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CA Final · Direct Tax Laws & International Taxation · Taxation of Digital Transactions

Zenith Digital Pvt Ltd, an Indian company, has a wholly owned subsidiary in Dubai whose financial statements are translated into rupees. It also holds a forward exchange contract hedging a USD receivable from a software client. Under section 43 of the Income-tax Act, 2025, which statement is correct?

Section 43 treats foreign exchange gain or loss on foreign currency transactions as income or loss computed under the notified computation standards. It expressly covers forward exchange contracts and translation of foreign operations, as well as monetary and non-monetary items and translation reserves.

  1. AGain or loss from a forward exchange contract is outside the section, which covers only spot transactions
  2. BGain or loss from foreign exchange changes is computed under the notified income computation and disclosure standards, and the section covers forward contracts and translation of foreign operationsCorrect
  3. CThe section covers monetary items only, not non-monetary items
  4. DForeign currency translation reserves are excluded from the section

Explanation

Section 43(1) treats gain or loss from changes in foreign exchange rates on foreign currency transactions as income or loss, computed per the notified income computation and disclosure standards. Section 43(2) extends this to monetary and non-monetary items, translation of financial statements of foreign operations, forward exchange contracts and foreign currency translation reserves. The forward contract and the subsidiary translation are therefore both covered.

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