Exchange fluctuation gain on repatriated royalty and interest was separate taxable income, not treaty-exempt original income.

Where royalty and interest had already accrued in earlier years and were valued for treaty purposes at the relevant balance-sheet exchange rate, a later gain on remittance in foreign currency was held to arise only from currency fluctuation and the passage of time. Applying Accounting Standard 11 and the reasoning approved in Woodward Governor, the court treated that exchange difference as a separate receipt in the year of realisation rather than an accretion to the original income. The gain did not retain the character of royalty or interest for Indo-Malaysian treaty exemption and was taxable in India as distinct income.

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Issues: Whether the gain arising on remittance and conversion of royalty and interest originally accrued in Malaysia retained the character of royalty and interest so as to remain exempt under the Indo-Malaysian double taxation agreement, or whether such exchange fluctuation gain constituted separate taxable income in India.

Analysis: The royalty and interest had accrued in earlier years and were taken into account at the exchange rate prevailing on the relevant balance-sheet date, with exemption available then under the treaty. The subsequent receipt in foreign currency at a different exchange rate produced an additional gain or loss only because of currency variation and passage of time. Applying the principle recognised in Accounting Standard 11 and the reasoning approved in Woodward Governor, exchange differences arising after the period of accrual are to be recognised in the period in which they arise. The later gain was not an accretion to the royalty or interest itself, nor did it arise from the Malaysian source of those receipts. The reliance on cases concerning export turnover under section 80HHC was held inapplicable because that provision contains a specific statutory scheme for including foreign exchange realisation, unlike the present treaty-based claim.

Conclusion: The exchange fluctuation gain did not retain the character of royalty or interest and was taxable as separate income in India; the questions were answered in favour of the Revenue and against the assessee.

Ratio Decidendi: Where income has already accrued and been valued in earlier years, any later gain arising only from foreign exchange variation on its repatriation is a distinct taxable receipt and does not inherit the original character of the underlying income for treaty exemption purposes.

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