AS 22 – (Accounting Income) Accounting for Taxes on Income

Important Keyword: Accounting for Taxes, AS 22, Income from Business & Profession, Income Tax.

AS 22 – Accounting for Taxes on Income

The primary objective of Accounting Standard 22 (AS 22) is to provide guidelines for the accounting treatment of taxes on income. This standard addresses situation where taxable income may diverge from accounting income, leading to challenges in aligning taxes with revenue for a specific period. By establishing consistent principles for recognizing and accounting for income taxes, AS 22 aims to enhance transparency and accuracy in financial reporting. This standard ensures that companies appropriately reflect their tax obligations and liabilities in their financial statements, facilitating a clearer understanding of their financial performance and position.

Types of Income

Accounting income refers to the net profit or loss reported in the statement of profit and loss for a specific period, before considering income tax expenses or savings.

Taxable income represents the income (or loss) for a period as determined by tax laws, upon which income tax payable is calculated.

Differences between Taxable and Accounting Income

Taxable income may deviate from accounting income due to various factors:

1. Disallowed Expenses: Some items debited in the profit and loss account are not permitted as expenses under tax laws.
2. Partially Allowed Expenses: Certain expenses fully debited in the profit and loss account are only partially allowed or amortized over time under tax laws.

Timing and Permanent Differences

These differences are classified into two categories:

1. Timing Differences: These differences arise in one period but are adjusted or reversed in subsequent periods. Examples include provisions for bad debts and expenses allowed on a payment basis.
2. Permanent Differences: These differences between taxable and accounting income do not reverse subsequently. Examples include non-deductible expenses like goodwill amortization and disallowed personal expenditures.

Application of AS 22

Accounting Standard 22 (AS 22) mandates the recognition of deferred tax for all timing differences. It ensures that financial statements reflect the impact of transactions during the year, whether current or deferred.

What is Deferred Tax Asset?

DTA arises when taxable income exceeds accounting income, resulting in higher tax payable based on tax laws. This creates an asset since taxes are paid in advance, with benefits expected in the future.

What is Deferred Tax Liability?

DTL occurs when accounting income exceeds taxable income, leading to lower tax payable under tax laws. It represents a provision for taxes payable in future years, as the amount paid is less than the actual amount per books.

Computation of DTA/DTL

Computation of Accounting Income	Year
Particulars	One	Two	Three
Profit Before Depreciation & Tax	2,00,000	2,50,000	200,000
Less: Depreciation	-20,000	-20,000	-30,000
Accounting Profit (PBT)   (A)	180,000	230,000	170,000

Computation of Taxable Income	Year
Particulars	One	Two	Three
Accounting Profit (PBT)   (A)	180,000	230,000	170,000
Add: Depreciation as per books	20,000	20,000	30,000
Less: Depreciation as per income tax Act	-70,000	–	–
Taxable Profit	130,000	250,000	200,000
Tax rate	30%	30%	30 %
Current tax	39,000	75,000	60,000

Deferred Tax Computation	Year
Particulars	One	Two	Three
Opening balance of timing difference	–	-50,000	-30,000
Addition	-50,000	–	–
Deletion	–	20,000	30,000
Closing Balance	-50,000	-30,000	–
Tax rate	30%	30%	30 %
Deferred Tax	-15,000	-6,000	–
DTA/DTL to be shown in Balance Sheet	DTL	DTL	NIL
Amount for P&L	-15,000	6,000	9,000
To be Debited/Credited to P&L	Debited	Credited	Credited
Reason for Debit/Credit	Creation of DTL	Reversal of DTL	Reversal of DTL

Tax Expense in books	Year
Particulars	One	Two	Three
Current Tax	39,000	75,000	60,000
Deferred Tax	12,000	-6,000	-9,000
Total Tax	54,000	69,000	51,000
Accounting Profit (PBT)   (A)	180,000	230,000	170,000
Profit After Tax (A-B)	126,000	161,000	119,000

Comparison Table: AS 22 vs IND AS 12 (Income Taxes)

Basis	AS 22 – Accounting for Taxes on Income	IND AS 12 – Income Taxes
Recognition Basis	Recognizes tax effect of differences between accounting income and taxable income.	Recognizes tax effect of differences between the carrying amount of assets/liabilities and their tax base.
Approach	Based on the Profit and Loss Statement approach.	Based on the Balance Sheet approach.
Types of Differences Recognized	Covers timing and permanent differences.	Covers only temporary differences – classified as taxable and deductible. Does not deal with permanent differences.
Recognition of Deferred Tax Asset (DTA)	DTA is recognized only if there is reasonable certainty of realization. If losses/unabsorbed depreciation exist, virtual certainty supported by convincing evidence is required.	DTA is recognized based on the probability of future taxable profits. No concept of virtual certainty.
Disclosure Requirements	Focuses on disclosure of DTA/DTL in the Balance Sheet.	Requires recognition and disclosure in Profit & Loss, and for items directly in equity or OCI, disclosed in Balance Sheet as current/non-current.
Revaluation of Assets	Not addressed in AS 22.	Explicitly recognizes deferred tax on differences arising from revalued assets.
Goodwill Treatment	Silent on goodwill arising from business combinations.	Recognizes taxable temporary difference on goodwill (tax base = NIL), but prohibits recognizing deferred tax liability due to its residual nature.
Virtual Certainty Concept	Required for DTA recognition when there are losses or unabsorbed depreciation.	Not applicable. Recognition is based solely on probable taxable profits.
Tax Holidays	Provides specific guidance on tax holidays (Sections 80-IA, 80-IB, 10A, 10B).	Does not specifically address tax holidays.
Capital Loss Treatment	Gives guidance on DTA recognition for capital losses.	No specific guidance, but general principles may apply.

Frequently Asked Questions

1. My company has reported accounting profits, but tax payable is lower due to higher depreciation under the Income Tax Act. How do we account for this difference?

Answer: This is a timing difference. Under AS 22, you must create a Deferred Tax Liability (DTL) since tax payable is lower now but will increase in future when depreciation aligns.

2. We incurred business losses in earlier years. Can we now recognize Deferred Tax Asset (DTA) since we expect profits this year?

Answer: Yes, but only if there’s virtual certainty, supported by convincing evidence (as per AS 22), that you’ll have sufficient future taxable profits to utilize the losses.

3. Our P&L includes a provision for bad debts that is not yet allowable under tax laws. Should we recognize DTA?

Answer: Yes. Since the expense will be allowed in future years, it’s a timing difference. You should recognize DTA under AS 22.

4. Can we recognize DTA on goodwill amortization disallowed under tax laws?

Answer: No. Goodwill amortization creates a permanent difference, which is not recognized under AS 22 for deferred tax purposes.

5. We are a startup claiming deduction under Section 80-IAC. Do we need to account for deferred tax during the tax holiday?

Answer: Yes, AS 22 requires recognizing deferred taxes even during tax holidays, but only for timing differences that originate and reverse outside the holiday period.

6. In our books, we’ve expensed certain personal expenses that are disallowed under tax laws. Do these affect DTA/DTL?

Answer: No. These are permanent differences and do not create DTA or DTL under AS 22.

7. Is it mandatory to show DTA/DTL in our Balance Sheet?

Answer: Yes. AS 22 mandates disclosure of Deferred Tax Assets and Liabilities under the head of non-current assets or liabilities in the Balance Sheet.

8. How is AS 22 different from IND AS 12 in recognizing deferred taxes for revalued assets?

Answer: AS 22 is silent on revaluations. In contrast, IND AS 12 requires recognizing deferred tax on temporary differences arising from revalued assets.

Read More: Deferred Tax Assets: Definition, Types, and Treatment

Web Stories: Deferred Tax Assets: Definition, Types, and Treatment

Official Income Tax Return filing website: https://incometaxindia.gov.in/