Section 43 — Taxation of foreign exchange fluctuation. Successor to s.43AA of the 1961 Act.
Section 43 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) provides that, subject to section 42, any gain or loss arising on account of a change in foreign exchange rates on foreign currency transactions is to be treated as income or loss as the case may be, and is to be computed as per the income computation and disclosure standards notified under section 276(2). Sub-section (2) makes that rule apply to all foreign currency transactions and puts four categories beyond argument: monetary and non-monetary items, translation of the financial statements of foreign operations, forward exchange contracts, and foreign currency translation reserves. The section supplies the charge and the pointer; it contains no computation mechanics of its own.
The provision settles that exchange differences are on income account and removes the question of which method of recognising them applies, by routing the computation to the notified income computation and disclosure standards. Listing non-monetary items, foreign operation translations, forward contracts and translation reserves closes off the argument that these are outside the charge.
Exchange gains and losses are recognised for tax under the notified standards, not under whatever accounting treatment has been adopted, so the two have to be reconciled and the difference tracked. Because sub-section (2) reaches non-monetary items and foreign currency translation reserves, differences parked in reserves rather than routed through the profit and loss account still have to be tested against the standards. The section itself sets out no method, no rate and no timing rule — those live in the standards notified under section 276(2) — and the whole of sub-section (1) is subject to section 42.
A company with a foreign currency borrowing books a loss of Rs. 4 crore on restatement at the year end, and parks a further Rs. 60 lakh difference arising on translating its overseas branch accounts in a foreign currency translation reserve, arguing that what never passed through the profit and loss account cannot be income or loss at all. Sub-section (2) closes that off: clause (b) brings in translation of the financial statements of foreign operations and clause (d) foreign currency translation reserves, so both differences are within the rule in sub-section (1). What the section will not give is the amount — neither figure stands as booked, because both have to be computed as per the income computation and disclosure standards notified under section 276(2). And the whole of sub-section (1) is subject to section 42, which prevails where the two meet.
In the reconciliation between book profit and taxable profit in a company's return, where exchange differences are adjusted, and then in the assessment that tests those adjustments against the income computation and disclosure standards notified under section 276(2). The section itself names no form and no authority.
any gain or loss arising on account of change in foreign exchange rates on foreign currency transactions shall be treated as income or loss, as the case may be, and shall be computed as per the income computation and disclosure standards notified under section 276(2)
See the full 1961 to 2025 concordance.