mumbai a company that makes a notional loss on a forex derivative because of a fall in its value cannot deduct the loss from its taxable income since it still owns the derivative this has been clarified by central board of direct taxes cbdt the apex body that administers direct taxes in the country the clarification comes in the wake of substantial losses to an assessee in the last financial year fy2009 on account of trading in forex derivatives according to a cbdt circular a large number of assessees are said to be reporting forex derivativesrelated losses on their own or on the advice of chartered accountants the tax body has made it clear that if no sale or settlement has actually taken place and the loss on marktomarket basis has resulted in reduction of book profits such a loss would not allowed to be offset against income companies protect themselves against forex risk and volatility by entering into contracts with banks in the simplest form a company which say expects dollars on a periodic basis enters into contracts with a bank to sell the dollars to it at a fixed rate for delivery at a future date if during the life of a contract the rupee falls below the rate fixed with the bank the company books a marktomarket loss difference between value as on valuation date and purchase price of say an option or a futures contract on either its balance sheet or its pl account even thought the contract has not matured companies make this adjustment in the pl account or balance sheet as part of transparent accounting practices however according to cbdt the companies cannot offset such notional losses against income the cbdt has said that the losses should be added back to the income and be taxed going one step further the tax body has said that if a loss arises on actual settlement of such contracts and is not a notional or marked to market book entry the assessing officer would have to determine whether such a loss is on account of a speculative or an eligible transaction a speculative loss can only be offset against a speculative profit and can be carried forward for only four years however an eligible transaction is one that is carried out electronically on a screenbased system through a stock broker or a subbroker on a recognised stock exchange this means that if companies buy or sell dollars or pounds on nse and mcxsx the losses or profits arising out of such transactions can be offset against business gain or losses and can be carried forward for eight years the cbdt has said that after due diligence by the assessing officer such losses or gains may be offset against taxable income a note from pricewaterhousecoopers said the above instructions are not binding on taxpayers though the taxpayers may take a contrary position the instruction would certainly be the basis of assessments completed hereafter the positive fallout is that