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TMI Blog2023 (11) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... galistic 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. 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. 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. As we 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. The policy behind the deductions of profits from the business of exports is to encourage and incentivise export trade. Through Section 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent : Mr. Balbir Singh, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mr. Rupesh Kumar, Adv. Mr. Shyam Gopal, Adv. Mr. Samarvir Singh, Adv. Mr. Shashank Bajpai, Adv. JUDGMENT S. V. N. BHATTI, J. I. FACTUAL BACKGROUND 1. Shah Originals/assessee is the appellant in the subject Civil Appeals. The Commissioner of Income Tax-24, Mumbai/Revenue, is the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HC 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 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, Calcutta (1978) 4 SCC 358 and Commissioner of Income Tax, Delhi v. Woodward Governor India Pvt. Ltd (2009) 13 SCC 1 . The Learned Counsel also places reliance on Commissioner of Income Tax and Anr. v. Motorola India Electronics (P) Ltd. (2013) SCC OnLine Kar 10731 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unct 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, Madurai (2003) 5 SCC 590 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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, 1973 (the FERA). This Notification aims t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport of such goods/merchandise. The main point of discussion is on the gain in foreign exchange vis- -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. (1951) 2 All ER 473, p. 485 , 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 Legislature thought of them, would have been covered by appropriate words IRC v. Wolfson, (1949) 1 All ER 865, p. 868 (HL) . 10.2 This Court, in the recent judgment in Commissioner. of Customs (Import), Mumbai v. M/S. Dilip Kumar and Company Ors. (2018) 9 SCC 1 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 withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Commissioner of Income Tax, Madurai (2003) 5 SCC 590 The words derived from in Section 80-HH of the Income Tax Act, 1961 must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. 3. Commissioner of Income Tax v. Willamson Financial Services and Ors. (2008) 2 SCC 202 The word derived occurring in Section 80HHC of the Act would mean derived from source under Section 14 of the Act. 4. Hindustan Lever Ltd. v. Commissioner of Income- Tax, Bombay City-I (1980) 121 ITR 951 (Bom) The word derived as far as income tax law is concerned has been given a narrow 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 and Calico Printing Co. Ltd. v. Commissioner of Income-Tax, Gujarat-I (1982) 137 ITR 616 (Guj) (i) There must be a direct nexus between the activity of export and the earning of profit or gains for applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licy 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 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 req ..... X X X X Extracts X X X X X X X X Extracts X X X X
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