Answer Posted / s.malleswara rao

Entities prepare Profit and Loss account on the basis of
Accounting Standards. Tax on Income is paid according to
Income Tax Act. There are some allowances, disallowances as
per Income Tax Act. As a result, accounting profit and
income for taxation differs. The difference may be
permanent or temporary. Permanent Difference do not result
in Deferred Tax Asset/Liability. Temporary Difference
results in Deferred Tax Asset / Liability. All this
position can be clearly understood by examining the
following example.
For Example: Book Profit Before Depreciation as per Profit
and Loss A/c Rs.3 lacs, Depreciation as per Companies Act
Rs.1 lac. Depreciation allowable under Income Tax Act is
Rs.1.5 lacs.
In this case Book Profit after Depreciation comes to Rs.2
lacs (i.e Rs.3 lacs - 1 lac)
Income for the purpose of Income tax is Rs.1.5 lacs (i.e
Rs.3 lacs - 1.5 lacs)
Thus there is a difference between accounting/book profit
and Profit for Income tax purpose. In this connection, it
may need not be said the difference is due to difference in
Depreciation. This portion of depreciation is accounted for
in course of time. However, income tax is paid on income as
per the provisions of Income Tax Act. Now Income tax is
paid less for the current year. Therefore, you have to pay
tax on difference due to change in depreciation in later
period. So you have to create Deferred Tax Liability (DTL)
in current account period to nullify the effect on Book
Profit.
Reverse is the case of Deferred Tax Asset (DTA). One day or
the other, DTA or DTL will become Nil if there is no moment
in Fixed Assets.

Hope this answer clears the doubt to some extent.

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