Accounting Treatment and Tax Treatment

The following are the Accounting treatment and Tax treatment of Deferred Tax:

ACCOUNTING ENTRIES:

P&L A/c Dr		18,540.00
To Deferred Tax Liability A/c			18,540.00

(Being Deferred Tax Liability created in Year 1 at the Maximum Marginal Rate of Tax)

Deferred Tax is shown under Provisions in Balance Sheet.

Deferred Tax Asset Dr	1,236.00
To P & L A/c		1,236.00

(Being Deferred Tax Liability Reversed in Year 2)

Finally at the end of Year 5 the Balance Sheet will be thus:

PROVISIONS:Deferred Tax Liability		18,540	Rs.Ps
Less: Reversed upto year 4	12409.44
Reversed in year 5	6130.56	18,540	0

TAX TREATMENT:

INCOME FROM BUSINESS:Net Profit as per P&L A/c		XXX
Add: Deferred Tax Liability	XXX
Less: Deferred Tax Asset	XXX

Note: As Deferred Tax Liability is a Provision, it should be disallowed as an expense. Also deferred tax asset should be deducted from Income.

As seen from the above, deferred tax liability/asset does not affect tax computation.

PURPOSE: The Purpose of DTA/DTL: More appropriate presentation of financial statements and to make the various stakeholders aware of the tax situation of the company.

It may be noted that 80-IA (Section 80 IA of IT Act) exemption may be availed for Windmill. That is if the company starts to claim 80-IA benefit after 5 years (80-IA benefit can be claimed in any 10 Assessment years out of 15 A.Y’s after buying windmill), then there will be more benefits to the company as the Income in the first 5 years will be low and the company can claim business loss as there will be huge Depreciation as per IT.