AS - 22 Taxes On Income

SUB REGIONAL CONFERENCE &
19th ANNUAL CONFERENCE of

HUBLI BRANCH
Deferred Taxation AS 22 and

Latest Developments
K.GURURAJ ACHARYA
CHARTERED ACCOUNTANT
TELEFAX: (080) 2336 1800
acharyaguru@yahoo.com
AS 22 Accounting for Taxes on Income
ICAI Statements
Standards Guidance Notes

(Mandatory) (Recommendatory)
Accounting Auditing & Assurance

Standards Standards (SAP)
( 29 + 1 ) ( 32 + 2 )
A S I (29) General
{7 of AS 22} Clarification (18)
K.G.Acharya & Co., Chartered Accountants 2 of 36
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.

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. 2.05 Crores, Rs. 0.16 Crores
and Rs. 1.89 Crores respectively
 Listed/Proposed to be listed Cos

Level - I  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 - 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
Applicability of AS 22
(For All Levels - I / II/ III)
Companies listed and in the 01.04.2001
process of listing in India -
including Group companies.
In respect of other companies not 01.04.2002
covered above.
In respect of all other enterprises. 01.04.2004
01.04.2006
“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.

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.

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

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

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
Case Study -1 Computer Pur. value Depreciation Rate Tax Rate

(Rs. In Crores) Co's Act IT Act
50 40% 60% 30%
As as 31st March 1 2 3 4 5 6 7 8 9 10
PBT - AI 100 100 100 100 100 100 100 100 100 100 1000
Add: Depreciation - A/c's 20 12 7 4 3 2 1 1 0 0 50
Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50
Total Income - TI 90 100 102 102 102 101 101 101 100 100 1000
TD-being Depn differential -10 0 2 2 2 1 1 1 0 0 0
CT -30% of IT 27 30 31 31 31 30 30 30 30 30 300
DT-30% of TD -3 0 1 1 1 0 0 0 0 0 0
Tax Exp.(CT-DT) 30 30 30 30 30 30 30 30 30 30 300
TE= IT on (AI+/-PD) 30 30 30 30 30 30 30 30 30 30 300

(Rs. In Crores) Co's Act IT Act

50 40% 60% 30%
As as 31st March 1 2 3 4 5 6 7 8 9 10
PBT - AI 100 100 100 100 100 100 100 100 100 100 1000
Add: Depreciation - A/c's 20 12 7 4 3 2 1 1 0 0 50
43B disallowance 5 0 7 0 0 0 9 0 0 0 21
40A(3) disallowance 10 11 12 13 14 15 16 17 18 19
Less: Depreciation - IT 30 12 5 2 1 0 0 0 0 0 50
43B disallowance 0 5 0 0 7 0 0 0 9 0 21
Sec.10 exemption 20 20 20 20 20 20 20 20 20 20
Total Income - TI 85 86 101 95 89 96 106 98 89 99 1000
TD -5 -5 9 2 -5 1 10 1 -9 0 0
CT -IT on TI 26 26 30 29 27 29 32 29 27 30 283
DT-30% of TD -2 -2 3 1 -2 0 3 0 -3 0 0
Tax Exp.(CT-DT) 27 27 28 28 28 29 29 29 29 30 284
TE= IT on (AI+/-PD) 27 27 28 28 28 29 29 29 29 30 284

AI+/- PD 90 91 92 93 94 95 96 97 98 99 945

Case Study - No. 3

ABCL reported Accounting income of Rs. 9 Crores for FY 2004-05.
The following data are provided:
(Rs. In CT DT
Crores)
Sales tax not paid until filing of Return of Income 3.00 + TD
Income from exempted Govt. Bonds 2.00 - PD
Depreciation as per Books of Accounts 5.00 + }Difference
Depreciation as per Income Tax Act 10.00 - }is TD
Disallowance U/s. 40A(3) 1.00 + PD
Compute:
1. CT IT on TI (9+3-2+5-10+1) = 6 CT = 35% of 6 = 2.10
TI =
2. DT IT on +/- TD TD = [(3+(5-10)] = -2 DTL = 30% of -2 = - 0.60
3. TE CT - DT 2.10 - (-0.60) or 2.10 + 0.60 = 2.70

AS - 22 - Taxes on Income
CASE STUDY -4
Computation of Deferred Tax 31.3.2005 31.3.2004
(Amt in Rs.)
Deferred Tax Liability for earlier years 2393768 1590784

Deferred Tax Liability for the current year 372917 802984
2766685 2393768
TD Liability: DT @ DT @
Relating to fixed asset: 31.3.2005 33.66% 31.3.2004 35.875%
WDV as per Companies Act 29849597 20063103
WDV as per Income Tax. Act 21630092 13390579
8219505 6672524

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

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.

Recognition of Deferred Tax

Asset
Consideration of PRUDENCE is a must while recognizing DTA
DTA Arising due to Basis of Recognition
Unabsorbed Business Virtual Certainty (Judgment) &
& Depreciation Loss Convincing Evidence (Fact)
ASI 9
Other than above Reasonable Certainty

Re-Assessment v/s Review
Re-Assessment Review
(Right) (Duty)
Relates to DTA Relates to DTA

Previously unrecognized 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

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

Presentation of DT
PROFIT AND LOSS ACCOUNT
Balance Sheet (ASI-7) I. INCOME
Share capital Gross Sales
Less: Excise Duty
Reserves Net Sales
Other Income
Secured loans TOTAL - I
Unsecured loans II. EXPENDITURE
Material Cost
Deferred tax liability Employees' Remuneration & Benefits
Total Manufacturing Expenses
Repairs & Maintenance
Selling, General & Administration Expenses
Interest
Fixed assets Depreciation
Investments TOTAL - II
III. PROFIT BEFORE TAX (I-II)
Deferred tax asset IV. Provision for Current Taxation
Net Current Assets Provision for Deferred Tax
Provision for Fringe Benefit Tax
Total V. Profit after Tax (III - IV)

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.

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
Accounting Standard 22
Accounting for Taxes on
Income
ISSUES
&
LATEST DEVLOPMENTS
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. 5000 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)]

Timing Difference –
Expenses Dr. toEx….
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

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

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
Financial Implication of Deferred

Tax:
(1) Effect of Deferred tax on Income Tax
(2) Effect on Current Ratio
(3) 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)

(6) Affects Net Profit Ratio (PAT/Net Sales)
(7) Affects EPS
(8) 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)

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?


(4) Accounting for Taxes on Income in Interim
Financial Reports as per AS-25
(5) 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


(6) 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

situation ofTax Holiday U/S 10A and 10B of the
Income-tax Act,1961
(8) ASI 4: Losses under the head Capital Gains

context of S. 115JB of the Income-tax Act, 1961 –
MAT credit – whether Current Tax ?
Case Study - No. 5

Computation of Curre nt Tax and De fe rre d Tax unde r S.80IA/80IB/80IC
Ye ar De pre ciation TD CT De fe rre d Accumulated Tax
Books IT @ 30% Tax DTL/DTA Expe nse
(a) (b) (c) (d)=(c-b) (e ) (f)=(d*30%) (g) (h)=(e +f)
1 100 375 275 (O) 0 14 14 14
2 100 281 181 (O) 0 54 68 54
3 100 211 111 (O) 0 33 102 33
4 100 158 58 (O) 0 17 119 17
5 100 119 19 (O) 0 6 125 6
6 100 89 (11) (R) 0 0 125 0 -3
7 100 67 (33) (R) 0 0 125 0 -10
8 100 50 (50) (R) 0 0 125 0 -15
9 100 38 (62) (R) 0 0 125 0 -19
10 100 28 (72) (R) 0 0 125 0 -22 -69
11 100 21 (79) (R) 294 (24) 101 270
12 100 16 (84) (R) 295 (25) 76 270
13 100 12 (88) (R) 296 (26) 49 270
14 100 9 (91) (R) 297 (27) 22 270
15 100 7 (93) (R) 298 (28) (6) 270
Note: Deferred Tax, for the first year, is calculated after considering the reversal within 10 years.
I.e 275 (229) 46 @ 30% = 14
-69

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.

THE BEGINNING
K. GURURAJ ACHARYA
TELFAX: 080-2336 1800
acharyaguru@yahoo.com

AS - 22 Taxes On Income

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AS - 22 Taxes On Income

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SUB REGIONAL CONFERENCE &

19th ANNUAL CONFERENCE of

Deferred Taxation AS 22 and

Standards Guidance Notes

Accounting Auditing & Assurance

K.G.Acharya & Co., Chartered Accountants 3 of 36

 Listed/Proposed to be listed Cos

Level - II  Enterprises with > 40 Lacs but < 50 crores

Level - III  Other than Level - I & Level - II cases

K.G.Acharya & Co., Chartered Accountants 7 of 36

Timing differences -TD- Differences between TI

Permanent differences -PD- are the differences

K.G.Acharya & Co., Chartered Accountants 8 of 36

K.G.Acharya & Co., Chartered Accountants 9 of 36

K.G.Acharya & Co., Chartered Accountants 10 of 36

CT = IT on TI  (Applicable tax rates/laws)

Case Study -1 Computer Pur. value Depreciation Rate Tax Rate

K.G.Acharya & Co., Chartered Accountants 12 of 36

(Rs. In Crores) Co's Act IT Act

TE= IT on (AI+/-PD) 27 27 28 28 28 29 29 29 29 30 284

K.G.Acharya & Co., Chartered Accountants 13 of 36

Case Study - No. 3

K.G.Acharya & Co., Chartered Accountants 14 of 36

Deferred Tax Liability for earlier years 2393768 1590784

K.G.Acharya & Co., Chartered Accountants 15 of 36

DTA v/s DTL

Accounting Income < Taxable Income

Accounting Income = Taxable Income

Accounting Loss = Taxable Loss

K.G.Acharya & Co., Chartered Accountants 16 of 36

Does not cover Dividend Distribution Tax.

K.G.Acharya & Co., Chartered Accountants 17 of 36

Recognition of Deferred Tax

K.G.Acharya & Co., Chartered Accountants 18 of 36

Re-Assessment v/s Review

Relates to DTA Relates to DTA

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

Non Corporate Entities : Capital Account

K.G.Acharya & Co., Chartered Accountants 20 of 36

K.G.Acharya & Co., Chartered Accountants 21 of 36

DTA and DTL to be set off if permissible under

Evidence supporting the recognition of DTA to be

K.G.Acharya & Co., Chartered Accountants 22 of 36

a) has a legally enforceable right to set off

Timing Difference – Ex..

K.G.Acharya & Co., Chartered Accountants 25 of 36

K.G.Acharya & Co., Chartered Accountants 26 of 36

Timing Difference – Ex..

K.G.Acharya & Co., Chartered Accountants 27 of 36

Financial Implication of Deferred

(2) Effect on Current Ratio

(3) Affects Net Worth – Thereby affecting

(4) Affects Debt -Equity Ratio and TOL / TNW

K.G.Acharya & Co., Chartered Accountants 29 of 36

(6) Affects Net Profit Ratio (PAT/Net Sales)

(7) Affects EPS

(8) Affects Dividend declaration - No specific

(9) Affects Capital Adequacy Norms in case of

K.G.Acharya & Co., Chartered Accountants 30 of 36

Issues relating to DTA / DTL:

(2) Is it OK not to recognize DTL on the ground

K.G.Acharya & Co., Chartered Accountants 31 of 36