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CA Final · Financial Reporting · Ind AS 12 Income Taxes

Sagar Textiles Ltd bought machinery for ₹10,00,000 on 1 April 2025. It charges depreciation under the straight-line method at 10% per annum for accounting. For tax, depreciation is allowed at 25% on the written down value. The tax rate is 25% and there are no other differences. At 31 March 2026, what deferred tax balance arises on the machinery?

A deferred tax liability of ₹37,500 arises. The carrying amount is ₹9,00,000 and the tax base is ₹7,50,000, giving a taxable temporary difference of ₹1,50,000. At 25% this results in a liability, because tax depreciation has been claimed faster than accounting depreciation.

  1. ADeferred tax liability of ₹25,000
  2. BDeferred tax liability of ₹62,500
  3. CDeferred tax asset of ₹37,500
  4. DDeferred tax liability of ₹37,500Correct

Explanation

Carrying amount is 10,00,000 - 1,00,000 = 9,00,000. Tax base is 10,00,000 - 2,50,000 = 7,50,000. The taxable temporary difference is 1,50,000, so the DTL is 25% × 1,50,000 = 37,500. Using only the year's depreciation of 1,00,000 gives 25,000, which is wrong because the base is the cumulative difference in carrying amount and tax base.

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