Name :Dhairya soni

Roll no. 20182052

Taxation Assignment

DTA under Income Tax Act in India.

In some cases there is a difference between the amount of

expenses or incomes that are considered in books of accounts
and the expenses or incomes that are allowed/disallowed as
per Income Tax.

A very common example of this is depreciation. For

companies, depreciation rates to be considered in books of
accounts are defined in companies act but while calculating
Income Tax the depreciation will be allowed only as per rates
given in Income Tax Act. Therefore, there is difference between
income as per books and taxable income as per IT Act.
In accordance with the matching concept of accounting, taxes
on income are accrued in the same period as the revenue and
expenses to which they relate. Because there is a difference
between income as per books and taxable income as per IT
Act, this matching concept is not followed. So, only income tax
related to income as per books is shown as expense in books of
account and the rest amount is shown as DTA or DTL.

It should also be noted that DTA and DTL are to be considered

only when it is a temporary difference. Temporary difference is
a difference which is going to be settled in subsequent years.
For example – In case of depreciation, if depreciation rate is
20% as per books and 15% as per income tax then depreciation
on Rs. 1,00,000 is allowed in following manner.

Year Depreciation @ Depreciation @

 20% 15%

1 20,000 15,000

2 16,000 12,750

3 12,800 10,837.5

4 1,0240 9,211.88

5 8,192 7,830.09

6 6,553.6 6,655.58

7 5,242.88 5,657.24

8 4,194.3 4,808.66

9 3,355.44 4,087.36

10 2,684.36 3,474.25

11 2,147.48 2,953.12

12 1,717.99 2,510.15

13 1,374.39 2,133.63

As you can see in above example the depreciation as per books

is more for first 5 years but this difference in then reversing from
the 6th year. A DTA or DTL is to be made only for such
temporary difference which are to be reversed in future.

No DTA or DTL are to be made for permanent differences. An

example of permanent difference is donation which is not
allowed under section 80G. Such donation is allowed in books
of account in year of payment but it is not allowed in Income
tax; not in year of payment and not in any future period. So this
difference will become permanent.
If the income as per books is more than taxable income then it
means that we have paid less tax as per book’s income and we
have to pay more tax in future and thus recorded as Deferred
Tax Liability (DTL). Similarly if income as per books is less than
taxable income then it means we have to paid more tax and has
to pay less tax in future. So it will be a Deferred Tax Asset
(DTA).

When the future benefits for which DTA is made is realised in

future then the DTA is reversed and same for the DTL.

DTA and DTL is accounting treatment is covered in Accounting

Standard 22.
 Illustration
Let us consider a situation wherein the following details are
provided :

Income as per the books of accounts of a company

Revenue 50,00,000

Expenses as per books 10,00,000

Taxable income 40,00,000

Tax @ 30% 12,00,000

Income as per Income tax authorities

Revenue 50,00,000

Expenses allowable as per IT

authorities 8,00,000

Taxable income 42,00,000

Tax @ 30% 12,60,000

In the given situation, excess tax paid today due to the

difference among the income computed as per books of the
company and the income computed by the income tax
authorities is 12,60,000 – 12,00,000 = 60,000.
This amount i.e. 60,000 will be termed as deferred tax asset
(DTA). It will be adjusted in the books of accounts during one or
more subsequent year(s).
References to Common conditions in which DTA,
DTL arises
1. Expenses debited in the statement of profit and loss for
accounting purpose but the same are allowed for the taxation
 purpose in the subsequent year(s).
e.g. Expenditure under section 43Bsuch as taxes, duties, cess,
fee etc. debited as per mercantile basis but allowable on
payment basis for tax purpose, Provisions for liabilities made in
the books on estimated basis but the deduction for the same is
allowed in the year when the liability crystallizes.
2. Expenses such as under section 35D, 35DD, 35E of
income tax act 1961 amortized in the books over a period of
years but are allowed for tax purpose wholly in the first year.
e.g. Preliminary expenses, expenses incurred for
amalgamation, advertisement expenditure etc.
3. Difference in the amount of depreciation as per books of
accounts and amount of depreciation allowable as per tax
authorities.
e.g. Difference in depreciation rates, difference in method of
depreciation i.e. SLM or WDV.
4. When a company incurs loss as per Income Tax act then
such loss can be carry forward to next years can set off against
profits of such subsequent years and reduce tax liability.
Therefore there is a timing difference and DTA is to be created.
Although deferred tax asset is to be created only in the situation
where their is reasonable certainty that company will earn the
profits in near future.

Calculation of DTA, DTL and its accounting

treatment
Suppose we consider the following situation :

Company XYZ ltd. purchases a Machine at a cost of

Rs.2,00,000 on 1st April 20XX with an useful life of two years
and has NIL scrap value. However, the said machine is eligible
for 100% depreciation allowance for taxation purpose in the first
year. Company closes its accounts every year on 31st March.
The company follows SLM method for computing depreciation.
Profit before tax and depreciation is Rs.5,00,000 each year and
tax rate is 30% each year.

The accounting treatment in the given case will be done as

under :

Statement of Profit and Loss

(for the years ending on 31st march 20X1, 20X2 )

20X1 20X2

Profit before
depreciation and
taxes 5,00,000 5,00,000

Less: Depreciation as
per books 1,00,000 1,00,000

Profit before tax 4,00,000 4,00,000

Less: Tax Expense

(a) Current Tax

0.30 (500000-200000) 90,000

0.30 (500000) 1,50,000

(b) Deferred Tax

DTL resulting from

timing difference 0.30
(100000) 30,000
 Reversal of DTL 0.30
(100000) (30,000)

(c) Tax expense (a+b) 1,20,000 1,20,000

Profit after tax 2,80,000 2,80,000

In 20X1, excess depreciation allowed for taxation purpose is

Rs.100000 due to which accounting profit is different from the
taxable profit. This has resulted in Deferred tax liability
amounting to Rs.30000. In 20X2, no depreciation is allowed as
per tax while the depreciation charged in books is Rs.100000
due to which Taxable profit exceeds accounting profit by
Rs.1,00,000. Accordingly, the deferred tax liability created
earlier has been reversed in this year.

Following journal entries would be passed :

Year Debit Credit

Profit and
Loss
20X1 Account Dr. 90,000

To Current
Tax
Account 90,000

(Being
Provision
for current
tax made)

Profit and
Loss
Account Dr. 30,000
 To Deferred
tax Account 30,000

(Being
deferred tax
liability
created)

Profit and
Loss
20X2 Account Dr. 1,50,000

To Current
tax Account 1,50,000

(Being
Provision
for current
tax made)

Deferred tax
Account Dr. 30,000

To Profit
and Loss
Account 30,000

(Being
deferred tax
liability
reversed)

You can also calculate DTA/DTL using this calculator.

Since DTA and DTL are made for the future benefit or future
liability, if there is a change in tax rate then the new rates
should be considered for calculating the deferred tax asset or
deferred tax liability.
 Presentation in the balance sheet and other points
worth noting
 Balance of Deferred tax asset and deferred tax liability
should be netted off i.e. either DTA or DTL should be disclosed
in the balance sheet and both should not be disclosed
simultaneously for the same period.
 Enterprise should offset DTA and DTL if :
o The enterprise has a legally enforceable right to set off e.g.
Amount representing DTA, DTL falls under the purview of same
governing taxation laws such as income tax act, 1961 and the
laws permit to make
a single net payment.
o The enterprise intends to settle the asset and liability on a net
basis.
 DTA, DTL should be disclosed under a separate heading
in the balance sheet separately from current assets and current
liabilities.
 And lastly, the DTA/DTL should be reviewed as at each of
the Balance Sheet Date and written up/down to reflect the
amount that is reasonably /virtually certain to be realised.