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As 22 deferred tax assets/liabilities

Arka Bose (None) (313 Points)

30 July 2013

Provisions are disallowed in income tax.
Why are they considered to calculate deferred tax assets?

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7 Replies

Abhisek Rungta (PRACTISING CHARTERED ACCOUNTANT) (234 Points)
Replied 30 July 2013

Provisions are disallowed in Income Tax Act. But as per Accounting Standards we have to create provisions in the Books of Acounts. Both are different and you keep provision for Deferred Tax because of Difference ( Timing and Permanent ) difference between Income Tax books and as per Books of Accounts.

Abhisek Rungta (PRACTISING CHARTERED ACCOUNTANT) (234 Points)
Replied 30 July 2013

CA vinod (Chartered Accountant) (518 Points)
Replied 30 July 2013

Differed tax will arise when there is a TIMING difference between Taxable income & Income as per Accounts. As you know provisions are not allowed as per IT Act, but allowed as per AS. Provision is a timing difference. for Ex. If you create provision for doubtful debts it is not allowed as per IT act, but when you write off these provision as bad debts then it will allowd under IT act. As provisions are not allowed as exp under IT act, it leads to Differed Tax asset which will be reversed in future.

Arka Bose (None) (313 Points)
Replied 30 July 2013

But that creates permanent difference. Why deferred tax then?

CA vinod (Chartered Accountant) (518 Points)
Replied 30 July 2013

When you create provision for bad debts that is not allowed under Income tax, but allowed as expenses in your books. When you actually write off the provision that is allowed under income tax. So it is clearly a timing difference.

AnubhavAggarwal (associate) (21 Points)
Replied 12 April 2015

Guyz check out. I believed same to be true but recently I found that it is considered permanent difference and the reason is provisiofor bad debts is not allowed and when actual expense ouccurs then provision is reversed and not written off..and subsequently actual expense is booked. Refer ICAI NOV 14 ca final paper and solution (QUESTIONS NO. 1)

Piyush Vasantrao Jadhav (1) (41 Points)
Replied 18 July 2015

CA Vinod's answer seems to be correct. Also, Mr. Anubhav, I would like to bring this to your notice that ICAI has changed the answer of the question you have referred to in your comment.(https://www.icai.org/new_post.H T M L?post_id=11594&c_id=343) Provision is timing difference and hence to be considered while computation of DTA/DTL.