The objective of Accounting standard 22 (AS 22) is to prescribe accounting treatment of taxes on income. Taxable income may be different from the accounting income causing problems in matching taxes against revenue for a period.
Types of Income
- Accounting income 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 is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable is determined.
Taxable income may be different from the accounting income due to various reasons as follows:
- Some items which are debited in profit and loss account are not allowed as expenses as per Income Tax
- Some expenses which are wholly debited in Profit and loss account but are allowed as expenses in part or amortized over some years
Above differences are of two types:
- Timing Difference
- Permanent Difference
To calculate and recognize such difference in Financial Statement is an object of this standard.
What is Timing Difference?
Timing difference are differences that originate in one period and get adjust or reversed in subsequent period. Some example of timing differences are as follows:
- Provision for Bad/Doubtful debts
Reason for difference:
For computing Accounting income – 100% deduction allowed in same year.
For computing Taxable income – Only actual bad debts are allowed
- Expense allowable on payment basis, like expense u/s 43B of Income tax Act
Reason for difference:
For computing Accounting income – Expenses allowed on accrual basis.
For computing Taxable income – Expenses allowed on payment basis
- Allowance of Excessive depreciation u/s 32 and 32AC of Income Tax Act
Reason for difference:
For computing Accounting income – Depreciation allowed as per SLM
For computing Taxable income – Excessive depreciation allowed.
Likewise, charging depreciation under different methods for the purpose of accounting income and taxable income is also a timing difference
- Preliminary expenses
Reason for difference:
For computing Accounting income – Fully deductible in first year
For computing Taxable income – Allowed in the five installment u/s 35D of Income Tax Act
- Unabsorbed depreciation and carried forward loss is also an example of timing difference
What is Permanent Difference?
Permanent difference are the differences between Taxable income and Accounting income for a period that originate in one period and do not reverse subsequently. Some example of permanent differences are as follows:
- Amortization of goodwill considered as disallowable expense for computing Taxable income
- Personal expenditure disallowed by tax authorities
- Penalty (Not being compensatory) is disallowable expense for computing Taxable income
- Payments disallowed U/s 40(A)(3) of Income Tax Act
- Donations to the extent not allowed for computing Taxable income
- Remuneration to partners disallowed U/s 40(b) of Income Tax Act
Application of AS 22
AS 22 requires recognition of deferred tax for all timing differences. This is based on the matching principle that the financial statements for a period should recognize the effect of all the transactions during the year , whether current or deferred.
So, AS 22 is applicable when there are differences between taxable income and accounting income. If taxable income is greater than accounting income, then it will result in deferred tax asset. And if accounting income is greater than taxable income, then it will result in deferred tax liability.
What is Deferred Tax Asset?
Deferred Tax Asset (DTA) arises when the income as per Income tax Act is higher than the income as per Profit & Loss account. Therefore, tax payable is more due to higher income as per Income Tax Act but actual income as per Profit & Loss account is less.
Moreover, DTA is an asset is created in books of accounts since some amount of tax is paid in advance for which benefit will be received in future.
What is Deferred Tax Liability?
Deferred Tax Liability (DTL) arises when the income as per Income tax Act is lower than the income as per Profit & Loss account. Therefore, tax payable is less due to lower income as per Income Tax Act but actual income as per Profit & Loss account is more.
Moreover, DTL is a provision created in books since amount of taxpaid is less than actual amount as per books and the same is to be paid in future years.
Computation of DTA/DTL
Computation of Accounting Income | Year | ||
Particulars | One | Two | Three |
Profit Before Depreciation & Tax | 2,00,000 | 2,50,000 | 200,000 |
Less: Depreciation | -20,000 | -20,000 | -30,000 |
Accounting Profit (PBT) (A) | 180,000 | 230,000 | 170,000 |
Computation of Taxable Income | Year | ||
Particulars | One | Two | Three |
Accounting Profit (PBT) (A) | 180,000 | 230,000 | 170,000 |
Add: Depreciation as per books | 20,000 | 20,000 | 30,000 |
Less: Depreciation as per income tax Act | -70,000 | – | – |
Taxable Profit | 130,000 | 250,000 | 200,000 |
Tax rate | 30% | 30% | 30 % |
Current tax | 39,000 | 75,000 | 60,000 |
Deferred Tax Computation | Year | ||
Particulars | One | Two | Three |
Opening balance of timing difference | – | -50,000 | -30,000 |
Addition | -50,000 | – | – |
Deletion | – | 20,000 | 30,000 |
Closing Balance | -50,000 | -30,000 | – |
Tax rate | 30% | 30% | 30 % |
Deferred Tax | -15,000 | -6,000 | – |
DTA/DTL to be shown in Balance Sheet | DTL | DTL | NIL |
Amount for P&L | -15,000 | 6,000 | 9,000 |
To be Debited/Credited to P&L | Debited | Credited | Credited |
Reason for Debit/Credit | Creation of DTL | Reversal of DTL | Reversal of DTL |
Tax Expense in books | Year | ||
Particulars | One | Two | Three |
Current Tax | 39,000 | 75,000 | 60,000 |
Deferred Tax | 12,000 | -6,000 | -9,000 |
Total Tax | 54,000 | 69,000 | 51,000 |
Accounting Profit (PBT) (A) | 180,000 | 230,000 | 170,000 |
Profit After Tax (A-B) | 126,000 | 161,000 | 119,000 |
FAQs
Deferred tax should be measured using the tax rates and tax laws prevailing as on balance sheet date.
No, deferred tax is calculated only on timing differences.
Income tax payable is a type of account in the current liabilities section of a company’s balance sheet. It is compiled of taxes due to the government within one year.
Hi @Dixita
Not all the tax payers have to disclose their assets and liabilities. Only the individuals or HUFs having total income exceeding INR 50 lakh should fill in Schedule AL. Your total income is calculated by subtracting Chapter VI A deductions from Gross Total Income.
Hope this helps
@AkashJhaveri @Kaushal_Soni @Divya_Singhvi @Laxmi_Navlani @Sakshi_Shah1 @Saad_C can you?
Hey @Sreeraag_Gorty
Schedule AL has to be mandatorily filled up in case of tax payer’s income exceeds INR 50 lakhs for particular financial year.
For your doubt, you can read below article for more insights:
Hope, it helps!
Hey @Sreeraag_Gorty
There is no such requirements to mandatory report in ITR immovable property even if tax payer doesn’t own in particular financial year.
Other assets such as financial assets viz. bank deposits, shares and securities, insurance policies, loans and advances given, cash in hand, movable assets viz. jewellery, bullion, vehicles should be disclosed in AL schedule.
Hope, it helps!