Deferred Tax Liability

Deferred Tax Liability is the difference between the provision of tax and actual tax. It is the timing difference that arises because of the tax calculated as per Companies Act and Income Tax Act.

Example:- Provision for Tax in the P/L was Rs. 10,00,000/- however, in September when the ITR was filled the actual tax is Rs. 8,00,000/- only. Thus Rs.2,00,000/- is the deferred tax liability.

It is the appropriation of the profit and reduces the actual profit. It is not a liability because it is not required to be paid in future.

2*[(ga) of the Sick Industrial Companies (Special Provisions) Act, 1985  "net worth" means the sum total of the paid-up capital and free reserves.

Explanation.-- For the purposes of this clause, "free reserves" means all reserves credited out of the profits and share premium account but does not include reserves credited out of re-evaluation of assets, write back of depreciation provisions and amalgamation.

Thus includes deferred tax liability.

Under section 2(29A) of the Companies Act, net worth means the sum total of the paid up capital and free reserves after deducting the provisions or expenses as may be prescribed.

Explanations:- for the purpose of this clause, free reserves means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation.

Thus includes deferred tax liability.

Under Rule 2(d) of Acceptance of Deposit Rule, 1975 free reserve includes the balance in the share premium account, capital and debenture redemption reserve and any other reserves shown or published in the balance sheet of the company and created by appropriation out of the profits of the company, but does not include the balance in any reserve created:

1.      For repayment of  any future liability or for depreciation in assets or for bad debts:

2.      by the revaluation of any assets of the company.

Thus includes deferred tax liability.

THUS, DEFERRED TAX LIABILITY SHOULD BE INCLUDED IN THE NET WORTH.