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In some cases, there is a difference between the Amount of expenses or incomes that are considered in books of accounts of the assessee and the expenses or incomes that are allowed/disallowed as per the Income Tax Department.
We are trying to explain this concept with an example of depreciation:-
As Defined under Companies act, depreciation rate to considered on the base of the book of accounts and While the calculation of Income Tax Depreciation rates are given in the income tax act should be considered for calculation Depreciation. Therefore, there is a difference between the amount of income or Tax Liability as per books and taxable income as per the Income Tax Act.
For example –if the depreciation rate is 20% as per books and 15% as per income tax then depreciation on Rs. 1,50000 /- is allowed in the following manner.
|
Year |
Depreciation @ 20% |
Depreciation @ 15% |
|
1 |
30,000 |
22500 |
|
2 |
24,000 |
19,125 |
|
3 |
19,200 |
16,256.25 |
|
4 |
15,360 |
13817.8125 |
|
5 |
12,288 |
11,745.141 |
|
6 |
9,830.4 |
9,983.370 |
|
7 |
7,864.32 |
8,485.864 |
|
8 |
6,291.456 |
7,212.984 |
|
9 |
5,033.1648 |
6131.037 |
As you can see in the above example the depreciation as per books is more for the first 5 years but this difference is reversing from the 6th year.
DTA or DTL is only a temporary difference that is to be reversed in the future.
If Income according to books is more than assessable Income, at that point it implies that we have paid less Tax according to books and we need to pay more Tax in future and in this manner recorded as Deferred Tax Liability (DTL).
Similarly, if income as per books is less than taxable income then it means we have to pay more tax and have to pay less tax in the future. So, it will be treated as a Deferred Tax Asset (DTA).
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