2007 (6) TMI 542 - HC - Income Tax

Summary

Issues involved:
1. Confirmation of addition of royalty and interest due to exchange fluctuation
2. Characterization of exchange rate difference compared to royalty
3. Application of Double Taxation Agreement to income from Malaysia
4. Disallowance of depreciation for assets of amalgamated company
5. Disallowance of depreciation on assets not allowed under relevant sections
6. Benefit of unabsorbed depreciation not allowed despite compliance with relevant provisions

Issue I: Confirmation of addition of royalty and interest due to exchange fluctuation
The Tribunal confirmed the addition of royalty and interest received from a Malaysian party as a result of exchange fluctuation. The question of law raised was whether this confirmation was correct under the applicable legal provisions.

Issue II: Characterization of exchange rate difference compared to royalty
The Tribunal also confirmed that the difference in exchange rate, amounting to a specific sum, did not have the same character as royalty derived from Malaysia as per the Agreement for Avoidance of Double Taxation with Malaysia. The legal query was whether this characterization was appropriate under the relevant laws.

Issue III: Application of Double Taxation Agreement to income from Malaysia
Considering the findings that royalty and interest income from Malaysia fell under the exemption method, the issue arose as to whether the provisions of the Agreement for Avoidance of Double Taxation should be interpreted to apply to such income only at the accrual stage and not at the receipt stage in respect of exchange fluctuation.

Issue IV: Disallowance of depreciation for assets of amalgamated company
The Income Tax Appellate Tribunal upheld the disallowance of depreciation amounting to a specific sum concerning the assets of a company that was amalgamated with the appellant company as per the order of BIFR. The question was whether this disallowance was justified under the Income-tax Act, 1961.

Issue V: Disallowance of depreciation on assets not allowed under relevant sections
Another point of contention was the confirmation by the Tribunal of the disallowance of depreciation on the value of assets of the amalgamating company that were not actually allowed under specific sections of the Income-tax Act, 1961.

Issue VI: Benefit of unabsorbed depreciation not allowed despite compliance
Lastly, it was argued whether the Tribunal erred in not allowing the benefit of unabsorbed depreciation, even though compliance with the relevant provisions of the Income-tax Act, 1961, along with the Sick Industrial Companies (Special Provision) Act, 1985, had been met.