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. ApplicRead more
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:
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The loss is realized or recognized as per accounting standards.
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It is a revenue loss and not a capital loss.
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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)
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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.
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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
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ICDS – I mandates that expected losses should be recognized only if permitted under the Act.
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ICDS – VI (Foreign Exchange Gains/Losses) allows MTM losses on monetary items but not on capital account transactions.
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ICDS – VIII (Securities) permits deduction of MTM losses only for securities held as stock-in-trade.
4. Loss on Derivative Contracts
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Section 43(5) considers derivative trading in recognized stock exchanges as a non-speculative business, allowing deduction for MTM losses.
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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.
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Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance: 1. Advertisement for Political Purposes Expenses incurredRead more
Under the Income Tax Act, 1961, advertisement expenses are typically allowed as a deduction under Section 37(1) if they are incurred wholly and exclusively for business or profession. However, certain circumstances lead to their disallowance:
1. Advertisement for Political Purposes
Expenses incurred on advertisements directly supporting political parties or political causes are not allowed as deductions. However, contributions to political parties through Electoral Bonds or donations under Section 80GGC may be eligible for tax benefits.
2. Advertisements Resulting in Capital Expenditure
If the advertisement expense creates a long-term brand value, such as launch campaigns, logo redesigns, or promotional hoardings with permanent benefits, it may be classified as a capital expense and not deductible as a business expense. However, depreciation under Section 32 may be available if treated as an intangible asset.
3. Expenses That Are Prohibited by Law
Any expenditure incurred for an illegal purpose, violating regulations, or encouraging unlawful activities is not deductible. This includes advertisements promoting banned products, misleading claims, or violations of ethical advertising standards.
4. Personal Advertisement Expenses
If the expense is related to personal promotion rather than business (e.g., congratulatory advertisements for individuals, non-business sponsorships), it is not deductible. Only business-related advertising expenses qualify.
5. Non-Compliance with TDS Requirements
If an advertisement payment exceeds the prescribed limit and TDS is not deducted as per Section 194C, the expense can be disallowed under Section 40(a)(ia). Ensuring proper TDS compliance is essential to avoid disallowance.
6. Excessive or Unreasonable Advertisement Expenses
If the expense is disproportionate to the business scale or unreasonably high, the Assessing Officer may invoke Section 40A(2) to disallow the excessive portion.
Conclusion
See lessTo ensure the deductibility of advertisement expenses, businesses should maintain proper records, ensure compliance with tax laws, and justify the necessity of expenses for business purposes. Keeping track of TDS deductions, ensuring expenses are revenue in nature, and aligning with business requirements can help prevent tax disallowances.