DEFERRED TAX ASSET (DTA)

 

There are differences in income calculated as per the books of accounts and income calculated as per the Income Tax Act. The differences arises due to 2 main reasons-

1. Permanent Difference– Differences which are not capable of reversal in the subsequent period is called permanent differences.

 

For example– Personal expenses. Personal expenses are debited to Profit and Loss account while calculating book profits and are added back while calculating profit as per Income Tax Act. This expense is never allowed to us in future.

 

2. Timing Difference- Differences which are capable of reversal in subsequent periods are called timing differences.

 

For example- Interest to nationalized banks. We book interest to nationalized banks on accrual                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           basis and according to Income Tax act, it is allowed only when it is actually paid.

 

Deferred Tax Asset and Deferred Tax Liability will arise only due to timing differences. Calculation of DTA and DTL is done as per Accounting Standard 22.

 

Deferred Tax Asset (DTA)

 

Deferred Tax Asset arises when Income as per Income tax is more than the accounting income.

1. CALCULATION

 

Example-

 

Net Profit for F.Y. 2017-18 as per books of accounts- Rs. 100000.00 (after interest payable)

Interest payable to bank- Rs. 20000.00

Assume tax rate 30%.

 

Solution-

 

FOR F.Y. 2017-18

• Therefore profit as per Income Tax = 100000+20000

= Rs. 120000.00

Therefore as per Income Tax, Tax  = 120000*0.30

= 36000.00

• Profit as per books of accounts = Rs. 100000.00

Therefore, as per books, Tax            = 100000*0.30

= 30000.00

• Excess tax paid = 36000-30000

= 6000.00. This is Deferred Tax Asset.

This excess is allowed to us in the subsequent years.

 

Now, in the subsequent year 2018-19, Income= Rs. 100000.00 and interest is paid in this year. But the interest is already debited to P&L account in the previous year 2017-18.

 

FOR F.Y. 2018-19

 

• Taxable income as per Income Tax for 2018-19 = Rs. 100000-20000

= Rs. 80000.00

Therefore as per Income Tax, Tax                        = 80000*0.30

= 24000.00

 

• Taxable income as per books                               = Rs. 100000.00

Therefore, as per books, Tax                                  = 100000*0.30

= 30000.00

 

• Short payment                                   = 24000-30000

= 6000.00. Thus DTA created in the previous   year is now reversed.

 

 

 

1. ACCOUNTING TREATMENT

Journal entries-

 

When DTA arises-

Deferred Tax Asset A/c Dr.

To P&L A/c

 

On reversal of DTA

P&L A/c Dr.

To Deferred Tax Asset A/c

 

1. CLASSIFICATION IN BALANCE SHEET

Classified under the head Non-current Assets of Sch. III