The Supreme Court has ruled that the foreign exchange earned by transferring the rights of exploitation of the films outside India by way of lease is admissible for deduction under Section 80HHC of the Income-Tax Act, 1961.

The court turned down the plea of the revenue department, which had said that films are not goods and so, deduction under Section 80HHC was not permissible.

A bench comprising Justice S H Kapadia and Justice H L Dattu said, “The basic requirement of Section 80HHC is earning in foreign exchange and retention of profits for export business. Profits are embedded in the ‘income’ earned. Earning of income depends on sale of goods and services. Today, the difference between the two is getting blurred with globalization and cross-border transaction. Today, with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles.”

The court dismissed a bunch of appeals filed by the revenue department. In one such case, during the assessment year 1993-94, an assessee, B Suresh, had transferred feature film rights for exploitation outside India and earned income in foreign exchange. The assessee claimed deduction under Section 80HHC in respect of the receipts. The Assessment Officer (AO), however, held that the assessee was not entitled to deduction since no goods were exported as contemplated under Section 80HHC, but it was merely an export of “rights” in the film.

The decision of the AO was overruled by the commissioner of incometax. The department then had moved the Income Tax Appellate Tribunal, which held that the assessee was entitled to deduction under Section 80HHC. The department then came to the apex court.

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