A financial year has a double role to play: it is a previous year as well as an assessment year. Explain. Define Previous year as per section 3 of Income Tax Act, 1961. Enumerate the cases when income of previous year is not taxable in the immediately following assessment year. What will be the relevant previous year to the AY 2020-21, if the new business is established on 28.03.2018? What will be the answer if the new business is set up on 28.03.2019?

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Answer

Explanation:

A financial year is a period of 12 months that starts from 1st April and ends on 31st March of the following year. In India, it has a dual role to play; it is both a previous year as well as an assessment year.

- As a Previous Year: The period of 12 months for which the income is being assessed and taxed is known as the previous year. For example, if we are assessing the income for the financial year 2019-20, then the previous year would be the period from 1st April 2018 to 31st March 2019.
- As an Assessment Year: The period of 12 months during which the income of the previous year is assessed, and tax liability is determined, is known as the assessment year. For example, if we are assessing the income for the financial year 2019-20, then the assessment year would be the period from 1st April 2020 to 31st March 2021.

Previous Year as per Section 3 of Income Tax Act, 1961:

As per Section 3 of the Income Tax Act, 1961, the previous year is defined as the financial year immediately preceding the assessment year. It is the period for which the income is being assessed and taxed.

Cases when the Income of Previous Year is not Taxable in the Immediately Following Assessment Year:

- If the income is exempt from tax, such as agricultural income or income from certain other sources.
- If the income is taxable but has already been taxed in the previous year, such as income from fixed deposits or savings accounts.
- If the income is taxable, but the taxpayer has incurred a loss in the previous year, which can be carried forward to the next year.

Relevant Previous Year to AY 2020-21:

If a new business is established on 28.03.2018, the relevant previous year to AY 2020-21 would be the period from 1st April 2018 to 31st March 2019. This is because the previous year is the financial year immediately preceding the assessment year.

Relevant Previous Year to AY 2020-21 if the New Business is Set up on 28.03.2019:

If a new business is set up on 28.03.2019, the relevant previous year to AY 2020-21 would be the period from 28th March 2019 to 31st March 2020. This is because the previous year is the period from the date of establishment of the business to 31st March of the following year. In this case, the business was established on 28th March 2019, so the previous year would be from 28th March 2019 to 31st March 2020.

Answer

In Income-tax Act, 1961 is “AssessmentYear” defined in Section 2(9) as: “Assessment Year” means the period oftwelve months commencing on the 1st day of April every year.

“Previous Year” is defined inSection 3 of the Income-tax Act, 1961 to mean “for the purpose of this Act,“previous year” means the financial year immediately preceeding the assessmentyear.

There is no difference in theperiod of Assessment Year & Previous Year since both are financialyear/Income Year for accounting purpose.

As a general rule, the incomeearned in the previous year is taxed only in the assessment year but in thefollowing cases, the income earned is taxed in the same year in which it is earnedor received. Such exceptions to the general rule are given in Sections 172 and174 to 176.

Income of Non-Residents fromShipping Business (Sec. 172):

Where a ship is owned orchartered by a non-resident and is used for carrying passengers, livestock,mail, or goods shipped at a port in India, his income from such business shallbe taxed in the year in which it is earned.

Income of Persons leavingIndia (Sec. 174):

When it appears to theassessing officer that an individual may leave India during the cur�rentfinancial year or shortly after its expiry, and that he has no presentintention of returning to India, he shall assess the total income of such anindividual for the period from the expiry of the previous year relevant to theassessment year to probable date of Ins departure from India, in the same year.

Association or bodies formedfor short duration (Sec. 174A):

When an association ofpersons or body of individuals or an artificial juridical person formed,established or incorporated for a particular event or purpose and it appears tothe Assessing Officer that such association or body of individual or artificialjuridical person is likely to be dissolved in the same assessment year orshortly after that, the total income of such association/body/juridical personfor the period from the expiry

Person trying to alienate hisassets with a view to avoid tax (Sec. 175):

If, in the opinion of theAssessing Officer, an assessee is likely to transfer, charge, sell, disposeoff, or otherwise part with any of his assets with an intention to avoid histax liability, the total income of such a person from the close of the relevantprevious year to the date of initiating a proceeding under this section shallbe chargeable to tax in the same assessment year.

The previous year of thebusiness will be 2019-20. ( for both the cases)

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