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

Kaveri Textiles Ltd. has an unabsorbed business loss of ₹5,00,000 carried forward under the tax law, which can be set off against future profits. There is no virtual certainty supported by convincing evidence of future taxable income; the company has made losses for three years. Tax rate is 30%. How should the company treat the carried forward loss under AS 22?

The company should not recognise a deferred tax asset on the carried forward loss. AS 22 requires virtual certainty supported by convincing evidence of sufficient future taxable income for losses, and a three-year loss history means that test fails. The position is reassessed at every balance sheet date.

  1. ARecognise deferred tax asset of ₹1,50,000
  2. BDo not recognise deferred tax asset; reassess at each balance sheet dateCorrect
  3. CRecognise deferred tax asset of ₹1,50,000 and disclose it as a contingent asset
  4. DRecognise deferred tax asset at 50% of ₹1,50,000

Explanation

Under AS 22, where there are carry forward unabsorbed losses, a deferred tax asset is recognised only if there is virtual certainty supported by convincing evidence of future taxable income. With a history of losses, no such certainty exists, so no asset is recognised. It is reassessed at each balance sheet date.

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