Section 42 — Capitalising impact of foreign exchange fluctuation. Successor to s.43A of the 1961 Act.
Section 42 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) applies, irrespective of anything in any other provision of the Act, where at the time of making payment during the tax year there is a variation in an assessee's liability expressed in Indian currency, caused by a change in the rate of exchange, in relation to an asset acquired for the purpose of business or profession from a country outside India. Such a variation is dealt with under sub-sections (2) and (3).
Sub-section (2) defines the measurement. The liability excludes any part met directly or indirectly by any other person or authority, and the variation is computed as A = B – C, where A is the variation in liability, B is the payment expressed in Indian currency at the time it is made — either towards the whole or part of the cost of the asset, or towards repayment of the whole or part of moneys borrowed directly or indirectly, along with interest in foreign currency, specifically for acquiring that asset — and C is the liability corresponding to the amount in B, in Indian currency at the time of acquisition of the asset.
Sub-section (3) then adds or reduces the variation from the actual cost of the asset as referred in section 39, or the capital expenditure referred to in section 32(i) or 45(1)(a)(i), or the cost of acquisition of a capital asset (not being a capital asset referred to in section 74) for the purpose of section 72, and the resulting amount is taken to be the actual cost, the capital expenditure or the cost of acquisition, as the case may be. Sub-section (4) deals with forward cover: where the assessee has a contract with an authorised dealer as defined in section 2 of the Foreign Exchange Management Act, 1999 for a specified sum in foreign currency on or after a stipulated future date at a rate specified in the contract, the addition or deduction is computed with reference to that contract rate, to the extent of the sum in the contract that is available for discharging the liability.
An imported business asset is bought in foreign currency but taxed in rupees, and the rupee cost of the same asset moves between acquisition and payment. The section prevents that movement from being treated as a revenue gain or loss: it is instead capitalised into the cost base the Act uses for depreciation or for capital gains. The exclusion of any part of the liability met by another person stops an assessee capitalising a cost it never bore, and sub-section (4) makes a hedged assessee use the rate it actually locked in rather than the market rate.
The trigger is payment, not year-end revaluation: sub-section (1) speaks of a variation arising "at the time of making payment during the tax year", so an unrealised movement in the rupee value of an outstanding foreign currency liability does not by itself operate the section. The adjustment is not a deduction — it changes the actual cost, the capital expenditure or the cost of acquisition, and so works through depreciation or through the capital gains computation instead of hitting the profit and loss account. Because C is the rupee liability at the time of acquisition corresponding only to the amount actually paid in B, the computation is done payment by payment rather than on the whole liability at once, and any part of the liability met by another person or authority is stripped out before the arithmetic starts. Where a forward contract exists, sub-section (4) displaces the actual payment rate to the extent the contracted sum is available to discharge the liability.
A company imports plant from outside India for a business, the liability at the time of acquisition being the rupee equivalent of one crore rupees. When it makes the payment during a later tax year, the rupee equivalent it actually pays is one crore ten lakh rupees. The variation A is ten lakh rupees, being B of one crore ten lakh less C of one crore, and under sub-section (3)(a) that ten lakh is added to the actual cost of the plant referred in section 39, so it is recovered through depreciation rather than claimed as an exchange loss. If the company had booked a forward contract with an authorised dealer at a rate that fixed the payment at one crore four lakh rupees, sub-section (4) requires the adjustment to be computed at that contract rate for the sum covered by the contract.
You meet this in the fixed-asset and depreciation schedule filed with a return, and in the capital gains computation when an imported asset is sold. It appears in an assessment when the Assessing Officer moves an exchange difference the assessee claimed as revenue expenditure into the cost of the asset instead.
Irrespective of anything contained in any other provision of this Act, where at the time of making payment during the tax year, there is a variation in liability of an assessee as expressed in Indian currency, due to change in rate of exchange, in relation to an asset acquired for the purpose of business or profession from a country outside India
the liability shall exclude any part met directly or indirectly by any other person or authority
the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset
See the full 1961 to 2025 concordance.
