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B Limited will recognise a deferred tax liability of Rs. 2,700 on taxable temporary difference relating to

accelerated depreciation of Rs. 9,000 @ 30%.

● However, it will limit and recognise a deferred tax asset on reversal of deductible temporary difference
relating to preliminary expenses reversing up to year ending March 31, 20X4 amounting to Rs. 900 (Rs.

3,000 @ 30%).
● No deferred tax asset shall be recognized for the reversal of deductible temporary difference for the

year ending on March 31, 20X5 as there are no taxable temporary differences. Further, the outlook is
also a loss.

● However, if there are tax planning opportunities that could be identified for the year ending on March
31, 20X5 deferred tax asset on the remainder of Rs. 1,000 (Rs. 4,000 – Rs. 3,000) of deductible

temporary difference could be recognised at the 30% tax rate.

Q10 (October 20 – 4 Marks)

What is the tax effect of the sale of property, plant, and equipment, considering the block of assets approach
followed in the Income-tax Act, 1961?
A company has a block of assets with a written down value of Rs. 1,00,000 on April 1, 2018 for tax purposes.
The book value of the assets for accounting purposes is also Rs. 1,00,000. The assets are depreciated on a
written down value basis at 25 percent per annum for both accounting and tax purposes. Of the entire block,

assets costing Rs. 5,000 on April 1, 2018, were sold for Rs. 10,000 on March 31, 2020. Compute the deferred
tax asset/liability assuming tax rate of 40 per cent.
SOLUTION

In the case of a company, the following computations will be made:

2018-2019

In this year, depreciation for both accounting and taxation purposes would be Rs. 25,000 (25 percent of Rs.
1,00,000). Accordingly, no timing difference arises on this account.

2019-2020

Depreciation for the year would be Rs. 18,750 (25 percent of Rs. 75,000) as per the books of account,
while for tax purposes it would be Rs. 16,250 as sale proceeds of Rs. 10,000 would be reduced from the block
of assets prior to the computation of depreciation. Accordingly, the following timing differences arise:

● Depreciation for tax purposes is Rs. 16,250 and for accounting purposes Rs. 18,750 giving rise to a timing
difference of Rs. 2,500.
● Profit on sale of property, plant and equipment amounting to Rs. 7,188 (Rs. 10,000 - Rs. 2,812 being the

WDV of the asset as on 31st March, 2020) is recognized for accounting purposes. However, for tax
purposes this income is not considered. This will result in a timing difference of Rs. 7,188.
The net timing difference would be Rs. 4,688 (Rs. 7,188 – Rs.2,500) by which the accounting income would
exceed the taxable income, thus requiring creation of a deferred tax liability of Rs.1,875 (4,688 X 0.4).

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