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

Ranjit Engineering Ltd. has unabsorbed business loss of Rs 6,00,000 carried forward under tax law (tax rate 30%). The company has no deferred tax liabilities and no convincing other evidence of future taxable profits, though it expects some profits. How should AS 22 be applied to the loss?

A deferred tax asset of Rs 1,80,000 (6,00,000 x 30%) can be recognised only if virtual certainty supported by convincing evidence of future taxable income exists. Mere expectation or probability of profits is insufficient for carried-forward losses under AS 22.

  1. ARecognise a deferred tax asset of Rs 1,80,000 only if virtual certainty supported by convincing evidence existsCorrect
  2. BRecognise a deferred tax asset of Rs 1,80,000 since profits are probable
  3. CRecognise a deferred tax liability of Rs 1,80,000
  4. DRecognise a deferred tax asset of Rs 1,80,000 as a contingent asset in notes

Explanation

Under AS 22, deferred tax assets on unabsorbed losses are recognised only if there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. Mere probability is not enough, so the second option is wrong. Losses never create a liability.

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