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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 ..... 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 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 Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion "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?" 6.1 The admitted circumstances are that the assessee is a 100% EOU of garm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(iiid) 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner. 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 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 (1948) 16 ITR 325, while interpreting the expression "derived from", has held:- "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 effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve" 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- Tax v. Eastern Seafoods Exports (P.) Ltd. (1995) 215 ITR 64 (Mad) The term 'derived' occurring in Section 80J of the Act is not a term of art. Profits or gains 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- Tax v. Viswananthan and Co. (2003) 261 ITR 737 (Mad) The expression "derived from" means to get or trace from a source. It is narrower than the term attributable to. 8. Kirloskar Electrodyne Ltd. v. Deputy Commissioner of Income-Tax 2003 SCC OnLine ITAT 25 The term 'derived from' has a definite but narrow meaning. It cannot receive a flexible or wider connotation. 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-mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X
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