Case: – Shah Originals v/s Commissioner of Income Tax-24, Mumbai; Civil Appeal No. 2664 OF 2011
In a recent decision, the Supreme Court provided a crucial interpretation of Section 80 HHC of the Income Tax Act, emphasizing that profits from exchange fluctuations are distinct from export earnings. Section 80 HHC allows deductions for profits derived from exporting goods or merchandise. The Apex Court asserted that the deduction is limited to the profits directly related to the export of goods and merchandise, excluding other sources.
The Court while highlighting the legislative intent behind Section 80 HHC, emphasized its role in encouraging and incentivizing export trade. It pointed out that the Parliament, through this section, specifically restricted deductions to the profits arising from the export of goods and merchandise.
This case involved a 100% Export Oriented Unit (EOU) of garments, which claimed 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 claim, leading to a legal dispute. The assessee argued that the EEFC account is an enabling facility for exporters, authorized for meeting overseas financial commitments. Thus, gains from foreign exchange fluctuations should be treated as business profits eligible for deduction under Section 80 HHC. On the contrary, the Revenue contended that the EEFC account is optional and not directly related to the export business.
The Apex Court after carefully examination the relevant documents and the language of Section 80 HHC, held that the maintaining an EEFC account is not a mandatory requirement for export businesses to earn profits. It underscored the importance of the phrase “derived from” in interpreting the section, citing precedents that support a strict interpretation of taxing provisions.
Quoting Lord Simonds from St. Aubyn v. A.G., the court emphasized that the focus should be on the natural meaning of the language used in the section. It concluded that the deduction under Section 80 HHC is intended only for profits directly linked to the export of goods and merchandise.
In summary, the Supreme Court’s decision clarified that gains from foreign exchange fluctuations in the EEFC account do not qualify as profits “derived from” the export of goods under Section 80 HHC. The judgment reaffirms the strict interpretation of tax provisions and underscores the legislative intent to restrict deductions to export-related profits.

Author of this article:
Adv. Ravish Bhatt,
Partner, R&D Law Chambers,
Dual Qualified Lawyer Solicitor | International Tax Affiliate

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