The assessee, Ballarpur Industries Ltd, a public limited company derived income from business and from royalty and interest from a joint venture company in Malaysia. The assessee accounted the income by way of royalty and interest from the Malaysian Company on accrual basis. In the relevant assessment year the assessee received the royalty and interest which were accounted in earlier years on accrual basis. However, the assessee company received more than what was earlier accounted in Indian rupees due to difference in currency exchange rate. The Ld. AO treated the royalty and interest income as exempt as per India-Malaysia Double taxation avoidance agreement (‘DTAA’). However, he did not agree with the contention of the assessee that the forex gain must also be treated as akin to royalty and interest income.
The contention of assessee that the treatment should not be met out differently because the assessee accounts as per mercantile system was not accepted by the Hon’ble High Court stating that even incase of cash system of accounting, though the income is recorded only on receipt, yet for the purposes of taxation the amount received from Malaysia would be split on account of royalty or interest income earned in Malaysia as one head of income and the income gain on account of exchange rate fluctuation as other head of income. Therefore, source of receipt is different and two fold.
As regards the contention of assessee that under Section 80HHC, amount gained on foreign exchange fluctuation is treated as part of export turnover and the same treatment must be given in the present case, the Hon’ble Bombay High Court held that Section 80HHC is a specific provision wherein it is specified that any gain or loss made on account to amounts in convertible foreign exchange is to be included as export turnover for the purposes of computing deduction. In the absence of specific provision, forex gain or loss will be brought to tax under the head, income from other sources. Thus the Hon’ble High Court held that the forex gain/loss would not bear the same character as royalty or interest income earned in Malaysia and it is taxable in India.