Deferred tax

Deferred tax refers to the tax effect of temporary differences between accounting income that is calculated by taking into consideration the provisions of Companies Act, 2013 and taxable income that is calculated by taking into consideration the provisions of Income Tax Act,1961.

Temporary Differences:

While calculating taxable income, certain expenses debited to Profit or Loss A/c are disallowed in one period and gets reversed in future period in accordance with provisions of the Income-tax Act. In the same manner, certain incomes credited in one period to Profit or Loss A/c form part of the income in future period. Such items are considered as temporary differences.

 

For example:

(i) In case of treatment of deferred revenue expenditure (say, advertisement expenses incurred in one year but the benefit of which extends in subsequent years also), the expenditure incurred is amortised over a period of time but as per tax laws, it is allowed wholly in first year in which such deferred revenue expenditure is made.

(ii) In case of advance incomes received (say, advance rent), the disclosure of same is mandatory for the purpose of calculating taxable income. However, this income is recognized in the books of account when actually earned.

(iii)       In case of different book and tax depreciation which could arise due to difference in depreciation rates or methods of calculating depreciation i.e. SLM or WDV or differences in composition of actual cost of assets.

(iv) In case of provisions made in anticipation of liabilities where the liability is allowed in the subsequent period when it crystalizes.

Deferred Tax Accounting:

The accounting, presentation and disclosure of deferred tax is carried out as per the provisions of “Accounting Standard- 22” (i.e., Accounting for Taxes on Income) or “Ind AS- 12” (i.e., Income Taxes). Deferred tax asset or deferred tax liability is created by debiting/crediting Statement of Profit and Loss.

The following table shows different cases where deferred tax asset/ liability is required to be created:

CASES DEFERRED TAX ASSET/ LIABILITY
Book Profit > Taxable Profit Deferred Tax Liability (DTL)
Book Profit < Taxable Profit Deferred Tax Asset (DTA)

Deferred Tax Asset/ liability in case of LOSS:

Due to differences in income as per financial books and taxable profit as per tax laws, there is a certainty that one book reflects loss and other shows profit. In that case, the following treatment shall be made:

 

CASES DEFERRED TAX ASSET/ LIABILITY
Loss as per books of accounts and Profit as per tax laws (Subject to the principles of prudence) Deferred Tax Asset (DTA)
Loss as per tax laws and Profit as per books of account (MAT has to be paid) Deferred Tax Liability (DTL)

Deferred Tax Computation Rate:

The deferred tax asset/liability is calculated at the normal rate of tax.

Deferred Tax Asset Accounting:

Deferred Tax Asset (DTA) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.

Deferred Tax Asset A/C……………. Dr

To Profit & Loss A/C……………………..….

Deferred Tax Liability Accounting:

Deferred Tax Liability (DTL) account is created by crediting Profit & Loss Account. The following journal entry is required to be passed.

Profit & Loss A/C ……………. Dr

To Deferred Tax Liability A/C ………..…….

 

ITD Warns Salaried Class Against Filing Wrong Returns

Income Tax Department Warns Salaried Class Against Filing Wrong Returns

The Income Tax Department on Wednesday cautioned salaried class taxpayers against using illegal means like under-reporting of income or “inflating” deductions while filing their returns, stating violators will be prosecuted and their employers will be intimated to take action against them.

The Central Processing Centre (CPC) of the Department in Bengaluru, that receives and processes the Income Tax Returns (ITRs), has issued an advisory specifying such taxpayers should not “fall prey” to unscrupulous tax advisors or planners who help them in preparing wrong claims to get tax benefits.

Calling it a “cautionary advisory” on reports of Tax evasion by under-reporting of income or inflating deductions or exemptions by salaried taxpayers, the department said such attempts “aided and abetted by unscrupulous intermediaries have been noted with concern”.

“Such offences are punishable under various penal and prosecution provisions of the Income Tax Act,” it said.

The advisory comes in the backdrop of the investigation wing of the department, in January, unearthing a racket of extracting fraudulent tax refunds by employees of bellwether information technology companies based in Bengaluru, in alleged connivance with a tax advisor.

The CBI recently registered a criminal case to probe this nexus.

The tax filing season for salaried class taxpayers has just begun with the Central Board of Direct Taxes (CBDT), that frames policy for the department, recently notifying the new ITRs.

The one-page advisory added that if the department notices any fraudulent claims in their ITRs, such claims “may be punishable under provisions of the IT Act and this may also delay issuance of their refunds.”

“Taxpayers, are, therefore strictly advised not to fall prey to false promises or mis-advice by unscrupulous intermediaries and submit wrong claims in their ITRs, which would be treated as cases of tax evasion. In the cases of such wrong claims by the government/PSU employees, reference would be made to the concerned vigilance division for action under conduct rules,” it added.

The advisory added that the department possesses an “extensive risk analysis system” that is aimed at identifying persons who are non-compliant and aim to subvert the trust based-system “envisioned” while processing of ITRs at the CPC, which it said is automated and devoid of any human interface.

“In all such cases of high risk , the department may examine and verify the details submitted by taxpayers in their ITR subsequent to the processing of returns,” it said.

It also asked tax planners and advisors to “confine their advice to taxpayers within the four corners of the IT Act” and warned that the violators will be prosecuted and such instances will also be referred to enforcement agencies like the CBI and the Enforcement Directorate (ED) for criminal prosecution.

Know about LLP- Limited Liability Partnership

1. Annual Return – FORM 11 – 60 days – 30th May, 2018
2. Statement of Accounts – FORM 8 – 30TH OCTOBER, 2018
3. INCOME TAX RETURN:
IF NO AUDIT- 31ST JULY
IF AUDIT – 30TH SEPTEMBER
STATUTORY AUDIT : Capital Contribution – 25 lakh or Annual Turnover – 40 Lakh
Mandatory Certificate from PCS – Annual Turnover – 5 crore or Contribution – 50 Lakh
Penalty – 100 Rs per day.
LLP can’t be close without making compliance good.

The words of Sir Maurice Gwyer In re the Central Provinces and Berar Act XIV of 1938 the learned JJ said–

“Subject always to the legislative competence of the taxing authority, a duty on home-produced goods will obviously be imposed at the stage which the authority find to be the most convenient and the most lucrative, wherever it may be; but that is a matter of the machinery of collection, and does not affect the essential nature of the tax”