We are aware that Going Concern, Consistency and Accrual are the basic fundamentals of accounting assumptions. While calculating Book Profit, we have to abide by the accepted norms of Accounting, which are enshrined and codified by the accepted norms of Accounting (through various Accounting Standards issued by the Institute of Chartered Accountants of India – ICAI).
However, Income Tax laws has nothing do with the accounting norms. Income tax liabilities are calculated based on the laws of Income Tax, which is a separate statute altogether and does not go hand-in-hand with that of Accounting Standards.
Coming to the crux of this subject, there is no disagreement that book profit and tax profit may not be equivalent during the same year. Book Profit is the profit as per the Profit and Loss Account, taking into consideration utmost important … Accounting Standards. Tax Profit is nothing but certain allowances and disallowances from the Book Profit to make the income taxable as per the Income Tax Act, 1961.
Book Profit and Tax Profit may differ because of the following items:
1. Depreciation;
2. Items related to Section 43B of the Income Tax Act, 1961, which allows certain expenses to be booked ONLY on payment basis;
3. Donation to an unregistered organisation (Permanent Difference);
4. Donation to a registered organisation, which is allowed less than 100% deduction U/s. 80G of the Income Tax Act, 1961 (Permanent Difference);
5. Section 115JB of the Income Tax Act, 1961 (Minimum Alternate Tax – MAT)
Deferred Tax Liability (DTL)
It will arise when the Depreciation (for example) is higher as per the Income Tax Act as compared to the Depreciation as per Books of Accounts (which is as per the rate prescribed under Schedule VI of the Companies Act, 1956).
Deferred Tax Asset (DTA)
It will arise when the Depreciation (for example) is lower as per the Income Tax Act as compared to the Depreciation as per the Books of Accounts (which is as per the rate prescribed under Schedule VI of the Companies Act, 1956). This situation may arise when the higher depreciation were claimed in the previous years as per the Income Tax Act, and now the depreciation as per books of accounts is slowly catching up with the depreciation earlier written off in excess.
It must be noted that there is a provision for set off of DTA against DTL and vice versa, while disclosing the same under the Balance Sheet.
It is interesting to note about the Deferred Tax Assets provision, which is hardly known to be implemented by accounting professionals in most of the cases of audits of Private Limited companies related to cases of carry forward of Business Losses and carry forward of Unabsorbed Depreciation losses. These carry forward Business Losses and unabsorbed depreciation losses are the ones which has given rise to provisions of MAT. MAT credit is available to be carried forward and given the same treatment as has been specified under Accounting Standard 22. However, there is second school of thought which does not consider it appropriate to consider MAT credit as a deferred tax asset for the purpose of AS-22.
You can refer to summarised discussion on MAT by clicking the following link
Gulab A. Singh 