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

Zenith Software Pvt Ltd, an Indian company, has a foreign subsidiary and enters into forward exchange contracts on its US dollar receivables. Under section 43 of the Income-tax Act, 2025, which statement about foreign exchange gains or losses is correct?

Section 43 covers all foreign currency transactions, including monetary and non-monetary items, forward exchange contracts, and translation of foreign operations' financial statements. Gains or losses are treated as income or loss and computed under the notified income computation and disclosure standards, subject to section 42.

  1. AIt applies only to monetary items and not to non-monetary items
  2. BIt excludes forward exchange contracts and translation of foreign operations' financial statements
  3. CIt applies to all foreign currency transactions, including forward exchange contracts and translation of financial statements of foreign operations, with the gain or loss computed as per the notified income computation and disclosure standards, subject to section 42Correct
  4. DGains are taxed but losses are never recognised

Explanation

Section 43(1) treats any 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, subject to section 42. Section 43(2) extends this to all such transactions, including monetary and non-monetary items, translation of foreign operations' statements, forward exchange contracts and foreign currency translation reserves. The options limiting its scope or denying losses contradict this.

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