Foreign Currency (EEFC) account. The Court rejected the argument that gains from foreign exchange fluctuations in the EEFC account should be considered part of export income, emphasizing that the EEFC account is not mandatory for export business.
The assessee contended that, “the Judgment under appeal has not recorded a finding on whether or not the foreign exchange difference could be chargeable under the head “profits and gains of business and profession”. The judgment under appeal has not referred to sub-section (3) of Section 80 HHC of the Act. 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”.
The Assessing Officer had disallowed the deduction, considering the gains as taxable income. The Court, relying on past judgments, upheld the decision, stating that the gain from foreign exchange fluctuations in the EEFC account does not qualify as “derived from” the export of garments.
The bench of Justices S V N Bhatti and B V Nagarathna observed that, “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.”
It was thus held that, “Hence, for the above reasons, we hold 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. The profit from exchange fluctuation is independent of export earnings, and the impugned judgment correctly answers the point.”
In conclusion, the Apex Court affirmed that Section 80 HHC deductions are specifically intended for profits from the business of exporting goods, and including other income would be counterproductive to the section’s purpose.
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