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Shah Originals vs. Commissioner of Income Tax-24, Mumbai

Civil Appeal · 2023 INSC 1014Decided 21 Nov 2023
Civil Appeal No. 2664 of 2011
B.V. Nagarathna · S.V.N. Bhatti

Background

Shah Originals, a 100% export-oriented garment manufacturer, credited part of its foreign exchange export earnings into a special RBI-permitted account called an EEFC (Exchange Earners' Foreign Currency) account. At the end of the financial year, this foreign currency had appreciated in value, giving the company a gain of about Rs. 26.6 lakh. The company claimed this gain as a tax deduction under Section 80HHC of the Income Tax Act, which allows deductions for profits "derived from" the export business. The tax department disallowed the deduction, arguing the currency gain was not itself earned from exporting goods.

Decision Breakdown

The Supreme Court held that the words "derived from" in Section 80HHC must be interpreted narrowly and strictly, requiring a direct and immediate nexus between the profit and the actual export activity, not merely something connected or attributable to it. It found that maintaining an EEFC account is an optional facility provided by the RBI, not a necessary or integral part of doing export business, and that the gain from currency fluctuation in that account was akin to a gain on a bank deposit rather than income "derived from" exporting goods. Relying on a long line of precedent narrowly construing "derived from" in tax deduction provisions, the Court agreed with the High Court that this currency-fluctuation gain could not be added to the exporter's deductible export profits. Both connected appeals were dismissed, with no order as to costs.

Lesson Learnt

Tax deduction provisions are read strictly by courts: a gain that is merely incidental to, or facilitated by, a business activity is not automatically treated as "derived from" that activity for tax deduction purposes; only income with a direct, immediate link to the specified activity qualifies.

Official source (sci.gov.in)View Judgment (PDF)

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