Marked-to-market (MTM) losses arise when businesses or traders adjust the value of their assets, liabilities, or financial instruments to reflect fair market value at the end of the financial year. The Income Tax Act, 1961 has specific provisions regarding the deductibility of such losses.

1. Applicability of MTM Loss Deduction

MTM losses are generally allowed as a deduction only if they satisfy the following conditions:

• The loss is realized or recognized as per accounting standards.

• It is a revenue loss and not a capital loss.

• The loss is computed following the Income Computation and Disclosure Standards (ICDS) prescribed under the Act.

2. Disallowance Under Section 40A(3) and Section 37(1)

• If the MTM loss is notional (i.e., an unrealized loss), it may be disallowed under Section 37(1), as it is not an expense incurred for business.

• Losses resulting from non-business transactions or capital assets (such as revaluation of land or investments) are not allowed.

3. ICDS and MTM Loss Deduction

• ICDS – I mandates that expected losses should be recognized only if permitted under the Act.

• ICDS – VI (Foreign Exchange Gains/Losses) allows MTM losses on monetary items but not on capital account transactions.

• ICDS – VIII (Securities) permits deduction of MTM losses only for securities held as stock-in-trade.

4. Loss on Derivative Contracts

• Section 43(5) considers derivative trading in recognized stock exchanges as a non-speculative business, allowing deduction for MTM losses.

• However, speculative MTM losses in unregulated derivatives may not be deductible.

5. Judicial Precedents

Several courts have allowed MTM losses if they are business expenses, such as for banks, financial institutions, or traders. However, notional losses due to mere valuation adjustments are typically not allowed as deductions.

Conclusion

The deductibility of MTM losses depends on their nature, compliance with ICDS, and whether they are realized or unrealized. To claim deductions, businesses should ensure proper accounting treatment and classify the losses as business expenses rather than capital losses.

Section 43B of the Income Tax Act, 1961 is a significant provision that deals with allowability of certain expenses on a payment basis. This section ensures that specific liabilities are deductible only when they are actually paid, irrespective of the method of accounting followed by the taxpayer.

1. Key Provisions of Section 43B

As per Section 43B, the following expenses are allowed as a deduction only in the year of actual payment:

🔹 Taxes & Duties: Any tax, duty, cess, or fee payable under any law (e.g., GST, excise duty, customs duty, etc.).
🔹 Employer’s Contribution to Provident Fund (PF) & Other Welfare Funds: Employer’s contribution to PF, ESI, superannuation fund, gratuity fund, etc. is deductible only if paid before the due date under the respective law.
🔹 Bonus & Commission to Employees: Deductible only when paid.
🔹 Interest on Loans from Banks & Financial Institutions: Interest on borrowed capital from banks, public financial institutions, or NBFCs is allowed only if actually paid.
🔹 Leave Encashment: Deduction for leave encashment is allowed only if the amount is paid.
🔹 Payments to Railways: Any sum payable to the Indian Railways for freight charges is deductible only when paid.

2. Exception: Payment Before the Due Date of Filing ITR

An exception exists under the first proviso to Section 43B, which states that if the payment is made before the due date of filing the income tax return (ITR) under Section 139(1), the expense is still allowed in the same financial year. This is particularly relevant for loan interest, tax payments, and statutory contributions.

3. Disallowance & Impact on Businesses

• If an assessee claims a deduction without making the actual payment, the tax authorities will disallow the expense, increasing the taxable income.

• Non-payment of employer’s PF or ESI within the due date under the respective Act (not ITR due date) results in permanent disallowance, as per recent judicial rulings.

4. Key Amendments & Judicial Rulings

• Amendment in Finance Act 2023: Clarified that employer’s contribution to PF/ESI is deductible only if deposited within the due date of the respective law, not the ITR due date.

• SC Ruling in Checkmate Services (P) Ltd. case reaffirmed this principle, ensuring strict compliance with PF/ESI payment deadlines.

5. Practical Considerations

✅ Maintain proper records of payments to claim deductions.
✅ Ensure that statutory dues like GST, PF, and ESI are deposited on time to avoid disallowance.
✅ If payments are delayed, pay before filing ITR to claim deductions in the same year.

Conclusion

Section 43B is a crucial provision ensuring timely payments of statutory and financial liabilities. Businesses must align their accounting and payment cycles to avoid disallowances and ensure maximum tax benefits.

1️⃣ General Provision for Deduction of Interest

As per Section 36(1)(iii) of the Income Tax Act, 1961, interest paid on capital borrowed for the purpose of business or profession is allowed as a deduction from business income. However, if the borrowed capital is used to acquire a capital asset, special rules apply.

2️⃣ When is the Deduction Allowed?

✔️ If the capital is borrowed for acquiring a capital asset, the interest expense can be deducted, but the timing of deduction depends on the asset’s usage status:

📌 Before the asset is put to use:

• Interest incurred up to the date when the asset is first put to use is not allowed as an immediate deduction.

• Instead, it is capitalized and added to the cost of the asset.

• This capitalized interest becomes part of the depreciable cost of the asset and is claimed as depreciation over time.

📌 After the asset is put to use:

• Interest paid on the borrowed capital after the asset is put to use is allowed as a deduction in the year in which it is incurred.

3️⃣ Special Cases & Exceptions

💡 For House Property (Section 24(b))

• Interest on capital borrowed for purchasing, constructing, repairing, or reconstructing a house property is deductible under Section 24(b) as follows:
  ✅ For self-occupied property: Up to ₹2,00,000 per annum.
  ✅ For let-out property: Full interest is deductible.

💡 For Capital Gains Computation

• If capital is borrowed for acquiring a capital asset (not for business use), the interest paid before the transfer of the asset is added to the cost of acquisition under Section 48 while computing capital gains.

4️⃣ Illustration

🔹 Example 1 (Business Asset): A company borrows ₹50 lakh for purchasing machinery. The machine is installed after one year. The interest for the first year is capitalized, while later interest is deducted from business income.

🔹 Example 2 (House Property): Mr. X takes a home loan of ₹30 lakh at 8% interest. He can claim ₹2 lakh per annum under Section 24(b) if the house is self-occupied.

5️⃣ Conclusion

✅ Interest deduction depends on whether the capital asset is put to use.
✅ Before use – Interest is capitalized; After use – Interest is deductible.
✅ Special provisions apply to house property and capital gains computation.

Understanding these provisions ensures maximum tax benefits while acquiring capital assets using borrowed funds! 🚀