Accounting for taxes on
income
Accounting Standard 22
Presented by :
CA. Rajeev Bansal
ACA, D.I.S.A.(ICA) B. Com.
M/s Rajeev Lakshmi Bansal & Co.
Chartered Accountants
Applicability
In respect of

All the companies.

On or after 1-04-2006: enterprises.
All other
Scope
Taxes covered
 Taxes on income in India
 Taxes on income overseas
Dividend distribution tax not covered
Recognition

Tax expense to be provided in the profit and loss
account for the period not with respect to taxable
income but with respect to accounting income as
per matching concept.

i.e.
Taxes on income are considered to be an expense
incurred by the enterprises in earning income and
are accrued in the same period as the revenue
and
expenses
(Para 10 of AS - 22)
to
which
they
relate.
Difference Between Accounting and
Taxable Income

Timing difference
The differences between
taxable and accounting
income originating in one
period and capable of
reversal in subsequent
period. For example,

Permanent Differences
The differences between taxable
and accounting income
originating in one period and not
capable of reversal in
subsequent period. For example,
 Different dep. Rates
 Dividend income.
 Disallowances u/s 43B
allowable on payment basis
 Weighted deduction allowed.
 Disallowance u/s 40A(3).
5
Tax Expense
It shall consist of :
Current tax - amount of income tax payable in respect of
taxable income.
+
Deferred tax - tax effect of timing differences
Tax expense may result into tax saving as
well
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Result of Timing Differences
Deferred tax liability-
When Book Income is
More
or
Deferred tax assets-
When Taxable Income
is More
Timing Differences Give Rise to









Deferred Tax Asset:
Lower Tax depreciation
(As Per I.T.)
43B disallowance
Loss
on
sale
of
depreciable assets
Loss/unabsorbed
depreciation
Provision for retirement
benefits allowable on
payment basis.
Diminution in value of
investment
Payment eligible for
deduction
u/s
35D/35DD, i.e. over a
number of years
40(a) disallowance

Deferred Tax Liability:
 Higher tax depreciation
(AS Per I.T.)
 Deferred
revenue
expenditure, fully tax
deductible in current
year
 Profit
on
sale
depreciable assets
of
Permanent Difference

No Treatment under AS 22

Examples








Capital expenditure (non-depreciable).
Personal expenditure.
Tax exemption u/s 10, 10A, 10B, etc.
Tax deduction under chapter VI A.
Income tax/wealth tax.
Disallowance u/s 40A(3).
Revaluation of income/write off.
Delay in deposit of employee’s share in provident fund,
etc.
Rationale
 International
practice
 Accrual
 Matching
Concept
 Prudence
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10
Example I
Profit before tax as
As Per
As Per Tax
Timing
Permanent
Books
Computation
Difference Difference
1000
1000
--
--
100
----
---
100
per P & L A/C
Dividend Income
------1100
-------
-------1000
--------
Expenses
800
800
Depreciation
100
150
50
Unpaid Excise Duty
20
---
(-) 20
Provision For Gratuity
10
---
(-) 10
Profit Before Tax
Current Tax @40%
--------
---------
----------
-----------
930
950
20
100
-------
---------
----------
------------
170
50
--
20
Deferred Tax on Timing Difference
@40%
--
--
(-) 12
(+)8
28
----------Profit after tax
-(+)20
Tax Expense to be provided in
P & L A/C
100
142
--
-----------
---
-----------
Example II
Year Ending 31st Mar. 2004
As Per Books
As Per
Timing
Computation
Profit before dep.. & tax
Depreciation
Profit before tax
200
200
50
150
Difference
(-)100
--------
--------
--------
150
50
--------
--------
--------
Current Tax @40%
----
20
---
Deferred tax on timing difference
---
---
40
Tax Expense to be provided in
P & L A/C
Profit after tax
60
---
---
----------
-----------
-----------
90
----------
------------
------------
CONTD…..
`
Example II
Year Ending 31st Mar.2005
As Per
As Per
Timing
Books
Computation
Difference
Profit before dep.. & Tax
Depreciation
Profit before taxes
200
200
50
---
50
--------
--------
--------
150
200
--------Current Tax @40%
----
---------
---------
80
---
----
(-)20
---
----
Deferred Tax Liability
Reversed on timing difference @40%
--
Tax expense to be provided in P & L A/c
60
Profit after tax
--------
----------
--------
90
-------
------------
----------
Unabsorbed depreciation and losses also timing
differences
Unabsorbed depreciation and carry forward
of losses which can be set off against future
taxable income are also considered as
timing differences and result in deferred tax
assets, subject to consideration of
prudence.
Concept of prudence

Recognition and carry forward of deferred tax asset
only to the extent there is ‘reasonable certainty”
that sufficient future taxable income will be available
against which deferred tax asset can be realized.

In case of unabsorbed depreciation or carry forward of
losses under tax laws, recognition if there is ‘virtual
certainty with convincing evidences’, that
sufficient future taxable income will be available
against which deferred tax asset can be realized.
(Para 17 of AS – 22)

Reassessment of unrecognized deferred tax
asset at each balance sheet date and review of
deferred tax assets at each balance sheet date.
Example III
As Per Books
As Per Tax
Computation
Profit as per P& L
Depreciation
Profit & loss
Current Tax @ 40%
Timing
Difference
1000
1000
-
400
1100
700
----------
------------
600
-100
----------
------------
------------
------------
--
Nil
--
--
--
280
for unabsorbed depreciation
--
--
(-)40
Tax expense @40%
240
Deferred Tax liability on
depreciation @40%
Deferred Tax Asset @40%
-------Profit after Tax
------------
360
--
----------
------------
------------240
----------------
Example IV
As Per Books
As Per
Timing Difference
Computation
Profit as Per P&L A/C
100
100
---
Depreciation
400
1100
700
-------
---------
----------
(-)300
(-)1000
-------
---------
-----------
Current Tax
----
Nil
-----
Deferred Tax liability
----
-----
280
Deferred Tax Asset
---
----
400
Tax Saving
120
---
(120)
-------
--------
---------
(-)180
--
-------
--------
Profit/Loss
Loss After Tax
----------
Measurement

Current Tax-
Applicable rates and tax laws to
be adopted

Deferred Tax-
Rates and tax laws that have
been enacted or substantively
enacted by the balance sheet
date to be adopted.

Discounting-
DTA and DTL discounting
neither required nor
permissible.

Review-
DTL and DTA to be restated
every year as per applicable
rates
Presentation and Disclosure

Netting of deferred tax assets and liabilities on
the face of Financial Statements.

To be shown separately from current assets and
current liabilities in the balance sheet.

Breakup of deferred tax assets and liabilities into
major components to be given in the notes to
accounts.

Nature of evidences supporting the recognition if
deferred tax assets recognized in case of losses.
Certain Issues
1.
When Financial Statements are Made
Date
Other
Than
31st
2.
MAT
In
4.
Whether for creating DTL -
6.
7.
DTA
-
3.
5.
case
Credit
Disallowances
is
not
during
whether
can be
created
Principal
may
143(3)
‘Recoverable’ word in definition of
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Profit/ Loss on sale of Assets -
on
a
March
DTA
created
Whether
AS-22 complied
of
be
prudence
applied.
Assessment.
timing differences.
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Whether timing difference.
Accounting Standard 22-impact
1. Impact on dividend paying capacity.
2. Impact on net worth/ debt equity ratio
/current ratio for fund raising.
3. DTL not part of reserves/ Net worth.
Impact on Dividend Paying
Capacity

A company has a profit of Rs. 100
crores before tax. Its current tax
expense is Rs. 35 crores and deferred
tax expense is Rs. 70 crores. Can the
company declare a dividend out of its
profit for the current year
?
7/31/2017
22
Impact on Earning Per share


The company has incurred a loss of Rs. 2,00,000 in
the year 2006 and made profit of Rs. 80,000 and
1,40,000 in year 2007 and year 2008 respectively.
Assuming Tax rate is 35%. The average No. of
equity shares outstanding as at the year end 2006
is 10,000. What is the basic earning/loss per share
in 2006 : Rs. 13 or
 Rs. 20.
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?
23
ASIs in respect of AS 22

ASI 3 -
Accounting for taxes on income
in situations of tax holidays u/s
80IA & 80IB

ASI 4-
Losses under the head Capital
Gains

ASI 5-
Accounting for taxes on income
in situations of tax holidays u/s
10A & 10B
ASI 6-
Accounting for taxes on income
24
in context of s. 115JB
`

7/31/2017
ASIs in respect of AS 22
ASI 7 -
Disclosure of DTA and DTL in the
balance sheet of the company
ASI 9-
Virtual certainty supported by
evidence
ASI 11-
Accounting for taxes on income
in case of amalgamation
25
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