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

Meghna Textiles Ltd. reports accounting profit of ₹10,00,000 for the year. Depreciation as per books is ₹3,00,000 and as per income-tax is ₹5,00,000. There are no other differences. The tax rate is 30%. What is the deferred tax created or reversed for the year, as per AS 22?

A deferred tax liability of ₹60,000 is created. Tax depreciation exceeds book depreciation by ₹2,00,000, a timing difference that reverses later and makes future taxable income higher. Applying the 30% rate to ₹2,00,000 gives ₹60,000 of deferred tax liability.

  1. ADeferred tax liability of ₹60,000 createdCorrect
  2. BDeferred tax asset of ₹60,000 created
  3. CDeferred tax liability of ₹90,000 created
  4. DDeferred tax liability of ₹1,50,000 created

Explanation

Tax depreciation exceeds book depreciation by ₹2,00,000, so taxable income is lower than accounting income. This is a timing difference that will reverse, giving a deferred tax liability of 2,00,000 x 30% = ₹60,000. Option 3 wrongly applies the rate to the book depreciation of ₹3,00,000. Option 2 wrongly treats the difference as an asset.

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