Forex gain / loss & its allowance in income tax

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Roshan (Querist)
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13 July 2012 I had imported goods in F.Y 11-12, and not yet paid the amount in that Financial year, whether on outstanding balance I need to calculate Forex gain / loss. I would also like to know whether it will be an allowable expenditure in the Income Tax.

CA Lokesh Pokharna

CA Lokesh Pokharna (Expert)
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13 July 2012 on notional forex gain.loss you need not to pay income tax.

Roshan

Roshan (Querist)
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19 July 2012 Thanks for the reply Mr. Lokesh
Can u just give some basis of judgement or section were in it has been specified that tax is not payable

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Roshan

Roshan (Querist)
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19 July 2012 ............

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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25 July 2024 In the context of income tax treatment of forex gain or loss related to imported goods, here are the key points to consider:

### Forex Gain/Loss Calculation

1. **Import of Goods in FY 2011-12**: If you imported goods in the financial year 2011-12 but did not pay for them within that financial year, you would need to account for any forex gain or loss due to currency fluctuations until the payment is made.

2. **Forex Gain/Loss Calculation**: Forex gain or loss is typically calculated based on the difference between the exchange rate at the time of the transaction (date of import) and the exchange rate at the time of payment. For instance, if the exchange rate has changed unfavorably, resulting in a higher payment in your local currency, it would lead to a forex loss.

### Income Tax Treatment

1. **Allowability as Expenditure**: Forex loss incurred on imported goods can generally be considered as a business expense and hence deductible for income tax purposes, provided it is incurred in the normal course of business. Section 37 of the Income Tax Act, 1961 allows for deductions of all expenditures (except those specifically disallowed) laid out for the purpose of business or profession.

2. **Judicial View**: Courts have held that forex losses arising out of genuine commercial transactions are allowable deductions under Section 37 of the Income Tax Act. However, it is important to ensure that the loss claimed is directly related to the business operations and supported by appropriate documentation.

3. **Allowable Conditions**: To claim the forex loss as an allowable deduction, ensure the following conditions are met:
- The loss should be directly attributable to the import transaction.
- The loss should be incurred in the course of normal business operations.
- Proper documentation should be maintained to substantiate the forex loss.

### Section 43A of Income Tax Act

Section 43A of the Income Tax Act specifically deals with the treatment of forex fluctuations in the context of imported goods. It provides guidelines on how to account for forex gains or losses arising from fluctuations in the rate of exchange between the currency of payment for imported goods and the currency of transaction.

### Conclusion

In conclusion, the forex gain or loss on outstanding balances related to imported goods is allowable as an expenditure under Section 37 of the Income Tax Act, provided it meets the necessary conditions of being incurred for business purposes and is supported by proper documentation. It is advisable to consult with a tax advisor or chartered accountant to ensure compliance with tax laws and to optimize the treatment of forex gains or losses in your specific situation.