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

Ritu Engineering Ltd. has unabsorbed depreciation of Rs 4,00,000 and carried forward business loss of Rs 2,00,000 as on the balance sheet date, with no deferred tax liabilities. Its profits in the past years were negative, and there is no convincing evidence of future taxable profit. Tax rate is 30%. Under AS 22, what is the correct treatment?

No deferred tax asset is recognised on either item. For unabsorbed depreciation and carried forward losses, AS 22 requires virtual certainty supported by convincing evidence of future taxable profit, and the company has a history of losses with no such evidence.

  1. ARecognise no deferred tax asset on either itemCorrect
  2. BRecognise a DTA of Rs 1,20,000 on unabsorbed depreciation only
  3. CRecognise a DTA of Rs 1,80,000 on both items
  4. DRecognise a DTA of Rs 60,000 on the business loss only

Explanation

Where there is unabsorbed depreciation or carried forward loss, a DTA is recognised only if there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. Here no such evidence exists, so no DTA arises on either item. The figures Rs 1,20,000, Rs 1,80,000 and Rs 60,000 are mere tax-rate computations that ignore the virtual certainty test.

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