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

Kaveri Plastics Ltd. (tax rate 30%) has a brought-forward unabsorbed depreciation of Rs 4,00,000 and no other timing differences. The company has never been profitable before, and there is only reasonable, not virtual, certainty of future taxable profits. As per AS 22, what should be the treatment in the books at year end?

No deferred tax asset should be recognised. AS 22 permits a deferred tax asset on unabsorbed depreciation or carried forward losses only when there is virtual certainty, supported by convincing evidence, of future taxable income. Mere reasonable certainty is insufficient, so the Rs 1,20,000 potential asset stays unrecognised.

  1. ARecognise deferred tax asset of Rs 1,20,000
  2. BDo not recognise deferred tax asset, since virtual certainty is absentCorrect
  3. CRecognise deferred tax asset of Rs 4,00,000
  4. DRecognise deferred tax liability of Rs 1,20,000

Explanation

AS 22 requires deferred tax assets on unabsorbed depreciation or carried forward losses to be recognised only if there is virtual certainty supported by convincing evidence of sufficient future taxable income. Reasonable certainty is not enough, so no asset is recognised. Rs 1,20,000 (4,00,000 x 30%) would be right only with virtual certainty; instead the unrecognised amount is disclosed.

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