CA Inter Paper 3: Taxation common mistakes
CA Inter Paper 3: Taxation · Understand the traps and how to avoid them.
Applying the slab rates directly to total income without first deducting Chapter VI-A deductions, then reporting a tax figure that is too high (or, conversely, deducting Chapter VI-A from the wrong base).
Candidates memorise the sequence 'Gross Total Income minus deductions equals Total Income' but under exam pressure compute tax on GTI, or they deduct Chapter VI-A items before setting off brought-forward losses, which is the wrong order. The assessment year vs previous year labels also get swapped, so the wrong Finance Act's rates are used.
What to do instead
Write the computation in a fixed vertical format on every attempt: income under each of the five heads, then inter-head set-off, then brought-forward losses under section 72/73/74 as permitted, giving GTI, then Chapter VI-A, giving Total Income, then apply the rates for the correct assessment year, then rebate under section 87A, then relief, then cess. Label the previous year and assessment year at the top of the answer before touching any figure.
Treating a foreign-company employee or a person with a foreign assignment as automatically non-resident, or counting only the days of physical presence in India and ignoring the 120-day/182-day deemed-residence rule and the 120-day rule for citizens leaving for employment abroad or on a ship.
The basic-condition tests under section 6 are remembered as '182 days' only. Candidates forget the second basic condition (60 days plus 365 days in the preceding four years), the 120-day and 182-day variations for Indian citizens and PIOs, and the deemed-residence provision for Indian citizens with Indian-source income above the threshold who are not liable to tax elsewhere. The result is that the scope of total income under section 5 is then applied on the wrong status.
What to do instead
Build a decision table before answering: (i) 182 days or more in the previous year; (ii) 60 days or more plus 365 days in the four preceding years; (iii) the 120-day and 182-day relaxations for citizens leaving for employment or crew; (iv) deemed resident under section 6(1A). Then test the resident against the two additional conditions for ROR versus RNOR. Only after fixing the status should you classify each income item as Indian or foreign source and as received or accrued.
Claiming the standard deduction under section 16(ia) against pension or salary income that is not eligible, or allowing the full deduction against family pension, and forgetting the section 16(ia) cap and the treatment of arrears.
The standard deduction is applied mechanically to every salary-like receipt. Candidates miss that it is capped at a fixed amount and limited to actual salary, that family pension is taxed under Other Sources with a separate one-third deduction subject to a cap, and that gratuity, leave encashment and commuted pension have their own exemption limits and conditions. Arrears relief under section 89 is then also forgotten.
What to do instead
For each salary item, state the section under which it is taxed and the exemption or deduction provision separately: salary, allowances with their exemption tests, perquisites valued per rules, retirement benefits with their individual caps, then section 16 deductions in the order standard deduction, entertainment allowance (government only), professional tax. Keep family pension out of the Salaries head entirely and apply the Other Sources deduction instead.
Computing annual value of a let-out house property as rent received minus municipal taxes only, omitting the 30 per cent standard deduction, or deducting interest on a self-occupied property beyond the statutory ceiling and against the wrong head.
The gross annual value, municipal taxes and net annual value sequence is confused with the deduction stage. Candidates also forget that municipal taxes are deductible only if borne by the owner and actually paid, that the 30 per cent deduction is on net annual value and not on rent, and that the interest ceiling for a self-occupied house and the pre-construction interest in five instalments are separate rules. Unrealised rent and vacancy allowance are skipped.
What to do instead
Follow the statutory ladder for each property in a table: actual rent versus reasonable expected rent, choose GAV, deduct municipal taxes paid by owner to get NAV, deduct 30 per cent of NAV, deduct interest on borrowed capital with the pre-construction portion spread over five years, giving income or loss from house property. Apply the self-occupied ceiling and the overall set-off limit for house property loss separately, and show the loss carried forward correctly.
Treating every receipt in a business as revenue income, or every asset sale as capital gain, without applying the tests, and then using the wrong cost base (indexed versus non-indexed) or the wrong holding period for the asset class.
The line between revenue and capital, and between short-term and long-term, is decided by feel rather than by the statutory tests. Candidates forget that listed securities and units have a different long-term threshold from unlisted shares and immovable property, that indexation is not available for certain transfers, that section 45(2) converts conversion into stock-in-trade into a deemed transfer, and that depreciation-recaptured amounts go to business income under section 50 rather than capital gains.
What to do instead
For each transaction, answer four questions in writing: is it a transfer under section 2(47); is the asset a capital asset and excluded by any of the exclusions; what is the holding period against the specific threshold for that asset class; and which cost base applies. Then compute full value of consideration, less expenditure on transfer, less cost of acquisition and improvement as adjusted, and apply the exemptions under sections 54, 54B, 54D, 54EC, 54F with their conditions and time limits. Handle section 50 separately before touching capital gains.
Setting off losses against income of a different head or against a different assessment year without checking the carry-forward conditions, and ignoring the restrictions on speculative business losses and on unabsorbed depreciation.
Inter-head set-off and carry-forward are treated as the same operation. Candidates do not distinguish the current-year inter-head set-off from the carry-forward rules, forget that speculative losses set off only against speculative gains, that business loss carry-forward requires a return filed within the due date under section 139(1), that house property loss carry-forward is capped per year, and that unabsorbed depreciation has no such time limit.
What to do instead
Maintain two separate columns, current-year set-off and carry-forward, and for each loss record the section, the permitted set-off head, the number of years and the return-filing condition. Before netting anything, ask whether the loss is speculative, whether it is from a specified business, and whether it is house property, business or capital. Show the return-filing condition explicitly where carry-forward depends on it.
Charging GST on the wrong value because the transaction value is accepted without checking whether the parties are related or whether the price is influenced, and forgetting inclusions such as packing, freight, interest on delayed payment and the subsidy or discount adjustments.
Section 15 looks simple, so candidates stop at transaction value. They miss that related-party transactions require the valuation rules, that discounts must be established in the agreement or linked to specific invoices to be excluded, that post-supply discounts need a credit note, and that the inclusion and exclusion lists are exhaustive rather than illustrative.
What to do instead
For every supply, first confirm the parties are unrelated and the price is not influenced, then apply section 15 in order: transaction value, add the specified inclusions, subtract discounts only where the conditions are met, and if transaction value fails, move to the valuation rules and state which rule and why. Show the GST rate applied and the computation of tax with the correct rounding.
Claiming input tax credit on blocked items or on invoices that do not meet the conditions, and not reversing credit for non-payment within 180 days, exempt supplies or the common credit apportionment.
Candidates treat any tax shown on a purchase invoice as creditable. They forget the block under section 17(5) for motor vehicles, food and beverages, club membership and works contract for immovable property, the requirement of tax invoice, receipt of goods and payment to the supplier, the 180-day payment rule for reverse-charge-free supplies, and the rule 42 and 43 apportionment of common credit.
What to do instead
Test each credit against a checklist: is the supply used in the course or furtherance of business, is it blocked by section 17(5), does the document and payment satisfy section 16(2), is the supplier compliant, and is any part attributable to exempt supplies. Compute the common credit reversal under rule 42 or 43 where applicable and show the electronic credit ledger position and the order of utilisation of IGST, CGST and SGST credit.
Determining place of supply by the location of the supplier or by where the contract is signed rather than by the statutory rules, and then applying CGST and SGST where IGST was due, or missing the time of supply for reverse-charge and continuous supplies.
Place of supply is a set of situation-specific rules for goods and for services, with separate treatment for immovable property, events, transportation, banking and online services. Candidates apply one general rule everywhere and then also confuse the time of supply rules, especially for reverse charge and for supply under continuous contract, where the earlier of invoice, payment or the statutory date governs.
What to do instead
Classify the supply first: goods or services, domestic or cross-border, and the specific situation. Then apply the matching place-of-supply provision and state the result. Determine time of supply separately for forward charge, reverse charge and continuous supply, and only then decide the tax head. Where the supplier and place of supply are in different states, IGST follows automatically.
In integrated case studies, answering the income-tax and GST parts in isolation and ignoring the cross-effects, such as treating a GST liability or an ITC as an income-tax deduction without checking the section 43B or section 43B(1)(h) conditions, or ignoring the interplay of turnover thresholds with registration and with presumptive taxation.
Case studies reward candidates who read the whole fact pattern, but under time pressure the tendency is to split the case into two independent questions. Facts given once, such as aggregate turnover, related-party status or the date of filing the return, are then used in only one part. The cash-basis versus accrual-basis distinction for GST payments and the due-date condition for deductions are the usual casualties.
What to do instead
Read the full case once and extract a fact sheet: entity type, turnover, registration status, dates of invoices, payments and returns, and related-party relationships. Then run a checklist that links the two laws, covering section 43B for statutory dues, TDS and TCS implications, ITC eligibility on the income-tax side, and turnover thresholds for registration and presumptive schemes. Answer each sub-question with the section reference and show how the shared fact was used.