Deferred tax should be recognised for all the timing differences,
subject to the consideration of prudence in respect of deferred tax assets
as set out in paragraphs 15-18.
(a) The deferred tax in respect of timing differences which reverse
during the tax holiday period is not recognised to the extent the
enterprise’s gross total income is subject to the deduction during
the tax holiday period as per the requirements of sections 80-IA/80-
IB of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’).
In case of sections 10A/10B of the Act (covered under Chapter III
of the Act dealing with incomes which do not form part of total
income), the deferred tax in respect of timing differences which
reverse during the tax holiday period is not recognised to the extent
deduction from the total income of an enterprise is allowed during
the tax holiday period as per the provisions of the said sections.
(b) Deferred tax in respect of timing differences which reverse after
the tax holiday period is recognised in the year in which the timing
differences originate. However, recognition of deferred tax assets is
subject to the consideration of prudence as laid down in paragraphs
15 to 18.
(c) For the above purposes, the timing differences which originate first
are considered to reverse first.
The application of the above explanation is illustrated in the
Illustration attached to the Standard.
352 AS 22
14. This Standard requires recognition of deferred tax for all the timing
differences. This is based on the principle that the financial statements for
a period should recognise the tax effect, whether current or deferred, of all
the transactions occurring in that period.
15. Except in the situations stated in paragraph 17, deferred tax assets
should be recognised and carried forward only to the extent that there is a
reasonable certainty that sufficient future taxable income will be available
against which such deferred tax assets can be realised.
16. While recognising the tax effect of timing differences, consideration
of prudence cannot be ignored. Therefore, deferred tax assets are recognised
and carried forward only to the extent that there is a reasonable certainty of
their realisation. This reasonable level of certainty would normally be
achieved by examining the past record of the enterprise and by making
realistic estimates of profits for the future.