income tax

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Niraj Sharma

Niraj Sharma (Querist)
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19 February 2011 i want to know Deffered tax Assets & Liability. please, Explain in Brief with Example

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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20 February 2011 Deferred Tax:

Profit Before Tax as computed in the Profit and Loss Account as per Companies Act has difference with the Taxable Income computed on the basis of Income Tax Act, 1961.This is because there are differences in tax treatment of various items charged as per accounting principles and tax provisions.
This tax difference arises because of Timing Difference and Permanent Difference.
Timing difference for example may arise because of difference in depreciation in accounting and tax purposes or provision created in the profit and loss account as per companies act may not be allowed as per income tax act and such may be allowed only after an expense or loss for which the provision is made is actually incurred.
Permanent difference may arise as in taking income as per companies act income on tax free interest is also taken into account but the same is not considered as income as per income tax act.
Tax effect of timing difference is called deferred tax. When additional tax liability arises because of accounting income is more than taxable income and the difference is reversible deferred tax liability is to be created. Similarly, when tax payable as per taxable income is more than tax liablilty as per accounting profit and the difference is temporary in nature, deferred tax asset should be created.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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23 February 2011 Little more details are given hereunder:-
1.Source:-
AS-22 deals with deferred tax.
2.Focus;-
It is based on the matching concept.
3.Reason:-
Accounting income and taxable income may differ on account of various reasons.
4.Measurement;-
The difference as aforesaid is itemized and permanent differences are eliminated. The rest is called timing difference.
5.Timing difference;-
Those differences which lead to either saving in tax or payment of tax in the current year in the manner that such saving or payment is nullified in later years.
6.Recognition;-
Deferred tax should be recognized for all timing differences subject to consideration of prudence in respect of deferred tax assets.
7.Rates;-
deferred tax is to be recognized using the tax rates that have been enacted on the balance sheet date. If not enacted can be measured on the tax laws that have been substantially enacted as on the b/s date.
8. Positioning;-
deferred tax asset/liability should be disclosed separately from current assets and current liabilities in the b/s.
9.Disclosure;-
In the notes on accounts compliance of AS 22 may be mentioned as well as the workings of the deferred tax may be given.

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