Worked Solution
✓ VerifiedAS-22 — Accounting for Taxes on Income requires recognition of deferred tax on timing differences — differences between taxable income and accounting income that originate in one period and reverse in subsequent periods. Permanent differences do not give rise to deferred tax.
Classification of each item:
(i) Depreciation — Tax > Book (₹20L vs ₹15L): Tax depreciation exceeds book depreciation by ₹5 lakhs. This is a timing difference — taxable income is lower now but will be higher in future years when the difference reverses. This creates a Deferred Tax Liability (DTL).
(ii) Interest to NBFC — accrued but not paid by 31.03.2023: Under Section 43B of the Income Tax Act, 1961, interest to a financial institution is deductible only on actual payment. Since ₹6 lakhs was paid on 30.06.2023 (after the year end), it is disallowed in 2022-23 for tax. Book income is lower (expense recognised) but taxable income is higher — more tax is paid now, less in future → Deferred Tax Asset (DTA).
(iii) Items disallowed in 2021-22 but allowed in 2022-23 (₹1.05L): These items had created a DTA in 2021-22 (tax paid in excess). In 2022-23, they are allowed for tax, so the timing difference reverses. This is a reversal of earlier DTA — it reduces the DTA balance in 2022-23.
(iv) Donation to Private Trust (₹40L): Donations to private trusts are not deductible under the Income Tax Act, 1961 (they do not qualify under Section 80G). This is a permanent difference — it will never reverse. No deferred tax is recognised on permanent differences under AS-22.
Summary on 31-03-2023:
Deferred Tax Liability (DTL): Arising from excess tax depreciation = ₹5.00 lakhs × 15% = ₹0.75 lakhs
Deferred Tax Asset (DTA): Net timing difference = Interest disallowed (₹6.00L) less reversal of prior DTA (₹1.05L) = ₹4.95 lakhs × 15% = ₹0.7425 lakhs
Final Answer: DTL = ₹0.75 lakhs | DTA = ₹0.7425 lakhs
Write it like this
1The skeleton
- Classify FIRST, calculate SECOND — your opening line should sort all five items into 'timing difference' vs 'permanent difference' before you write a single rupee figure; examiners are trained to look for this filter because AS-22 para 13 is the entire conceptual hinge of the question.
- Name Section 43B explicitly when writing about NBFC interest — don't just say 'disallowed for tax'; say 'disallowed under Section 43B since not paid before due date of filing'; that one phrase shows you understand WHY it's a timing difference and not just that it is one.
- Show the reversal of prior-year DTA as a separate line — don't net it silently into the NBFC figure; write '₹1.05L reversal of DTA created in 2021-22' as its own row so the examiner can trace your logic and award the step mark even if your final number slips.
- Kill the donation in one sentence — write 'Donation to Private Trust is a permanent difference — no deferred tax arises as per AS-22' and move on; students who calculate DTL on ₹40L lose 2 marks and waste 3 minutes.
- Present DTL and DTA as a boxed summary — two clear lines, 'DTL = ₹X | DTA = ₹Y', at the end; examiners award the final mark from this box, not from hunting through your workings.
2Examiner-rewarded phrases
3Common trap
Heads up — the single most dangerous trap here is computing deferred tax on the ₹40L donation to a private trust; nearly every student either creates a DTA or DTL on it because ₹40L looks important. The moment you do that, you've shown you don't know what a permanent difference is, and the examiner will dock marks even if your depreciation math is perfect.