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Introduction

As per Ind AS, all forwards contracts in foreign currency needs to be marked to market at exchange rate as on the day of closing of financial period. However taxability of MTM ( Marked to Market ) losses is governed by ICDS & Income Tax Act. Assessee needs to make adjustments in Computation of Income to disallow unrealized MTM losses for the financial period considered in Profit and Loss Account.

Taxation of MTM  in ICDS & Income Tax Act

Following are comprehensive provisions related to taxation of MTM losses as per ICDS and as per Income Tax Act. Provisions are elaborated for ready reference of the readers.

As per ICDS I Para 4 (ii) MTM Loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS

As per ICDS VI Para 8 (5), Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement. It means only realised losses will be allowed as deduction as per ICDS.

As per Income Tax Act Section 36 (1) (xviii), marked to market loss or other expected loss as computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 will be allowed as deduction. As per ICDS loss on settlement of forward contracts will be allowed as deduction.

As per Income Tax Act Section 43AA, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. It means any forex loss shall be allowed as deduction only if it is computed in accordance with ICDS. As per ICDS only realized Forex loss on forward contracts is allowed as deduction

Taxation MTM (Marked to Market) Loss on Forward Contracts as per ICDS & Income Tax Act

Conclusion :-

Considering all the provisions of Act and ICDS, unrealized MTM Loss will not be allowed as deduction in Computation of Income as per Income Tax Act. Assesse needs to make required adjustments while preparing Computation of Income.

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