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

Rohan Engineering Ltd. has an accounting profit of ₹8,00,000 and a 30% tax rate. Book profit includes ₹50,000 of penalty paid for violation of law (not allowed for tax) and ₹1,20,000 of provision for warranties, deductible for tax only when paid, expected to be paid next year. Ignoring other items, the current tax and the deferred tax for the year are:

Current tax is ₹2,91,000 and a deferred tax asset of ₹36,000 arises. Taxable income is ₹9,70,000 after adding back the penalty and the warranty provision. Only the warranty provision is a timing difference; the penalty is permanent and creates no deferred tax.

  1. ACurrent tax ₹2,91,000; deferred tax asset ₹36,000Correct
  2. BCurrent tax ₹2,91,000; deferred tax liability ₹36,000
  3. CCurrent tax ₹2,40,000; deferred tax asset ₹36,000
  4. DCurrent tax ₹2,55,000; deferred tax asset ₹51,000

Explanation

Taxable income = 8,00,000 + 50,000 (penalty, permanent) + 1,20,000 (warranty provision, timing) = 9,70,000. Current tax = 30% = ₹2,91,000. Only the warranty provision is a timing difference, giving DTA = 1,20,000 × 30% = ₹36,000. Including the penalty in deferred tax (option 4) is wrong because it is permanent.

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