Section 42 — Capitalising Forex | ITA 2025

Section 42 — CAPITALISING IMPACT OF FOREIGN EXCHANGE FLUCTUATION

Section 42 prescribes the treatment of forex fluctuation on borrowings used to acquire imported capital assets — the substantive equivalent of 1961 s. 43A. Where forex liability for asset acquisition increases due to rupee depreciation, the increase is added to actual cost (capitalised) — not a revenue loss. Conversely, decrease (rupee appreciation) reduces actual cost.

Statutory text — Income-tax Act, 2025

Marginal note — Capitalising impact of foreign exchange fluctuation

(1) Irrespective of anything contained in any other provision of this Act, where at the time of making payment during the tax year, there is a variation in liability of an assessee as expressed in Indian currency, due to change in rate of exchange, in relation to an asset acquired for the purpose of business or profes- sion from a country outside India, it shall be dealt with in the manner specified in sub-sections (2) and (3).

(2) For this section, the liability shall exclude any part met directly or indirectly by any other person or authority and the “variation in liability” shall be computed as— A = B – C where,— A = variation in liability; B = payment expressed in Indian currency at the time when it is made—

(a) towards the whole or part of the cost of asset; or

(b) towards repayment of the whole or part of the moneys borrowed, directly or indirectly, along with interest in foreign currency, specifically for acquiring such asset; C = liability, corresponding to the amount referred in B, in Indian cur- rency at the time of acquisition of such asset.

(3) The variation in liability shall be added or reduced from the—

(a) actual cost of the asset as referred in section 39; or

(b) expenditure of capital nature referred to in section 32(i) or 45(1)(a) (i); or

(c) cost of acquisition of a capital asset (not being a capital asset referred to in section 74) for the purpose of section 72, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset.

(4) Where the assessee has entered into a contract with an authorised dealer as defined in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999), for providing him with a specified sum in a foreign currency on or after a stipu- lated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the said liability, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this section shall, in respect of so much of the sum specified in the contract as is available for discharging the said liability, be computed with reference to the rate of exchange specified therein. Taxation of foreign exchange fluctuation.

Corresponding provision — 1961 regime

INCOME-TAX ACT, 2025	INCOME-TAX ACT, 1961
INCOME-TAX ACT, 2025 — s. 42	INCOME-TAX ACT, 1961 — s. 43A
Forex on imported capital asset borrowings — capitalised	1961 s. 43A — substantively identical
Capitalisation on PAYMENT basis (post FA 2002)	1961 s. 43A — same
Forex on revenue items — taxed/deducted as ordinary forex gain/loss u/s 43	Outside s. 43A — handled by 1961 s. 43(6)/equivalent or general rules

STATUTORY ARCHITECTURE

Section 42 catches forex fluctuation only on capital-asset acquisition borrowings. The substantive rule (post-FA 2002): adjustment to actual cost is on PAYMENT basis (when forex installment is actually paid), not on accrual basis. This was a major shift from pre-FA 2002 accrual-basis treatment. Forex on revenue items (trade payables / receivables) falls under s. 43 (next section) and ordinary AS-11 / Ind-AS 21 rules.

JUDICIAL EVOLUTION — Pre-FA 2002 Accrual Basis (Woodward Governor)

CIT v. Woodward Governor India (P.) Ltd., (2009) 312 ITR 254 (SC) — confirmed that for revenue-item forex (trade payables / receivables), the AS-11 mark-to-market accrual treatment applies; assessees following AS-11 are entitled to deduct forex losses on outstanding receivables/payables on accrual. For capital-item forex (s. 43A / s. 42), the post-FA 2002 PAYMENT-basis prevails — Woodward Governor's accrual logic does NOT extend to s. 43A items.

PLANNING NOTES

(i) For imported capital assets purchased on deferred-payment basis, maintain installment-wise forex worksheet — adjustments to actual cost crystallise on each payment date. (ii) For ECB / buyer's credit on capital purchases, the forex on principal repayments adjusts WDV; forex on interest is revenue. (iii) For revenue-item forex (trade), follow AS-11 / Ind-AS 21 mark-to-market — cite Woodward Governor. (iv) Form 3CD Item 18 reconciles forex-adjustments to depreciation block.

CROSS-REFERENCES

Section 39 — Computation of actual cost (s. 42 adjusts).
Section 41 — WDV (s. 42 reflected in WDV computation).
Section 43 — Taxation of forex (revenue items).

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