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1. Introduction: Matching concept is a very significant concept of accounting. According to this concept
income and expense must be recognised in the period to which they relate. In India, Profit & Loss is
computed in accordance with two different sets of provision one set is Profit & Loss as per Companies
Act, 2013 (earlier it was Companies Act, 1956) and second one is Profit & Loss as per Income Tax Act,
1961 (for the purpose of computing taxable income). Generally there is difference between Profit & Loss
computed as per above mentioned two different set of provisions. The root cause of this difference is
different treatment of some items of expenditure/income under both set of provisions (i.e. Companies Act,
2013 and Income Tax Act, 1961). Some expenditure which are allowed to be deducted under Companies
Act, 2013, may not be allowed to be deducted under Income Tax Act, 1961 while computing the taxable
income.
Matching concept of accounting and different treatment of expenditure/income under above mentioned
both Act gives rise to the concept of Deferred Tax and accordingly ICAI issues an Accounting Standard-22
Accounting for Taxes on Income, to prescribe the accounting treatment for taxes on income since it is a
very significant item in the Statement of profit & Loss of an entity.
2. Analysis of AS-22: Deferred Tax is the tax effects of Timing Difference. The whole concept of
deferred tax is depend on timing difference. Before proceeding further we need to understand the
meaning of Accounting Income and Taxable Income.
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.
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.
As per AS-22 Timing differences are the 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.
In Simple words, Timing Difference is those items of Expense/Income which creates difference between
Accounting Income and taxable Income of a period and subsequent period.
Items creating the difference between Accounting Income and Taxable Income can be categorized into
Permanent difference and Timing difference.
Permanent difference: Permanent differences are those items of Expense/income that make difference
between Accounting Income and Taxable Income of a period but does not make any difference between
Accounting Income and Taxable Income of subsequent period (s). Eg:- Donation made (F.Y. 2014-15) to a
person (not permissible u/s 80G of Income tax Act) is allowed as expense while computing accounting
income but does not allowed as expense while computing taxable income (because not permissible u/s
80G) for that period and hence it makes difference between Accounting Income and Taxable Income of
that period. This donation is permanently disallowed by Revenue authority, hence it shall not make any
difference between Accounting Income and Taxable Income of subsequent period.
Timing Difference: Timing Difference is those items of Expense/Income which creates difference
between Accounting Income and taxable Income of a period and subsequent period.
Eg:- A asset is purchased of rs. 1,00,000 having useful life of 5 year and allowed 100% depreciation
under Income Tax Act. Profit before depreciation is rs. 2,00000.
Rs. 20,000 (100,000/5) is allowed as depreciation while computing the accounting income and rs.
1,00,000 is allowed as full depreciation in year of purchase while computing the taxable income. Hence,

Accounting Income is rs. 1,80,000 (2,00,000-20,000)

Taxable Income is rs. 1,00,000 (2,00,000-1,00,000)
Therefore, difference between Accounting Income and Taxable Income is created in this year and shall be
created in subsequent 4 year (by the balance depreciation of rs. 80,000=1,00,000-20,000) because in
subsequent years, while computing the accounting income entity shall deduct the depreciation of rs.
20,000 but nil depreciation shall be allowed while computing the taxable income. This is called timing
difference.
Some example of timing difference with explanation:
1. Provision for Bed/Doubtful debts (because this is deducted 100% when computing the accounting
income but disallowed while computing taxable income.)
2. Expense on payment basis, like expense u/s 43B of Income tax Act (expenses are allowed on accrual
basis while computing the accounting income but some expense are allowed on payment basis while
computing the taxable income.)
3. Allowance of Excessive depreciation (at the time of computing the taxable income excess depreciation
is allowed u/s 32 and 32AC of income tax act but for the purpose of accounting income no such excessive
depreciation is allowed)
4. While computing the income for accounting purpose some income is recognised in the given period but
same income is recognised in subsequent period for computing the taxable income.
5. Preliminary expenses are fully deductible as expense in first year for computing the accounting income
but same expense is allowed in the five installment u/s 35D of income tax act while computing the taxable
income.
6. Unabsorbed depreciation and carried forward loss is also an example of deferred tax.
7. Charging depreciation under different methods for the purpose of accounting income and taxable
income.
In one line, we can describe the timing difference as
Timing Difference is those items of Expense/Income which creates difference between Accounting
Income and taxable Income of a period and subsequent period.
Current Tax: Current Tax is the income tax payable (recoverable) for current year.
Tax Expense (Saving): Tax Expense is aggregate of current tax and deferred tax charged or credited to
the statement of profit and loss for the period.
3. Categorization of Deferred Tax: Deferred tax is of two type i.e. Deferred tax Asset and Deferred Tax
Liability. When there is a timing difference that shall result in tax saving in future period then it shall be
recognised as Deferred tax Asset (DTA).
Eg. Disallowance of provision for gratuity while computing the taxable income. This disallowance shall
result in DTA, since we know that once amount of gratuity is paid on subsequent year same shall be
allowed as deduction for computing the taxable income.
Eg. Excess/fully depreciation allowed for tax purpose but SLM method of depreciation has adopted for
accounting purpose. In such case, we have to make provision for tax {i.e. Deferred Tax Liability (DTL)}
because less/nil depreciation shall be allowed for tax purpose in subsequent years this shall result in
excess income tax liability. So keeping in mind the concept of prudence one shall make the provision of
this excess tax liability in subsequent year.
4. Recognition: 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 of AS-22.

As per para 15, 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.
As per para 16, While recognizing 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.
As per para 17, 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.
Determination of virtual certainty that sufficient future taxable income will be available is a matter of
judgment 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.
5. Re-assessment of Unrecognised Deferred Tax Assets: At each balance sheet date, an enterprise
re-assesses unrecognized deferred tax assets. The enterprise recognises previously unrecognized
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
reasonably certain that the enterprise will be able to generate sufficient taxable income in the future.
6. Treatment in Balance sheet & Statement of P&L:
a). DTA (in the nature of tax saving) is to be added to Net profit and DTL (in nature of provision) is to be
deducted from Net profit.
b). If net of DTA and DTL is DTL then same shall be shown under Non-Current Liabilities on Liabilities
side of balance sheet.
c). If net of DTA and DTL is DTA then same shall be shown under Non-Current Assets after non-current
investment on Assets side of Balance Sheet.
7. Whether MAT is a DTA: The definition of asset is anything which is expected to be provided future
economic benefit. MAT is income tax paid on book profit (a type of taxable income). MAT does not create
any difference between accounting income and taxable income since it comes in the scene after
computation of accounting income & taxable income. Therefore MAT is not a deferred tax asset.
8. Accounting entries for deferred tax: followings are the accounting entries for deferred tax:a). For creating DTA:
DTA a/c
Dr.
To P&L a/c

b). For creating DTL:

P&L a/c
Dr.
DTL a/c
c). For reversal of DTA in subsequent years:
P&L a/c
Dr.
DTA a/c
d). For reversal of DTL in subsequent years:
DTL a/c
Dr.
P&L a/c
9. Practical example of Deferred Tax:
Facts: A company has a profit before depreciation & tax Rs. 2,00,000 in each of five year. Company
bought a machinery of rs. 60,000 having useful life of 3 year for accounting purpose but for tax purpose
100% depreciation is allowed in first year. There is also a disallowance of rs. 80,000 in 4 th year, out of
which rs. 40,000 is allowed in 5th year.
Statement of Profit & Loss
Particulars

year-1

Year-2

year-3

year-4

year-5

Profit Before Depreciation & Tax200,000

200,000

200,000

200,000

200,000

Less: Depreciation

-20,000

-20,000

-20,000

Accounting Profit (PBT) (A) 180,000

180,000

180,000

200,000

200,000

Tax Expense:Current Tax

-42,000

-60,000

-70,000

-98,000

-56,000

Deferred Tax

-12,000

6,000

6,000

28,000

-14,000

(B)

-54,000

-54,000

-64,000

-70,000

-70,000

Profit After Tax (A-B)

126,000

126,000

116,000

130,000

130,000

Computation of Taxable Income

Particulars

year-1

Year-2

year-3

year-4

year-5

Accounting Profit (PBT) (A)

180,000

180,000

180,000

200,000

200,000

Add: Depreciation as per books

20,000

20,000

20,000

Less: Depreciation as per income

-60,000
tax Act

Add: Disallowance

80,000

Less: Allowance

-40,000

Taxable Profit

140,000

200,000

200,000

280,000

160,000

Tax rate

30%

30%

35%

35%

35%

Current tax

42,000

60,000

70,000

98,000

56,000

Deferred Tax Computation

Particulars

year-1

Opening balance of timing

difference

Year-2

year-3

year-4

year-5

-40,000

-20,000

80,000

Addition

-40,000

80,000

Deletion

20,000

20,000

-40,000

Closing Balance

-40,000

-20,000

80,000

40,000

Tax rate

30%

30%

35%

35%

35%

Deferred Tax

-12,000

-6,000

28,000

14,000

DTA/DTL to be shown in
DTL
Balance Sheet

DTL

NIL

DTA

DTA

Amount for P&L

6,000

6,000

28,000

-14,000

Credited

Credited

Credited

Debited

Reversal of
DTL

Reversal of
DTL

Creation of
DTA

Reversal of
DTA

-12,000

To be Debited/Credited to
Debited
P&L
Reason for Debit/Credit

Creation of
DTL

Entry for Deferred Tax in year-1:

P&L a/c

Dr.

12,000

TO DTL a/c

12,000

Entry for Deferred Tax in year-2&3:

DTL a/c

Dr.

6,000

To P&L a/c

6,000

Entry for Deferred Tax in year-4:

DTA a/c

Dr.

28,000

To P&L a/c

28,000

Entry for Deferred Tax in year-5:

P&L a/c

Dr.

14000

TO DTA a/c

14000

(Author can be contacted at M- 08287392720 or on Email: carockey99@gmail.com)

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http://www.bms.co.in/deferred-tax-assets-and-liabilities-as-22/
AS- 22: Accounting for Taxes on Income:
Applicability of Accounting Standard: Applicable for all enterprises.

Main gist of accounting standard:

The need for establishing a standard arises due to difference between profit computed for
accounting purpose and that for tax purpose. As per this accounting standard, the income taxexpense should be treated just like any other expenses on accrual basis irrespective of the timing of
payment of tax.
Tax Expense = Current Tax + Deferred Tax
Current tax is the amount of income tax determined to be payable (recoverable) in respect of the
taxable income (tax loss) for a period. Deferred tax is the tax effect of timing difference.
The difference accounts for:
a.
Treatment of revenue and expenses as appearing in the Profit and Loss Account and as
considered for the tax purpose.
b.
The amount of revenue or expenses as recognized in the Profit and Loss Account and as
allowed for tax purpose.
The difference as arising in the above context gives rise to deferred tax and it needs to be ensured
that the tax charges in future accounting period is not vitiated. The difference in accounting profit
and taxable profit can be broadly categorized into two categories:

a.
Permanent difference: Permanent difference which originates in one period and do not
reverse in subsequent periods. E.g. Personal expenses disallowed, interest/penalty disallowed as
expense or tax-free agricultural income, various deductions under Section 10 of Income Tax Act,
benefits/ reliefs under Section 80 of Income Tax Act in computing taxable income. Permanent
differences do not result in deferred taxes.
b.
Timing difference: Timing difference which originates in one period and is capable of reversal
in subsequent period(s):
i.
Difference in net block of fixed assets as per accounts and as per tax due to difference in the
rate and method of depreciation.
ii.
Provision for doubtful debts and advances, provision for warranties, provision for Voluntary
Retirement Scheme (VRS), provision for asset write-off, disallowed payments under Section 43 B of
Income Tax Act, provision for excise liabilities, research expenditure (not weighted deduction which
is a permanent difference), Section 350 deduction, amortization of deferred revenue expenditure,
lease income.

Situations which leads to Deferred Tax:

Deferred tax is the tax effect due to timing difference. They arise due to the following reasons
(situations):
a.

Accounting Income less than Tax Income.

b.

Accounting Income more than Tax Income.

c.

Income as per Accounts but loss as per Income Tax Act.

d.

Loss as per Accounts but income as per Income Tax Act.

The impact of such timing differences may lead to:

a.
Deferred Tax Liability (DTL): Deferred Tax Liability (DTL) is postponement of tax liability,
which states, Save Now, Pay Later.
Journal Entry
Profit and Loss A/cDr.
To Deferred Tax Liability A/c

b.
Deferred Tax Asset (DTA): Deferred Tax Asset (DTA) is pay you tax liability in advance, which
states, Pay Now, Save Later.
Journal Entry
Deferred Tax Asset A/c.Dr.

To Profit and Loss A/c

In the year of reversing time difference, either Deferred Tax Liability (DTL) is written back to Profit
and Loss Account or the Deferred Tax Asset (DTA) is revised by debiting Profit and Loss Account. For
the recognition of Deferred Tax Asset (DTA), prudence should be applied. Such recognition is based
on reasonable certainty that sufficient taxable income would be available in the future to realize

the Deferred Tax Asset (DTA). In case of unabsorbed depreciation and carry forward losses,
Deferred Tax Asset (DTA) should only be recognized to the extent that there is virtual certainty that
in future sufficient taxable income would be available to realize the Deferred Tax Asset (DTA).
Reasonable certainty shall be deemed to be in existence if the profitability of future taxable income
is greater than 50%. Virtual certainty shall be deemed to be in existence only when the evidence
suggests that there will be sufficient taxable income in the future.

Mandatory Disclosure to be made under AS-22:

a.

Break up of the deferred tax asset/liability.

b.
Deferred Tax Liability (DTL) should be shown after the head Unsecured Loans and Deferred
Tax Asset (DTA) after the head Investments with a separate heading.
Taxes on Income:
a.
Income tax is computed in accordance with Accounting Standard 22 Accounting for Taxes on
Income (AS-22), notified by the Companies (Accounting Standards) Rules, 2006. Tax expenses are
accounted in the same period to which the revenue and expenses relate.
b.
Provision for current income tax is made for the tax liability payable on taxable income after
considering tax allowances, deductions and exemptions determined in accordance with the
prevailing tax laws. The differences between the taxable income and the net profit or loss before tax
for the year as per the financial statements are identified and the tax effect of timing differences at
the end of the accounting year based on effective tax rates substantively enacted by the Balance
Sheet date.
c.
Deferred tax assets, other than on unabsorbed depreciation or carried forward losses, are
recognized only if there is reasonable certainty that they will be realized in the future and are
reviewed for the appropriateness of their respective carrying values at each Balance Sheet date. In
situations where the Company has unabsorbed depreciation or carried forward losses, deferred tax
assets are recognized only if there is virtual certainty supported by convincing evidence that the
same can be realized against future taxable profits.

Interpretation of AS 22:
1.
There is a need for this accounting standard since there is a difference between profit
computed for accounting purpose and that for income tax purposes.

2.
The income tax expense should be treated just like any other expenses on accrual basis
irrespective of the timing of payment of tax.
3.
The difference in accounting profit and taxable profit can be broadly categorized into two
categories:
permanent difference which originates in one period and do not reverse in subsequent periods and
timing difference which originates in one period and is capable of reversal in subsequent period(s).
4.
Deferred Tax Liability (DTL) is postponement of tax liability whereas Deferred Tax Asset (DTA) is
payment of your tax liability in advance.
5.
In case of Deferred Tax Liability (DTL) it should be shown with a separate heading after the
head Unsecured Loans in the Balance Sheet.
6.
In case of Deferred Tax Asset (DTA) it should be shown with a separate heading after the head
Investments in the Balance Sheet.

https://gulabsingh.wordpress.com/2009/08/16/def
erred-tax/
Deferred Tax (Accounting Standard 22)
Filed under: Accounting Standards Gulab A. Singh @ 11:57
Tags: CA Gulab A. Singh, Central Excise, CENVAT, Chartered Accountant, efiling, FCA, GS, Gulab A. Singh, Gulab Awadhpal Singh, Gulab Singh,gulabsingh, Income
Tax, India, Input Credit, LL.B, LL.M, Service Tax, TDS, VAT

We are aware that Going Concern, Consistency and Accrual are the basic
fundamentals of accounting assumptions. While calculating Book Profit, we
have to abide by the accepted norms of Accounting, which are enshrined and
codified by the accepted norms of Accounting (through various Accounting
Standards issued by the Institute of Chartered Accountants of India ICAI).

However, Income Tax laws has nothing do with the accounting norms.
Income tax liabilities are calculated based on the laws of Income Tax, which

is a separate statute altogether and does not go hand-in-hand with that of

Accounting Standards.

Coming to the crux of this subject, there is no disagreement that book profit
and tax profit may not be equivalent during the same year. Book Profit is the
profit as per the Profit and Loss Account, taking into consideration utmost
important Accounting Standards. Tax Profit is nothing but certain
allowances and disallowances from the Book Profit to make the income
taxable as per the Income Tax Act, 1961.

Book Profit and Tax Profit may differ because of the following items:
1. Depreciation;
2. Items related to Section 43B of the Income Tax Act, 1961, which allows
certain expenses to be booked ONLY on payment basis;
3. Donation to an unregistered organisation (Permanent Difference);
4. Donation to a registered organisation, which is allowed less than 100%
deduction U/s. 80G of the Income Tax Act, 1961 (Permanent Difference);
5. Section 115JB of the Income Tax Act, 1961 (Minimum Alternate Tax
MAT)

Deferred Tax Liability (DTL)

It will arise when the Depreciation (for example) is higher as per the Income
Tax Act as compared to the Depreciation as per Books of Accounts (which is
as per the rate prescribed under Schedule VI of the Companies Act, 1956).

Deferred Tax Asset (DTA)

It will arise when the Depreciation (for example) is lower as per the Income
Tax Act as compared to the Depreciation as per the Books of Accounts
(which is as per the rate prescribed under Schedule VI of the Companies Act,
1956). This situation may arise when the higher depreciation were claimed
in the previous years as per the Income Tax Act, and now the depreciation
as per books of accounts is slowly catching up with the depreciation earlier
written off in excess.

It must be noted that there is a provision for set off of DTA against DTL and
vice versa, while disclosing the same under the Balance Sheet.

It is interesting to note about the Deferred Tax Assets provision, which is

hardly known to be implemented by accounting professionals in most of the
cases of audits of Private Limited companies related to cases of carry
forward of Business Losses and carry forward of Unabsorbed Depreciation
losses. These carry forward Business Losses and unabsorbed depreciation
losses are the ones which has given rise to provisions of MAT. MAT credit is
available to be carried forward and given the same treatment as has been
specified under Accounting Standard 22. However, there is second school of
thought which does not consider it appropriate to consider MAT credit as a
deferred tax asset for the purpose of AS-22.