Previous Year and Assessment Year | Exceptions

[Meaning of Previous Year in Income Tax, Meaning of Assessment Year in Income Tax, Exceptions to the Rule - Income tax is charged on the income of the previous year- Income Tax Act 1961]

Q. Define the term “Previous year” and “Assessment year"? Income tax is charged on the income of the previous year.” Do you fully agree with this statement? If not, what are the exceptions?

Meaning of Previous Year in Income Tax

Previous Year: [Sec. 3]: As the word, ‘Previous’ means ‘coming before’, hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2020-2021 the  Previous Year should be the Financial Year ending 31st March 2020. The term previous year is very important because income earned in the previous year is to be assessed to tax in the assessment year. The simple rule is that the income of a previous year is taxed in its relevant assessment year. At present, the previous Year 2019-2020 (1-4-2019 to 31-3-2020) is going on.

Meaning of Assessment Year in Income Tax

Assessment Year: [Sec. 2 (9)]: “Assessment Year” means a period of 12 months commencing on the 1st day of April every year. In India, the Govt. maintains its accounts for period of 12 months i.e. 1st April to 31st March every year. As such it is known as Financial Year.  The Income Tax department has also selected the same year for its Assessment procedure.

The Assessment Year is the Financial Year of the Govt. of India during which income a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act, files Return of Income by prescribed dates. These Returns are processed by the Income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by the assessee is checked and verified, tax is calculated and compared with the amount paid and assessment order is issued. The year in which the whole of this process is undertaken is called Assessment Year. At present, the Assessment Year 2020-2021 (1-4-2020 to 31-3-2021) is going on.

The exception to the rule Income tax is charged on the income of the previous year

As a normal rule, the income earned during any previous year is charged to tax in the immediately succeeding assessment year. However, in the following circumstances, the income is taxed in the same year in which is earned.

1. Income of Shipping Business (Section 172): In case a non-resident Shipping Company, which has no representative in India, earns income from any Indian port it will not be allowed to leave the port till the tax on such income has been paid or alternative arrangements to pay tax are made in the current year itself.

2. In case of persons leaving India permanently [Section 174]: If the Assessing Officer has the reasons to believe that an individual will leave India permanently, he may ask him to pay tax on the income earned during the previous year up to the date of his leaving the country.

3. Assessment of association of persons or body of individuals or artificial judicial person formed for a particular event or purpose [Sec.174A]: Where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial judicial person formed or established or incorporated for a particular purpose and that purpose is completed, the total income of such person or body or artificial judicial person, for the period from the expiry of the previous year up to the date of its dissolution, shall be chargeable to tax in that assessment year.

4. In case of persons trying to transfer their assets [Section 175]: If the Assessing Officer thinks that any person is likely to sell, transfer, dispose of or to part with any of his assets with the intentions to avoid payment of any tax liability, he may ask to file the return and pay taxes during the previous year itself.

5. Discontinued business [Section 176]: In case any business or profession is discontinued during a previous year the income of the period from the expiry of last previous year till the date of discontinuation will be assessed to tax in the current previous year itself. The power of the Assessing Officer to invoke the provisions of section 176 is discretionary and concerning the other provisions mentioned above, it is mandatory.

In the above cases, the income of the previous year may be taxed as the income of the assessment year immediately preceding the normal assessment at the rates applicable to that assessment year.