AS 22 solves a simple but annoying problem: your profit as per books and your profit as per Income Tax are rarely the same number. The tax you actually pay this year (called current tax) doesn't match the tax expense your P&L should logically show. AS 22 fixes that mismatch by recognising deferred tax.
The mismatch happens because of timing differences — items that are included in profit in one year for accounting purposes but in a different year for tax purposes. The classic example: depreciation. Suppose your books charge ₹1,00,000 as depreciation (SLM), but the Income Tax Act allows you to claim ₹1,50,000 (WDV). That extra ₹50,000 deduction lowers your tax bill today, but the benefit will reverse in future years — creating a Deferred Tax Liability (DTL). DTL means: you're paying less tax now, but you'll pay more later. Conversely, a Deferred Tax Asset (DTA) arises when you pay more tax today than your books suggest — for instance, a provision for doubtful debts is charged in P&L but not allowed as a deduction until actually written off.
The formula is clean: Deferred Tax = Timing Difference × Tax Rate. Always use the tax rate that is enacted (or substantively enacted) at the balance sheet date — not the rate from when the difference first arose. Recognition rules matter here: DTLs are always recognised. DTAs are recognised only when there is reasonable certainty of future taxable profits to absorb them. For DTA on unabsorbed depreciation or carried-forward losses, the bar is even higher — virtual certainty (i.e., near-guaranteed future profits, backed by convincing evidence). This distinction is a favourite exam trick. Remember: permanent differences (like donations u/s 80G — deductible in books but never in tax, or vice versa) do NOT create deferred tax. Only timing differences do.