No deduction on profits due to foreign exchange fluctuations: SC
SC bench said the deduction is intended and restricted only to profits of the business of export of goods and merchandise outside India by the assessee, therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80 HHC of the Act
The Supreme Court has on November 21, 2023 held that no deduction can be claimed on profit received from foreign exchange fluctuation as these are independent of export earnings.
A bench of Justices B V Nagarathna and S V N Bhatti upheld the Bombay High Court's 2010 judgement and dismissed an appeal filed by Shah Originals, a 100% export-oriented unit, related to the assessment years 2000-01 and 2001-02.
"The policy behind the deductions of profits from the business of exports is to encourage and incentivise export trade. Through Section 80HHC of the Income Tax Act, the Parliament restricted the deduction of profit from the assessee's export of goods/merchandise. The interpretation now suggested by the assessee would add one more source to the sources stated in Section 80 HHC of the Act. Such a course is impermissible," the bench said.
The court said that profits earned by the assessee due to price fluctuation cannot be included or treated as derived from the business of its export income.
Going through the provisions of the law, the bench said the strict interpretation is in line with a few relative words, namely, manufacturer, exporter, purchaser of goods, etc. adverted to in Section 80 HHC of the Act.
"From the requirements of sub-sections (2) and (3) of Section 80 HHC, it can be held that the deduction is intended and restricted only to profits of the business of export of goods and merchandise outside India by the assessee. Therefore, including other income as an eligible deduction would be counter-productive to the scope, purpose, and object of Section 80 HHC of the Act," the bench said.
The appellant had filed its tax returns declaring the total taxable income at Rs 28.25 lakh. Its export turnover for the same assessment year was Rs 8.27 Cr, including an amount of Rs 26.62 lakh as gains on accounts of foreign currency fluctuations.
It had treated these earnings from foreign currency as income earned in the course of exports of goods and merchandise out India, which is profits of business from exports out of India.
The I T department rejected the claim saying gain or profit on account of foreign currency fluctuations in the Exchange Earners Foreign Currency account cannot be attributed as an earning from the export of goods or merchandise outside India by the assessee.
The bench also held 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," the bench said.