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Tax on unrealised/notional foreign exchange gain

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Padmaraj

Analyst

25 Points Posted on 01 July 2010

Please clarify on the following issue:

As held in Woodward Governer India Pvt Ltd case, "Loss on exchange fluctuation arising on mark to market losses in respect of loan taken for revenue purposes is allowable as a deduction" while computing Profits or Gains of Business or Profession.

Taking the same analogy from the above case law, the department will charge Gains on exchange fluctuation arising on mark to market in respect of loan taken for revenue purposes.

first of all i would like to know whether it is right to tax unrealised foreign exchange gain (as a result of applying AS-11) which is only booked?

secondly whether this can be extended to foreign debtors and creditors?

Thirdly i would also like to know whether the above issue amounts to taxing notional/unrealised gains which was not contemplated by the income tax act 1961?

i would like to know your views on these.

Padmaraj

Replies (1)

Amir

Learner

4016 Points Posted on 01 July 2010

Dear Padmaraj,

Accounting for unrealised REVENUE exchange gain/loss is nothing but the treatment done on "Accrual /Mercantile system of accounting" - I don't see any issues with this.

Whether this can be extended to foreign debtors/creditors - Yes , It is on account of debtors/creditors only, the above judgement has just given an extended meaning to Revenue by including "Loans" for the purposes of revenue expenses.

Well, ur third question is directed towards spirit of law..U can say that way but pls appreciate that if the notional gains does not materializes then the next year u will generate loss and you will be at par & vice a versa. So this has very limited effect with the year of taxability otherwise in nutshell there is no difference.

Finally, pls see sec 43A - Treatment of exchange difference relating to capital expenditure/fixed asset , where law prescribes cash basis of accounting i:e accounting for exchange differences at the time of payment.