1. Deferred Taxation AS 22 and
SUB REGIONAL CONFERENCE &
19th ANNUAL CONFERENCE of
HUBLI BRANCH
Deferred Taxation AS 22 and
Latest Developments
K.GURURAJ ACHARYA CHARTERED ACCOUNTANT TELEFAX: (080)

2. K.G.Acharya & Co., Chartered Accountants
ICAI Statements
Standards
(Mandatory)
Guidance Notes
(Recommendatory)
Accounting
Standards
( )
Auditing & Assurance
Standards (SAP)
( )
A S I (29)
{7 of AS 22}
General
Clarification (18)
K.G.Acharya & Co., Chartered Accountants

3. Accounting Standards u/s.211(3c) (wef 31.10.1998)
Accounting Standard means the standard of accounting:
Recommended by ICAI and
Prescribed by Government in
Consultation with the NACAS constituted u/s 210A(1) of the Companies Act, 1956.
K.G.Acharya & Co., Chartered Accountants

4. K.G.Acharya & Co., Chartered Accountants
Deviation from AS
4.(d) In our opinion, the Balance Sheet, P&L Account and the Cash Flow Statement dealt with by this report comply with the AS referred to in Sec. 211(3C) of the Companies Act, 1956 subject to the following observations:
Certain Transactions are accounted on cash basis vide significant policy No. 2. Further contract works / certain consultancy works undertaken by the company are not accounted on accrual basis vide note 11 on the accounts. The extent of impact on accounts is not ascertained.
Accounting Policy No. 13(b) is not in accordance with AS 10 on Fixed Assets. Certain transaction accounted under this policy has the effect of overstating value of Fixed Assets, Depreciation and profit by Rs Crores, Rs Crores and Rs Crores respectively
K.G.Acharya & Co., Chartered Accountants

5. K.G.Acharya & Co., Chartered Accountants
Listed/Proposed to be listed Cos
Banks, FIs, Insurance Cos
Enterprises with > 50 crores Turnover in preceding year
> 10 crores borrowings at any time during the year
Holding & subsidiary Cos of above.
Level - I
Level - II
Enterprises with > 40 Lacs but < 50 crores Turnover.
> 1 crore but < 10 crores borrowings
Holding & subsidiary cos of above.
Level - III
Other than Level - I & Level - II cases
w.e.f 17-Sep-2003
K.G.Acharya & Co., Chartered Accountants

6. Applicability of AS 22 (For All Levels - I / II/ III)
Companies listed and in the process of listing in India - including Group companies.
In respect of other companies not covered above.
In respect of all other enterprises.
K.G.Acharya & Co., Chartered Accountants

7. K.G.Acharya & Co., Chartered Accountants
“Deferred Tax”
Deferred Taxes are ‘Income Tax’ which arise in one period but because of Timing Difference will have to be actually paid in later years.
K.G.Acharya & Co., Chartered Accountants

8. K.G.Acharya & Co., Chartered Accountants
Timing differences -TD- Differences between TI and AI for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Permanent differences -PD- are the differences between TI and AI for a period that originate in one period and do not reverse subsequently.
K.G.Acharya & Co., Chartered Accountants

9. “Deferred Tax ” Deferred Tax Taxable Income Current Tax Tax Expense
As per IT Return
Rs. 70 cr
Current Tax
(applicable rate/law)
Tax
Expense
Accounting
Income
As per P&L A/c
Rs. 100 cr
Deferred Tax
(substantively enacted
rates /law) Average rate ?
Timing
Difference
Rs. 20 cr
Permanent
Difference
Rs. 10 cr
No Tax effect
K.G.Acharya & Co., Chartered Accountants

10. K.G.Acharya & Co., Chartered Accountants
“Deferred Tax ”
Accounting
Income
As per P&L A/c
Rs. 80 cr
Taxable
Income
As per IT Return
Rs. 90 cr
Current Tax
Timing
Difference
Reversal or DTA
Rs. 20 cr
(DTL) or
DTA Prudence
Permanent
Difference
Rs. 10 cr
No Tax effect
K.G.Acharya & Co., Chartered Accountants

11. K.G.Acharya & Co., Chartered Accountants
Computation of DT
STI AI
+/- PD
+/- TD TI
CT = IT on TI  (Applicable tax rates/laws)
DT = IT on (+\- TD)(Latest known tax rates/laws)
TE = CT – DT
(MAT - CT) is to be finally added to TE as a special case
K.G.Acharya & Co., Chartered Accountants

12. K.G.Acharya & Co., Chartered Accountants

13. K.G.Acharya & Co., Chartered Accountants

14. K.G.Acharya & Co., Chartered Accountants

15. K.G.Acharya & Co., Chartered Accountants
AS Taxes on Income
K.G.Acharya & Co., Chartered Accountants

16. K.G.Acharya & Co., Chartered Accountants
DTA v/s DTL
Accounting Income > Taxable Income
Create DTL
Accounting Income < Taxable Income
Reversal of DTL or Creation of DTA s.t PRUDENCE
Accounting Income = Taxable Income
Neither DTA nor DTL
Accounting Loss = Taxable Loss
Create DTA subject to PRUDENCE
K.G.Acharya & Co., Chartered Accountants

17. K.G.Acharya & Co., Chartered Accountants
Scope of AS 22
Taxes on income include all domestic and foreign taxes, which are based on taxable income
Does not cover Dividend Distribution Tax.
K.G.Acharya & Co., Chartered Accountants

18. K.G.Acharya & Co., Chartered Accountants
Recognition of Deferred Tax Asset Consideration of PRUDENCE is a must while recognizing DTA
DTA Arising due to
Basis of Recognition
Unabsorbed Business & Depreciation Loss
Virtual Certainty (Judgment) &
Convincing Evidence (Fact)
ASI 9
Other than above
Reasonable Certainty
K.G.Acharya & Co., Chartered Accountants

19. Re-Assessment v/s Review Previously unrecognized Previously recognized
(Right )
Review
(Duty)
Relates to DTA
Previously unrecognized
Relates to DTA
Previously recognized
Not a prior period item as per AS-5 unless it was a mistake
AS 22 does not mention review or re-assessment of DTL
K.G.Acharya & Co., Chartered Accountants

20. Transitional Provisions
On the first occasion, the enterprise should recognize, the deferred tax balance that has accumulated prior to adoption of this statement as DTA/DTL with the corresponding credit/charge to the revenue reserves.
Non Corporate Entities : Capital Account
K.G.Acharya & Co., Chartered Accountants

21. Presentation of DT Balance Sheet (ASI-7)
Share capital
Reserves
Secured loans
Unsecured loans
Deferred tax liability
Total
Fixed assets
Investments
Deferred tax asset
Net Current Assets
K.G.Acharya & Co., Chartered Accountants

22. K.G.Acharya & Co., Chartered Accountants
Disclosure
Break-up of major components of DTA / DTL to be disclosed.
DTA and DTL to be set off if permissible under tax laws but to be shown separately otherwise.
Evidence supporting the recognition of DTA to be disclosed, if an enterprise has Unabsorbed Depreciation / Tax Losses to be carried forward.
K.G.Acharya & Co., Chartered Accountants

23. Presentation of CT - Para 27
An Enterprise should offset assets and liabilities representing current tax if the enterprise:
a) has a legally enforceable right to set off the recognized amounts; and
b) intends to settle the asset and the liability on a net basis
K.G.Acharya & Co., Chartered Accountants

24. Accounting Standard 22 Accounting for Taxes on Income
ISSUES
&
LATEST DEVLOPMENTS

25. K.G.Acharya & Co., Chartered Accountants
Timing Difference – Ex..
Difference in net block of fixed assets between tax and accounts -
Difference in Depreciation due to
Different rates / methods
Pro rata treatment Vs. 180 days (in I year)
Exchange fluctuation of FC liability incurred for FA purchase. - As-11(R) Vs. Sch.VI Vs. S. 43A
Up to Rs assets write off under Companies Act
Impairment Loss as per AS-28
Sale Proceeds Cr. to Block of Asset as per IT Act Vs. Profit / Loss on sale of FA’s recognised in P&L A/c
Purchase of Scientific Research Assets [35(2)]
K.G.Acharya & Co., Chartered Accountants

26. Timing Difference – Ex….
Expenses Dr. to P & L A/c on accrual basis but allowed on actual payment.
Payments made without TDS, but disallowed for tax purposes u/s 40(a)(i) / (ia) and allowed when relevant tax is deducted & paid subsequently
Expenditure U/s 43B of Income Tax Act
Provision for Gratuity u/s 40A(7)
Provisions made in the P&L A/c in anticipation of liabilities – allowed when liabilities crystallize
K.G.Acharya & Co., Chartered Accountants

27. K.G.Acharya & Co., Chartered Accountants
Timing Difference – Ex..
Provision for doubtful debts / advance
Provision for warranties
Preliminary expenses written off fully when incurred (U/s 35D)
Expenses amortized in books of Accounts over a period of years but a shorter or longer period is allowable for tax purposes
K.G.Acharya & Co., Chartered Accountants

28. Permanent Difference – Ex...
Amortization of goodwill considered as disallowable expense
Personal expenditure disallowed by tax authorities
Penalty (Not being compensatory)
Payments disallowed U/s 40(A)(3)
Donations disallowed U/s 80G
Remuneration to partners disallowed U/s 40(b)
Scientific research expenditure.(only weighted element)
Exemptions u/s 10/10A/10B
Deductions U/s 80IA / IB / IC
Financial Lease - Circular No. 2 (dtd. 9th Feb 2001 – post AS 19 tax position)
Additional Depreciation on Revaluation
K.G.Acharya & Co., Chartered Accountants

29. Financial Implication of Deferred Tax:
(1) Effect of Deferred tax on Income Tax
Effect on Current Ratio
Affects Net Worth – Thereby affecting
- Limits under Companies Acceptance of Deposits Rules
- Eligibility to make investments
- Determination of Sickness for BIFR purposes
(4) Affects Debt -Equity Ratio and TOL / TNW
(Double edged sword)
K.G.Acharya & Co., Chartered Accountants

30. K.G.Acharya & Co., Chartered Accountants
(6) Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
Affects Dividend declaration - No specific reference in the Company Law on DT.
(PBT loss V PAT Profit position – Impact on dividend and Audit report)
(9) Affects Capital Adequacy Norms in case of banks (Tier-I & Tier-II Capital) - Capital to Risk Weighted Assets Ratio (CRAR)
K.G.Acharya & Co., Chartered Accountants

31. Issues relating to DTA / DTL:
(1) Accounting for Taxes on Income in case of an Amalgamation as per AS-14 (ASI 11)
(2) Is it OK not to recognize DTL on the ground that the enterprise intends to carry out a major capital expansion programme in near future?
(3) Is it OK not to recognize DTL on the ground that the company expects that there will be losses both for accounting and tax purposes in near future?
K.G.Acharya & Co., Chartered Accountants

32. Issues relating to DTA / DTL:
(4) Accounting for Taxes on Income in Interim Financial Reports as per AS-25
Accounting for Taxes on Income in Consolidated Financial Statements as per AS-21
ASI 26 : Total TE = TE in Parent Co + TE in Subsidiary Co.
GC 18/2002 : DT in CFS = simple aggregation of DT balances across the group
K.G.Acharya & Co., Chartered Accountants

33. Issues relating to DTA / DTL:
ASI 3: Accounting for Taxes on Income in the situations of Tax Holiday U/S 80-IA and 80-IB of the Income-tax Act, 1961
ASI 5: Accounting for Taxes on Income in the situation of Tax Holiday U/S 10A and 10B of the Income-tax Act,1961
(8) ASI 4: Losses under the head Capital Gains
ASI 6: Accounting for Taxes on Income in the context of S. 115JB of the Income-tax Act, 1961 –
MAT credit – whether Current Tax ?
K.G.Acharya & Co., Chartered Accountants

34. K.G.Acharya & Co., Chartered Accountants

35. K.G.Acharya & Co., Chartered Accountants
AS 22 – Conclusion
Increases transparency – Matching / accrual concept upheld
Tax effect Accounting - ensures that Tax Charge in future accounting periods is not vitiated by Timing Differences
- Aligns our AS with global AS
- Catch 22 standard
- A Tough job for CAs certifying on DT.
K.G.Acharya & Co., Chartered Accountants

36. K.G.Acharya & Co., Chartered Accountants
THE BEGINNING
K. GURURAJ ACHARYA TELFAX:
K.G.Acharya & Co., Chartered Accountants