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

Meera Textiles Ltd. has accounting profit of ₹10,00,000 for the year. Its only difference between accounting and taxable income is that ₹1,20,000 of depreciation is allowed for tax but only ₹80,000 is charged in the books, so the extra tax depreciation is ₹40,000. Tax rate is 30%. Opening deferred tax balances are nil. What is the deferred tax created for the year under AS 22?

A deferred tax liability of ₹12,000 is created. Tax depreciation exceeds book depreciation by ₹40,000, so taxable income is lower now and will be higher when the difference reverses. Applying the 30% tax rate to ₹40,000 gives ₹12,000 as a liability, not an asset.

  1. ADeferred tax asset of ₹12,000
  2. BDeferred tax liability of ₹12,000Correct
  3. CDeferred tax liability of ₹3,00,000
  4. DDeferred tax liability of ₹36,000

Explanation

Tax depreciation exceeds book depreciation by ₹40,000, a timing difference that will reverse and increase future taxable income. Deferred tax liability = 40,000 × 30% = ₹12,000. A deferred tax asset would arise only if book depreciation exceeded tax depreciation.

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