Supreme Court clarifies Section 80HHC deduction for Export-Oriented Units, emphasizing that profits eligible for deduction must be directly derived from the export of goods. Gain from foreign exchange fluctuations, in this case, ruled as not qualifying for deduction. Stay informed on crucial tax rulings.
In a recent landmark judgment, the Supreme Court, in the case of Shah Originals v. Commissioner of Income-tax-24 dated 21-11-2023, provided crucial clarity on the interpretation of Section 80HHC concerning the deduction of profits for export-oriented units (EOUs). The case involved Shah Originals, a 100% export-oriented unit in the garment industry, which credited a portion of its foreign exchange earnings from exports to the Exchange Earners’ Foreign Currency (EEFC) account.
Facts of the case:
The case revolves around the assessment year 2000-01 when the assessee, engaged in the business of garments, declared a total taxable income of Rs. 28,25,080.
During the captioned assessment year, the EOU booked export turnover of Rs. 8,27,15,688, which included an amount of Rs. 26,62,927 attributed to gains on account of fluctuation in foreign currency. Notably, this sum was credited in the Export Earners’ Foreign Currency (EEFC) account.
The assessee, in its tax return, treated this receipt as income earned in the course of exporting goods, categorizing it as profits of business from exports outside India and claimed deduction under section 80HHC.
However, the Assessing Officer took a contrary stance, arguing that gains from foreign exchange fluctuation in the EEFC account could not be considered as profit from the export business of garments for and deduction on such amount cannot be availed under section 80HHC.
On appeal, The Commissioner (Appeals) upheld this view, leading to the assessee’s appeal to the Tribunal.
In a turn of events, the Tribunal set aside the disallowance of the deduction claimed under Section 80HHC, providing a favorable outcome for the assessee. Nevertheless, this decision was short-lived, as the High Court subsequently restored the disallowance of the deduction.
Being aggrieved the assessee preferred an appeal before the supreme court.
Decision of SC:
The Supreme Court highlighted two critical expressions in the section: (a) being engaged in the business of export, and (b) deduction to the extent of profits derived from the export of such goods/merchandise.
The court emphasized the importance of the expression ‘derived from’ in interpreting Section 80HHC. It asserted that for a deduction to be claimed as profits of a business, the income or profit must be directly derived from the export of goods or merchandise. The section allows deductions only for profits directly linked to the export business of the assessee.
The court underscored that the legislative intent behind Section 80HHC is to encourage and incentivize export trade. Any interpretation that broadens the scope of eligible deductions beyond profits from the export of goods and merchandise would be counter-productive to the section’s purpose and objectives.
In the specific case, the Supreme Court held that profits earned by the assessee due to foreign exchange fluctuations, in this instance from the EEFC account, cannot be considered as derived from the business of exporting garments. The court reasoned that such gains were independent of export earnings and, therefore, did not fall within the meaning of ‘derived from’ as intended by Section 80HHC.
Comments
In conclusion, the Supreme Court’s ruling provides a clear and strict interpretation of Section 80HHC, limiting deductions to profits directly related to the business of exporting goods and merchandise.
This decision reaffirms the legislative intent to promote and support export trade while maintaining the integrity and purpose of the tax deduction provision.
Author Bio
