Exchange Gain Not Attributable to Export Activity Under Section 80HHC: HC
The present income tax appeal (No. 281 of 2008) has been filed by M/S Zafar Alam International (Appellant) in the High Court of Allahabad before the Bench of Justice Shekhar B. Saraf, J. and Praveen Kumar Giri, J., Asstt. Commissioner of Income Tax, Range-III Kanpur is the respondent. The decision of the current judgement (Neutral Citation No. – 2025:AHC:105464-DB) was announced on 04.07.2025.
Background of Case:
- The appellant, M/s Zafar Alam International, has filed this income tax appeal to challenge an order passed by the Assistant Commissioner of Income Tax, Range-III, Kanpur (respondent).
- The learned counsel of the appellant, Sri Rahul Agarwal, reminds the court that a similar case has already been decided by the Supreme Court of India. He took reference from a recent Supreme Court judgement titled Shah Originals Vs. Commissioner of Income Tax, which was reported in 459 ITR 385 (SC) and decided on November 21, 2023.
- In that judgement, the Supreme Court ruled that gains from foreign exchange fluctuations from the EEFC account do not fall within the meaning of “derived from” the export of garments by the appellant. The profit from exchange fluctuation does not depend on export earnings, and the current judgment correctly answers the point.
- Hence, the appellant hopes that the High Court will announce the same decision as was decided in the Supreme Court.
Supreme Court’s Ruling in Shah Originals Case
- The Shah Originals Case in the Supreme Court was about the interpretation of the phrase “derived from” in the context of Section 80HHC of the Income Tax Act.
- This section permits exporters to claim tax deductions on profits earned directly from the export of goods or merchandise. However, the scope of this benefit is limited only to profits that are directly and strictly earned from export activity.
- In that case, the Supreme Court ruled that the term “derived from” has a narrow meaning. Only profits directly linked to the export of goods are allowed to be deducted under Section 80HHC.
- Exchange gains, like profits from foreign currency held in EEFC accounts, are not considered as profits “derived from” exports because they are not directly tied to the actual act of exporting goods.
- Such gains can take place due to several reasons unrelated to export operations. Hence, these exchange fluctuation profits cannot be included while calculating deductions under Section 80HHC.
- Therefore, the Supreme Court quashed the appeal, saying as per the rules, foreign exchange fluctuation profits are not eligible for deduction under Section 80HHC.
Impact on Zafar Alam International’s Appeal
- Based on this ruling from the Supreme Court, the Allahabad High Court found that the same legal decision applies in this case too and wanted to claim a tax deduction under Section 80HHC for gains it made from foreign exchange fluctuations (likely from an EEFC account). However, since the Supreme Court has already ruled that these types of gains are not covered under Section 80HHC, the High Court also ruled the same.
- The substantial question of law has now been clearly answered by the Supreme Court.
- The law now favours the Income Tax Department (the respondent) and goes against the appellant, i.e., M/s Zafar Alam International.
High Court’s Final Decision:
- After taking reference from the Supreme Court’s previous judgement, the High Court decided that no relief can be granted to the appellant.
- Therefore, the high court quashed the appeal, which means the decision of the Income Tax Department stands, and the company cannot claim a tax deduction on its foreign exchange gains under Section 80HHC.