Previous Year: Section 3 under the Income Tax Act

Shreya Srivastava|Symbiosis Law School, Hyderabad| 11th June 2020

Assessment Year

Section 2(9) of the Act defines ‘assessment year’ as the twelve months starting from 1^st April every year and ending on 31^st March of the next year. The statute has fixed this assessment year. As the rates fixed by the relevant Finance Act, the Income in the previous year is taxed in the following year.

Previous Year

Section 3 of the Act defines ‘Previous year’ as the financial year which immediately precedes the assessment year.

In the next year, the income earned in the previous year will be taxable. ‘Previous year’ is the year where the income is earned and next year where the income becomes taxable is ‘assessment year’. For example, the income earned in the year 2018-19 is a previous year, and immediately the following year i.e. 2019-20 will be assessment year. All the assesses are required to follow 1^st April to 31^st March as the financial year, from the assessment year 1989-90 for all the income sources.

Provisions under Section 3

Proviso mentioned under the Section reads as-

‘in the case, if a profession or business is newly set up, or the source of income is coming into existence for the first time, the date when the business or profession was first set up or when the source of income came into existence or, as the case may be the ending will be said financial year.’ As a result, when the new business or profession is set up, or when the source of income came into existence and which is ending on 31^st March of the calendar year which is followed immediately. This means the period could be less than 12 months, for a newly set up business, profession, or income source. The subsequent and the second ‘previous years’ would be each of 12 months i.e. from April to March.

Exceptions to rule

1. Section 172, non-residents shipping business-  this section is applicable only if:

– is a non-resident taxpayer,

– the ship is either own by or is charterers by the taxpayer who is a non-resident,

– the ship carries livestock, passengers, goods or mail which is shipped at the port in India,

– if the non-resident taxpayer has an agent who represents in India.

• Section 174, Persons who are leaving India- the Section is applicable when:
• to the Assessing Officer, it appears that the person might leave India during or thereafter the current assessment.
• the person doesn’t have any present intention to return to India.
• Till the portable date of individuals’ departure from India, his income will be taxable in the same year and not in the assessment year following.
• Section 175, the person is mostly to transfer his property to avoid tax- salient feature of the section:

–  an asset can be either immovable or movable,

– to avoid the payment under the Income-tax Act, the person or the taxpayer is likely to part with the asset.

• Section 176, profession/business is discontinued

Difference between Assessment Year and Financial Year

From the perspective of income tax, the year in which income is earned in the Financial Year. The year which is followed by Financial year is the Assessment year in which the previous year’s income is evaluated and taxes have to pay on it.

Income Tax Return form to have Assessment Year

Income tax Return forms have Assessment Year since in the assessment year any income is evaluated for any financial year. The income cannot be taxed before it is earned in the financial year. Situations like a job change, loss of a job, new investments, etc. can come up anytime in the end or the middle of the Financial Year. For this particular reason, the assessment can only start after the financial year ends and the taxpayers have to select the Assessment Year option while filling the return.

Conclusion

As per the provisions mentioned under section 320(92) read with section 2 of the Code of Direct Taxes, 2013 the concept of ‘assessment year’ and ‘previous year’ may be replaced with ‘financial year’. As per the Code of Direct Taxes, 2013 financial year means-

• the period starting with the date of setting up of a business and consummation with the conclusion of the business or the 31st day of March following the date of setting up of such business, whichever is prior;
• the period starting with the date on which a wellspring of salary recently appears and finishing with the conclusion of the business or the 31st day of March following the date on which such new source appears, whichever is prior;
• the period starting with the first day of the budgetary year and completion with the date of discontinuance of the business or disintegration of the unincorporated body or liquidation of the organization, as the case may be; or
• the time of a year beginning from the first day of April of the applicable year in some other case.