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Neha Kawatra (Querist)

26 October 2013 Please define the following terms other than bookish language: 1) Deffered Tax Asset 2) Deffered Tax Liability

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

26 October 2013 We are maintaining the books of accounts as per the companies act based on that expenses, income, assets and liabilities will be arrived and the p&l, balance sheet will be prepared. but the provisions and determination of profit and tax on that will be based on the Income tax act, it will be differ, the different may be permanent or timing, such as some difference can be adjusted further years it is called timing difference, some difference cannot be adjusted in further year also that is called permanent difference. so the temporary tax difference between these 2 acts is called deferred taxation.if the tax liability under companies act higher than tax calculated under income tax then it is called deferred tax asset and if the tax liability under companies act less than the income tax asset,it is called deferred tax liability

Nikhil Kaushik

Nikhil Kaushik (Expert)

26 October 2013 For example:

Assuming Depreciation on computer under companies act @ 16.21% is Rs 4102 and under Income tax at 60% is 22,499. Then the profit under Companies Act shall be higher than income tax Act. This results in deferment of tax liability for Companies Act purposes. In this case you shall have deferred tax liability at 30.90% of (22,499 - 4102).

On the other hand take an example of preliminary expenses. In companies Act, preliminary expenses are charged to p&l in the first year itself, whereas in income-tax act it is expensed at 20% for five years.

So if the preliminary expense is Rs 10,000, then expense under companies act shall be Rs 10,000 but under income-tax act it shall be Rs 2000. Thus in this case, profit under companies act shall be lower than income tax asset. This would result in deferment of tax liability for income tax act. This is known as deferred tax asset for companies act purposes.

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