Accounting Standard (AS) 22*

(issued 2001)

Accounting for Taxes on Income

(This Accounting Standard includes paragraphs set in bold italic type and plain
type, which have equal authority. Paragraphs in bold italic type indicate the
main principles. This Accounting Standard should be read in the context of its
objective, the Preface to the Statements of Accounting Standards1 and the
‘Applicability of Accounting Standards to Various Entities’ (See Appendix 1 to this
Compendium).]
This Accounting Standard is applicable to a Micro enterprise (Level IV non-
company entities), as defined in Appendix 1 to this Compendium ‘Applicability of
Accounting Standards to Various Entities’, for current tax related requirements
only. Such entities shall apply this Standard for Current tax defined in paragraph
4.4 of AS 22, with recognition as per paragraph 9, measurement as per
paragraph 20 of AS 22, and presentation and disclosure as per paragraphs 27-
28.

Objective
The objective of this Standard is to prescribe accounting treatment for taxes on
income. Taxes on income is one of the significant items in the statement of
profit and loss of an enterprise. In accordance with the matching concept, taxes
on income are accrued in the same period as the revenue and expenses to
which they relate. Matching of such taxes against revenue for a period poses
special problems arising from the fact that in a number of cases, taxable income
may be significantly different from the accounting income. This divergence
between taxable income and accounting income arises due to two main
reasons. Firstly, there are differences between items of revenue and expenses
as appearing in the statement of profit and loss and the items which are
considered as revenue, expenses or deductions for tax purposes. Secondly,
there are differences between the amount in respect of a particular item of

* The Standard was earlier notified as part of Companies (Accounting Standards) Rules,
2006, under Companies Act, 1956. The Standard has been notified as part of Companies
(Accounting Standards) Rules, 2021, under Companies Act, 2013.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.
376 AS 22 (issued 2001)

revenue or expense as recognised in the statement of profit and loss and the
corresponding amount which is recognised for the computation of taxable
income.

Scope
1. This Standard should be applied in accounting for taxes on income.
This includes the determination of the amount of the expense or saving
related to taxes on income in respect of an accounting period and the
disclosure of such an amount in the financial statements.

2. For the purposes of this Standard, taxes on income include all domestic and
foreign taxes which are based on taxable income.

3. This Standard does not specify when, or how, an enterprise should

account for taxes that are payable on distribution of dividends and other
distributions made by the enterprise.

Definitions
4. For the purpose of this Standard, the following terms are used with
the meanings specified:

4.1 Accounting income (loss) is the net profit or loss for a period, as
reported in the statement of profit and loss, before deducting income tax
expense or adding income tax saving.

4.2 Taxable income (tax loss) is the amount of the income (loss) for a
period, determined in accordance with the tax laws, based upon which
income tax payable (recoverable) is determined.

4.3 Tax expense (tax saving) is the aggregate of current tax and deferred
tax charged or credited to the statement of profit and loss for the period.

4.4 Current tax is the amount of income tax determined to be payable

(recoverable) in respect of the taxable income (tax loss) for a period.

4.5 Deferred tax is the tax effect of timing differences.

4.6 Timing differences are the differences between taxable income and
accounting income for a period that originate in one period and are capable of
 Accounting for Taxes on Income 377

reversal in one or more subsequent periods.

4.7 Permanent differences are the differences between taxable income

and accounting income for a period that originate in one period and do
not reverse subsequently.

5. Taxable income is calculated in accordance with tax laws. In some

circumstances, the requirements of these laws to compute taxable income differ
from the accounting policies applied to determine accounting income. The effect of
this difference is that the taxable income and accounting income may not be the
same.

6. The differences between taxable income and accounting income can be

classified into permanent differences and timing differences. Permanent
differences are those differences between taxable income and accounting
income which originate in one period and do not reverse subsequently. For
instance, if for the purpose of computing taxable income, the tax laws allow only a
part of an item of expenditure, the disallowed amount would result in a permanent
difference.

7. Timing differences are those differences between taxable income and

accounting income for a period that originate in one period and are capable of
reversal in one or more subsequent periods. Timing differences arise because
the period in which some items of revenue and expenses are included in
taxable income do not coincide with the period in which such items of revenue
and expenses are included or considered in arriving at accounting income.
For example, machinery purchased for scientific research related to business
is fully allowed as deduction in the first year for tax purposes whereas the
same would be charged to the statement of profit and loss as depreciation
over its useful life. The total depreciation charged on the machinery for
accounting purposes and the amount allowed as deduction for tax purposes
will ultimately be the same, but periods over which the depreciation is
charged and the deduction is allowed will differ. Another example of timing
difference is a situation where, for the purpose of computing taxable income,
tax laws allow depreciation on the basis of the written down value method,
whereas for accounting purposes, straight line method is used. Some other
examples of timing differences arising under the Indian tax laws are given in
Illustration 1.

8. Unabsorbed depreciation and carry forward of losses which can be set- off
378 AS 22 (issued 2001)

against future taxable income are also considered as timing differences and
result in deferred tax assets, subject to consideration of prudence (see
paragraphs 15-18).

Recognition
9. Tax expense for the period, comprising current tax and deferred tax,
should be included in the determination of the net profit or loss for the
period.

10. Taxes on income are considered to be an expense incurred by the

enterprise in earning income and are accrued in the same period as the revenue
and expenses to which they relate. Such matching may result into timing
differences. The tax effects of timing differences are included in the tax expense
in the statement of profit and loss and as deferred tax assets (subject to the
consideration of prudence as set out in paragraphs 15-18) or as deferred tax
liabilities, in the balance sheet.

11. An example of tax effect of a timing difference that results in a deferred tax
asset is an expense provided in the statement of profit and loss but not allowed
as a deduction under Section 43B of the Income-tax Act, 1961. This timing
difference will reverse when the deduction of that expense is allowed under
Section 43B in subsequent year(s). An example of tax effect of a timing difference
resulting in a deferred tax liability is the higher charge of depreciation allowable
under the Income-tax Act, 1961, compared to the depreciation provided in the
statement of profit and loss. In subsequent years, the differential will reverse
when comparatively lower depreciation will be allowed for tax purposes.

12. Permanent differences do not result in deferred tax assets or deferred tax
liabilities.

13. Deferred tax should be recognised for all the timing differences,
subject to the consideration of prudence in respect of deferred tax assets
as set out in paragraphs 15-18.

Explanation:

(a) The deferred tax in respect of timing differences which reverse during
the tax holiday period is not recognised to the extent the enterprise’s
gross total income is subject to the deduction during the tax holiday
 Accounting for Taxes on Income 379

period as per the requirements of sections 80- IA/80IB of the

Income-tax Act, 1961. In case of sections 10A/10B of the Income-tax
Act, 1961 (covered under Chapter III of the Income-tax Act, 1961
dealing with incomes which do not form part of total income), the
deferred tax in respect of timing differences which reverse during
the tax holiday period is not recognised to the extent deduction from
the total income of an enterprise is allowed during the tax holiday
period as per the provisions of the said sections.

(b) Deferred tax in respect of timing differences which reverse after the
tax holiday period is recognised in the year in which the timing
differences originate. However, recognition of deferred tax assets is
subject to the consideration of prudence as laid down in
paragraphs 15 to 18.

(c) For the above purposes, the timing differences which originate first
are considered to reverse first.

The application of the above explanation is illustrated in the Illustration

attached to the Standard.

14. This Standard requires recognition of deferred tax for all the timing
differences. This is based on the principle that the financial statements for a
period should recognise the tax effect, whether current or deferred, of all the
transactions occurring in that period.

15. Except in the situations stated in paragraph 17, deferred tax assets
should be recognised and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available
against which such deferred tax assets can be realised.

16. While recognising the tax effect of timing differences, consideration of

prudence cannot be ignored. Therefore, deferred tax assets are recognised
and carried forward only to the extent that there is a reasonable certainty of
their realisation. This reasonable level of certainty would normally be
achieved by examining the past record of the enterprise and by making
realistic estimates of profits for the future.

17. Where an enterprise has unabsorbed depreciation or carry forward of

losses under tax laws, deferred tax assets should be recognised only to
380 AS 22 (issued 2001)

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.

Explanation:

1. Determination of virtual certainty that sufficient future taxable

income will be available is a matter of judgement based on
convincing evidence and will have to be evaluated on a case to
case basis. Virtual certainty refers to the extent of certainty, which, for
all practical purposes, can be considered certain. Virtual certainty
cannot be based merely on forecasts of performance such as
business plans. Virtual certainty is not a matter of perception and is
to be supported by convincing evidence. Evidence is a matter of
fact. To be convincing, the evidence should be available at the
reporting date in a concrete form, for example, a profitable binding
export order, cancellation of which will result in payment of heavy
damages by the defaulting party. On the other hand, a projection of
the future profits made by an enterprise based on the future capital
expenditures or future restructuring etc., submitted even to an
outside agency, e.g., to a credit agency for obtaining loans and
accepted by that agency cannot, in isolation, be considered as
convincing evidence.
2 (a) As per the relevant provisions of the Income-tax Act, 1961 , the
‘loss’ arising under the head ‘Capital gains’ can be carried forward
and set-off in future years, only against the income arising under
that head as per the requirements of the Income-tax Act, 1961.

(b) Where an enterprise’s statement of profit and loss includes an

item of ‘loss’ which can be set-off in future for taxation purposes,
only against the income arising under the head ‘Capital gains’ as
per the requirements of the Income-tax Act, 1961, that item is a
timing difference to the extent it is not set-off in the current year
and is allowed to be set-off against the income arising under the
head ‘Capital gains’ in subsequent years subject to the provisions
of the Income-tax Act, 1961. In respect of such ‘loss’, deferred tax
asset is recognised and carried forward subject to the
consideration of prudence. Accordingly, in respect of such ‘loss’,
deferred tax asset is recognised and carried forward only to the
 Accounting for Taxes on Income 381

extent that there is a virtual certainty, supported by convincing

evidence, that sufficient future taxable income will be available
under the head ‘Capital gains’ against which the loss can be set-
off as per the provisions of the Income-tax Act, 1961. Whether the
test of virtual certainty is fulfilled or not would depend on the facts
and circumstances of each case. The examples of situations in
which the test of virtual certainty, supported by convincing
evidence, for the purposes of the recognition of deferred tax asset
in respect of loss arising under the head ‘Capital gains’ is
normally fulfilled, are sale of an asset giving rise to capital gain
(eligible to set-off the capital loss as per the provisions of the
Income-tax Act, 1961) after the balance sheet date but before the
financial statements are approved, and binding sale agreement
which will give rise to capital gain (eligible to set-off the capital
loss as per the provisions of the Income-tax Act, 1961).

(c) In cases where there is a difference between the amounts of

‘loss’ recognised for accounting purposes and tax purposes
because of cost indexation under the Income-tax Act, 1961 in
respect of long-term capital assets, the deferred tax asset is
recognised and carried forward (subject to the consideration of
prudence) on the amount which can be carried forward and set-off
in future years as per the provisions of the Income-tax Act, 1961.

18. The existence of unabsorbed depreciation or carry forward of losses

under tax laws is strong evidence that future taxable income may not be
available. Therefore, when an enterprise has a history of recent losses, the
enterprise recognises deferred tax assets only to the extent that it has timing
differences the reversal of which will result in sufficient income or there is other
convincing evidence that sufficient taxable income will be available against which
such deferred tax assets can be realised. In such circumstances, the nature of
the evidence supporting its recognition is disclosed.

Re-assessment of Unrecognised Deferred Tax Assets

19. At each balance sheet date, an enterprise re-assesses unrecognised
deferred tax assets. The enterprise recognises previously unrecognised
deferred tax assets to the extent that it has become reasonably certain or
virtually certain, as the case may be (see paragraphs 15 to 18), that sufficient
future taxable income will be available against which such deferred tax assets
can be realised. For example, an improvement in trading conditions may make it
382 AS 22 (issued 2001)

reasonably certain that the enterprise will be able to generate sufficient taxable
income in the future.

Measurement
20. Current tax should be measured at the amount expected to be paid
to (recovered from) the taxation authorities, using the applicable tax rates
and tax laws.

21. Deferred tax assets and liabilities should be measured using the tax
rates and tax laws that have been enacted or substantively enacted by the
balance sheet date.

Explanation:

(a) The payment of tax under section 115JB of the Income-tax Act, 1961
is a current tax for the period.

(b) In a period in which a company pays tax under section 115JB of the
Income-tax Act, 1961, the deferred tax assets and liabilities in
respect of timing differences arising during the period, tax effect of
which is required to be recognised under this Standard, is
measured using the regular tax rates and not the tax rate under
section 115JB of the Income-tax Act, 1961.

(c) In case an enterprise expects that the timing differences arising in the
current period would reverse in a period in which it may pay tax
under section 115JB of the Income-tax Act, 1961, the deferred tax
assets and liabilities in respect of timing differences arising during
the current period, tax effect of which is required to be
recognised under AS 22, is measured using the regular tax rates and
not the tax rate under section 115JB of the Income-tax Act, 1961.

22. Deferred tax assets and liabilities are usually measured using the tax rates
and tax laws that have been enacted. However, certain announcements of tax
rates and tax laws by the government may have the substantive effect of actual
enactment. In these circumstances, deferred tax assets and liabilities are
measured using such announced tax rate and tax laws.

23. When different tax rates apply to different levels of taxable income,
 Accounting for Taxes on Income 383

deferred tax assets and liabilities are measured using average rates.

24. Deferred tax assets and liabilities should not be discounted to their
present value.

25. The reliable determination of deferred tax assets and liabilities on a

discounted basis requires detailed scheduling of the timing of the reversal of
each timing difference. In a number of cases such scheduling is
impracticable or highly complex. Therefore, it is inappropriate to require
discounting of deferred tax assets and liabilities. To permit, but not to require,
discounting would result in deferred tax assets and liabilities which would not be
comparable between enterprises. Therefore, this Standard does not require or
permit the discounting of deferred tax assets and liabilities.

Review of Deferred Tax Assets

26. The carrying amount of deferred tax assets should be reviewed at
each balance sheet date. An enterprise should write-down the carrying
amount of a deferred tax asset to the extent that it is no longer reasonably
certain or virtually certain, as the case may be (see paragraphs 15 to 18),
that sufficient future taxable income will be available against which
deferred tax asset can be realised. Any such write-down may be reversed
to the extent that it becomes reasonably certain or virtually certain, as the
case may be (see paragraphs 15 to 18), that sufficient future taxable income
will be available.

Presentation and Disclosure

27. An enterprise should offset assets and liabilities representing current tax
if the enterprise:

(a) has a legally enforceable right to set off the recognised amounts; and

(b) intends to settle the asset and the liability on a net basis.

28. An enterprise will normally have a legally enforceable right to set off an asset
and liability representing current tax when they relate to income taxes levied
under the same governing taxation laws and the taxation laws permit the
enterprise to make or receive a single net payment.
384 AS 22 (issued 2001)

29. An enterprise should offset deferred tax assets and deferred tax
liabilities if:

(a) the enterprise has a legally enforceable right to set off assets
against liabilities representing current tax; and

(b) the deferred tax assets and the deferred tax liabilities relate to taxes
on income levied by the same governing taxation laws.

30. Deferred tax assets and liabilities should be distinguished from

assets and liabilities representing current tax for the period. Deferred tax
assets and liabilities should be disclosed under a separate heading in the
balance sheet of the enterprise, separately from current assets and
current liabilities.

Explanation:

For non-companies entities, Deferred tax assets (net of the deferred tax
liabilities, if any, in accordance with paragraph 29) may be disclosed on the
face of the balance sheet separately after the head ‘Investments’ and
deferred tax liabilities (net of the deferred tax assets, if any, in accordance
with paragraph 29) may be disclosed on the face of the balance sheet
separately after the head ‘Unsecured Loans.’

31. The break-up of deferred tax assets and deferred tax liabilities into
major components of the respective balances should be disclosed in the
notes to accounts.

32. The nature of the evidence supporting the recognition of deferred

tax assets should be disclosed, if an enterprise has unabsorbed depreciation
or carry forward of losses under tax laws.

Transitional Provisions2
33. On the first occasion that the taxes on income are accounted for in
accordance with this Standard, the enterprise should recognise, in the

2 Ministry of Corporate Affairs, Government of India, inserted the following footnote in

Companies (Accounting Standards) Rules, 2021, under Companies Act, 2013, which is
relevant for companies:
“Transitional Provisions given in Paragraphs 33-34 are relevant only for standards notified
under Companies (Accounting Standards) Rules, 2006, as amended from time to time.”
 Accounting for Taxes on Income 385

financial statements, the deferred tax balance that has accumulated prior to
the adoption of this Standard as deferred tax asset/liability with a
corresponding credit/charge to the revenue reserves, subject to the
consideration of prudence in case of deferred tax assets (see paragraphs
15-18). The amount so credited/charged to the revenue reserves should
be the same as that which would have resulted if this Standard had been
in effect from the beginning.

33A On the first occasion when a non-company entity gets classified as a

Micro enterprise (Level IV non-company entity), the accumulated deferred
tax asset/liability appearing in the financial statements of immediate
previous accounting period, should be adjusted against the opening
revenue reserves.

34. For the purpose of determining accumulated deferred tax in the period in
which this Standard is applied for the first time, the opening balances of assets
and liabilities for accounting purposes and for tax purposes are compared
and the differences, if any, are determined. The tax effects of these
differences, if any, should be recognised as deferred tax assets or liabilities,
if these differences are timing differences. For example, in the year in which an
enterprise adopts this Standard, the opening balance of a fixed asset is Rs. 100
for accounting purposes and Rs. 60 for tax purposes. The difference is because
the enterprise applies written down value method of depreciation for calculating
taxable income whereas for accounting purposes straight line method is used.
This difference will reverse in future when depreciation for tax purposes will
be lower as compared to the depreciation for accounting purposes. In the
above case, assuming that enacted tax rate for the year is 40% and that
there are no other timing differences, deferred tax liability of Rs. 16 [(Rs. 100 -
Rs. 60) x 40%] would be recognised. Another example is an expenditure that
has already been written off for accounting purposes in the year of its
incurrence but is allowable for tax purposes over a period of time. In this
case, the asset representing that expenditure would have a balance only for
tax purposes but not for accounting purposes. The difference between
balance of the asset for tax purposes and the balance (which is nil) for accounting
purposes would be a timing difference which will reverse in future when this
expenditure would be allowed for tax purposes. Therefore, a deferred tax asset
would be recognised in respect of this difference subject to the
consideration of prudence (see paragraphs 15 - 18).
386 AS 22 (issued 2001)

Illustration I
Examples of Timing Differences
Note: This illustration does not form part of the Accounting Standard. The
purpose of this illustration is to assist in clarifying the meaning of the
Accounting Standard. The sections mentioned hereunder are references to
sections in the Income-tax Act, 1961, as amended by the Finance Act, 2001.

1. Expenses debited in the statement of profit and loss for accounting

purposes but allowed for tax purposes in subsequent years, e.g.

a) Expenditure of the nature mentioned in section 43B (e.g. taxes, duty,

cess, fees, etc.) accrued in the statement of profit and loss on
mercantile basis but allowed for tax purposes in subsequent years on
payment basis.

b) Payments to non-residents accrued in the statement of profit and loss

on mercantile basis, but disallowed for tax purposes under section
40(a)(i) and allowed for tax purposes in subsequent years when
relevant tax is deducted or paid.

c) Provisions made in the statement of profit and loss in anticipation of

liabilities where the relevant liabilities are allowed in subsequent years
when they crystallize.

2. Expenses amortized in the books over a period of years but are allowed
for tax purposes wholly in the first year (e.g. substantial advertisement
expenses to introduce a product, etc. treated as deferred revenue expenditure
in the books) or if amortization for tax purposes is over a longer or shorter
period (e.g. preliminary expenses under section 35D, expenses incurred for
amalgamation under section 35DD, prospecting expenses under section 35E).

3. Where book and tax depreciation differ. This could arise due to:

a) Differences in depreciation rates.

b) Differences in method of depreciation e.g. SLM or WDV.

c) Differences in method of calculation e.g. calculation of depreciation with

 Accounting for Taxes on Income 387

reference to individual assets in the books but on block basis for tax
purposes and calculation with reference to time in the books but on the
basis of full or half depreciation under the block basis for tax purposes.

d) Differences in composition of actual cost of assets.

4. Where a deduction is allowed in one year for tax purposes on the basis of a
deposit made under a permitted deposit scheme (e.g. tea development account
scheme under section 33AB or site restoration fund scheme under section
33ABA) and expenditure out of withdrawal from such deposit is debited in the
statement of profit and loss in subsequent years.

5. Income credited to the statement of profit and loss but taxed only in
subsequent years e.g. conversion of capital assets into stock in trade.

6. If for any reason the recognition of income is spread over a number of years
in the accounts but the income is fully taxed in the year of receipt.
 Accounting for Taxes on Income 388

Illustration II
Note: This illustration does not form part of the Accounting Standard. Its purpose
is to illustrate the application of the Accounting Standard. Extracts from
statement of profit and loss are provided to show the effects of the transactions
described below.

Illustration 1

A company, ABC Ltd., prepares its accounts annually on 31st March. On 1st
April, 20x1, it purchases a machine at a cost of Rs. 1,50,000. The machine has a
useful life of three years and an expected scrap value of zero. Although it is
eligible for a 100% first year depreciation allowance for tax purposes, the
straight-line method is considered appropriate for accounting purposes. ABC Ltd.
has profits before depreciation and taxes of Rs. 2,00,000 each year and the
corporate tax rate is 40 per cent each year.

The purchase of machine at a cost of Rs. 1,50,000 in 20x1 gives rise to a tax
saving of Rs. 60,000. If the cost of the machine is spread over three years of its life
for accounting purposes, the amount of the tax saving should also be spread over
the same period as shown below:

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)
(Rupees in thousands)
20x1 20x2 20x3
Profit before depreciation and taxes 200 200 200
Less: Depreciation for accounting purposes 50 50 50
Profit before taxes 150 150 150
Less: Tax expense
Current tax
0.40 (200 – 150) 20
0.40 (200) 80 80
 Accounting for Taxes on Income 389

Deferred tax
Tax effect of timing
differences originating
during the year
0.40 (150 – 50) 40
Tax effect of timing differences
reversing during the year
0.40 (0 – 50) (20) (20)
Tax expense 60 60 60
Profit after tax 90 90 90
Net timing differences 100 50 0
Deferred tax liability 40 20 0
In 20x1, the amount of depreciation allowed for tax purposes exceeds the
amount of depreciation charged for accounting purposes by Rs. 1,00,000 and,
therefore, taxable income is lower than the accounting income. This gives rise
to a deferred tax liability of Rs. 40,000. In 20x2 and 20x3, accounting
income is lower than taxable income because the amount of depreciation
charged for accounting purposes exceeds the amount of depreciation
allowed for tax purposes by Rs. 50,000 each year. Accordingly, deferred tax
liability is reduced by Rs. 20,000 each in both the years. As may be seen, tax
expense is based on the accounting income of each period.

In 20x1, the profit and loss account is debited and deferred tax liability account
is credited with the amount of tax on the originating timing difference of Rs.
1,00,000 while in each of the following two years, deferred tax liability account is
debited and profit and loss account is credited with the amount of tax on the
reversing timing difference of Rs. 50,000.

The following Journal entries will be passed:

Year 20x1
Profit and Loss A/c Dr. 20,000
To Current tax A/c 20,000
(Being the amount of taxes payable for the year 20x1 provided for)
Profit and Loss A/c Dr. 40,000
390 AS 22 (issued 2001)

To Deferred tax A/c 40,000

(Being the deferred tax liability created for originating timing difference of
Rs. 1,00,000)

Year 20x2
Profit and Loss A/c Dr. 80,000
To Current tax A/c 80,000
(Being the amount of taxes payable for the year 20x2 provided for)
Deferred tax A/c Dr. 20,000
To Profit and Loss A/c 20,000
(Being the deferred tax liability adjusted for reversing timing difference of
Rs. 50,000)

Year 20x3
Profit and Loss A/c Dr. 80,000
To Current tax A/c 80,000
(Being the amount of taxes payable for the year 20x3 provided for)
Deferred tax A/c Dr. 20,000
To Profit and Loss A/c 20,000
(Being the deferred tax liability adjusted for reversing timing difference of
Rs. 50,000)

In year 20x1, the balance of deferred tax account i.e., Rs. 40,000 would be
shown separately from the current tax payable for the year in terms of
paragraph 30 of the Standard. In Year 20x2, the balance of deferred tax
account would be Rs. 20,000 and be shown separately from the current tax
payable for the year as in year 20x1. In Year 20x3, the balance of deferred tax
liability account would be nil.

Illustration 2
In the above illustration, the corporate tax rate has been assumed to be same in
each of the three years. If the rate of tax changes, it would be necessary for the
enterprise to adjust the amount of deferred tax liability carried forward by
applying the tax rate that has been enacted or substantively enacted by the
 Accounting for Taxes on Income 391

balance sheet date on accumulated timing differences at the end of the

accounting year (see paragraphs 21 and 22). For example, if in Illustration 1,
the substantively enacted tax rates for 20x1, 20x2 and 20x3 are 40%, 35%
and 38% respectively, the amount of deferred tax liability would be computed
as follows:

The deferred tax liability carried forward each year would appear in the balance
sheet as under:

31st March, 20x1 = 0.40 (1,00,000)= Rs. 40,000

31st March, 20x2 = 0.35 (50,000) = Rs. 17,500
31st March, 20x3 = 0.38 (Zero) = Rs. Zero

Accordingly, the amount debited/(credited) to the profit and loss account (with
corresponding credit or debit to deferred tax liability) for each year would be as
under:

31st March, 20x1 Debit = Rs. 40,000

31st March, 20x2 (Credit) = Rs. (22,500)

31st March, 20x3 (Credit) = Rs. (17,500)

Illustration 3
A company, ABC Ltd., prepares its accounts annually on 31st March. The
company has incurred a loss of Rs. 1,00,000 in the year 20x1 and made profits
of Rs. 50,000 and 60,000 in year 20x2 and year 20x3 respectively. It is assumed
that under the tax laws, loss can be carried forward for 8 years and tax rate is
40% and at the end of year 20x1, it was virtually certain, supported by
convincing evidence, that the company would have sufficient taxable income in
the future years against which unabsorbed depreciation and carry forward of
losses can be set-off. It is also assumed that there is no difference between
taxable income and accounting income except that set- off of loss is allowed in
years 20x2 and 20x3 for tax purposes.
392 AS 22 (issued 2001)

Statement of Profit and Loss

(for the three years ending 31st March, 20x1, 20x2, 20x3)
(Rupees in thousands)
20x1 20x2 20x3
Profit (loss) (100) 50 60
Less: Current tax — — (4)
Deferred tax:
Tax effect of timing differences originating 40
during the year
Tax effect of timing differences reversing (20) (20)
during the year
Profit (loss) after tax effect (60) 30 36

Illustration 4
Note: The purpose of this illustration is to assist in clarifying the meaning of the
explanation to paragraph 13 of the Standard.

Facts:

1. The income before depreciation and tax of an enterprise for 15 years is Rs.
1000 lakhs per year, both as per the books of account and for income-tax
purposes.

2. The enterprise is subject to 100 percent tax-holiday for the first 10 years
under section 80-IA. Tax rate is assumed to be 30 percent.

3. At the beginning of year 1, the enterprise has purchased one machine for
Rs. 1500 lakhs. Residual value is assumed to be nil.

4. For accounting purposes, the enterprise follows an accounting policy to

provide depreciation on the machine over 15 years on straight-line basis.
 Accounting for Taxes on Income 393

5. For tax purposes, the depreciation rate relevant to the machine is 25% on
written down value basis.

The following computations will be made, ignoring the provisions of section

115JB (MAT), in this regard:

Table 1
Computation of depreciation on the machine for accounting purposes and
tax purposes
(Amounts in Rs. lakhs)

Year Depreciation for Depreciation for tax

accounting purposes purposes
1 100 375
2 100 281
3 100 211
4 100 158
5 100 119
6 100 89
7 100 67
8 100 50
9 100 38
10 100 28
11 100 21
12 100 16
13 100 12
14 100 9
15 100 7
At the end of the 15th year, the carrying amount of the machinery for accounting
purposes would be nil whereas for tax purposes, the carrying amount is Rs. 19
lakhs which is eligible to be allowed in subsequent years.
394 AS 22 (issued 2001)
 Accounting for Taxes on Income 395

Notes:

1. Timing differences originating during the tax holiday period are Rs.644 lakhs,
out of which Rs. 228 lakhs are reversing during the tax holiday period and Rs.
416 lakhs are reversing after the tax holiday period. Timing difference of Rs. 19
lakhs is originating in the 15th year which would reverse in subsequent years
when for accounting purposes depreciation would be nil but for tax purposes the
written down value of the machinery of Rs. 19 lakhs would be eligible to be
allowed as depreciation.

2. As per the Standard, deferred tax on timing differences which reverse during
the tax holiday period should not be recognised. For this purpose, timing
differences which originate first are considered to reverse first. Therefore, the
reversal of timing difference of Rs. 228 lakhs during the tax holiday period, would
be considered to be out of the timing difference which originated in year 1. The
rest of the timing difference originating in year 1 and timing differences
originating in years 2 to 5 would be considered to be reversing after the tax
holiday period. Therefore, in year 1, deferred tax would be recognised on the
timing difference of Rs. 47 lakhs (Rs. 275 lakhs - Rs. 228 lakhs) which would
reverse after the tax holiday period. Similar computations would be made for the
subsequent years. The deferred tax assets/liabilities to be recognised during
different years would be computed as per the following Table.

Table 3
Computation of current tax and deferred tax
(Amounts in Rs. lakhs)
Year Current tax (Taxable Deferred tax (Timing Accumulated Tax expense
Income x 30%) difference x 30%) Deferred tax
(L= Liability and
A = Asset)
1 Nil 47 × 30%= 14 14 (L) 14
(see note 2 above)
2 Nil 181 × 30%=54 68 (L) 54
3 Nil 111× 30%=33 101 (L) 33
4 Nil 58 × 30%= 17 118 (L) 17
5 Nil 19 × 30%=6 124 (L) 6
6 Nil Nil1 124 (L) Nil
7 Nil Nil1 124 (L) Nil
8 Nil Nil1 124 (L) Nil
9 Nil Nil1 124 (L) Nil
 396 AS 22 (issued 2001)

10 Nil Nil1 124 (L) Nil

11 294 –79 × 30%= -24 100 (L) 270
12 295 –84 × 30%= -25 75 (L) 270
13 296 –88 × 30%= -26 49 (L) 270
14 297 –91 × 30%= -27 22 (L) 270
15 298 –74 × 30%= -22 Nil 270
–19 × 30%= -6 6(A)2
1.
No deferred tax is recognised since in respect of timing differences
reversing during the tax holiday period, no deferred tax was recognised at their
origination.
2.
Deferred tax asset of Rs. 6 lakhs would be recognised at the end of year 15
subject to consideration of prudence as per AS 22. If it is so recognised, the said
deferred tax asset would be realized in subsequent periods when for tax purposes
depreciation would be allowed but for accounting purposes no depreciation would
be recognised.