NITIN GOEL

❏ CHARTERED ACCOUNTANT

❏ All India Rankholder

(CPT-9, Inter-7 , Final-9)
❏ Gold Medalist

❏ Educator: CA Inter Accounts

& Advanced Accounts
❏ 3 Years Experience with ITC Ltd.
8 years Teaching Experience

Use Code: CANITIN to get 10% Discount

Question 1 ICAI Study Material
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 2017-2018, 2018-2019 and 2019-2020 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 2017-2018, 2018-2019 and
2019-2020 respectively. Income-tax rate is 35%.
Compute the amount of deferred tax asset/ liability for the years 2017-2018, 2018-2019 and 2019-2020.
Question 2 Inter May 2018 (5 Marks)
Rohit Ltd. has provided the following information:
Particulars Amount
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
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 – 2,50,000) Liability
Unamortised preliminary 40,000 Timing Deferred Tax 20,000
expenses as per tax records Asset
Net deferred tax liability 1,30,000
Net deferred tax liability amounting ₹ 1,30,000 should be recognized as transition adjustment.
Question 3 Inter Jan 2021 (5 Marks)
The following particulars are stated in the Balance Sheet of HS Ltd. as on 31.03.2019
(₹ In Lakhs)
Deferred Tax Liability (Cr.) 60.00
Deferred Tax Assets (Dr.) 30.00

The following transactions were reported during the year 2019-20

(i) Tax Rate 30%
(₹ In Lakhs)
(ii) Depreciation as per accounting records 160.00
Depreciation as per income tax records 140.00
(iii) Items disallowed in 2018-19 & allowed for tax 20.00
purposes in 2019-20
(iv) Donations to Private Trusts 20.00
There were no additions to Fixed Assets during the year. You are required to show the impact of various
items on Deferred Tax Assets and Deferred Tax Liability as on 31.03.2020 as per AS 22.
Solution
Impact of various items in terms of AS 22 deferred tax liability/deferred tax asset
(1) Difference in Depreciation- Generally, written down value method of depreciation is adopted under
income Tax Act which leads to higher depreciation in earlier years of useful life of the asset in
comparison to later years. It is timing difference for which reversal of Deferred tax liability is
required.
Reversal of DTL= (160 – 140) Lakhs X 30% = 6 Lakhs

(2) Disallowances, as per IT Act of earlier years- Due to disallowance tax payable for the earlier years
was higher on this account. It is responding timing difference which required Reversal of Deferred
tax assets.
Reversal of Deferred tax assets = 20 Lakhs X 30% = 6 Lakhs

(3) Donations to private trusts is not an allowable expenditure under IT Act. It is permanent difference.
Hence, no reversal of tax is required
Deferred Tax ❖ While recognising the tax effect of timing differences, consideration of prudence
Assets cannot be ignored. Therefore, deferred tax assets are recognised and carried
forward only to the extent that there is a reasonable certainty of their realisation.
❖ 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.
❖ 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.
Question 4 ICAI Study Material
PQR Ltd.'s accounting year ends on 31st March. The company made a loss of ₹ 2,00,000 for the year
ending 31.3.2018. For the years ending 31.3.2019 and 31.3.2020, 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 31.3.2018, 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 2019
and 2020 for tax purposes.
Prepare a statement of Profit and Loss for the years ending 2018, 2019 and 2020
Question 5 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 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).
Question 6 ICAI Study Material
From the following details of A Ltd. for the year ended 31-03-2020, 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
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%
 Practice Questions
Question 1 Inter May 2019 (5 Marks) / RTP Nov 2020
Write short note on Timing differences and Permanent differences as per AS 22.

Solution
In current practices, companies, in general, prepare books of accounts as per Companies Act, 2013
generating Accounting Profit/Loss and Income-tax Act, 1961 generating Taxable Profit/Loss.
Accounting income and taxable income for a period are seldom the same.
Permanent differences are the differences between taxable income and accounting income which arise
in one accounting period and do not reverse subsequently. For example, an income exempt from tax or
an expense that is not allowable as a deduction for tax purposes.
Timing differences are those differences between taxable income and accounting income which arise in
one accounting period and are capable of reversal in one or more subsequent periods. For e.g.,
Depreciation, Bonus, etc

Question 2 ICAI Study Material

Y 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 ₹ 200 lakhs and ₹
400 lakhs respectively. From the third year it is expected that the timing difference would reverse each
year by ₹ 10 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end of the second
year and any charge to the Profit and Loss account

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing
Solution
As per 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
recognised 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 recognised 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 ₹ 200 lakhs timing difference due to depreciation, difference amounting ₹ 80 lakhs (₹ 10 lakhs x
8 years) will reverse in the tax holiday period and therefore, should not be recognised. However, for ₹
120 lakhs (₹ 200 lakhs – ₹ 80 lakhs), deferred tax liability will be recognised for ₹ 48 lakhs (40% of ₹ 120
lakhs) in first year. In the second year, the entire amount of timing difference of ₹ 400 lakhs will reverse
only after tax holiday period and hence, will be recognised in full. Deferred tax liability amounting ₹
160 lakhs (40% of ₹ 400 lakhs) will be created by charging it to profit & loss account and total balance of
deferred tax liability account at the end of second year will be ₹ 208 lakhs (48 lakhs + 160 lakhs).

Question 3 Inter Nov 2019 (5 Marks)

Sheetal Ltd. has provided the following information for the year ended 31-03-2020:
Particulars ₹
Accounting Profit 9,00,000
Book Profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000
Tax Rate 30%
MAT Rate 7.50%
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing
You are required to 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.

Solution
Tax as per accounting profit 9,00,000 x 30% = ₹ 2,70,000
Tax as per Income-tax Profit 95,000 x 30% = ₹ 28,500
Tax as per MAT 5,25,000 x 7.50% = ₹ 39,375
Tax expense= Current Tax + Deferred Tax
₹ 2,70,000 = ₹ 28,500+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020 = ₹ 2,70,000 – ₹ 28,500 = ₹ 2,41,500
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ₹ 28,500 + ₹ 2,41,500 + ₹ 10,875 (39,375 – 28,500) = ₹ 2,80,875

Question 4 Inter Nov 2020 (5 Marks)

From the following details of Aditya Limited for accounting year ended on 31st March, 2020
Particulars ₹
Accounting Profit 15,00,000
Book Profit as per MAT 7,50,000
Profit as per Income Tax Act 2,50,000
Tax Rate 20%
MAT Rate 7.50%
You are required to 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.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing
Solution
Tax as per accounting profit 15,00,000 x 20% = ₹ 3,00,000
Tax as per Income-tax Profit 2,50,000 x 20% = ₹ 50,000
Tax as per MAT 7,50,000 x 7.50% = ₹ 56,250
Tax expense= Current Tax + Deferred Tax
₹ 3,00,000 = ₹ 50,000+ Deferred tax
Therefore, Deferred Tax liability as on 31-03-2020 = ₹ 3,00,000 – ₹ 50,000 = ₹ 2,50,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2020
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ₹ 50,000 + ₹ 2,50,000 + ₹ 6,250 (56,250 – 50,000) = ₹ 3,06,250

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing