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

Kaveri Ltd. has brought forward unabsorbed depreciation of ₹6,00,000 and no other deferred tax balances. In the current year it expects future taxable profits only from a firm order book that is not yet signed, and has no deferred tax liabilities to offset. Tax rate is 30%. As per AS 22, what is the correct treatment of the deferred tax asset on the unabsorbed depreciation?

No deferred tax asset should be recognised. AS 22 requires virtual certainty, supported by convincing evidence, of future taxable income before recognising a deferred tax asset on unabsorbed depreciation or losses. An unsigned order book is not convincing evidence, and there are no deferred tax liabilities to absorb it.

  1. ARecognise deferred tax asset of ₹1,80,000 as it is a timing difference
  2. BDo not recognise any deferred tax asset as there is no virtual certainty supported by convincing evidenceCorrect
  3. CRecognise deferred tax asset of ₹1,80,000 only to the extent of 50% prudence
  4. DRecognise deferred tax liability of ₹1,80,000

Explanation

Under AS 22, where a company has unabsorbed depreciation or carried forward losses, a deferred tax asset is recognised only if there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. An unsigned order book is not such evidence, and there are no deferred tax liabilities to offset. So the potential ₹1,80,000 is not recognised. A 50% partial recognition is not a rule in AS 22.

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