Given below are two statements:
Statement I: Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income.
Statement II: Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries, i.e., they are neither actual liability nor actual asset.
In the light of the above statements, choose the correct answer from the options given below:

Correct option is A

Statement I: True

Deferred Tax Liabilities (DTL) arise due to temporary differences between accounting income and taxable income. These differences occur because the treatment of certain revenues and expenses differs under accounting standards and tax laws.

• When accounting income exceeds taxable income, the company will pay higher tax in the future, resulting in a deferred tax liability.
• Example: Depreciation as per Income Tax Act might be higher than depreciation as per accounting standards, leading to a lower taxable income initially and higher taxable income in subsequent years.

Statement II: True

Deferred Tax Liabilities (DTL) and Deferred Tax Assets (DTA) are notional entries recorded in the books.

• They represent future tax consequences of current transactions but do not indicate actual cash outflows (for liabilities) or inflows (for assets).
• These are created as per the matching principle of accounting, ensuring that expenses and revenues are recognized in the correct periods.

Thus, both statements are correct, making (a) the correct answer.

Information Booster:

Deferred Tax Liabilities (DTL):

• Represent future tax outflows due to temporary differences.
• Arise when taxable income is lower than accounting income.
• Common causes:
  1. Higher depreciation claimed under tax laws.
  2. Revenue recognized in books but deferred for tax purposes (e.g., installment sales).

Deferred Tax Assets (DTA):

• Represent future tax savings due to temporary differences.
• Arise when taxable income is higher than accounting income.
• Common causes:
  1. Expenses recognized in books but disallowed for tax purposes (e.g., provision for bad debts).
  2. Carryforward of losses to offset future taxable profits.

These entries are governed by Ind AS 12 (Income Taxes) or AS 22 (Accounting for Taxes on Income).