Case: Accounting profit of Mahi Chemicals Ltd for the year is ₹50,00,000. This is after charging penalties of ₹3,00,000 (never deductible for tax) and a provision for doubtful debts of ₹2,00,000 (deductible only when the debts are written off). Tax depreciation exceeds book depreciation by ₹6,00,000. Tax rate is 25%, and there is reasonable certainty of sufficient future taxable income to realise any deferred tax asset. Total tax expense in the statement of profit and loss under AS 22 is:

Correct answer: D) ₹13,25,000

Explanation

Taxable income = 50,00,000 + 3,00,000 + 2,00,000 - 6,00,000 = 49,00,000; current tax = 49,00,000 x 25% = 12,25,000. Penalties are a permanent difference, so no deferred tax arises on them. Excess tax depreciation gives a deferred tax liability of 6,00,000 x 25% = 1,50,000, and the provision for doubtful debts gives a deferred tax asset of 2,00,000 x 25% = 50,000 (recognised because reasonable certainty exists), so net deferred tax expense = 1,00,000. Total tax expense = 12,25,000 + 1,00,000 = ₹13,25,000, which equals (50,00,000 + 3,00,000) x 25%. Ignoring the deferred tax asset would give ₹13,75,000.