2010 (4) TMI 216 - HC - Income Tax

Deduction u/s 80HHC - receipts on account of Foreign Exchange Fluctuation on EEFC Account and interest on EEFC Account ITAT decided that the receipts on account of Foreign Exchange Fluctuation on EEFC Account and interest on EEFC Account can be treated as part of business income and accordingly included in the profit of business while calculating deduction u/s .80HHC - Held that - The Tribunal has merely relied upon decisions of its coordinate benches and there is merit in the submission of counsel appearing on behalf of the Revenue that the Tribunal ignored the plain meaning and intendment of the words used by Parliament while legislating upon Section 80HHC. The fluctuation in the present case is not on account of the sale proceeds or for that matter on account of a delayed realization of the sale proceeds. The fluctuation has arisen in the deposits maintained by the assessee in the EEFC Account in convertible foreign exchange after the completion of the export transaction. - The interest which accrued to the assessee on the deposits held in the EEFC Account cannot be treated as business income. decided in favor of revenue and against the assessee

Summary

Issues:
1. Interpretation of Section 80HHC of the Income Tax Act, 1961 regarding treatment of receipts on account of Foreign Exchange Fluctuation and interest on EEFC Account as part of business income for calculating deduction u/s .80HHC.

Analysis:
The High Court of Bombay heard an appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961, concerning the treatment of receipts on account of Foreign Exchange Fluctuation and interest on EEFC Account for the purpose of claiming deduction under Section 80HHC. The case involved the Assessment Year 2000-01 and subsequent years. The dispute arose when the Revenue contended that gains from foreign currency fluctuation should be excluded from export turnover for calculating the deduction under Section 80HHC. The assessee had maintained an Exchange Earners Foreign Currency (EEFC) Account, leading to fluctuations in foreign exchange rates and interest income.

The Assessing Officer treated the entire receipt on account of exchange fluctuation and interest income as income under the head of other sources, which was upheld by the Commissioner of Income Tax (Appeals). However, the Tribunal reversed these findings based on its interpretation of the law and allowed the appeal filed by the assessee.

The Court analyzed the provisions of Section 80HHC, emphasizing that the deduction is applicable to profits derived from the export of goods or merchandise. It highlighted that the term 'derived' signifies a direct and proximate nexus with the export activity. The Court referred to previous judgments to explain the concept of 'derived from' in the context of income tax laws.

The Court concluded that the exchange fluctuation and interest income arising from the EEFC Account did not have a direct nexus with the export transaction. It noted that the export proceeds were received in full, and the decision to maintain funds in the EEFC Account was at the discretion of the exporter. The fluctuations post-export did not qualify as profits derived from export under Section 80HHC. Similarly, the interest income from the EEFC Account was not classified as business income but as income from other sources.

Ultimately, the Court ruled in favor of the Revenue, holding that the receipts in question were not part of the profits derived from the export activity. The judgment highlighted the importance of a direct connection between income and the business activity for tax purposes.