AS 22 | Accounting for taxes on income AS 22.

AS 22 - Accounting for Taxes on Income

1. OBJECTIVES (WHY AS 22 ?)
1. Matching Concept: In accordance with matching concept, taxes on income are accrued in
the same period as the revenue and expenses to which they relate.
2. Accrual Concept: Taxes should be accounted on accrual basis and not on payment basis. This
statement requires recognition of deferred tax for all the timing differences. This is based
on the principles that the financial statements for a period should recognise the tax effect,
whether current or deferred, of all the transactions occurring in that period. (Thus accrual
concept is to be applied for tax expense also)
3. Concept of prudence: Concept of Prudence requires that any foreseeable future liability be
provided for in current year by a charge against profit. Such provisioning retains fund in
business to meet the liability in future by restricting current dividend.

2. SCOPE
This accounting standard does not cover dividend tax, wealth tax, gift tax, etc.

3. Definitions
Accounting Income (Loss): The net profit or loss for a period, as reported in the statement of
profit and loss, before deducting income tax expense or adding income tax saving (PBT).
Taxable Income (Tax Loss): The amount of income (loss) for a period, determined in
accordance with the tax laws based upon which income tax payable or recoverable is
determined.
Permanent differences Timing differences
The differences between taxable income and The differences between taxable income and
accounting income for a period that originate accounting income for a period that originate
in one period and do not reverse subsequently. in one period and are capable of reversal in
one or more subsequent periods.
For example: For example:
◼ Penalty paid for infringement of law. ◼ Expenditure mentioned in Section 43 B
◼ Donations disallowed as per section 80G ◼ Difference in method / rate of
of the income tax act. Depreciation
◼ Tax holiday profits ◼ Amortisation of Preliminary Expenses-
◼ Deduction under Sec.80 IA, 80 IB 35 D
◼ Taxable income based on presumptive ◼ Carry forward of loss
taxation Sec.44AD ◼ Expenses incurred for amalgamation

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AS 22 | Accounting for taxes on income AS 22.2
◼ Provision for doubtful debts
◼ Voluntary retirement compensation
◼ Municipal Taxes on House Property
NOTE: Permanent differences do not result in NOTE: Timing differences result in deferred
deferred tax assets or deferred tax liabilities. tax assets or deferred tax liabilities.

Timing Difference

Timing difference being difference in either items or

amounts

Amounts considered for tax

Items or amounts
purposes over a given period,
considered in “different periods”
being different in each year as between
for books and tax purposes.
. taxable income and accounting income.

Eg. 43B item (bonus) E.g. Depreciation

(SLM/WDV)

Differences between Accounting

income and taxable income

Permanent Difference Timing Difference

Differences which originate in one

period and do not reverse Differences which are Capable of
subsequently. reversal in Subsequent periods.

CurrentTax: Tax on Taxable Income

Deferred Tax: Deferred Tax is the Tax Effect of Timing Difference.

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AS 22 | Accounting for taxes on income AS 22.3
4. DEFERRED TAX ASSET:
1. Deferred Tax Asset arises when taxable income is more than Accounting Income.
2. It means the tax paid in current year as per tax laws is more than the tax to be paid as per
books of accounts.
3. Deferred Tax Asset arises when business anticipates a future tax saving.
4. PAY NOW SAVE LATER

5. DEFERRED TAX LIABILITY

1. Deferred tax liability arises when taxable income is less than accounting income.
2. It means the tax paid in current year as per tax laws is less than the tax to be paid as per
books of accounts.
3. SAVE NOW PAY LATER
Remember
◼ Deferred Tax Asset ◼ Deferred Tax Liability
Taxable Income > Accounting Income Taxable Income < Accounting Income
or or
Tax Expenditure < Accounting Expense Tax Expenditure > Accounting Expense

6. TAX EXPENSE
= Current Tax + Deferred Tax Liability OR Current Tax - Deferred Tax Asset
Tax expense or tax saving = Current tax (i.e. tax as per I.T. Act provisions)  Deferred tax.

7. TAX EXPENSE AND TAX SAVING MATHEMATICS

Deferred Tax = Timing differences x Rate Of tax
Deferred Tax Asset = Timing differences (Accounting Income < Taxable income ) x Rate Of tax
Deferred Tax Liability = Timing differences (Accounting Income > Taxable income ) x Rate Of
tax

8. TIPS FOR STUDENTS IN WORKING OUT PROBLEMS UNDER AS-22

1. Never pass entries for timing differences. Already entries for these have been made. That
is why these differences arise in the first place. Rather entries to be made for tax effect of
timing difference i.e. timing differences multiplied by applicable tax rates.
2. First calculate closing balances of deferred tax assets and deferred tax liabilities. This is
done by multiplying the unreversed amount of the timing difference by the tax rates
prevailing as at the balance sheet date. The difference between opening and closing balance
to be adjusted in P&L A/c.

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AS 22 | Accounting for taxes on income AS 22.4

9. PRUDENCE FOR RECOGNIZING DEFERRED TAX ASSET

Unabsorbed depreciation or carry forward of losses - Where an enterprise has unabsorbed
depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised
only to the extent that there is virtual certainty supported by convincing evidence that
sufficient future taxable income will be available against which such deferred tax assets can
be realised.
The existence of unabsorbed depreciation or carry forward of losses under tax laws is strong
evidence that future taxable income may not be available.
Nature of evidence should be disclosed in the notes to account.
Other Cases: Except in the situations stated above, deferred tax assets should be recognised
and carried forward only to the extent that there is a reasonable certainty that sufficient future
taxable income will be available against which such deferred tax assets can be realised.
This reasonable level of certainty would normally be achieved by examining the past record of
the enterprise and by making realistic estimates of profits for the future.
Note: Deferred tax liabilities will be provided without exception.

10.ASI 9: MEANING OF ‘VIRTUAL CERTAINTY’ SUPPORTED BY CONVINCING EVIDENCE

The expression ‘virtual certainty supported by convincing evidence’ for the purpose of paragraph
17 of AS-22 has been defined by ASI – 9 issued by ICAI.
ASI 9 makes the following points regarding ‘virtual certainty’
Determination of virtual certainty is a matter of judgement. It will have to be evaluated on a
case to case basis.
1) Virtual certainty is the extent of certainty, which, for all practical purposes, can be
considered certain.
2) Virtual certainty cannot be based merely on forecasts of performance such as business
plans.
3) Virtual certainty is not a matter of perception. It should be supported by convincing
evidence. To be convincing,
4) the evidence should be available at the reporting date in a concrete form, for example,
a. a profitable binding export order, cancellation of which will result in payment of heavy
damages by the defaulting party.
b. In the case of a pharmaceutical company, virtual certainty may be demonstrated through
the successful patent of a block buster drug.
c. In the case of oil company, it may be demonstrated through the successful discovery of
oil fields.

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AS 22 | Accounting for taxes on income AS 22.5
5) A projection of the future profits made by an enterprise based on the future capital
expenditures or future restructuring etc., submitted even to an outside agency, e.g. to a
credit agency for obtaining loans and accepted by that agency cannot, in isolation, be
considered as convincing evidence. This is because the enterprise may change its plans on
the basis of subsequent developments.
SUMMARY
Sr No. Nature of timing difference resulting Prudence considerations
in deferred tax asset
1 Unabsorbed losses\depreciation under Only to the extent there is VIRTUAL
tax laws CERTAINTY supported by convincing
evidence
2 Others Only to the extent there is REASONABLE
(Eg. Amortization of Preliminary CERTAINTY about availability of future
Expenses – Sec 35D ) taxable income

11. RE-ASSESSMENT OF UNRECOGNISED DEFERRED TAX ASSETS

At each balance sheet date, an enterprise re-assesses unrecognised deferred tax assets. The
enterprise recognises previously unrecognised deferred tax assets to the extent that it has
become reasonably certain or virtually certain, as the case may be, that sufficient future
taxable income will be available against which such deferred tax assets can be realised. For
example, an improvement in trading conditions may make it reasonably certain that the
enterprise will be able to generate sufficient taxable income in the future.

12. REVIEW OF DEFERRED TAX ASSETS

a)The carrying amount of deferred tax assets should be reviewed at each balance sheet date.
b)An enterprise should write-down the carrying amount of a deferred tax asset to the extent
that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient
future taxable income will be available against which deferred tax asset can be realised.
c) Any such write-down may be reversed to the extent that it becomes reasonably certain or
virtually certain, as the case may be, that sufficient future taxable income will be available.

13. MEASUREMENT
a) Current tax should be measured at the amount expected to be paid to (recovered from) the
taxation authorities, using the applicable tax rates and tax laws.
b)Deferred tax assets and liabilities should be measured using the tax rates and tax laws that
have been enacted or substantively enacted by the balance sheet date.

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AS 22 | Accounting for taxes on income AS 22.6
c) When different tax rates apply to different levels of taxable income, deferred tax assets and
liabilities are measured using average rates.
d) Deferred tax assets and liabilities should not be discounted to their present value.

14. CRITERIA FOR SETTING OFF DEFERRED TAX ASSET AGAINST DEFERRED TAX
LIABILITY
a) Enterprise should have a legally enforceable right to set off current tax items that stand
recognised in the balance sheet.
b)The DTA& DTL should relate to taxes on income levied by the same governing tax laws. E.g.
an excise duty liability cannot be set off against an income tax asset.

15. DISCLOSURES
Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be disclosed
under separate heading in the balance sheet of the enterprises, separately from current assets
and current liabilities.
The nature of the evidence supporting the recognition of deferred tax assets should be disclosed,
if an enterprise has unabsorbed depreciation or carry forward of losses under tax laws.

16. AS I7: DISCLOSURE OF DEFERRED TAX ASSETS AND LIABILITIES BY A COMPANY.

As per Schedule III, DTA would be shown under the head Non-current assets and DTL would be
shown under the head Non-current Liabilities.

17. TRANSITIONAL PROVISIONS

On the first occasion that the taxes on income are accounted for in accordance with this
statement, the enterprise should recognise, in the financial statements, the deferred tax
balance that has accumulated prior to the adoption of this Statement as deferred tax asset /
liability with a corresponding credit / charge to the revenue reserves, subject to the
consideration of prudence in case of deferred tax assets. The amount as credited / charged to
the revenue reserves should be the same as that which would have resulted if this statement
had been in effect from the beginning.

Example:
An export-oriented unit enjoyed tax holiday up to 31/03/02 and did not provide for
deferred tax liability upto that date. While finalizing the accounts for 2002-03, the
Accountant says that the entire deferred tax liability upto 31/03/02 and current year

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AS 22 | Accounting for taxes on income AS 22.7
deferred tax liability should be routed through Profit and Loss Account as the relevant Accounting
Standard has become mandatory from 01/04/01. Do you agree?

Solution:
The view of the accountant is incorrect. Paragraph 33 of AS 22 states that “On the first occasion
that the taxes on income are accounted for in accordance with this statement, the enterprise
should recognize, in the financial statements, the deferred tax balance that has accumulated
prior to the adoption of this statement as deferred tax asset / liability with a corresponding
credit / charge to the revenue reserves, subject to the consideration of prudence in case of
deferred tax assets.
Note that the requirements of paragraph 22 apply on the first occasion the AS 22 is applied,
irrespective of the date from which the standard becomes mandatory. This means, the balance
of Deferred Tax Liability as on 01/04/02 should be brought to books by debiting the Revenue
Reserves, rather than the Profit & Loss A/c.
Provision for deferred tax asset / liability for the current year should be routed through profit
and loss account like normal provision.

ACCOUNTING STANDARDS INTERPRETATIONS (ASI)

18. ASI 3 & 5:DEALING WITH TAX HOLIDAYS U/S 80IA, 80IB, 10A, 10B
1) The deferred tax (assets and liabilities) in respect of timing differences which originate
during the tax holiday period and reverse during tax holiday period should not be recognized
to the extent the enterprise’s gross total income is subject to deduction or income is exempt
during the tax holiday period.
2) The deferred tax asset or liability for timing differences which originate during the tax
holiday period and reverse after tax holiday period should be recognized in the period in
which they originate. The recognition of deferred tax assets will be subject to fulfilment of
the virtual certainty criterion or the reasonable certainty criterion, as the case may be, laid
down in paras 15-18 of AS – 22.
3) For the purpose of (1) and (2), timing differences which originate first should be assumed
to reverse first (i.e. First originate first reversed or FIFR)

Rationale for the above treatment

According to the Framework for the Preparation and Presentation of Financial Statement, an
asset should be recognized in the balance sheet when –

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AS 22 | Accounting for taxes on income AS 22.8
1. It is probable that future economic benefits associated with it will flow to the enterprise;
and
2. Its cost / value can be reliably measured.
According to the Framework, a liability should be recognized in the balance sheet when –
a) It is probable that a settlement of present obligation will result into outflow of economic
resources.
b) The amount at which settlement is expected to take place can be measured reliably.
A deferred tax asset or liability for timing difference which originates and reverses during the
tax holiday period does not meet the above recognition criteria for asset / liability. Because,
there is no flow to the enterprise of economic benefits nor outflow of economic benefits from
settlement of obligation due to tax liability.

Example:
Your client is a full tax free enterprise for the first 10 years and is in the second year
of operations. Depreciation timing difference resulting in a deferred tax liability in Year
1 & 2 is Rs. 100 million and Rs. 200 million respectively. From the 3rd year and onwards
it is expected that the timing difference would reverse each year by Rs. 5 million. Determine
deferred tax liability at the end of 2nd year and the charge to the P & L A/c. if any. Assume tax
rate @ 35%. (NOV RTP 2012), (NOV 2012(5 marks)
Solution:
In case of tax free companies, no deferred tax liability is recognised in respect of timing
differences that originate and reverse in the tax holiday period. Deferred tax liability (or asset)
is created in respect of timing difference that originate in a tax holiday period but are expected
to reverse after the tax holiday period. For this purpose, adjustments are done in accordance
with the FIFO method. Of the Rs. 100 million, Rs. 40 million will reverse in the tax holiday period.
Therefore, deferred tax liability will be created on Rs. 60 million at the tax rate of 35%, i.e. Rs.
21 million. In the second year, the entire Rs. 200 million will reverse only after the tax holiday
period; therefore, deferred tax charge in the profit and loss account will be Rs. 70 million (200 x
35%) and deferred tax liability in the balance sheet will be Rs. 91 million (70 + 21).

19. ASI 6:
1. According to ASI No. 6, even if an enterprise expects timing differences arising in the current
period to reverse in a period in which it will pay tax u/s 115JB, the deferred tax assets /
liabilities (required to be recognized under AS – 22) in respect of such timing differences
should be measured using regular tax rates and not tax rates u/s 115 JB.
2. The provisions of section 115JB is relevant only for measurement of current tax and not for
measurement of deferred tax.

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AS 22 | Accounting for taxes on income AS 22.9

20. ASI 4: LOSSES UNDER THE HEAD CAPITAL GAINS

If profit and loss account includes loss which can be set off for taxation purposes in future
against income under the head capital gains it is a timing difference. Recognition of Deferred
Tax Asset in respect of such loss will be as per table below:
Sr. Situation Criteria for recognition and carry forward of deferred tax asset in
No. respect of ‘loss’ under the head “Capital Gains” (Considerations
of prudence)
1 Where an The deferred tax asset in respect of ‘loss’ under the head ‘Capital
enterprise has gains’ should be recognized and carried forward only to the extent
unabsorbed that there is virtual certainty supported by convincing evidence
depreciation or that sufficient future taxable income will be available under the
carry forward of head ‘Capital gains’ against which such loss can be set-off as
business losses per the provisions of the Act.
under the tax
laws.
2 In other The deferred tax asset should be recognized and carried forward
situations only to the extent that there is a reasonable certainty that
sufficient future taxable income will be available under the head
‘Capital gains’ against which the loss can be set-off as per the
provisions of the Act.
If there is a difference between the amounts of ‘loss’ recognized for accounting purposes and
tax purposes because of cost indexation under the Act in respect of long-term capital assets,
the deferred tax asset should be recognized and carried forward (subject to the consideration
of prudence) on the amount which can be carried forward and set-off in future years as per
the provisions of the Act.

Example:
Y sold a piece of land on 12/01/05 for Rs.14 lakh. The land was purchased on November
14, 1979 for Rs.1 lakh. The market value of the land on 01/04/81 was Rs.3 lakh. The
cost inflation index for financial year 2004-05 was 480. The rate is 20% on long-
term capital gains and 40% for other cases. Profit before tax is Rs.16 lakh.Compute
current and deferred tax.
Solution:
Loss on sale of land as per IT Act = 3 x (480 / 100) – 14 = Rs.0.4 lakh
Profit on sale of land as per books = Rs.14 lakh – Rs.1 lakh = Rs.13 lakh
Current tax = (16 – 13) x 0.4 = Rs.1.2 lakh

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AS 22 | Accounting for taxes on income AS 22.10
Deferred Tax (Asset) = 0.40 x 0.2 = Rs.0.08 lakh
Note:
Long-term capital loss can be set-off against long-term capital gains only. Since Y did not
earn any capital gain in current year, the long-term capital loss shall be carried forward for
set-off against future long-term capital gains. Deferred tax asset can be recognised provided,
earning of sufficient future long-term capital gain is reasonably certain.

AS 22 at a glance
OBJECTIVE
At times, taxable income differs significantly from accounting income due to timing & permanent
differences. Objective of AS 22 is to lay down treatment of such differences & to prescribe accounting
treatment for other issues relating to taxes on income.

TAX EXPENSE
means
Deferred Tax Deferred tax + Current tax
Based on taxable income as per
Income Tax Laws
Arises out of Permanent & Timing differences
(relating to tax liability) on accounting income

Permanent Differences Timing Differences

Originate in one period but Originate in one period and get

don’t reverse subsequently reversed in one more later periods

IGNORE Results in

Deferred Tax Assets (DTA) Deferred Tax Liabilities (DTL)

Tax in subsequent years lower Tax in subsequent years higher

P & L A/c – Credit P & L A/c – Debit

Balance Sheet - Asset Balance Sheet - Liability

• Use tax rate & tax laws enacted or substantially enacted • State it at the amount expected to
by the balance sheet date be paid or recovered, using tax rates
MEASUREMENT & tax laws enacted
• Don’t discount DTA or DTL to their present value
Offset current tax assets &
liabilities if
OFFSETTING
Offset DTA & DTL if ❖ enterprise has a legally
• enterprise has a legally enforceable right to set off assets enforceable right to set off the
against current tax liabilities & recognized amounts &
• DTA & DTL relate to taxes on income levied by same ❖ enterprise intends to settle the
governing tax laws asset & liability on a net basis

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AS 22 | Accounting for taxes on income AS 22.11

RECOGNITION ISSUES (For deferred tax)

• Consider prudence
• Recognise & c/f DTA when there is reasonable certainty
• For unabsorbed depreciation & c/f of tax losses, recognize & c/f DTA when there is virtual certainty
• Review DTA at each balance sheet date & write down if required
• Reassess unrecognized DTA at each balance sheet date
• Ignore timing differences originating & reversing during tax holiday
• Recognise DTA for timing differences originating during tax holiday but reversing after tax holiday period is over
• Recognise DTA for loss u/h capital gain subject to consideration of prudence
• If tax paid under Mat, recognise DTA or DTL using regular tax rates and not MAT rates

DISCLOSURES
• Distinguish DTA & DTL from current tax assets & liabilities
• DTA & DTL under a separate heading in balance sheet
• Break up of DTA & DTL into major components in notes to accounts
• If DTA relating to unabsorbed depreciation & c/f of losses recognized, nature of supporting evidence

TRANSITIONAL PROVISIONS
• Determine accumulated deferred tax in the first period by comparing opening balance of assets & liabilities
for accounting & tax purposes
• Credit opening balance of revenue reserves (and debit in case of DTL) in case of DTA

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AS 22 | Accounting for taxes on income AS 22.12

Let’s Get Started….With Class Work

ILLUSTRATION 1:
ABC Ltd. has shown profit before tax of Rs.5,00,000. However, the taxable income has been
calculated as Rs. 4,50,000. The tax rate is 35%. Find out the amount of current tax and deferred
tax asset / liability of the company. Would it make any difference of the taxable income is
calculated as Rs.6,00,000?
SOLUTION:
Current Tax
CASE TAXABLE INCOME TAX RATE CURRENT TAX
1 4,50,000 35%
2 6,00,000 35%

Deferred Tax
Case Particulars Financial Tax Permanent Timing Tax rate DTA DTL
Balance Balance difference difference
sheet Sheet
1 Profit
2 Profit

ILLUSTRATION 2:
XYZ Ltd. charges depreciation at different rates for financial statements and tax purpose.
Consequently, the WDV of some of the assets are different for two records as follows:
Balance Sheet Tax Record
Plant &Machinery Rs.5,00,000 Rs.3,00,000
Furniture & Fixture Rs.1,00,000 Nil

There is a liability for Rs.60,000 which is provided for in accounting record. This is allowable
deduction for tax purpose. Find out the amount of Deferred Tax Asset / liability, given that the
tax rate is 35%.
SOLUTION:
Calculation of DTA / DTL
S. Particulars Financial Tax Permanent Timing Tax rate DTA DTL Net
N Balance Balance difference difference
sheet Sheet
1 Plant and
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AS 22 | Accounting for taxes on income AS 22.13
Machinery
2 Furniture
& Fixture
3 Expenditur
e
Total

ILLUSTRATION 3:
RST Ltd. has reported a profit before tax of Rs. 200,000 for the current year. Following additional
information is provided:
Additional depreciation allowable for tax purpose Rs. 30,000
Advance rent received: (in respect of next year) 15,000
Interest income from Tax-free Government Bonds 18,000
Tax rate 35%
Find out the current tax and deferred tax asset / liability.
SOLUTION:
Calculation of Current Tax
Rs.
Profit before tax 2,00,000
Less: Additional depreciation under tax laws (30,000)
Interest income from Tax free Govt. Bonds (18,000)

1,52,000
Current Tax @ 35% 53,200

Calculation of Deferred Tax liability – Rs.

Timing difference on depreciation (DTL) 30,000
Deferred Tax liability (35% x 30,000) 10,500

ILLUSTRATION 4 Similar question in May 2011 Exam:

The WDV of fixed assets of ABC Ltd. as per accounting records is Rs. 15,00,000 and as per tax
records is Rs. 11,00,000. The reason being higher depreciation has been claimed for tax purposes.
There is also a deferred revenue expenditure of Rs. 30,000 which is charged to Profit & Loss A/c in
earlier years, but is yet to be written off for tax purposes.
Find out the amount of deferred tax asset / liability to be recognized given that:
a. Rate of tax is 35%.
b. This is the first year when AS-22 is applied.
SOLUTION:
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AS 22 | Accounting for taxes on income AS 22.14
Calculation of DTA / DTL
S. Particulars Financial Tax Permanent Timing Tax DTA DTL Net
N. Balance Balanc difference difference rate
sheet e Sheet
1 Plant and
Machinery
2 Expenditure
Total

ILLUSTRATION 5:
The profit before tax of an enterprise is Rs. 3,00,000. However, its taxable income has been
calculated as Rs. 50,000. This difference has been identified as timing difference as per AS-22.
The rate of income tax is 35%, whereas the rate of MAT is 7.5%. Find out the amount of
deferred tax asset / liability.
SOLUTION:
Current Tax
Tax on Taxable income based on normal Provision of Income Tax Act
= 35% x 50,000
= 17,500

MAT = 3,00,000 x 7.5%

= 22,500

 Current Tax = Higher of the two

= 22,500
Calculation of Deferred Tax Liability –
Particulars Rs.
Timing Difference (3,00,000 – 50,000) 2,50,000
Deferred Tax liability (35% x 2,50,000) 87,500

Note: As per the clarification issued by ICAI regarding MAT the following points should be noted.
1. The payment of tax under MAT is the current tax for the period.
2. In a period in which a company pays tax as per MAT (Sec. 115 JB) of Income Tax Act the DTA
/ DTL in respect of timing difference should be measured using the normal tax rate.

ILLUSTRATION 6:
PQR Ltd. pays a premium of Rs. 2,50,000 on an insurance policy for one year with effect from
Oct. 1. It prepares its final accounts on March 31 next. The entire premium is a deductible expense
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AS 22 | Accounting for taxes on income AS 22.15
in the year in which it is paid. Find out the amount of deferred tax asset / liability to be recognized
on March 31 given the tax rate of 35%.
SOLUTION:
S.N Particulars Books of Tax Permanent Timing Tax rate DTA DTL
accounts record difference difference
1 Insurance 1,25,000 2,50,00 35%
Premium 0

ILLUSTRATION 7:
XYZ Ltd. shows accounting profit of Rs. 6,00,000 and taxable income of Rs. 8,50,000 for the Year
1. The difference between the two has been caused by a timing difference. This would be allowed
as deductible expense during year 2, Year 3 and year 4 to the extent of Rs. 1,00,000, Rs. 1,00,000
and Rs. 50,000. Find out the deferred tax asset / liability for different years given that the tax
rate for Year 1 and 2 is 35% and for year 3 and 4 is 30%.
SOLUTION:
Calculation of DTA / DTL
S.no Particulars Year
1 2 3 4
A Opening Timing Difference
B Originating Timing Difference
C (OTD)Timing Difference (A+ B)
Total
D Timing Difference Reversed
E (RTD)
Timing Difference c/f (C – D)
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in
P&L A/c.
Note:It is assumed that tax rates for subsequent year has been substantively enacted.

ILLUSTRATION 8:
BST Ltd. is working on different projects which are likely to be completed within 3 years period.
It recognises revenue from these contracts on % of completion method for financial statements.
During three years period, it has recognised revenue of Rs.10,00,000, Rs.15,00,000 and Rs.20,00,000
in the Profit and Loss A/c.
However, for income tax purpose, it has adopted the completed contract method under which it
has recognized revenues of Rs.6,00,000, Rs.17,00,000 and Rs.22,00,000 over 3 years.

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AS 22 | Accounting for taxes on income AS 22.16
Find out the amount of deferred tax asset / liability for different years, given that the tax rate is
35%.
SOLUTION:
Calculation of DTA / DTL
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in P&L
A/c.

ILLUSTRATION 9:
PQR Ltd. purchased a machine for Rs.3,00,000 on Year 1. The expected salvage value was nil after
life of 3 years. It adopted straight line method of depreciation for accounting purpose whereas
the machine was eligible for 100% depreciation in the year of purchase. The profit before
depreciation of the company for the years Year 1, Year 2 and Year 3 are Rs.4,00,000 p.a. Find out
the deferred tax asset / liability for different years, given that the tax rate is 35% for all the 3
years. Also show the presentation in the Profit and Loss A/c.
SOLUTION:
1. Current Tax (Figures in Rs.)
S.N. Year 1 Year 2 Year 3
A Profit before depreciation and tax
B Less: Depreciation
C Taxable income (A – B)
D  Current Tax @ 35%

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AS 22 | Accounting for taxes on income AS 22.17

2.Deferred Tax
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)
F Tax rate applicable
G DTA / DTL to be c/f
H Deferred tax to be recognized in P&L A/c.

3. Profit and loss statement

Year 1 Year 2 Year 3
Profit before depreciation and tax
Less: Depreciation
PBT
(-) Tax Expense
(a) Current Tax (W.N. 1)
(b) Deferred Tax (W.N. 2)
Sub -Total
Profit After Tax

ILLUSTRATION 10:
Continue with above Illustration and find out the amount of deferred tax liability if the tax rates
for the three years are 35%, 30% and 32% respectively.
SOLUTION:
Deferred Tax (Figures in Rs.)
S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)

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AS 22 | Accounting for taxes on income AS 22.18
F Tax rate applicable
G DTA / DTL to be c/f
H Deferred tax to be recognized in P&L A/c.

Assumption:
It is assumed that the tax rate for the subsequent year has been either enacted on substantively
enacted. Hence the tax rate applicable to the next year is used for calculating the deferred tax.

ILLUSTRATION 11 RTP MAY2013, RTP MAY 2014 :

PQR Ltd. incurs a loss of Rs.2,00,000 in Year 1 and makes profit of Rs.1,00,000 and Rs.1,20,000 in
Year 2 and year 3 respectively. The tax rate is 40% and the loss can be carried forward for 5
years under the tax laws. At the end of year 1, it was certain that the company would have
sufficient taxable income in future years against which unabsorbed depreciation and carry
forward of losses can be set off. Show the reversal of timing difference and the consequent effect
on tax liability.
SOLUTION:
Step – 1: Current Tax (Figures in Rs.)
S.N. Particulars Year
1 2 3
A Profit / Loss
B Less: brought forward loss adjusted
C Taxable income
D Current tax @ 40%

Step – 2: Deferred Tax

S.no Particulars Year
1 2 3
A Opening Timing Difference
B Originating Timing Difference (OTD)
C Total Timing Difference (A+ B)
D Timing Difference Reversed (RTD)
E Timing Difference c/f (C- D)
F Tax rate applicable
G DTA / DTL to be c/f (E x F)
H Deferred tax to be recognized in P&L A/c.

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AS 22 | Accounting for taxes on income AS 22.19
Step – 3: Profit & Loss Statement
S.No. Particulars Year
1 2 3
A Profit / Loss
B (-) Tax expense
(a) Current Tax (WN – 1)
(b) Deferred Tax (WN – 2)
Sub –Total
D Profit / Loss after tax

ILLUSTRATION 12: (ICAI), RTP May 2018

Rama Ltd., has provided the following information:
Particulars `
Depreciation as per accounting records 2,00,000
Depreciation as per tax income records Unamortised preliminary 5,00,000
expenses as per tax record 30,000

There is adequate evidence of future profit sufficiency. How much deferred tax asset/ liability
should be recognised as transition adjustment? Tax rate 50%.
SOLUTION
Table showing calculation of deferred tax asset / liability
Particulars Amount Timing Deferred tax Amount @
differences 50%
` `
Excess depreciation as per tax records 3,00,000 Timing Deferred tax 1,50,000
(` 5,00,000 – `2,00,000) liability
Unamortised preliminary 30,000 Timing Deferred tax (15,000)
expenses as per tax records asset
Net deferred tax liability 1,35,000

ILLUSTRATION 13 (ICAI)
From the following details of A Ltd. for the year ended 31-03-2017, calculate the deferred tax asset/
liability as per AS 22 and amount of tax to be debited to the Profit and Loss Account for the year.

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AS 22 | Accounting for taxes on income AS 22.20

Particulars `
Accounting Profit 6,00,000
Book Profit as per MAT 3,50,000
Profit as per Income Tax Act 60,000
Tax rate 20%
MAT rate 7.50%

SOLUTION
Tax as per accounting profit 6,00,000x20% = ` 1,20,000
Tax as per Income-tax Profit 60,000x20% = ` 12,000
Tax as per MAT 3,50,000x7.50% = ` 26,250
Tax expense = Current Tax +Deferred Tax
` 1,20,000 = ` 12,000+ Deferred tax Therefore, Deferred Tax liability as on 31-03-201
= ` 1,20,000 – ` 12,000 = ` 1,08,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2017 Current Tax +
Deferred Tax liability + Excess of MAT over current tax
= ` 12,000 + ` 1,08,000 + ` 14,250 (26,250 – 12,000)
= ` 1,34,250

ILLUSTRATION 14 (ICAI)
Ultra Ltd. has provided the following information. Depreciation as per accounting records = `
2,00,000 Depreciation as per tax records =` 5,00,000
Unamortised preliminary expenses as per tax record = ` 30,000
There is adequate evidence of future profit sufficiency. How much deferred tax asset/ liability should
be recognised as transition adjustment when the tax rate is 50%?
SOLUTION
Calculation of difference between taxable income and accounting income
Particulars Amount (`)
Excess depreciation as per tax ` (5,00,000 – 2,00,000) 3,00,000
Less: Expenses provided in taxable income (30,000)
Timing difference 2,70,000

Tax expense is more than the current tax due to timing difference. Therefore deferred tax liability
= 50% × 2,70,000 = ` 1,35,000
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AS 22 | Accounting for taxes on income AS 22.21
ILLUSTRATION 15 (ICAI)
XYZ is an export oriented unit and was enjoying tax holiday upto 31.3.2016. No provision for
deferred tax liability was made in accounts for the year ended 31.3.2016. While finalising the
accounts for the year ended 31.3.2017, the Accountant says that the entire deferred tax liability
upto 31.3.2016 and current year deferred tax liability should be routed through Profit and Loss
Account as the relevant Accounting Standard has already become mandatory from 1.4.2001. Do
you agree?
SOLUTION
AS 22 on “Accounting for Taxes on Income” relates to the transitional provisions. It says, “On the
first occasion that the taxes on income are accounted for in accordance with this statement, the
enterprise should recognise, in the financial statements, the deferred tax balance that has
accumulated prior to the adoption of this statement as deferred tax asset/liability with a
corresponding credit/charge to the revenue reserves, subject to the consideration of prudence in
case of deferred tax assets.
Further AS 22 lays down, “For the purpose of determining accumulated deferred tax in the period
in which this statement is applied for the first time, the opening balances of assets and liabilities
for accounting purposes and for tax purposes are compared and the differences, if any, are
determined. The tax effects of these differences, if any, should be recognised as deferred tax
assets or liabilities, if these differences are timing differences.”
Therefore, in the case of XYZ, even though AS 22 has come into effect from 1.4.2001, the
transitional provisions permit adjustment of deferred tax liability/asset upto the previous year to
be adjusted from opening reserve. In other words, the deferred taxes not provided for alone can be
adjusted against opening reserves.
Provision for deferred tax asset/liability for the current year should be routed through profit and
loss account like normal provision.

ILLUSTRATION 16 (ICAI)
PQR Ltd.'s accounting year ends on 31st March. The company made a loss of ` 2,00,000 for
the year ending 31.3.2015. For the years ending 31.3.2016 and 31.3.2017, it made profits of ` 1,00,000
and ` 1,20,000 respectively. It is assumed that the loss of a year can be carried forward for eight
years and tax rate is 40%. By the end of 31.3.2015, the company feels that there will be sufficient
taxable income in the future years against which carry forward loss can be set off. There is no
difference between taxable income and accounting income except that the carry forward loss is
allowed in the years ending 2016 and 2017 for tax purposes. Prepare a statement of Profit and Loss
for the years ending 2015, 2016 and 2017.

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AS 22 | Accounting for taxes on income AS 22.22

SOLUTION
Statement of Profit and Loss
Particulars 31.3.2015 31.3.2016 31.3.2017
Profit (Loss) (2,00,000) 1,00,000 1,20,000
Less: Current Tax (20,000X40%) Deferred (8,000)
Tax:
Tax effect of timing differences originating during the 80,000
year (2,00,000 × 40%)
Tax effect of timing differences reversed/ adjusted (40,000) (40,000)
during the year (1,00,000 × 40%)

Profit (Loss) After Tax Effect

(1,20,000) 60,000 72,000

ILLUSTRATION 17 (ICAI)
Omega Limited is working on different projects which are likely to be completed within 3 years
period. It recognises revenue from these contracts on percentage of completion method for financial
statements during 2014-2015, 2015-2016 and 2016-2017 for ` 11,00,000, ` 16,00,000 and ` 21,00,000
respectively. However, for Income-tax purpose, it has adopted the completed contract method under
which it has recognised revenue of
` 7,00,000, ` 18,00,000 and ` 23,00,000 for the years 2014-2015, 2015-2016 and 2016-
2017 respectively. Income-tax rate is 35%. Compute the amount of deferred tax asset/
liability for the years 2014-2015, 2015-2016 and 2016-2017.
SOLUTION
Omega Limited.
Calculation of Deferred Tax Asset/Liability
Year Accounting Taxable Timing Deferred Tax
Income Income Difference Liability
(balance) (balance)
2014-2015 11,00,000 7,00,000 4,00,000 1,40,000
2015-2016 16,00,000 18,00,000 2,00,000 70,000
2016-2017 21,00,000 23,00,000 NIL NIL
48,00,000 48,00,000

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AS 22 | Accounting for taxes on income AS 22.23
ILLUSTRATION 18 RTP Nov 2018
Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the
second year of its operation. Depreciation timing difference resulting in a tax liability in year
1 and 2 is ` 1,000 lakhs and ` 2,000 lakhs respectively. From the third year it is expected
that the timing difference would reverse each year by ` 50 lakhs. Assuming tax rate of 40%,
you are required to compute to the deferred tax liability at the end of the second year and
any charge to the Profit and Loss account.
SOLUTION
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax
in respect of timing differences which originate during the tax holiday period and reverse during
the tax holiday period, should not be recognized to the extent deduction from the total income
of an enterprise is allowed during the tax holiday period as per the provisions of sections 10A
and 10B of the Income-tax Act. Deferred tax in respect of timing differences which originate
during the tax holiday period but reverse after the tax holiday period should be recognized in
the year in which the timing differences originate. However, recognition of deferred tax assets
should be subject to the consideration of prudence. For this purpose, the timing differences
which originate first should be considered to reverse first.
Out of ` 1,000 lakhs depreciation, timing difference amounting ` 400 lakhs (` 50 lakhs x 8
years) will reverse in the tax holiday period and therefore, should not be recognized. However,
for ` 600 lakhs (` 1,000 lakhs – ` 400 lakhs), deferred tax liability will be recognized for ` 240
lakhs (40% of ` 600 lakhs) in first year. In the second year, the entire amount of timing
difference of ` 2,000 lakhs will reverse only after tax holiday period and hence, will be recognized
in full. Deferred tax liability amounting ` 800 lakhs (40% of ` 2,000 lakhs) will be created by
charging it to profit and loss account and the total balance of deferred tax liability account at
the end of second year will be ` 1,040 lakhs (240 lakhs + 800 lakhs).

ILLUSTRATION 19 QP May 18
Rohit Ltd. has provided the following information
Particulars `
Depreciation as per accounting records 2,50,000
Depreciation as per tax records 5,50,000
Unamortised preliminary expenses as per tax record 40,000

There is adequate evidence of future profit sufficiency. How much deferred tax assets/liability
should be recognized as transition adjustment when the tax rate is 50%?
SOLUTION
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AS 22 | Accounting for taxes on income AS 22.24

Table showing calculation of deferred tax asset / liability

Particulars Amount ` Timing Deferred tax Amount @
difference 50% `
Excess depreciation as per tax 3,00,000 Timing Deferred tax 1,50,000
records (` 5,50,000 – liability
` 2,50,000)
Unamortised preliminary expenses 40,000 Timing Deferred tax
as per tax records asset (20,000)
Net deferred tax liability 1,30,000

Net deferred tax liability amounting ` 1,30,000 should be recognized as transition adjustment.

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