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Accounting for Taxes on Income

19 June 2007

I have just come across the message and its replies form experts about creating defered asset or deferred liability in stark contrast.

One expert has advised on creating a DTA as follows :There's this simple funda... if the profit as per books is more ie accounting profit is more than the IT profit then create DTA otherwise create DTL.. apply the same concept for loss.. and may be i'll help you out with the excel sheet very soon. hope this clears ur concept...By NIKITA posted on06/11/2007

The other expert has advised on creating a DTL as follows :DTL if Book profit > Taxable profit & vice versa.

Could any one please clarify the matter.

Thanks

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7 Replies

CA Nikita (Chartered Accountant) (4158 Points)
Replied 19 June 2007

hello!!! plz do check it properly there was some error made while writin so i have clarified the same in the next answer posted by me... accounting written by me also means book profit.. i hope now it is clear..

Jiten (CA) (167 Points)
Replied 20 June 2007

As per AS 22. DTA/DTL should be created on basis of difference between Accounting profit and Taxable profit but you should be aware that if difference is permanent like some expenditure disallowed in income tax and in future it can not be allowed then it will not create any DTA/DTL ... So first u have to decide that what reason behind this difference .. one difference called timing difference like Depreciation it will create DTA/DTL.. So this is the right concept.. if u need further advise u can contact me at 9310605606 Jiten Jain Delhi

Jiten (CA) (167 Points)
Replied 20 June 2007

As per AS 22. DTA/DTL should be created on basis of difference between Accounting profit and Taxable profit but you should be aware that if difference is permanent like some expenditure disallowed in income tax and in future it can not be allowed then it will not create any DTA/DTL ... So first u have to decide that what reason behind this difference .. one difference called timing difference like Depreciation it will create DTA/DTL.. So this is the right concept.. see para 12 of AS 12 if u need further advise u can contact me at 9310605606 Jiten Jain Delhi

(Guest)

i am a cost accountant

The One (379 Points)
Replied 22 June 2007

While the basic aspects stated above are accurate they are only partially so.

AS cannot be interpreted in a simplistic manner. There needs to be a wholistic approach. For eg. for creation of deferred tax assets it is clear that there must a reversing temporary difference wherein tax income is greater than accounting income - therefore the current tax is higher and in the future will be lower therefore we create a DTA.

DTA is usually recognized based on reasonable certainty based on prudence. However as per paragraph 17 of Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.

This is just a brief example to suggest a wholitic approach to interpretation of AS. Hope its useful - other points of view are welcome as always.

PS. Congratulations to Mr. Kumar on being a cost accountant how about sharing your knowledge with us?

Amit (ca student) (112 Points)
Replied 08 September 2007

PLs. clarify how the Tax on in future will be lower.
In regard to DTA / DTL i m thinking the logic after considering the AS para is that,

If the Profit as per income yax is higher as compare to book profit that means there is higher provision, so that there will be entry of

DTA A/c Dr.
To P & L Appr A/c

which will be reversed back subsequently year.

Note : Assume that there is only Depn difference, there is no DTL in previous year, & no permanent difference any other

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