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

Meenakshi Textiles Ltd. incurred a loss of ₹4,00,000 in the current year before considering tax. Under the Income-tax Act, the loss can be carried forward for 8 years. The company has no deferred tax liabilities and, as per its past record, there is no virtual certainty supported by convincing evidence of future taxable profit. Tax rate is 25%. What is the correct accounting treatment under AS 22?

No deferred tax asset should be recognised. AS 22 permits a deferred tax asset on unabsorbed losses only where there is virtual certainty, supported by convincing evidence, of future taxable income. Since the company has no such evidence, the potential asset of ₹1,00,000 stays unrecognised.

  1. ARecognise deferred tax asset of ₹1,00,000
  2. BDo not recognise any deferred tax asset on the unabsorbed lossCorrect
  3. CRecognise deferred tax liability of ₹1,00,000
  4. DRecognise deferred tax asset of ₹50,000

Explanation

AS 22 requires deferred tax assets on carry forward of unabsorbed losses to be recognised only if there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. Here there is no such evidence, so the potential asset of 4,00,000 x 25% = ₹1,00,000 is not recognised. Recognising it would be wrong because the virtual certainty test is not met.

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