AS 22 Accounting for Taxes on Income — Your CA Inter Roadmap

If the words deferred tax make you nervous, you are not alone. Almost every CA Inter student feels that way the first time. But here is the truth: once you understand the why behind AS 22, the journal entries and the balance sheet presentation become almost obvious.

Let us walk through it together, the way a senior teacher would explain it at a whiteboard.

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Why Does AS 22 Exist at All?

A company prepares two sets of numbers every year:

  • Book profit — calculated under accounting standards (what you show in the Profit & Loss account).
  • Taxable profit — calculated under the Income Tax Act (what the tax department uses to compute the actual tax bill).

These two numbers are often different. Sometimes that difference is permanent (certain expenses are simply never allowed as a deduction). Sometimes the difference is only temporary — it will reverse in a future year. AS 22 deals entirely with that second type: the temporary differences that cause tax effects to shift across time.

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Timing Differences — The Core Concept

A timing difference arises when an item of income or expense is recognised in the books in one year but is included in taxable income in a different year.

A Simple Way to See This

Imagine a machine costing ₹10,00,000. Your company depreciates it at 20% SLM (Straight Line Method) for accounting purposes, but the Income Tax Act allows a higher rate — say 40% WDV.

  • Year 1 book depreciation: ₹2,00,000 → Book profit is higher relative to taxable profit.
  • Year 1 tax depreciation: ₹4,00,000 → Taxable profit is lower, so you pay less tax now.

You have essentially taken a tax benefit today that belongs to a future year (because in later years, the WDV depreciation shrinks while book depreciation stays the same). That future tax outflow must be recognised today as a liability — that is your Deferred Tax Liability (DTL).

Flip the logic: if you pay tax today on income that has not yet hit your books, you get a future tax saving — that is a Deferred Tax Asset (DTA).

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The Deferred Tax Formula (Keep This on Your Fingertips)

Deferred Tax = Timing Difference × Tax Rate applicable

Use the tax rate that is expected to apply in the period when the timing difference reverses. In practice at the Inter level, the question will give you the rate — just apply it consistently.

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Journal Entries — Clean and Simple

When a DTL arises (e.g., higher tax depreciation today)

Deferred Tax Expense A/c Dr. To Deferred Tax Liability A/c

This increases your total tax expense in the P&L, even though the cash has not gone out yet.

When a DTA arises (e.g., a provision allowed in books but disallowed in tax)

Deferred Tax Asset A/c Dr. To Deferred Tax Expense A/c

This reduces your tax expense today because you are recognising the future tax saving now.

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Permanent Differences — Do NOT Touch Them

A permanent difference (like a penalty that is never deductible under tax law) does not create deferred tax. It affects only the current year's tax, never reverses, so AS 22 simply ignores it for deferred tax purposes. Students often lose marks by creating deferred tax on permanent differences — avoid this trap.

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DTA — The Prudence Caution

AS 22 requires that a DTA is recognised only when there is reasonable certainty of sufficient future taxable profit to absorb it. If a company is consistently loss-making, you cannot sit and create a DTA wishfully. For unabsorbed depreciation or carried-forward losses, the standard demands virtual certainty (an even higher bar) of future profits before recognising a DTA. Examiners love testing this condition — always state it in your answer.

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Balance Sheet Presentation

  • DTL appears under Non-Current Liabilities (or as a separate line, depending on the Schedule).
  • DTA appears under Non-Current Assets.
  • DTL and DTA can be offset only when there is a legally enforceable right of set-off and they relate to the same taxable entity and the same tax authority.

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Quick Exam Checklist for AS 22 Questions

  • Identify whether the difference is timing or permanent first.
  • For timing differences, decide: does it create DTL or DTA?
  • Apply the correct tax rate to the cumulative timing difference (not just the current year movement, unless the question asks for movement only).
  • State the prudence/virtual certainty condition whenever DTA is involved.
  • Show the opening balance, current year movement, and closing balance neatly — examiners reward structure.

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FAQs

Q1. Can DTL and DTA exist simultaneously in the same balance sheet? Yes. A company can have multiple timing differences — some creating DTL and others creating DTA. Present them separately unless the offset conditions are met.

Q2. Is the tax rate the enacted rate or the expected rate? AS 22 says use the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Always verify the applicable rate from the latest ICAI study material / announcement since rates can be updated by Finance Acts.

Q3. How is AS 22 different from Ind AS 12? Both deal with income taxes, but Ind AS 12 uses the balance sheet approach (temporary differences based on asset/liability carrying amounts vs. tax bases), while AS 22 uses the income statement approach (timing differences based on when items hit P&L vs. taxable income). CA Inter currently uses AS 22 — verify in the latest ICAI study material for your exam year.

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Practice is what converts understanding into exam marks. Map out a structured daily study schedule using the free day-by-day study planner at https://caparveensharma.com/free-planner?src=article, and sharpen your skills further with free case-scenario practice available in the courses section at https://caparveensharma.com. Consistent, focused preparation — not last-minute cramming — is what gets you through CA Inter Accounts with confidence.