18/03/2015

CAclubindiaNews:As22AccountingforTaxesonIncomeBriefNote

As22AccountingforTaxesonIncomeBrief
Note

AccountingforTaxesonIncome:

WhatistheObjectofthisstandard?

Innumberofcases,theaccountingincomeisdifferentfromtaxableincomethatisprofitasperProfit&
LossaccountisdifferentcomparedtoIncomecalculatedinStatementofTotalIncomeforcalculatingtax
liability.Thereasonsareasfollows:

1.Therearesomeitemswhicharedebitedinprofitandlossaccountwhicharenotallowedas
expenses as per Income Tax Act for calculating tax liability. For e.g. We have debited
Rs.60,000aspaymenttocontractorbutwehavenotdeductedtaxonit,sotheresultisitwill
getaddedbackinStatementofTotalIncomethatisnotallowedasexpensesu/s40(a)(ia).

2.TherearesomeexpenseswhicharewhollydebitedinProfitandlossaccountbutareallowed
asexpensesinpartoramortizedoversomeyears.Fore.g.Preliminaryexpensesareentirely
debited to the Profit & Loss account but as per section 35D of Income Tax Act are spread
overtimefordeductionthatisnotentirelyallowedintheyearinwhichitisincurred.

Abovedifferencesareoftwotypes.

1.TimingDifference

2.PermanentDifference

TocalculateandrecognisingsuchdifferenceinFinancialStatmentisanobjectofthisstandard.

WhatisTimingDifference?

Difference between taxable income and income as per Profit & Loss account which is time being in
natureandwillgetreversedinsubsequentperiod.Fore.g.asdiscussedabovepreliminaryexpensesu/s
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35DisdebitedentirelyinP&Lbutisallowedentirelyinspecificnumberofyears,thatisitisamortised
over number of years but finally it is allowed but in parts in every years, say 5 years. So Rs.100
(preliminaryexpenses)debitedentirelyinP&Lbutisallowedin5equalinstallmentsfor5yearsthatis
Rs.20everyyear.Attheendof5years,entireRs.100isallowed.

WhatisPermanentDifference?

DifferencebetweentaxableincomeandincomeasperP&Lwhichispermanentinnatureandwillnotget
reversedinsubsequentyears.

In short, Taxable income is calculated in accordance with the tax laws. In some circumstances, the
requirements of these laws to compute taxable income differ from the accounting policies applied to
determineincomeasperP&L.

Permanentdifferencedoesnotresultindeferredtaxassetorliability.

GiveanexampleofTimingDifferenceandexplainitindetail.

Depreciation:

Depreciation method followed in books is SLM in which equal amount of depreciation is charged to
P&L.Fore.g.CostofAssetisRs.10,000/.Usefullifeofassetis10years.Sotheamountofdepreciation
tobechargedeveryyearisRs.1,000/(10,000/10).Attheendof10thyear,thebookvalueofassetwill
benil.

DepreciationmethodfollowedfortaxpurposeisWDV.Underthismethod,theamountofdepreciationis
decreasingeveryyear.Sayfore.g.therateis10%andthecostofassetisRs.10,000/.Now,forfirstyear
depreciation is Rs.1,000/ (10,000 x 10%).Now,the writtendownvalue isRs.9,000 (10,0001,000).
Nextyear10%of9,000isdepreciationthatisRs.900/andtheWDVis8,100/(9000900).Thebook
valueoftheassetwillbeNilaftersomeyears.

Now,thedepreciationforsecondyearunderaccountingpolicies(SLM)willbeRs.1,000/whileasper
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CAclubindiaNews:As22AccountingforTaxesonIncomeBriefNote

incometaxcalculation(WDV)isRs.900,thisdifferenceisduetodepreciationistimingdifference.At
the end of useful life of the asset the depreciation is equal to cost but year wise amounts are different
underbothsystem.Thisisatimingdifference.

WhatisthemeaningofDeferredTaxAsset?

DeferredTaxAssetariseswhentheincomeasperIncometaxActishigherthantheincomeasperProfit
&Lossaccount.Therefore,taxtobepaidismoreduetohigherincomeasperIncomeTaxActbutactual
incomeasperProfit&Lossaccountisless.IfonehasconsideredincomeasperProfit&Lossfortax
liabilitycalculationthanthetaxpayablewillbeless.Thisdifferenceoftaxliabilityduetodifferencein
incomeasperProfit&LossaccountandincomeasperIncomeTaxActisDeferredTaxAsset.

WhatisthemeaningofDeferredTaxLiability?

Deferred Tax Liability arises when the income as per Income tax Act is lower than the income as per
Profit&Lossaccount.Therefore,taxtobepaidislessduetolowerincomeasperIncomeTaxActbut
actualincomeasperProfit&Lossaccountismore.IfonehasconsideredincomeasperProfit&Loss
for tax liability calculation than the tax payable will be higher. This difference of tax liability due to
differenceinincomeasperProfit&LossaccountandincomeasperIncomeTaxActisDeferredTax
Liability.

Howtomeasurethedeferredtaxassetandliability?.

Deferredtaxassetsandliabilitiesshouldbemeasuredusingthetaxratesandtaxlawsprevailingatthe
timeofbalancesheetdate.

Deferredtaxshouldbemeasuredusingtheregulartaxratedforcompaniesevenifcompanypaystaxu/s
115JB(MAT).

Whatistherequirementofthisstandard?

Thisaccountingstandardrequiresrecognitionofdeferredtaxforalltimingdifferences.Thisisbasedon
theprinciplethatthefinancialstatementforaperiodshouldrecognizethetaxeffect,whethercurrentor
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CAclubindiaNews:As22AccountingforTaxesonIncomeBriefNote

deferred,ofallthetransactionsduringtheyear.

Whendeferredtaxasset/liabilityshouldberecognized?

WhenevertheincomeasperIncomeTaxassetislesserthantheincomeasperProfit&LossAccount,
thedeferredtaxliabilityshouldbecalculatedandrecognizedinfinancialstatement.Butforrecognizing
deferredtaxasset,thereisaconditiongiveninthestandard.Deferredtaxassetshouldberecognizedand
carried forward only if there is certainty that there will be sufficient future taxable income (higher
incomeasperIncomeTaxActcomparedtoProfit&Lossaccount)againstwhichsuchdeferredtaxasset
canberealized.

Inshortthereshouldbecertaintythatinfuture,therewillbeenoughofdeferredtaxliabilitywillariseso
againstwhichthecurrentdeferredtaxassetwillbeadjusted.

Howtomakedisclosure/presentationofdeferredtaxasset/liabilityinfinancialstatement?

Deferredtaxassetorliabilityshouldbedistinguishedfromassetsandliabilitiesrepresentingcurrenttax
fortheperiod.

Deferred tax asset and liability should be disclosed under a separate heading in the balance sheet
separatelyfromthecurrentassetsandcurrentliabilities.

Deferred tax asset or deferred tax liability is a timing difference shown in P&L. the other effect is in
balanceSheet

In Balance Sheet: Deferred tax asset should be disclosed separately after the head Investments and
deferredtaxliabilityshouldbedisclosedseparatelyaftertheheadUnsecuredLoans.

InNotestoAccounts:Thebreakupofdeferredtaxassetsandliabilitiesintomajorcomponentsshould
bedisclosedinnotestoaccounts.

SomemoreexamplesofTimingDifferences.
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CAclubindiaNews:As22AccountingforTaxesonIncomeBriefNote

Disallowanceu/s43BofIncomeTaxActExpenditureofnaturementionedinsection43B
)e.g. taxes, duties, cess, fees, etc.) accrued in P& L on mercantile basis but allowed for tax
purposeinsubsequentyearsonpaymentbasis.

Disallowance u/s 40(a)(ia) payment to resident / nonresident accrued in P & L on

mercantilebasisbutallowedfortaxpurposeu/s40(a)(ia)whentaxisdeductedandpaidtothe
Government.

ProvisionmadeinP&Linanticipationofliabilitythatisinadvancebyforecastingliability,
wheretherelevantliabilitiesareallowedinsubsequentyearswhentheyarecrystallizedthatis
whentheyactuallyariseswithdefiniteamount.(provisionforexpenses)

Expensesamortisedinthebooksoveraperiodofyearsbutareallowedfortaxpurposewholly
inthefirstyear.

Amortisation for tax purpose is over a longer or shorter period like Preliminary expenses
(Section35D)

IncomecreditedtoProfit&Lossaccountbuttreatedonlyinsubsequentyears.E.g.conversion
ofcapitalassetintostockintradebutgaincalculatedintheyearinwhichstockissold.

By
CAShreyaSanghvi

Source:AccountingStandardbyICAI

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