Case: Ganga Retail Ltd prepares quarterly interim financial reports under AS 25. It expects to earn ₹40,00,000 for the year, evenly at ₹10,00,000 per quarter. Tax is levied at 20% on the first ₹10,00,000 of annual income and 30% on the balance. The income tax expense to be recognised in the first quarter is:

Correct answer: A) ₹2,75,000

Explanation

AS 25 requires interim income tax to be measured using the weighted average annual effective tax rate expected for the full year. Expected annual tax = 10,00,000 x 20% + 30,00,000 x 30% = 11,00,000; effective rate = 11,00,000 / 40,00,000 = 27.5%. Q1 tax = 10,00,000 x 27.5% = ₹2,75,000. Applying the 20% slab to Q1 alone would understate tax because annual income will cross into the 30% slab.