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

Rohini Traders Ltd. has accounting profit of ₹10,00,000 for the year. Its only difference between accounting and taxable income is that depreciation under the Income-tax rules exceeds book depreciation by ₹2,00,000 in the year. Tax rate is 30%. Which of the following is the deferred tax effect for the year under AS 22?

A deferred tax liability of ₹60,000 is created. Higher tax depreciation than book depreciation is a timing difference that reduces current taxable income but will reverse later, so tax payable rises in future. The liability equals ₹2,00,000 multiplied by the 30% tax rate.

  1. ADeferred tax liability of ₹60,000 createdCorrect
  2. BDeferred tax asset of ₹60,000 created
  3. CDeferred tax liability of ₹3,00,000 created
  4. DNo deferred tax, as the difference is permanent

Explanation

Tax depreciation exceeds book depreciation, so taxable income is lower than accounting income now, but this reverses in later years. It is a timing difference creating a deferred tax liability: 2,00,000 x 30% = ₹60,000. Treating it as an asset reverses the direction of the effect.

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