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Deferred tax-reg.

Aaditya Raghuraman (Article Assisstant) (73 Points)

12 April 2014

Hi Friends,

I want to get cleared with regard to creation of provision for deferred tax liability/asset when there is a loss..

Do we need to create Deferred Tax Provision even when a company suffers loss??

Pl let me know asap..

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CA SANKET GARG (Sanket Garg & Company ) (838 Points)
Replied 15 April 2014

Hi,

In your case Deferred Tax Asset will be created because of Loss. Creating DTA depends on the "virtual certainity supported by convincing evidence" that sufficient future taxable income will be available against which such deferred tax asset can be realised.

In normal practice many companies does not created DTA because of lack of certainity of future taxable income, however many times it depends on Company to Company basis also.

As per AS - 22 Convincing Evidence means:

To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation of which will result in payment
of heavy damages by the defaulting party. On the other hand, a projection of the future profits made by an enterprise based on the future capital expenditures or future restructuring etc. submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in isolation, be considered as convincing evidence.

As per AS - 22 Virtual Certaininty Means:

Virtual certainty refers to the extent of certainty, which,for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence. Evidence is a matter of fact.

So broadly check these two conditions and create DTA, but mostly companies avoid to create it because of lack of evidence and certainity.

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