CMA Intermediate · Financial Accounting · Accounting for Taxes on Income (AS 22)
For a year, a company's accounting depreciation is Rs. 10 lakhs against tax depreciation of Rs. 16 lakhs. It also debited Rs. 2 lakhs as a penalty, which is not deductible for tax in any year. With a tax rate of 30%, what deferred tax liability arises for the year?
The deferred tax liability is Rs. 1.8 lakhs. Only the Rs. 6 lakh excess of tax depreciation over accounting depreciation is a timing difference, taxed at 30%. The non-deductible penalty of Rs. 2 lakhs is a permanent difference and creates no deferred tax.
- ARs. 1.8 lakhsCorrect
- BRs. 2.4 lakhs
- CRs. 0.6 lakh
- DRs. 1.2 lakhs
Explanation
Only the depreciation difference is a timing difference: 16 - 10 = Rs. 6 lakhs, so deferred tax = 30% x 6 = Rs. 1.8 lakhs. The penalty is a permanent difference and gives no deferred tax. Adding it to the timing difference (8 lakhs) gives the wrong Rs. 2.4 lakhs.
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