Taxation of Forex

Section 43 — TAXATION OF FOREIGN EXCHANGE FLUCTUATION

Section 43 prescribes the treatment of forex fluctuation on revenue items (trade receivables / payables / current monetary assets) — the substantive equivalent of 1961 s. 43AA / ICDS VI. Forex gains / losses on revenue items are recognised as PGBP receipts / deductions per AS-11 / Ind-AS 21 / ICDS VI (subject to assessee's accounting policy).

JUDICIAL EVOLUTION — Mark-to-Market (Woodward Governor)

The Supreme Court in CIT v. Woodward Governor India (P.) Ltd., (2009) 312 ITR 254 (SC), confirmed that for revenue-item forex, AS-11 mark-to-market accrual treatment applies; assessees following AS-11 are entitled to deduct forex losses on outstanding receivables / payables on accrual.

HELD: Loss arising on year-end revaluation of foreign currency monetary items at the closing rate, debited in books per AS-11, is allowable as a business loss / deduction. The accrual is recognised on the year-end basis — actual remittance / settlement is not required for tax recognition. (per Woodward Governor ¶ 19).

PLANNING NOTES

(i) Maintain forex-fluctuation register per outstanding receivable / payable for year-end mark-to-market. (ii) Distinguish revenue items (s. 43 — accrual) from capital items (s. 42 — payment basis). (iii) For ICDS-VI departures, disclose in Form 3CD Item 13.

CROSS-REFERENCES

• Section 42 — Capital-item forex (preceding section).
• Section 27 — Manner of computing PGBP.
• AS-11 / Ind-AS 21 / ICDS VI — accounting standards on forex.