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

Kaveri Textiles Ltd. has an accounting profit of Rs 10,00,000. Book depreciation is Rs 2,00,000 and tax depreciation is Rs 3,50,000, so the difference arises only this year. The company also paid Rs 60,000 of penalty for a statutory violation, which is disallowed for tax. Tax rate is 30%. What is the deferred tax for the year arising from the timing difference?

A deferred tax liability of Rs 45,000 arises. Tax depreciation exceeds book depreciation by Rs 1,50,000, a timing difference that will reverse, so 30% of it is recognised as liability. The penalty of Rs 60,000 is a permanent difference and creates no deferred tax.

  1. ADeferred tax liability of Rs 45,000Correct
  2. BDeferred tax liability of Rs 27,000
  3. CDeferred tax asset of Rs 45,000
  4. DDeferred tax liability of Rs 63,000

Explanation

Only depreciation is a timing difference: 3,50,000 - 2,00,000 = 1,50,000 where tax depreciation is higher, creating a DTL. DTL = 30% x 1,50,000 = Rs 45,000. The penalty is a permanent difference and gives no deferred tax; including it (net 90,000 or 2,10,000) is wrong.

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