NOTIONAL LOSSES ON FX HEDGE NOT TAX-DEDUCTIBLE

A company that makes a notional loss on a forex  derivative because of a fall in its value cannot deduct the loss from its taxable income since it still owns the derivative. This has been clarified by Central Board of Direct Taxes (CBDT), the apex body that administers direct taxes in the country. The clarification comes in the wake of substantial losses to an assessee in the last financial year (FY 2009) on account of trading in forex derivatives. According to a CBDT circular, a large number of
assesses are said to be reporting forex derivatives- related losses on their own or on the advice of
chartered accountants. The tax body has made it clear that if no sale or settlement has actually taken place and the loss on mark to market basis has resulted in reduction of book profits, such a loss would not allowed to be offset against income. "The assessments made on the basis of this circular are likely to be contested before the court." CBDT said if no sale has taken place and the loss on mark-to-market basis has resulted in reduction of book profits only, such a loss would not be allowed to be offset against income.