CA Paras Mehra

Introduction

Love it or hate it but you cannot ignore it. Income tax is easy if you understood it well otherwise it is the most complex subject you will ever see. Once the great scientist Albert Einstein said: “the hardest thing in the world to understand is the income tax.”

But you have all the resources to know and learn this beautiful subject. However, from my practical experience, students are following a trend which is created by them only. This is leading to your downfall. I am not explaining to you how to clear CA exam, but how to learn something. I am talking about the conceptual understanding.

Income Tax Mistakes

So out of many in this article, I want to concentrate only on four psychological mistakes you should avoid while preparing for income tax;

1. Not reading the Section Properly: Income tax is the only subject where a single word can change the whole interpretation of the section. While you are reading the section, make sure you mark every single word correctly. Don’t just go through the section.

Let me give you a practical example: Most of us have read the section 44AD of Income-tax Act, 1961 where 8% of the total revenue is treated as your presumptive income.

I was explaining the importance of section 44AD to the group of students, and then a student asked me a question:

“Sir, thank you for your time, but I have doubt, in my mind. Suppose, my total revenue of 50 Lakh and my real earning is around 15 Lakh, but as per section 44AD, only 8% of the revenue, i.e. 8% of 50 lakh is 4,00,000 will be my deemed income. Sir, so the difference between my real and deemed income is 11 Lakh. So can an AO, in future question me on this difference and levy penalty for not disclosing right income?”

Immediately upon listening to the question, I asked him that how many times you have read the section 44AD. He said I don’t remember but many times.

Then I told him, to read the section again with me and you will get the answer. So, I opened the book and started reading the section 44AD as;

“Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession”.

Then I put an emphasis on a line bold and underlined above. Then I told him, that even if your actual earning is more than the deeming income, but you choose to pay tax on your deemed income then it is your right which is conferred by section 44AD. Further, you are under no obligation to pay tax on your real income as to pay tax on deemed income is the benefit given by the lawmaker to the assessee.

Point to Learn

Hence, always read the section carefully. Assume yourself as a consultant and think practically about the solutions the country will seek your expertise.

2. Facts are more Important than Law: How many times it happened to you when you had a superb exam, but you scored very little marks?

No one has the answer to this question; we only assume that things are not going well for us, or it is all destiny. But I give you the answer today.

When do we decide that we had a wonderful exam? It is when we know all the answers. Right? But knowing all the answers is a different thing and writing the correct answers is a different thing.

The most important reason behind this is we don’t give much importance to the facts than law. Every time, upon reading the question, the next thing we do is to search for the answer before verifying facts of the question. This is where we have to work upon. Understand the facts first and the pursuit of the law.

Remember, “It is better to answer logically on the right facts than to write correctly on the wrong facts.

Let us understand this with the help of an example. I reproduce here the few lines of the first question of IPCE tax exam May 2016.

Question 1 (a) Mr. Vinod Kumar, resident, aged 62 furnishes the following information about the year ended 31 March 2016.

It is true that when we read any question, we read the first line very leniently, and this is where we make a mistake. The age of the assessee in this question decides the answer to the question. If you failed to observe this point, then you’ve done it wrong.

Point to Learn

Hence, always make sure that you understand the facts right, then only apply the appropriate section to write the correct answer.

3. Exam oriented Approach: I have always been against this approach. During my student days as well, my collages used to focus on clearing the exam. But for me, CA is not just passing the CA final examination; it is about the knowledge.

Students had themselves created this approach which puts more harm to them then benefits. You must understand that there is a reason behind the CA curriculum designed by ICAI. Training is started when you clear your IPCE papers; this is because, during the practical training, you develop an analytical mind which helps you to understand the concepts more logically.

Always remember, you are living in a practical world. Always ask the question why this provision was introduced. What is the idea behind this?

Income tax is the most logical subject. Everything here is for a reason. You must ask your teachers, professionals about it and learn something out of it. If you were able to understand the importance and basic concept about taxation, then you will have a command over the subject.

“Never try to become an expert, always be a student…”

4. Not Taking training Seriously: This is a crime. If you are not serious about your practical training, then you are losing the gem of the time. As said, training not only helps you to develop an analytical mind, rather it helps you to implement what you have learned in the books. Training also builds your personality, the way of speaking, the art of argument and discussion. If you prefer your classes over the exam, then you are doing it wrong.

Income tax is a practical subject, and if you are not implementing what you are learning, then you tend to forget the sections.

The bottom lineStart your Action

Don’t just read the article and appreciate it rather learn something out of it and get into the action straight away. You all are the future of our privileged profession and hence to keep its reputation intact is your duty.

About the Author

Author is  a passionate startup advisor and a Chartered Accountant by profession and love to read, write and teach students on taxation subject.  Author can be reached at paras.mehra18gmail.com or Facebook page.

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  • M Krishnan

    In the above example the Real Income is Rs.15 lakh and the Deemed income is Rs.4 lakh .But the answer to this question on tax liability is not clear.Should I pay tax for 15 laksh or 4 laksh has not been categorically stated. Can I understand that even though the deemed income is less than the real income I should pay for the entire real income earned by me notwithstanding the limitation envisaged under Sec.44AD ?