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IND AS VS. IT ACT Reconciliation – When Accounting Profit Diverges From Taxable Income
1. INTRODUCTION: THE IND AS VS. IT ACT RECONCILIATION CHALLENGE
The Problem Every CFO Faces
Scenario:
You’re presenting quarterly financial results to the Board:
Finance Chief says:
- “Accounting profit (per Ind AS) is ₹100 crores”
- “Earnings per share: ₹50”
- “Dividend to shareholders: ₹30 crores”
Tax Head then says:
- “But taxable income is only ₹70 crores”
- “We’ll pay tax on ₹70 crores, not ₹100 crores”
- “Tax liability: ₹21 crores (30% of ₹70 crores), not ₹30 crores”
Board Director asks:
- “Why is there ₹30 crore difference?”
- “Is this a tax dodge?”
- “Is the profit real or artificial?”
This is the reconciliation challenge between Ind AS and the IT Act. It requires explaining the ₹30 crore gap in clear, documented terms.
Why This Matters
Regulatory Requirements:
- RBI (for banks), SEBI (for listed companies), statutory auditors all demand reconciliation
- Schedule 33 (Balance Sheet Schedule) in financial statements requires detailed reconciliation
- Missing reconciliation = Qualified audit opinion
Credibility:
- Investors need to understand if profit is “real” or inflated
- Banks rely on reconciliation for credit assessment
- Revenue authorities use reconciliation to detect aggressive tax planning
Strategic Tax Planning:
- Understanding reconciliation helps optimize tax without crossing into evasion
- Identifies opportunities to match accounting treatments with tax benefits
2. WHY IND AS PROFIT ≠ IT ACT (THE CORE DIVERGENCE)
The Fundamental Reason: Different Purposes
Ind AS (Accounting Standards):
- Purpose: Present true financial position to shareholders
- Principle: Conservative, prudent
- Approach: Match revenues with incurred costs (matching principle)
- Result: Realistic profit reflecting economic performance
IT Act (Tax Statute):
- Purpose: Calculate tax liability to government
- Principle: Policy-driven, incentive-based
- Approach: Statutory deductions, exemptions for policy goals
- Result: Tax income that may differ from economic profit
Seven Key Reasons for IND AS and IT Act Divergence
Reason 1: Depreciation Methods
Ind AS (Depreciation per useful life):
- Building: 40 years (2.5%/year)
- Plant & machinery: 10 years (10%/year)
- Computers: 3 years (33.33%/year)
IT Act (Accelerated depreciation):
- Building: 5% per year
- Plant & machinery: 15% per year (some assets 40%)
- Computers: 40% per year
Example:+
Equipment cost: ₹100 crores
Ind AS depreciation (Year 1): ₹10 crores (10% useful life)
IT Act depreciation (Year 1): ₹40 crores
────────────────────────────────────────
Divergence: ₹30 crores (IT Act more aggressive)
Impact on Profit:
- Accounting profit: ₹90 crores (after 10% depreciation)
- Taxable income: ₹60 crores (after 40% depreciation)
- Difference: ₹30 crores (temporary; reverses in later years)
Reason 2: Provisions for Uncertain Liabilities
Ind AS 37 (Provisions, Contingent Liabilities):
- Provision for gratuity (actuarially calculated)
- Provision for warranties (estimated)
- Provision for legal settlements (probable)
- All deducted from accounting profit if probable
IT Act (Section 37):
- Provisions allowed only if:
- Statutory obligation OR
- Specifically prescribed (e.g., 5% bad debt provision)
- Many provisions disallowed
Example:
Litigation Settlement (Gratuity Fund):
Ind AS provision: ₹10 crores (high probability of payout)
IT Act deduction: ₹0 (not yet crystallized)
────────────────────────────────────────
Impact: ₹10 crore divergence (permanent difference)
Reason 3: Bad Debt Provisions
Ind AS 9 (Financial Instruments):
- Expected credit loss model
- Provision based on probability-weighted outcomes
- Often 2-5% of receivables
IT Act (Section 36):
- Specific bad debt provision: 100% (only for actually bad debts)
- General bad debt provision: Limited to 5% (and only for certain types of companies)
Example:
Receivables: ₹100 crores
Ind AS bad debt provision: ₹3 crores (expected credit loss model)
IT Act bad debt provision: ₹2 crores (prescribed limit)
────────────────────────────────────────
Divergence: ₹1 crore (temporary; permanent if not actually bad)
Reason 4: Inventory Valuation
Ind AS 2 (Inventories):
- Lower of cost or net realizable value (NRV)
- Includes allocable production overheads
- Conservative approach
IT Act (Section 145A):
- Cost basis acceptable
- Limited overhead allocation
- More liberal than Ind AS
Example:
Inventory valuation (end-year):
Ind AS: ₹50 crores (conservative; low NRV for unsold items)
IT Act: ₹60 crores (cost basis; higher)
────────────────────────────────────────
Impact: ₹10 crore divergence (cost of goods sold differs)
Reason 5: Revenue Recognition Timing
Ind AS 15 (Revenue from Contracts):
- Revenue recognized when control transfers
- May not coincide with cash receipt
IT Act (Section 2(47)):
- Income on accrual/receivable basis
- Or cash basis (if permitted under Section 145)
- Different timing than Ind AS
Example:
Advance received from customer (multi-year service contract):
Ind AS: ₹0 revenue (control not yet transferred; deferred revenue)
IT Act: ₹100 crores (full amount on receipt, if on cash basis)
────────────────────────────────────────
Divergence: ₹100 crores (temporary; matches in later years)
Reason 6: Employee Benefits
Ind AS 19 (Employee Benefits):
- Actuarial gains/losses recognized
- Post-retirement benefits provisioned
- Comprehensive accrual
IT Act:
- Limited provisions allowed
- Actual payment or statutory obligation basis
- No actuarial gains/losses
Example:
Post-retirement medical benefits (actuarial study):
Ind AS: ₹5 crores provision
IT Act: ₹0 (not yet due/incurred)
────────────────────────────────────────
Impact: ₹5 crore permanent difference
Reason 7: Exemptions Under Section 10, 11, 12
Accounting Treatment:
- All income credited to P&L (gross basis)
- No segregation
Tax Treatment:
- Exempt income removed from taxable income (Section 10, 11, 12)
- But related expenses disallowed (Section 14A)
Example:
Dividend income: ₹5 crores (credited to P&L, accounted)
Interest on dividend portfolio loan: ₹2 crores (expensed in P&L)
────────────────────────────────────────
Ind AS profit: Includes both (₹5 – ₹2 net = ₹3 crore advantage)
IT Act taxable income: Excludes both (₹0 impact; per Section 14A)
Divergence: ₹3 crores (permanent difference)
3. RECONCILIATION MECHANISM: CONCEPTUAL FRAMEWORK
The Reconciliation Formula
ACCOUNTING PROFIT (Per Ind AS P&L)
± Adjustments for Differences
─────────────────────────────────
= TAXABLE INCOME (Per IT Act)
Types of Adjustments
Adjustment 1: Timing Differences (Temporary)
- Will reverse in future years
- Create deferred tax assets/liabilities
- Example: Depreciation, provisions
Adjustment 2: Permanent Differences
- Will NOT reverse
- No deferred tax implications
- Example: Exempt income, disallowed expenses
The Reconciliation Process: IND AS Vs. IT ACT (5 Steps)
Step 1: Start with Accounting Profit
Net Profit per Audited Ind AS P&L: ₹100 crores
Step 2: Identify All Differences
Difference 1: Depreciation Timing
Ind AS depreciation: ₹10 crores
IT Act depreciation: ₹40 crores
Add-back to profit: ₹30 crores (temporary)
Difference 2: Bad Debt Provision
Ind AS provision: ₹3 crores
IT Act provision: ₹2 crores
Add-back: ₹1 crore (temporary)
Difference 3: Exempt Dividend Income
Amount: ₹5 crores
Deduct from profit: (₹5 crores) (permanent)
Difference 4: Employee Gratuity Provision
Ind AS: ₹2 crores
IT Act: ₹0
Add-back: ₹2 crores (permanent)
Step 3: Classify Each Difference
TEMPORARY DIFFERENCES (Will reverse):
– Depreciation: ₹30 crores
– Bad Debt: ₹1 crore
– Subtotal: ₹31 crores
PERMANENT DIFFERENCES (Won’t reverse):
– Exempt Income: (₹5 crores)
– Gratuity: ₹2 crores
– Subtotal: (₹3 crores)
Step 4: Calculate Deferred Tax (Temporary Differences Only)
Temporary differences: ₹31 crores (net of removals)
Deferred tax rate: 30%
Deferred Tax Asset/Liability: ₹31 crores × 30% = ₹9.3 crores
(If temporary difference increases expenses/reduces income in future,
creates DTA; if increases income in future, creates DTL)
Step 5: Compute Taxable Income
Accounting Profit: ₹100 crores
Add: Temporary differences ₹31 crores
Add: Permanent differences (₹3 crores)
────────────────────────────────
TAXABLE INCOME: ₹128 crores
Tax @ 30%: ₹38.4 crores
4. SCHEDULE 33 (BALANCE SHEET SCHEDULE): THE FORMAL RECONCILIATION
What is Schedule 33?
Schedule 33 is a mandatory disclosure in the financial statements (Balance Sheet schedules) that reconciles:
- Profit per Ind AS
- Tax paid/payable
- Effective tax rate
Required by:
- Companies Act, 2013 (Schedule III)
- Ind AS 12 (Income Taxes)
- SEBI (for listed companies)
- RBI (for banks, with modifications)
Structure of Schedule 33
SCHEDULE 33: INCOME TAX RECONCILIATION
─────────────────────────────────────────────────────────
- Profit Before Tax (Per Audited P&L) ₹100 crores
- Less: Income Tax @ Standard Rate (30%) (₹30 crores)
────────────────────────────────
Expected Tax on Profit ₹30 crores
- Add/(Less): Tax Effect of Non-Deductible
Items:
- a) Provisions (Gratuity): ₹0.6 crores
- b) Penalties & Fines: ₹0.3 crores
- c) (Less) Exempt Income: (₹1.5 crores)
- d) (Less) Section 80 Deductions: (₹0.9 crores)
────────────────────────────────
Tax Effect of Timing/Permanent Diff: (₹0.5 crores)
- Less: Deferred Tax Movement (Ind AS 12): (₹2 crores)
────────────────────────────────
- TOTAL TAX PROVISION: ₹27.5 crores
- Effective Tax Rate: 27.5% / 100 = 27.5%
Components of Schedule 33 (Detailed)
Part A: Reconciliation of Effective Tax Rate
text
Profit Before Tax: ₹100 crores
Expected tax @ statutory rate (30%): ₹30 crores
Expected rate: 30%
Adjustments:
- Tax effect of non-deductible items:
– Disallowance u/s 40(a) (TDS not deducted) ₹0.5 cr tax effect
– Penalty provisions (not deductible) ₹0.3 cr tax effect
– Medical/health insurance (disallowed) ₹0.2 cr tax effect
- Tax effect of exemptions:
– HRA exemption (Section 10(13A)) (₹1 cr tax effect)
– Dividend income (Section 10(34)) (₹1.5 cr tax effect)
- Tax relief:
– Section 80C deductions (₹0.9 cr tax effect)
Net adjustment: (₹1.4 crores)
Total tax provision: ₹30 – ₹1.4 = ₹28.6 crores
Effective rate: 28.6%
Part B: Deferred Tax Asset/Liability Movement
DEFERRED TAX ASSET/LIABILITY SCHEDULE
─────────────────────────────────────
Opening Balance (DTL/(DTA)):
– Depreciation timing (DTL): ₹5 crores
– Provisions (DTA): (₹2 crores)
Net Opening DTA/(DTL): ₹3 crores
Deferred Tax Expense During Year:
– Additional depreciation (creates DTL): ₹1.5 crores
– Provision reduction (reduces DTA): (₹0.5 crores)
Net DT Expense: ₹1 crore
Closing Balance (DTL/(DTA)):
– Opening: ₹3 crores + Year movement: ₹1 cr = ₹4 crores
5. TEMPORARY DIFFERENCES: DEFINITION & EXAMPLES of IND AS and IT ACT
Definition
Temporary Difference: A difference between the book value of an asset/liability and its tax base, which will reverse in future periods.
Character: Will impact taxes in future years (creates deferred tax)
Examples of Temporary Differences: IND AS vs IT ACT
1. Depreciation
BALANCE SHEET (Ind AS):
Equipment Cost: ₹100 crores
Less: Accumulated Depreciation
(Straight-line, 5 years) (₹30 crores) [Year 3]
Net Book Value: ₹70 crores
TAX BASIS (IT Act):
Equipment Cost: ₹100 crores
Less: Tax Depreciation
(40% reducing balance) (₹48.4 crores) [Year 3]
Tax Base: ₹51.6 crores
TEMPORARY DIFFERENCE: ₹70 – ₹51.6 = ₹18.4 crores
Type: Taxable (future taxable income higher when reverses)
Deferred Tax Liability (DTL): ₹18.4 × 30% = ₹5.5 crores
Why Temporary? In Year 5 (fully depreciated under Ind AS) or Year 6 (fully depreciated under IT Act), the difference will reverse.
2. Provisions (Gratuity, Warranties)
BALANCE SHEET (Ind AS):
Provision for Gratuity: ₹10 crores (actuarial estimate)
TAX BASIS (IT Act):
Provision for Gratuity: ₹0 (not deductible until paid)
TEMPORARY DIFFERENCE: ₹10 crores
Type: Deductible (future deductions available)
Deferred Tax Asset (DTA): ₹10 × 30% = ₹3 crores
When reverses: Upon actual payment of gratuity, IT Act allows deduction
3. Bad Debt Provision
BALANCE SHEET (Ind AS 9):
ECL Provision on Receivables: ₹5 crores (probability-weighted)
TAX BASIS (IT Act Section 36):
Bad Debt Allowance: ₹2 crores (prescribed 5% limit)
TEMPORARY DIFFERENCE: ₹3 crores
Type: Deductible (excess available in future if debt actually bad)
Deferred Tax Asset (DTA): ₹3 × 30% = ₹0.9 crores
4. Revenue Recognition Timing
SCENARIO: Long-term Service Contract
Customer pays ₹100 crores upfront for 3-year service.
Ind AS 15 (Revenue Recognition):
Year 1: ₹30 crores revenue (service delivered 30%)
₹70 crores deferred revenue (liability)
IT Act (Cash Basis Election – Section 145):
Year 1: ₹100 crores income (full amount received)
TEMPORARY DIFFERENCE: ₹70 crores (Year 1)
Type: Taxable (future taxable income lower when revenue recognized)
Deferred Tax Liability (DTL): ₹70 × 30% = ₹21 crores (Year 1)
Future years: DTL reverses as revenue recognized.
6. PERMANENT DIFFERENCES: DEFINITION & PRACTICAL EXAMPLES OF IND AS and IT ACT
Definition
Permanent Difference: A difference that will NOT reverse in future periods. No deferred tax implications.
Character: Only affects current year (or will always be different)
Examples of Permanent Differences: IND AS vs IT ACT
1. Exempt Income
Dividend Income Received: ₹5 crores
Ind AS: Credited to P&L ₹5 crores (increases profit)
IT Act: Exempt (Section 10(34)) ₹0 (taxable income not increased)
PERMANENT DIFFERENCE: ₹5 crores (will never reverse)
Tax Effect: ₹5 × 30% = ₹1.5 crores tax benefit
Why Permanent? Dividend income will always be exempt; no future reversal.
2. Disallowed Expenses
Penalties Imposed: ₹2 crores
Ind AS: Expense in P&L ₹2 crores (reduces profit)
IT Act: Disallowed (Sec 40A) ₹0 (not deductible; disallowance u/s 40A)
PERMANENT DIFFERENCE: ₹2 crores
Tax Effect: ₹2 × 30% = ₹0.6 crores tax cost
Why Permanent? Penalties will never be deductible in future years.
3. Non-Deductible Expenses
Donations (Over Prescribed Limit): ₹3 crores
Ind AS: Expense in P&L ₹3 crores
IT Act: Disallowed (excess over limit) ₹0 deduction
PERMANENT DIFFERENCE: ₹3 crores
Tax Effect: ₹3 × 30% = ₹0.9 crore tax cost
4. Section 14A Disallowance (Exempt Income Expenses)
Interest on Loan for Exempt Dividend Portfolio: ₹1 crore
Ind AS: Expense in P&L ₹1 crore
IT Act: Disallowed (Section 14A) ₹0 (per Rule 8D)
PERMANENT DIFFERENCE: ₹1 crore
Tax Effect: ₹1 × 30% = ₹0.3 crore tax cost
5. Capital Gains (Differential Rates)
Long-Term Capital Gain (LTCG on Equity): ₹10 crores
Ind AS: Reported as Gain ₹10 crores
IT Act: Tax @ 20% (vs. 30% normal rate) ₹2 crores tax (not ₹3 crores)
PERMANENT DIFFERENCE: Effective rate difference
Tax Effect: Reduced tax of ₹1 crore
7. DEFERRED TAX ASSET/LIABILITY COMPUTATION
The DTA/DTL Formula
Deferred Tax = Temporary Difference × Tax Rate
If temporary difference:
– Creates future tax expense (asset reverses as expense) = DTA (Asset)
– Creates future income reversal (liability reverses as income) = DTL (Liability)
Practical Computation Example
Company X – Year-End Assessment:
ASSET/LIABILITY BOOK VALUE TAX BASE DIFFERENCE
──────────────────────────────────────────────────────────────────────
Equipment ₹70 crores ₹51.6 cr ₹18.4 cr (DTL)
Gratuity Provision ₹10 crores ₹0 ₹10 cr (DTA)
Warranty Provision ₹2 crores ₹0 ₹2 cr (DTA)
Bad Debt (Ind AS) ₹3 crores ₹1 crore ₹2 cr (DTA)
Deferred Revenue ₹15 crores ₹0 ₹15 cr (DTL)
──────────────────────────────────────────────────────────────────────
COMPUTATION:
Deferred Tax Liabilities (DTL):
– Equipment: ₹18.4 × 30% = ₹5.52 crores
– Deferred Revenue: ₹15 × 30% = ₹4.5 crores
Total DTL: ₹10.02 crores
Deferred Tax Assets (DTA):
– Gratuity: ₹10 × 30% = ₹3 crores
– Warranty: ₹2 × 30% = ₹0.6 crores
– Bad Debt: ₹2 × 30% = ₹0.6 crores
Total DTA: ₹4.2 crores
Net Deferred Tax Liability: ₹10.02 – ₹4.2 = ₹5.82 crores
Balance Sheet Impact
BALANCE SHEET (Non-Current Liabilities):
Deferred Tax Liability (Net): ₹5.82 crores
- ADJUSTMENTS UNDER SECTION 115JB (MAT)
How Reconciliation Changes for MAT
Scenario: Company subject to Minimum Alternate Tax (MAT) under Section 115JB.
Tax computation branches:
text
Path A: Normal Tax (Chapter IV)
– Taxable Income: ₹70 crores (after all deductions, exemptions)
– Normal Tax @ 30%: ₹21 crores
Path B: MAT (Chapter XII-B)
– Book Profit: ₹90 crores (after Explanation 1 adjustments)
– MAT @ 15%: ₹13.5 crores
Tax Payable: Higher of ₹21 crores (normal) or ₹13.5 crores (MAT)
= ₹21 crores
Reconciliation Becomes Multi-Tiered
STEP 1: Accounting to Normal Taxable Income
(Temp + Permanent differences)
STEP 2: Accounting to Book Profit (Section 115JB)
(Different set of adjustments per Explanation 1)
STEP 3: Determine which tax path is higher
Adjustments Unique to Book Profit (Section 115JB)
Net Profit Per Ind AS P&L: ₹100 crores
Add/Deduct (Explanation 1 to Section 115JB):
- Income Tax Paid/Payable: +₹20 crores
- Reserves Created: +₹10 crores
- Depreciation (per books): +₹15 crores
- Less: Depreciation (IT Act): -₹40 crores
- Less: Exempt Income: -₹5 crores
- Add: Expenses for Exempt Income: +₹1 crore
────────────────────────────────────────────────
Book Profit for MAT: ₹96 crores
MAT @ 15%: ₹14.4 crores
- RECONCILIATION BY INDUSTRY: CASE STUDIES
Case Study 1: Manufacturing Company
Company Profile: ABC Machinery Ltd. (mid-size manufacturer)
Income Components:
Sales Revenue: ₹500 crores
Other Income (interest): ₹5 crores
Total Income: ₹505 crores
Key Divergence Items: IND AS VS. IT ACT
| ITEM | IND AS | IT ACT | DIFF | TYPE |
| Depreciation | ₹30 cr | ₹75 cr | ₹45 cr | Temporary |
| Gratuity Prov. | ₹5 cr | ₹0 | ₹5 cr | Temporary |
| Bad Debt | ₹3 cr | ₹1 cr | ₹2 cr | Temporary |
| Warranty Prov. | ₹2 cr | ₹0 | ₹2 cr | Temporary |
| Excise Duty | ₹10 cr | ₹0 | ₹10 cr | Permanent |
Reconciliation:
Accounting Profit: ₹100 crores
Add: Temporary Differences ₹54 crores
Less: Permanent (Excise): (₹10 crores)
────────────────────────────────
Adjusted Profit: ₹144 crores
Less: Deductions (80C, etc.): (₹10 crores)
────────────────────────────────
TAXABLE INCOME: ₹134 crores
Tax @ 30%: ₹40.2 crores
Effective Rate on Acct. Prof.: 40.2% / 100 = 40.2%
Deferred Tax Liability: ₹54 × 30% = ₹16.2 crores
Schedule 33 Presentation:
Profit Before Tax: ₹100 crores
Expected Tax @ 30%: ₹30 crores
Tax effect of:
– Depreciation difference: ₹13.5 crores (expense)
– Provisions difference: ₹2.1 crores (expense)
– Excise duty (permanent): (₹3 crores) (benefit)
Net adjustment: ₹12.6 crores
Total Tax: ₹42.6 crores
Effective Rate: 42.6%
Case Study 2: Software/IT Services Company
Company Profile: XYZ Software Ltd. (IT services company)
Income & Expenses:
Service Revenue (Accrual): ₹200 crores
Less: Employee Benefits: ₹60 crores
Operating Expenses: ₹30 crores
────────────────────────────────
Accounting Profit: ₹110 crores
Key Divergence Items: IND AS VS. IT ACT
| ITEM | IND AS | IT ACT | DIFF | TYPE |
| Deferred Revenue (cash upfront) | -₹20 cr income | -₹0 income | ₹20 cr | Temporary |
| Stock Options (employee) | ₹8 cr expense | ₹2 cr | ₹6 cr | Temporary |
| Gratuity/Leave | ₹10 cr prov. | ₹3 cr actual | ₹7 cr | Temp+Perm |
| Patent Depreciation | ₹2 cr Amort. (over 5 years) | ₹0 (IT doesn’t allow) | ₹2 cr | Permanent |
Reconciliation:
Accounting Profit: ₹110 crores
Add: Deferred Revenue ₹20 crores (temporary)
Add: Stock Options ₹6 crores (temporary)
Add: Gratuity Excess ₹4 crores (temporary + perm mix)
Add: Patent Amortization ₹2 crores (permanent)
────────────────────────────────
Adjusted Total: ₹142 crores
Less: Section 80IC Deduction (₹40 crores) (for IT services)
────────────────────────────────
TAXABLE INCOME: ₹102 crores
Tax @ 30% (or 29.12% with cess): ₹30.6 crores
Deferred Tax:
Temporary Differences: ₹30 crores
DTA/DTL @ 30%: ₹9 crores (net)
Case Study 3: Financial Services (Bank)
Company Profile: ABC Bank Ltd. (RBI-regulated)
Special Considerations:
Banks have unique reconciliation due to:
- RBI norms for provision coverage (more than 5% prescribed by RBI)
- IT Act limit (5% for general provision)
- Different depreciation (buildings 10% vs. IT Act 5%)
- Ind AS 109 ECL models vs. RBI norms
Reconciliation (Illustrative):
Accounting Profit (Per Audited Statements): ₹1000 crores
Key Reconciling Items:
- Loan Loss Provision:
Ind AS 109 (ECL model): ₹150 crores
IT Act (RBI + Prescribed 5%): ₹100 crores
Add-back for Tax: ₹50 crores
- Depreciation (Buildings):
Ind AS (3-5%): ₹20 crores
IT Act (5%): ₹25 crores
Less for Tax: (₹5 crores)
- Interest Income Recognition:
Accrual (Ind AS): ₹200 crores
Cash (if elected under IT Act): ₹180 crores
Add-back: ₹20 crores
────────────────────────────
Adjusted Income: ₹1065 crores
Less: DRP Deductions: (₹50 crores)
────────────────────────────
TAXABLE INCOME: ₹1015 crores
Tax @ 30%: ₹304.5 crores
10. COMMON RECONCILIATION ERRORS & CORRECTIONS
Error 1: Forgetting to Reverse Book Adjustments
Mistake:
Adding provision in Year 1: ₹10 crores
(Provision created; expense recognized)
Year 2: When provision is reversed or payment made
❌ WRONG: Forget to reverse the DTA
DTA remains ₹3 crores
(Tax benefit double-counted in future)
✅ CORRECT: Reverse the DTA in Year 2
Record tax expense for DTA reversal
DTA reduced to ₹0 (provision fully paid/reversed)
Error 2: Confusing Gross vs. Net Deferred Tax
Mistake:
Multiple DTA items:
– Gratuity: ₹10 crores × 30% = ₹3 crores DTA
– Bad Debt: ₹5 crores × 30% = ₹1.5 crores DTA
– Warranty: ₹3 crores × 30% = ₹0.9 crores DTA
❌ WRONG: Set off against DTL immediately
Report net DTA
(Violates matching principle)
✅ CORRECT: Classify by type:
– Recoverable within 12 months: Current DTA
– Recoverable after 12 months: Non-current DTA
– Separately classify DTL (Current/Non-current)
– Set-off only per IAS 12 rules
Error 3: Using Wrong Tax Rate
Mistake:
Company subject to MAT (18.5%) in current year
But normal tax rate: 30%
Computing DTA:
❌ WRONG: Using 18.5% (current year rate)
DTA = ₹10 crores × 18.5% = ₹1.85 crores
✅ CORRECT: Using rate at which DTA will be recovered
If future years: Normal rate 30%
If reversible in MAT year: 18.5%
Generally assume: 30% (longterm rate)
DTA = ₹10 crores × 30% = ₹3 crores
Error 4: Forgetting About Carve-Outs in Section 115JB
Mistake:
Company with exempt income:
– Dividend: ₹5 crores (exempt under Section 10(34))
– Interest on dividend loan: ₹1 crore (per Section 14A, disallowed)
❌ WRONG: For book profit, adding back Rule 8D disallowance
(Violates Vireet Investments principle)
Results in inflated book profit
✅ CORRECT: Only actual P&L debits relating to exempt income
added back (per Explanation 1(f) of Section 115JB)
Document Vireet Investments precedent
Error 5: Misclassifying Current vs. Non-Current
Mistake:
Deferred Tax Asset: ₹5 crores
Expected to reverse: In 3 years
❌ WRONG: Classify as Current Asset
(Within 12 months to realization)
✅ CORRECT: Classify as Non-Current Asset
(Expected recovery beyond 12 months)
Separate disclosure in Balance Sheet
11. DOCUMENTATION & COMPLIANCE
Required Reconciliation Documentation
1. Tax Audit Requirements (Section 44AB)
Form 10B (Tax Audit Report) Requires:
Section 10(13): “Whether the books of account and other records
have been maintained and produced as required by law?”
Schedule to Form 10B: Must attach reconciliation schedule showing:
– Accounting profit (per audited statements)
– Adjustments for differences
– Taxable income (per tax return)
2. Schedule 33 Compliance
Mandated by:
- Ind AS 12 (Income Taxes)
- Companies Act, 2013 (Schedule III)
- SEBI listing rules
Must Disclose:
- a) Effective tax rate (ETR) reconciliation
- b) Deferred tax assets/liabilities
- c) Movement in DTA/DTL
- d) Any valuation allowance on DTA
- e) Tax rate changes’ impact
3. Income Tax Return (ITR) Disclosure
Schedule IT-U (Reconciliation Schedule – Optional but Best Practice):
Reported in ITR Schedule IT-U:
Accounting Profit: ₹100 crores
Add: Depreciation Difference ₹30 crores
Less: Exempt Income (₹5 crores)
────────────────────────────
Taxable Income: ₹125 crores
Professional Standards
Auditor’s Checklist (Per SA 700 – Forming an Opinion)
External Auditor must verify:
☐ Reconciliation mathematically accurate
☐ All material differences identified
☐ Proper classification (temporary vs. permanent)
☐ Deferred tax computation correct
☐ Schedule 33 disclosure complete
☐ Effective tax rate reasonable
☐ Footnotes explain any anomalies
☐ Consistency with prior year
☐ Compliance with Ind AS 12
☐ Cross-referenced to tax return
Internal Controls
Best Practice Procedures:
- MONTHLY:
– Reconcile preliminary profit (GL) to tax computation
– Identify new differences immediately
- QUARTERLY:
– Detailed DTA/DTL movement analysis
– Recompute deferred tax position
- YEAR-END:
– Full reconciliation schedule prepared
– External auditor review
– Tax advisor sign-off
– CFO/Audit Committee approval
- POST-ASSESSMENT:
– Reconciliation updated for any AO adjustments
– Deferred tax recalculated if income changes
12. CONCLUSION: THE RECONCILIATION PHILOSOPHY
Why Reconciliation Matters Beyond Compliance
- Stakeholder Communication:
- Investors understand: Profit is real, not accounting manipulation
- Creditors see: Tax liability accurately reflected
- Regulators confirm: No aggressive tax avoidance
- Internal Management:
- CFO identifies: Tax planning opportunities within compliance
- Finance team understands: Why taxable income differs from accounting profit
- Board can explain: Effective tax rate to analysts
- Tax Planning:
- Deferred tax assets: Can be monetized through loss carryforwards
- Permanent differences: Shape overall tax strategy
- Temporary differences: Guide investment decisions (depreciation methods, etc.)
The Reconciliation Bridge: Ind AS vs. IT Act
ACCOUNTING WORLD │ TAX WORLD
(Ind AS/GAAP) │ (IT Act 1961)
│
Profit Focus │ Income Focus
Investor Interest │ Government Interest
Conservative │ Policy-Driven
Matching Principle │ Statutory Rules
│
╌╌╌╌╌ RECONCILIATION SCHEDULE ╌╌╌╌╌
Bridges the Gap Through:
– Clear documentation
– Professional analysis
– Compliance with standards
– Transparency
Key Principles to Remember
- All Differences Must Be Explained:
- Every line item in reconciliation should trace to a specific accounting or tax rule
- Classify Correctly:
- Temporary differences → Deferred tax (balance sheet impact)
- Permanent differences → Current tax (no future reversal)
- Use Appropriate Tax Rate:
- Generally: 30% (current statutory rate) for DTA/DTL
- Exception: If company subject to MAT or special rate, consider that
- Document Comprehensively:
- Keep reconciliation schedules with tax return
- Reference to specific provisions and judicial precedents
- Update when facts change (especially post-audit)
- Reconciliation is Iterative:
- Not one-time document prepared at year-end
- Updated continuously as audits progress
- Refined post assessment if AO makes adjustments
