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.

Defective Return Under Income Tax Act (Section 139(9))

A Defective Return refers to an income tax return (ITR) that is incomplete or incorrect due to missing or improper information. Under Section 139(9) of the Income Tax Act, if a return is found defective, the taxpayer is given an opportunity to correct and resubmit it.

📌 When is a Return Considered Defective?

A return is treated as defective if it has any of the following errors or omissions:

1️⃣ Mandatory Details Missing

• Personal details such as Name, PAN, or Address are incomplete or incorrect.
• Bank account details are missing or invalid.

2️⃣ Incomplete or Inconsistent Information

• Balance sheet or profit & loss account details missing in cases where audit is applicable.
• Income details and TDS/TCS claims do not match with Form 26AS.

3️⃣ Tax Computation & Payment Issues

• Taxes due are not paid fully before filing the return.
• Self-assessment tax (SAT) or advance tax is not deposited.

4️⃣ Incorrect ITR Form Used

• Filing an incorrect ITR form based on the income source.

5️⃣ Missing Attachments (For Audit Cases)

• If the taxpayer is required to maintain books of accounts but fails to attach the details.
• Failure to submit the audit report under Section 44AB when applicable.

📢 What Happens If a Return is Defective?

If the Income Tax Department detects a defective return, they issue a Notice under Section 139(9), giving the taxpayer 15 days to rectify and resubmit the correct return.

🚀 If the defect is not rectified within the given time, the return may be treated as invalid, and the taxpayer may face penalties or further notices.

To avoid a defective return, always ensure that the ITR form is properly filled, taxes are paid, and supporting documents are submitted where required.