How much deferred tax should be recognized ?

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uday singh Negi (Querist)
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14 March 2014 Z Ltd. has provided depreciation as per accounting records ` 5.00 lakhs and as per
tax records it is ` 8.00 lakhs. An unamortised preliminary expense as per tax records
is ` 6,500. There is adequate evidence of future profits sufficiency. How much deferred
tax assets/liabilities should be recognized as per AS-22 ? Tax rate is 30%.

BabuRaj.P

BabuRaj.P (Expert)
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14 March 2014 Deferred Tax Liability of Rs.92,700/- to be recognized[(8L-5L)*30.9%]for depreciation

Please give the Total Prelim Exp incurred Yearly w/o amount to calculate deferred tax

BabuRaj.P

BabuRaj.P (Expert)
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14 March 2014 Deferred Tax Liability of Rs.92,700/- to be recognized[(8L-5L)*30.9%]for depreciation

Please give the Total Prelim Exp incurred, Yearly w/o amount to calculate deferred tax

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uday singh Negi

uday singh Negi (Querist)
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14 March 2014 dear baburaj. p

i have typed this question as it is provided in book, their is no further information is available and it is asked in ca final examination and the solution is
as under ( and please don't change tax rate for caln )

It is a case of timing difference
Excess depreciation as per tax records =` ( 8,00,000 – 5,00,000) =` 3,00,000.
Less, expenses provided in taxable income ` 6,500.
2,93,500
As tax expense is more than the current tax due to timing difference of Rs 293500,
therefore D.T.L =30% of ` 2,93,500 = ` 88,050 shall be credited in accounts

but why he reduce preliminary expenses because in another question he did reverse of it see the below question it is also asked in ca final

q) Rama Ltd. has provided the following information:
Depreciation as per accounting records = ` 2,00,000
Depreciation as per income-tax records = ` 5,00,000
Unamortised preliminary expenses as per tax record = ` 30,000

There is adequate evidence of future profit sufficiency. How much deferred Tax
asset/liability should be recognized as transition adjustment ? Tax rate 50%.

solution as provided by them

Excess depreciation as per tax AMOUNT @ 50%
records (5,00,000 - 2,00,000) DTL 1,50,000

Unamortised preliminary expenses (15,000)
as per tax records
_________
1,35,000

in both the cases he reduce preliminary expenses which is allowed as per income tax act but why

thanks

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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28 July 2024 In accounting and taxation, **Deferred Tax Assets (DTA)** and **Deferred Tax Liabilities (DTL)** arise due to timing differences between the accounting and tax treatment of certain items. The treatment of these items depends on whether they result in a future tax benefit (DTA) or a future tax expense (DTL). Here’s a detailed explanation of why preliminary expenses are treated differently in the two scenarios you provided:

### 1. **Understanding Timing Differences**

- **Timing Differences**: These occur when there is a difference between the accounting income and taxable income due to temporary differences in the recognition of income and expenses.

- **Deferred Tax Liability (DTL)**: When taxable income is lower than accounting income, leading to higher taxable income in future periods (e.g., excess depreciation claimed for tax purposes).

- **Deferred Tax Asset (DTA)**: When taxable income is higher than accounting income, leading to a future reduction in taxable income (e.g., unamortised preliminary expenses that will be amortized in future periods).

### 2. **Scenario 1: Timing Difference Calculation**

In the first scenario, the calculation is:

- **Excess Depreciation**: ₹8L (tax depreciation) - ₹5L (accounting depreciation) = ₹3L
- **Expenses Provided**: ₹6.5K

**Net Timing Difference**: ₹3L - ₹6.5K = ₹2.935L

**Deferred Tax Liability (DTL)**: 30% of ₹2.935L = ₹88,050

Here, DTL is recognized because the taxable income is reduced by more depreciation now, but in future years, the accounting depreciation will be higher, and the taxable income will be lower.

### 3. **Scenario 2: Calculation of Deferred Tax Asset/Liability**

In the second scenario:

- **Excess Depreciation as per Tax Records**: ₹5L (tax) - ₹2L (accounting) = ₹3L
- **DTL Calculation**: 50% of ₹3L = ₹1.50L

- **Unamortised Preliminary Expenses**:
- Unamortised preliminary expenses as per tax records: ₹30K
- For accounting purposes, these expenses will be amortized over time, leading to a future reduction in taxable income.

**DTA Calculation**: 50% of ₹30K = ₹15K

**Net Deferred Tax Asset/Liability**:
- DTL: ₹1.50L
- DTA: ₹15K
- Net DTL = ₹1.50L - ₹15K = ₹1.35L

### 4. **Why Preliminary Expenses are Reduced**

- **Preliminary Expenses and DTA**: Preliminary expenses are allowed as a deduction under the tax law, but amortized for accounting purposes. When calculating deferred tax assets or liabilities, you need to consider whether these expenses create a future benefit or expense.

- **Inclusion/Exclusion in DTA/DTL Calculations**: Preliminary expenses are often subtracted in the calculation of deferred tax assets because they represent future tax benefits. If the preliminary expenses are to be amortized and provide future deductions, their unamortized portion is considered a deferred tax asset.

- **In Scenario 1**: Preliminary expenses were not considered because they were not part of the information provided.

- **In Scenario 2**: The unamortized preliminary expenses are considered as a deferred tax asset because they represent future tax benefits that will reduce taxable income in future periods.

### Conclusion

The treatment of preliminary expenses depends on the context of their usage and the specific tax and accounting rules.

- **In Scenario 1**: Only depreciation timing differences were considered, and preliminary expenses were not relevant to the calculation.

- **In Scenario 2**: Both excess depreciation and unamortized preliminary expenses were considered, reflecting both the future tax liability and benefit.

**Key Takeaway**: Always ensure to include relevant components of timing differences and adjust them appropriately based on whether they create future tax liabilities or assets.