Profit from exchange rate fluctuation is independent of export earnings. Fluctuations from the EEFC account does not fall within the meaning of “derived from” the export.
In a recent judgment, Allahabad High Court has denied deduction u/s 80HHC following Supreme Court that the profit from exchange rate fluctuation is independent of export earnings, gain from foreign exchange fluctuations from the EEFC account does not fall within the meaning of “derived from” the export.
ABCAUS Case Law Citation:
4634 (2025) (07) abcaus.in HC
In the instant case, the appellant assessee filed appeal against the order passed by Income Tax Appellate Tribunal by which it has held that the appellant was not entitled to the benefit under Section 80HHC in respect of the amount of interest received by the appellant on the deposits in the Exchange Earners Foreign Currency Account and also amount being the gains on account of exchange rate fluctuation in foreign exchange rates for the appellant EEFC account
The appeal was admitted on the question of law, as follows:-
1. Whether, interest on deposits of sale proceeds in foreign currency in EEFC account under Reserve Bank of India Scheme is eligible to benefit under Section 80 HHC of the Act?
2. Whether, receipts arising on account of upward fluctuation in foreign exchange rates applicable to the sale proceeds in EEFC account are liable to the benefit under Section 80 HHC of the Act?
The counsel appearing on behalf of the appellant submitted that the substantial questions of law that had been admitted in this appeal had been decided by the Hon’ble Supreme Court.
The Hon’ble High Court observed that the Hon’ble Supreme Court had held as under:
“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 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 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.”
The Hon’ble High Court noted that the Hon’ble Supreme Court had held 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 answered the point.
As a result, the substantial questions of law were answered against the assessee and in favour of the department.
Accordingly, the appeal was dismissed.
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