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CA Intermediate · Advanced Accounting · AS 22 Accounting for Taxes on Income

Himalaya Engineering Ltd. has unabsorbed depreciation of Rs 4,00,000 carried forward under tax law. Tax rate is 30%. It has a deferred tax liability of Rs 1,50,000 on depreciation timing differences, which will reverse in future. It has no virtual certainty of future taxable profit other than from reversal of that liability. What deferred tax asset on unabsorbed depreciation can be recognised and what is the net position?

This is a trap: the DTA is limited to its computed amount. Potential DTA is 30% of Rs 4,00,000, which is Rs 1,20,000. Because the reversal of the Rs 1,50,000 DTL provides sufficient future taxable income, it is recognised fully.

  1. ARecognise DTA of Rs 1,20,000; net DTL of Rs 30,000
  2. BRecognise DTA of Rs 1,50,000 only; net nilCorrect
  3. CRecognise DTA of Rs 1,20,000; net DTA of Rs 30,000 recognised
  4. DRecognise no DTA; DTL of Rs 1,50,000 remains

Explanation

Potential DTA = 30% x 4,00,000 = 1,20,000. Unabsorbed depreciation is recognised only to the extent of virtual certainty supported by convincing evidence; here the only source is the reversal of DTL of 1,50,000, which exceeds 1,20,000, so the full 1,20,000 can be recognised. Net DTL is therefore Rs 30,000. The option stating DTA of 1,50,000 is wrong because the DTA is limited to 1,20,000.

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