Shah Originals vs Commissioner Of Income Tax 24 Mumbai

2023 INSC 1014 [NON-REPORTABLE]

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2664 OF 2011

WITH

CIVIL APPEAL NO. 2665 OF 2011

Shah Originals … Appellant(s)

VERSUS

Commissioner of Income Tax-24, Mumbai … Respondent(s)

JUDGMENT

S.V.N. BHATTI, J.

I. FACTUAL BACKGROUND

1. Signature Not Verified Shah Originals/assessee is the appellant in the subject Civil Digitally signed by Deepak Guglani Date: 2023.11.21

Appeals. The Commissioner of Income Tax-24, Mumbai/Revenue, is the 17:44:40 IST Reason:

1

respondent. The appeals arise from the orders dated 22.04.2010 in

Income Tax Appeal Nos 431 and 996 of 2008 in the High Court of

Judicature at Bombay. The subject matter of the Civil Appeals relates to

the assessment years 2000-01 and 2001-02. The appeals presented

before this Court have a similar set of facts and a common question for

the decision of this Court and, hence, are disposed of by this common

judgment.

1.1 Civil Appeal No. 2664 of 2011 has been treated as the lead case. A

reference to the circumstances, consideration and conclusions by the

High Court and the authorities in the lead appeal is sufficient for disposing

of both the appeals before this Court.

1.2 The assessee claims to be a 100% Export-Oriented Unit (EOU). The

assessee for the assessment year 2000-01 filed returns declaring the total

taxable income at Rs. 28,25,080/- (Rupees Twenty-Eight Lakhs Twenty-

Five Thousand and Eighty). The assessee for the relevant assessment

year had adopted export turnover at Rs. 8,27,15,688/- (Rupees Eight

Crores Twenty-Seven Lakhs Fifteen Thousand Six Hundred and Eighty-

Eight). The said turnover included an amount of Rs. 26,62,927/- (Rupees

Twenty-Six Lakhs Sixty-Two Thousand Nine Hundred and Twenty-Seven)

being gains on accounts of foreign currency fluctuations in the

assessment year 2000-01. The assessee treated the said earning from

2 foreign currency as income earned by the assessee in the course its

export of goods/merchandise out of India, i.e., profits of business from

exports outside India. The assessee claimed deduction under Section 80

HHC of the Income Tax Act, for short, “the Act”.

2. The Assessing Officer (AO), by the assessment order dated

10.02.2006, disallowed the deduction claim of Rs. 26,62,927/- and added

it to the assessee's taxable income. The case of the Revenue is that

gain/profit on account of foreign currency fluctuations in the Exchange

Earners Foreign Currency (EEFC) account cannot be attributed as an

earning from the export of goods/merchandise outside India by the

assessee. The assessee has completed the export obligations and

received the foreign exchange remittances from the buyers/importers of

the assessee’s goods. The credit of the foreign currency in the EEFC

account and positive fluctuation at the end of the financial year cannot be

treated as the assessee’s income/receipt from the principal business, i.e.,

export of goods and merchandise outside India. It is pointed out by the

Revenue that the Reserve Bank Notification No. FERA.159/94-RB dated

01.03.1994 permitted foreign exchange earners to open and operate an

EEFC account by crediting a percentage of foreign exchange into the

account. The guidelines issued in continuation of the Notification dated

01.03.1994 allow the units covered by the notification to credit twenty-five

3 per cent or as permitted, in the EEFC accounts and operate in foreign

currency. In other words, the credit of foreign exchange to the EEFC

account facilitates the foreign exchange earners to use the foreign

currency in the EEFC account depending upon the business necessities

of the exporter.

2.1 In the case at hand, the assessee received the foreign exchange

remittances and credited the foreign exchange in the EEFC account. At

the end of the financial year, the convertible foreign exchange value was

reflected in the assessee's balance sheet. The assessee has

gained/earned from the fluctuation in foreign currency credited to its EEFC

account. Therefore, the maintenance of an EEFC account is neither

necessary nor incidental in any manner to the export activity of the

assessee. Crediting remittances or maintaining a balance in an EEFC

account is akin to any deposit held by an assessee in the Indian Rupee.

The Revenue opposes the deduction under section 80 HHC because

gains from foreign currency fluctuation are not a profit derived from

exporting goods/merchandise outside India. By the assessment order

dated 10.02.2006, the deduction was disallowed. The assessee,

aggrieved by the disallowance, filed an appeal before the Commissioner

of Income Tax (Appeals), who dismissed the assessee's appeal by the

order dated 21.11.2006. The assessee filed the ITA No. 1254/MUM/2007

4 before the Income Tax Appellate Tribunal, Mumbai. On 25.10.2007, the

Appellate Tribunal, by the common order dated 25.10.2007, set aside the

disallowance of the deduction claimed under Section 80 HHC of the Act

of the gains earned on account of foreign exchange fluctuations. The

Revenue filed an appeal under Section 260(A) of the Act, and through the

impugned judgment, the appeal at the instance of Revenue was allowed,

resulting in restoring the disallowance of the deduction under Section 80

HHC of the Act. Hence, the appeal at the instance of the assessee.

II. SUBMISSIONS BY PARTIES

3. Mr. V.P. Gupta, learned counsel for the assessee, contends that the

assessee is a 100% EOU. In the subject assessment year, the assessee

has earned foreign currency from the export of garments outside India

and, as provided by notification dated 01.03.1994, has credited a portion

of foreign currency earned in the EEFC account. To meet the business

exigencies, the assessee has used the credited amount in the EEFC

account to promote or meet its business needs. Section 80 HHC provides

for a deduction of profits of business from exports. The High Court erred

by not noticing that the foreign exchange is chargeable or computed under

the head “profits and gains of business or profession”. The High Court

answered the question framed, viz., whether the Tribunal was right in

5 setting aside the disallowance of gain earned from foreign exchange

fluctuations by the assessee without recording findings on crucial matters

in issue.

3.1 It is argued that sub-section (1) of Section 80 HHC allows the

deduction of profits of business derived from exports of

goods/merchandise outside India. Sub-section (1) of Section 80 HHC is

appreciated by also applying sub-section (3) of the section. The combined

reading of sub-sections (1) and (3) of Section 80 HHC would bring the

gain from foreign exchange within the fold of profits from the business of

exports outside India. The said sub-section (3) provides that profits

derived from export shall be the amount which bears to the business's

profit, the same proportion as the export turnover with the total business

turnover carried on by the assessee. Clause (baa) of the Explanation to

Section 80 HHC clearly states that the profit of the business, as computed

under the head “profits and gains of business or profession”, is reduced

by ninety percent of the items mentioned therein, including interest. The

income under the head “profits and gains of business or profession” is

arrived in the manner provided under Section 80 HHC by keeping the

CBDT Circular No. 347 dated 07.07.1982 in perspective. The conversion

of foreign currency into Indian Rupee at the closure of the financial year

is revenue in nature and is ancillary and incidental to the business of the

6 assessee. Therefore, the profit or loss on account of conversion of the

foreign currency is of revenue account or trading asset or as a part of

circulating capital, and the gain from foreign exchange fluctuation comes

within the permissible deduction of Section 80 HHC of the Act. He places

strong reliance on Sutlej Cotton Mills Ltd. v. Commissioner of Income

Tax, Calcutta1 and Commissioner of Income Tax, Delhi v. Woodward

Governor India Pvt. Ltd2. The Learned Counsel also places reliance on

Commissioner of Income Tax and Anr. v. Motorola India Electronics

(P) Ltd.3 and contends that the ratio therein directly deals with the

contingencies of an EEFC account. He argues that a direct nexus exists

between the gain from foreign exchange fluctuation and the assessee's

business income from exports. The deposit of funds in an EEFC account

is appreciated from the business perspective of the exporter; denying or

disallowing deduction under Section 80 HHC is illegal. In fine, the

arguments are:-

i. The foreign exchange credited to the EEFC account is a direct

revenue from the export of garments.

ii. The foreign exchange credited to the EEFC account is used for

the business purposes of the assessee.

1 (1978) 4 SCC 358.

2 (2009) 13 SCC 1.

3 (2013) SCC OnLine Kar 10731.

7 iii. The exchange fluctuation is incidentally attributable to the

business of the assessee, and necessarily, the deduction under

Section 80 HHC is available.

iv. The computation of business income is correctly carried out by

the assessee by applying Clause (baa) of Section 80 HHC.

v. A combined reading of sub-sections (1) and (3) applies to

Section 80 HHC.

4. Mr. Arijit Prasad, learned senior counsel appearing for the Revenue,

argued that whether the deduction claimed under Section 80HHC is a

profit derived from the export business depends on each case's facts and

circumstances. None of the precedents relied upon by the assessee deals

with a foreign exchange fluctuation. The case on hand deals with profit or

gain earned by the assessee on the fluctuation of foreign currency

maintained in the EEFC account. The deduction attracts strict compliance

with Section 80 HHC of the Act. Before appreciating the effect of gain or

loss of foreign exchange fluctuation on profits of business from exports,

this Court could consider the scheme under which the assessee is allowed

to credit the foreign currency in EEFC accounts.

5. The Reserve Bank of India (RBI), through Notification No.

FERA.159/94-RB dated 01.03.1994 permitted an EOU or a unit located in

a unit processing zone/park in Software Technology Park or Electronic

8 Hardware Technology Park to open and operate an EEFC account with

an authorized dealer and credit to such an EEFC account up to fifty

percent of any foreign exchange remittances received from outside India.

The guidelines provide the method and manner of opening and operating

an EEFC account. According to the learned senior counsel, an EEFC

account is an adjunct/facility provided by the RBI to the 100% EOUs to

credit foreign exchange earnings in the EEFC account and transact in

foreign exchange on overseas commitments from the said account. The

EEFC account is a facilitator rather than a mandatory requirement for

doing export business or earning foreign exchange. It is argued that

opening an EEFC account is not even an adjunct for necessarily doing

export business of garments by the assessee. According to Mr. Arijit

Prasad, the credit by the assessee is like a transfer/deposit into a bank

account. In the case at hand, the foreign exchange currency maintained

by the assessee had positive appreciation from the date of receipt till the

end of the financial year. The earned foreign exchange appreciation is not

a derived income from the business activity of the assessee, namely, the

export of goods/merchandise outside India. Section 80 HHC

conspicuously refers to the words “derived from” to merit a deduction

under Section 80 HHC of the Act. The expression “derived from” ought

not to be understood or interpreted as “attributable to”. He places strong

reliance on Pandian Chemicals Ltd. v. Commissioner of Income Tax,

9 Madurai4 for the interpretation commended on the expression “derived

from”. The expression must be literally understood, and the ambit of

deductions is not expanded through interpretation. He invites our attention

to the judgment under appeal and the orders of the AO/CIT to contend

that the findings of fact disallowing the deduction of gains in the EEFC

account from foreign exchange fluctuation are well-founded. The credit is

independent of the business of exports, and earning is a passive earning

of the assessee. Therefore, the income claimed as a deduction must have

a direct nexus with the main business activity and be a derivative income

from that activity. The disallowance of deduction under Section 80 HHC is

justified in law, and no ground is made for interference.

III. ANALYSIS

6. In the above narrative, the question that falls for our consideration

is “whether the gain on foreign exchange fluctuation in the EEFC account

of the assessee partakes the character of profits of the business of the

assessee from exports and can the gain be included in the computation

of deduction under profits of the business of the assessee under Section

80 HHC of the Act?”

4 (2003) 5 SCC 590.

10 6.1 The admitted circumstances are that the assessee is a 100% EOU

of garments. In the subject financial year, the assessee recorded the

turnover of exports and the profits from the export of goods and

merchandise outside India. It is also admitted that the assessee, without

delay, received the consideration against the goods exported. With

respect to the foreign exchange earned from the exports of goods, instead

of converting the exchange immediately to Indian currency, the assessee

credited a percentage of the foreign exchange to the EEFC account. The

assessee received a gain of Rs. 26,62,927/- from the amount credited to

the EEFC account due to an upward revision in the exchange rate at the

end of the financial year. The assessee claimed deduction of gains from

fluctuation in foreign currency under Section 80 HHC of the Act. The

assessee argues that, firstly, EEFC is an enabling account for an exporter

of the categories covered by the RBI Notification dated 01.03.1994;

secondly, the account holders are authorised to meet their overseas

financial commitments from the foreign exchange credited in their EEFC

account. Therefore, the EEFC account is used for the assessee’s

business; hence, the gain in foreign exchange fluctuation is treated as

profits of business while computing the permissible deduction under

Section 80 HHC of the Act.

11 6.2 The Revenue has not denied the deduction of profits of business

earned from the export of goods and merchandise to the assessee. The

Revenue contends that crediting foreign exchange earned in an EEFC

Account is only an enabling facility provided by the RBI to the export

earners and the EEFC account, and the account does not have much to

do with the business of the assessee, viz., export of garments. The

opening and running of an EEFC account are not mandatory for any

exporter, but it facilitates transactions in foreign exchange from the

account of the assessee. In other words, it is neither necessary nor

incidental for doing export business of garments but is purely optional.

Therefore, the gains earned from foreign exchange fluctuation of the

amount credited in the EEFC account cannot be treated as profit from the

export business of garments for deduction under Section 80 HHC of the

Act.

7. We find it useful to set out beforehand the origin, scheme, and

advantage of opening and maintaining an EEFC account by a 100% EOU

or a unit located in the Export Processing Zone, Software Technology

Park, or Electronic Hardware Technology Park. Notification No.

FERA.112/92/RB dated 12.03.1992 permits opening an EEFC Account.

This Notification has been issued under sub-section (1) to Section 8 read

with sub-section (3) to Section 73 of the Foreign Exchange Regulation Act,

12 1973 (the FERA). This Notification aims to facilitate an account separately

maintained with the foreign currency received by an exporter. The said

permission granted by the RBI has to be equated with a facility to an

exporter of one or the other categories referred to in the Notification and

maintain the transactions in foreign exchange conforming to the FERA.

7.1 The guidelines issued for the EEFC account are placed as

Annexure-P1 in the Civil Appeal. We have perused the guidelines and

appreciate their object. The guidelines show how the amounts in foreign

exchange are credited and the bonafide use of amounts separately

credited or parked in the EEFC account. The amount credited to an EEFC

account represents foreign currency. The foreign currency/exchange rate

is susceptible to upward or downward value. By the Notification and

Annexure-P1, we record that opening and maintaining an EEFC account

is not a mandatory requirement for export business or earning profits in

the business of export outside India. Had the gain been on account of any

statutory scheme, the ratio in Topman Exports v. Commissioner of

Income Tax, Mumbai5 is attracted and applied. On referring to the

Notification dated 01.03.1994 we hold that the EEFC account is a facility

5 2012 (3) SCC 593.

13 under the FERA. Therefore, we must necessarily examine the gain from

foreign currency fluctuation from the perspective of Section 80 HHC.

7.2 Let us refer to the judgment reported in Topman Exports (supra).

The case considers a situation, viz., statutory flair/character of the revenue

receipt and treatment, as eligible for deduction under Section 80HHC. The

case considers the interplay between Section 28 Clause (iii-d) and Section

80 HHC of the Act. The controversy in Topman Exports (supra) was that

the assessee was claiming a deduction of Rs. 83,69,303/- (Rupees Eighty-

Three Lakhs Sixty-Nine Thousand Three Hundred and Three) under

Section 80HHC of the Act on the sale of Duty Entitlement Pass

Book (DEPB) and Duty-Free Replenishment Certificate (DFRC), which

had accrued to the assessee on the export of its products. This Court

directed the AO to compute the deduction under Section 80HHC of the Act

and observed that the DEPB/ Duty Drawback is relatable to the cost of

manufacture and has a direct nexus with the cost of imports. The relevant

paragraphs are as follows: -

“37. … that where an assessee has an export turnover exceeding Rs 10 crores and has made profits on transfer of DEPB under clause (iii-d) of Section 28, he would not get the benefit of addition to export profits under the third or fourth proviso to sub-section (3) of Section 80-HHC, but he would get the benefit of exclusion of a smaller figure from “profits of the business” under Explanation (baa) to Section 80-HHC of the Act and there is nothing in Explanation (baa) to

14 Section 80-HHC to show that this benefit of exclusion of a smaller figure from “profits of the business” will not be available to an assessee having an export turnover exceeding Rs 10 crores. In other words, where the export turnover of an assessee exceeds Rs 10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iii-d) of Section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit.

38. The High Court, therefore, was not right in coming to the conclusion that as the assessee did have the export turnover exceeding Rs 10 crores and as the assessee did not fulfil the conditions set out in the third proviso to Section 80-HHC(3), the assessee was not entitled to a deduction under Section 80-HHC on the amount received on transfer of DEPB and with a view to get over this difficulty the assessee was contending that the profits on transfer of DEPB under Section 28(iii-

d) would not include the face value of DEPB.”

8. The assessee further contends 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.

8.1 Per contra, the reply of learned counsel appearing for the Revenue

is that Section 80 HHC deals with a permissible deduction while computing

15 the assessee’s tax liability. The provisions of a tax statute are interpreted

strictly, and the literal meaning of the expression “derived from” ought not

to be confused with the words “attributable to”. Interpreting literally, it is

contended that the words “derived from” mentioned in sub-sections (1) and

(3) would be the deciding factor whether the gain from the foreign

exchange fluctuation forms a part of the business income of the assessee

or not. We may refer to the illustration given by Mr. Arijit Prasad; the

crediting of foreign exchange into an EEFC account is like transferring

from one account to another, and the gain from foreign exchange

appreciation is, in no way, attributable to the assessee’s business of export

of goods or merchandise outside India. The foreign exchange fluctuation

resulting in gain, disallowed under Section 80 HHC, is looked at by tracing

the origin of income or the source from which the gain is derived. The gain

cannot be given the status of profits from the business of exports unless

the gain is said to be derived from the business of exports of

goods/merchandise. The learned senior counsel argues that if the foreign

currency fluctuation gain is included in Section 80 HHC, all the incomes

earned by the assessee will come under the head “profit or gain from

business or profession”, and no other head under Section 14 of the Act is

attracted.

16 8.2 The Counsel for Revenue explains that a foreign exchange

appreciation gain due to a delayed remittance is a different consideration.

In the subject assessment year, the assessee's case is not that there is a

delay in the receipt of the sale price and the gain has occasioned in the

delayed period. The case at hand is of a credit of a certain percentage of

foreign exchange earnings in an EEFC account, and the credited amount

has appreciated in Rupee convertibility at the end of the financial year.

The findings of fact on the nature of the investment and the circumstances

in which gains are earned by the dealer, disallowing the deduction under

Section 80 HHC, in the facts and circumstances of the case, are valid and

tenable.

9. We have perused the citations Mr. V. B. Gupta, learned counsel

appearing for the assessee, has placed a strong reliance on. The cases

relied on by the assessee are clearly distinguishable on the point of

deciding the appeal. The ratio does not apply to the facts and

circumstances of the case. Hence, we are not adverting to them in detail

or explaining why these decisions are distinguishable.

9.1 Section 80 HHC of the Act reads as follows:

“S.80HHC. Deduction in respect of profits retained for export business.- Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India

17 of 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, a deduction to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise.

Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate, (hereinafter in this section referred to as an Export House or a Trading House, as the case may be,) issues a certificate referred to in clause (b) of sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.

xxx xxx xxx

xxx xxx xxx

(3) For the purposes of sub-section (1),-

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;

18 (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export. (emphasis supplied) xxx xxx xxx”

10. Section 80 HHC provides for the deduction of profits the assessee

derives from exporting such goods/merchandise. The operation of Section

80 HHC is substantially dependent on two sets of expressions, viz., (a) is

engaged in the business of export outside India of any

goods/merchandise; (b) a deduction to the extent of profits defined in sub-

section (1B) derived by the assessee from the export of such

goods/merchandise. The main point of discussion is on the gain in foreign

exchange vis-à-vis the export business of the assessee.

10.1 In interpreting a section in a taxing statute, Lord Simonds, in the case

St. Aubyn (LM) v. A.G. 6, observed that “the question is not at what

transaction the section is according to some alleged general purpose

aimed, but what transaction its language according to its natural meaning

fairly and squarely hits.” Lord Simonds calls this “the one and only proper

test.” Therefore, it is not the function of a court of law to give words a

strained and unnatural meaning to cover loopholes through which the

evasive taxpayer may find escape or to tax transactions which, had the

6 (1951) 2 All ER 473, p. 485.

19 Legislature thought of them, would have been covered by appropriate

words7.

10.2 This Court, in the recent judgment in Commissioner. of Customs

(Import), Mumbai v. M/S. Dilip Kumar and Company & Ors. 8 held as

follows:-

“24. …It is axiomatic that taxation statute has to be interpreted strictly because the State cannot at their whims and fancies burden the citizens without authority of law. In other words, when the competent legislature mandates taxing certain persons/certain objects in certain circumstances, it cannot be expanded/interpreted to include those, which were not intended by the legislature. (emphasis supplied)”

10.3 A taxing provision, including a deduction/exemption, is interpreted

strictly. In other words, the interpretation is by the strict legalistic method.

With wisdom and experience, the Parliament used the words “derived

from” in Section 80 HHC to indicate the extent to which the deduction is

permitted.

10.4 The Privy Council in Commissioner of Income-Tax, Bihar and

Orissa v. Raja Bahadur Kamakshya Narayan Singh 9, while interpreting

the expression “derived from”, has held:-

7

IRC v. Wolfson, (1949) 1 All ER 865, p. 868 (HL).

8 (2018) 9 SCC 1.

9 (1948) 16 ITR 325.

20 “The word “derived” is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the, interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non- payment. And rent is not land within the meaning of the definition.”

10.5 Raja Bahadur Kamakshya Narayan Singh (supra) has been

considered and relied on by this Court in Pandian Chemicals Ltd. (supra)

and Hindustan Lever Ltd. v. Commissioner of Income-Tax.10 A catena

of decisions deals with the construction of the expression “derived from”,

especially in the context of the Act. To appreciate the difference between

“derived from” and “attributable to”, we are not referring to all the

fundamental principles of interpretation of statutes or citations on this

point. It would suffice if a few decisions on the construction of the

expression “derived from” are referred to, in order to decide whether the

gain from fluctuation forms a part of the assessee's business income or

not.

S. NO. NOMINAL INDEX OBSERVATION

1. Commissioner of Income There must be, for the application of the Tax, Karnataka v. Sterling words “derived from”, a direct nexus Foods, Mangalore11 between the profits and gains and the industrial undertaking.

10 (1998) 9 SCC 540.

11 (1999) 4 SCC 98.

21

2. Pandian Chemicals Ltd. v. The words “derived from” in Section 80-HH Commissioner of Income of the Income Tax Act, 1961 must be Tax, Madurai12 understood as something which has direct or immediate nexus with the appellant's industrial undertaking.

3. Commissioner of Income The word “derived” occurring in Section Tax v. Willamson Financial 80HHC of the Act would mean ‘derived from Services and Ors.13 source’ under Section 14 of the Act.

4. Hindustan Lever Ltd. v. The word “derived” as far as income tax law Commissioner of Income- is concerned has been given a narrow Tax, Bombay City-I14 meaning. In other words, only the proximate source has to be considered and not the source to which it may ultimately be referable.

5. Ahmedabad Manufacturing (i) There must be a direct nexus between and Calico Printing Co. Ltd. the activity of export and the earning of profit v. Commissioner of or gains for application of the expression 'derived from export.

Income-Tax, Gujarat-I15

(ii) As discussed above, the word “derive” as far as income-tax law is concerned, has been given a narrow meaning—a restricted meaning—by the courts and has been understood in the restricted sense of a direct derivation and not understood in the broad sense as equivalent to derived directly or indirectly.

6. Commissioner of Income- The term ‘derived’ occurring in Section 80J Tax v. Eastern Seafoods of the Act is not a term of art. Profits or gains Exports (P.) Ltd.16 can be said to have been ‘derived’ from an activity carried on by a person only if the said activity is the immediate and effective source of such profits or gains.

7. Commissioner of Income- The expression “derived from” means to get Tax v. Viswananthan and or trace from a source. It is narrower than Co.17 the term attributable to.

8. Kirloskar Electrodyne Ltd. The term ‘derived from’ has a definite but v. Deputy Commissioner of narrow meaning. It cannot receive a flexible Income-Tax18 or wider connotation.

12 (2003) 5 SCC 590.

13 (2008) 2 SCC 202.

14 (1980) 121 ITR 951 (Bom).

15 (1982) 137 ITR 616 (Guj).

16 (1995) 215 ITR 64 (Mad).

17 (2003) 261 ITR 737 (Mad).

18 2003 SCC OnLine ITAT 25.

22

11. We have taken note of the construction/interpretation of the

expression “derived from” adopted by this Court and a few High Courts as

stated in the above-mentioned table—the expressions “derived from” and

“since” are used in multiple instances in the Act. Unless the context does

not permit, the construction of the expression “derived from” must be

consistent.

12. In interpreting Section 80 HHC, the expression “derived from” has a

deciding position with the other expression viz., “from the export of such

goods or merchandise”. While appreciating the deduction claimed as

profits of a business, the test is whether the income/profit is derived from

the export of such goods/merchandise.

12.1 Let us read the very relevant words in Section 80 HHC of the Act,

namely, “derived by the assessee from the export of such goods or

merchandise”, in the background of interpretation given to the said

expression by this Court. The Section enables deduction to the extent of

profits derived by the assessee from the export of such goods and

merchandise and none else.

12.2 The policy behind the deductions of profits from the business of

exports is to encourage and incentivise export trade. Through Section

80HHC, the Parliament restricted the deduction of profit from the

23 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

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.

13. In Topman Exports (supra), a converse case is available, where a

receipt, pursuant to or in terms of a statutory provision, is treated as

income derived from the export business. The instant case is not proved

or stated as falling within a statutory requirement/benefit. At foremost, by

applying the meaning of the words “derived from”, as held in the catena of

cases, we are of the view that profits earned by the assessee due to price

fluctuation, in the facts and circumstances of this case, cannot be included

or treated as derived from the business of export income of the assessee.

The assessee can be correct that the computation shall be as per Sections

28 to 44 of the Act if the receipt or income is from an export business. As

24 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. 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.

14. We agree with the reasoning and the view recorded in the Judgment

under Appeal. Consequently, Civil Appeal No. 2664 of 2011 fails and is

dismissed.

15. For the above reasons and discussion, Civil Appeal No.2665 of 2011

fails and is dismissed. There is no order as to costs.

……………...............J. [B.V. NAGARATHNA]

...………...................J. [S.V.N. BHATTI]

NEW DELHI;

NOVEMBER 21, 2023.

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