CIT vs. Shah Originals (Bombay High Court)

DATE: (Date of pronouncement)
DATE: May 4, 2010 (Date of publication)

Click here to download the judgement (shah_originals_80HHC.pdf)

EEFC A/c foreign exchange fluctuation and interest not eligible u/s 80HHC

The assessee, an exporter, claimed deduction u/s 80HHC on account of foreign exchange fluctuation and interest in the EEFC account on the ground that it was part of business income and arose from exports. The AO & CIT (A) rejected the claim though the Tribunal allowed it. On appeal by the Revenue, HELD reversing the Tribunal:

(i) S. 80HHC allows a deduction in respect of the profits “derived” from exports. The term ‘derived’ is of a narrower connotation than the term ‘attributable to’ and postulates the existence of a direct and proximate nexus with the export activity. Pandian Chemicals 262 ITR 278 (SC) and Ravindranathan Nair 295 ITR 228 (SC) followed;

(ii) An exporter is not obliged to maintain the export proceeds in the EEFC Account but, this is a facility made available by the RBI. The transaction of export is complete in all respects upon repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation arises after the export transaction is complete and payment has been received by the exporter. It does not bear a proximate and direct nexus with the export transaction so as to be “derived” from exports for s. 80HHC. Interest on EEFC deposits is not “business income” but is “income from other sources” and not eligible for deduction u/s 80HHC.

Note: Exchange fluctuation on account of delayed realization of export proceeds as well as interest from the customer for delayed payment stands on a different footing. See: CIT vs. Rachna Udyog 230 CTR 72 (Bom) and ACIT vs. Prakash I. Shah 306 ITR 1 (Mum)(SB)(AT)