Section 43AA of ITA, 1961 : Section 43Aa: Taxation Of Foreign Exchange Fluctuation

Explanation using Example

Imagine a software development company in India, which has a subsidiary in the United States. The Indian company receives revenue in US dollars for services rendered. During the financial year, the exchange rate between the US dollar and the Indian Rupee fluctuates. At the beginning of the year, the exchange rate was 1 USD = 74 INR, but by the end of the year, it changed to 1 USD = 70 INR.

According to Section 43AA of the Income-tax Act, 1961, if the Indian company had 100,000 USD in receivables at the beginning of the year, the value in INR would have been 7,400,000. However, due to the change in exchange rate, the same amount is now worth 7,000,000 INR. This results in a notional loss of 400,000 INR due to foreign exchange fluctuation.

The company must treat this loss as an expense in its books and claim it in its income tax return, in accordance with the income computation and disclosure standards notified under section 145(2).