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

Kaveri Textiles Ltd. has accounting profit of Rs 12,00,000 for the year. Its only difference is that depreciation charged in books is Rs 2,00,000 while depreciation allowed under income-tax is Rs 3,50,000. Tax rate is 30%. Assuming no other differences, what is the deferred tax created for the year and its nature?

A deferred tax liability of Rs 45,000 arises. Tax depreciation exceeds book depreciation by Rs 1,50,000, a timing difference that reverses later and makes future taxable income higher. At 30%, the liability is Rs 45,000.

  1. ADeferred tax liability of Rs 45,000Correct
  2. BDeferred tax asset of Rs 45,000
  3. CDeferred tax liability of Rs 60,000
  4. DDeferred tax asset of Rs 60,000

Explanation

Tax depreciation exceeds book depreciation by Rs 1,50,000, so taxable income is lower than accounting income in this year. This is a timing difference that will reverse later, creating a DTL = 1,50,000 x 30% = Rs 45,000. Rs 60,000 wrongly uses the book depreciation of Rs 2,00,000 as the difference.

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