The financial statements of R Limited are prepared as on 31st March of every year. The applicable rate of income tax is 35%. The following…

CA Final · Financial Reporting · PYQS · January 2026
The financial statements of R Limited are prepared as on 31st March of every year. The applicable rate of income tax is 35%. The following information of R Limited is for the financial year ended 31st March, 2025: Situation 1: R Limited holds 35% equity shares in J Limited which was acquired prior to 1st April 2023 for 40.00 crores. The shareholding gives R Limited a significant influence over J Limited but not control. Hence R Limited recognizes its interest in J Limited as per the equity method. As per the equity method, the carrying value of R Limited's investment in J Limited was - 70.00 crores as on 31st March 2024 and - 80.00 crores as on 31st March 2025. In the income tax jurisdiction in which R Limited operates, profits recognized under the equity method are taxed if and when they are distributed as a dividend or the relevant investment is disposed off by the investor. Situation 2: R Limited measures its Corporate Office Building by applying the revaluation method. The building is revalued every year. On 31st March, 2024, carrying value of the building (after revaluation) was - 50.00 crores and its tax base was - 30.00 crores. During the year ended 31st March 2025, R Limited charged depreciation of 2.50 crores in its statement of profit and loss but claimed a tax deduction for tax depreciation of 1.80 crores. On 31st March 2025, the building was revalued to 60.00 crores. In the tax jurisdiction in which R Limited operates, revaluation of property, plant and equipment does not affect taxable income at the time of revaluation. On the basis of the above information, you are required, for both the situations of R Limited, to compute as per applicable Ind AS as at for the financial year ended 31st March 2025: the deferred tax asset / liability;the charge or credit relating to deferred tax to statement of profit and loss and other comprehensive income.

Suggested Answer and Working Notes:

(A) Deferred Tax Liability as at 31st March, 2025 Situation 1: Investment in J Ltd: Carrying Amount = 80.00 Cr Tax base = 40.00 Cr (Purchase cost) Temporary Difference = 40.00 Cr Since carrying amount is higher than the tax base, the temporary difference is recognized as a taxable temporary difference. Using the tax rate of 35%, a deferred tax liability of 14.00 Cr is recognized: Situation 2: Corporate office building Carrying Amount = 60 Cr (Revalued amount on 31st March, 2025) Tax base = 28.20 Cr (30.00 Cr – 1.80 Cr) Temporary Difference = 31.80 Cr Since carrying amount is higher than the tax base, the temporary difference is recognized as a taxable temporary difference. Using the tax rate of 35%, a deferred tax liability of 11.13 Cr is created. Total Deferred Tax Liability = 14.00 Cr +11.13 Cr = 25.13 Cr (B) Charge to Statement of Profit and Loss for the year ended 31st March 2025: Situation 1: Investment in J Ltd. Particulars Carrying amount Tax Base Temporary Difference ₹ Cr Opening Balance (1st April, 2024) 70 Cr 40 Cr 30 Cr Closing Balance (31st March, 2025) 80 Cr 40 Cr 40 Cr Net Change 10 Cr Increase in Deferred Tax Liability (35% tax rate) charged to Profit and Loss Account 3.50 Cr Considering the increase in the value of investment, the increase in deferred tax liability would be charged to Profit or loss account as under: Tax expense (Statement of Profit and Loss) Dr - 3.50 Cr To Deferred Tax Liability - 3.50 Cr (Being increase in deferred tax liability recognized) Situation 2: Corporate Office Building: The deferred tax liability at 31st March 2024 is 7.00 Cr (35% x {50Cr – 30Cr}). At 31st March 2025, prior to revaluation, the carrying amount of the property is 47.50 Cr (50 Cr. – 2.50 Cr) and its tax base is 28.20 Cr (30Cr - 1.80 Cr). The deferred tax liability at this point is 6.755 Cr (35% x {47.50 Cr - 28.20 Cr}). The reduction in this liability is 0.245 Cr (₹ 7.00 Cr - 6.755 Cr). This would be credited to income tax expense in arriving at profit or loss. Post revaluation, the carrying value of the building becomes - 60.00 Cr and the tax base stays the same. Therefore, the new deferred tax liability is 11.13 Cr (35% x (60Cr - 28.20 Cr)). The increase in the deferred tax liability of 4.375 Cr (₹ 11.13 Cr - 6.755 Cr) is charged to other comprehensive income on account of defer tax on revaluation gain.

Topics: Ind AS 12

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