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Often assessees who have exposure to forex transactions book forward contracts and in that process they incur either a loss or a profit. The assessing officer generally treats such loss as notional and do not allow deduction to the assessees.

In making such claim for loss incurred on forward contracts it may be of interest to know the Madras High Court decision in Indian Overseas Bank Vs. Commissioner of Income-tax (183ITR200). In this case the Court held that a loss or profit on foreign exchange transactions can be ascertained only after the settlement of the forward contracts and not before and so long as that stage has not been reached, the loss can only be notional and not actual or real and a notional loss cannot be claimed as a deduction. The Court held that the same principle would hold good even in case of a loss. Following this principle the High Court in their decision in Indian Overseas Bank v. CIT (2002) 121TAX16 held that the notional profit arrived at on the basis of the rate of exchange which prevailed on the last day of the accounting year, without an actual settlement of the forward contract in foreign exchange, did not represent the income of the assessee and the notional profit could not be subjected to tax.

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