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

Meenakshi Textiles Ltd. has an accounting profit of ₹10,00,000 for the year. Its tax rate is 30%. Depreciation as per books is ₹3,00,000 and as per tax laws is ₹4,00,000. There are no other differences. Treating the depreciation difference as the only timing difference, the deferred tax for the year is:

A deferred tax liability of ₹30,000 arises. Tax depreciation is higher than book depreciation by ₹1,00,000, which is a timing difference that reverses in later years, so the tax effect at 30% is a liability, not an asset.

  1. ADeferred tax liability of ₹30,000 createdCorrect
  2. BDeferred tax asset of ₹30,000 created
  3. CDeferred tax liability of ₹1,20,000 created
  4. DNo deferred tax, as the difference is permanent

Explanation

Tax depreciation exceeds book depreciation by ₹1,00,000, so taxable income is lower than accounting income now and will reverse later. DTL = 1,00,000 × 30% = ₹30,000. Treating it as an asset reverses the direction of the timing difference. The difference is a timing one, not permanent.

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