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Amber Ltd bought a building for ₹20,00,000 (life 4 years, nil scrap). Accounting depreciation is straight-line; tax depreciation is 50% in year 1, 50% in year 2 and nil thereafter. Tax rate 30%. Why does a deferred tax liability (rather than an asset) arise in the early years?
AAccounting depreciation exceeds tax depreciation in the early years
BThe tax rate is expected to fall in the later years
CThe building has no residual value at the end of its life
DTax depreciation exceeds accounting depreciation, lowering current taxable income
Answer & Solution
Correct answer: D. Tax depreciation exceeds accounting depreciation, lowering current taxable income
1. In years 1 and 2 tax depreciation (₹10,00,000) is higher than accounting depreciation (₹5,00,000).
2. So taxable income is lower than accounting income now, deferring tax to later years.
3. A liability for that future tax is created, i.e. a deferred tax liability.
_Source: ICAI BoS CA Intermediate Paper 1 (Advanced Accounting), Sept 2025 — Q.1(a), AS 22 Accounting for Taxes on Income._
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