For better understanding of the concept of Previous Year & Financial Year vis-a-vis Assessment Year in the case of a layman, the terms ‘Assessment Year’ and ‘Previous Year’ have been defined under Sections 2(9)/ 2(34) and 3 of the Income Tax Act, 1961.
a) Meaning of Assessment Year: Section 2(9) Income Tax
As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘assessment year’ means the period of twelve months commencing on the 1st day of April every year.
Therefore, basically the Assessment year is considered to be a 12 months period starting from April 1, during which an assessee is required to file the return of income (ITR) for the previous year and the ITO has to initiate assessment proceedings for such returned income and tax thereon. Since Income Tax is on income of a financial/ previous year or period, so tax filings and assessment can start thereafter. Probably, that’s why it’s called assessment year/ period.
For example, Assessment Year 2021-22 is a period of 12 months starting from 01/04/2021 and ending with 31/03/2022.
b) Meaning of Previous Year: Section 2(34) & Section 3 Income Tax
As per Section 2(34) of Income Tax Act, 1961, unless the context otherwise requires, the term ‘previous year’ means the previous year as defined in section 3.
In view of above, we need to visit Section 3 of Income Tax Act, 1961, which defines the term previous year as under:
“For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.”
Therefore, basically the Previous Year indicates the year/ period prior to another. Under Income Tax, the returns are filed by assessees after end of the year/ period during which earnings are made and that period is called previous year/ financial year. However, when such earnings are subjected to assessment/ review by ITO in the subsequent period/ year, the same is called assessment period/ year.
For example, previous year corresponding to assessment year 2021-22 means the preceding financial year, i.e. 2020-21 (01/04/2020 to 31/03/2021), however the previous year may begin from a later date in the case of new business/ source of income (i.e. from 01/04/2020 or any date thereafter upto 31/03/2021). For example, in the case of a new business set-up on 01/10/2020, the previous year will be the period from 01/10/2020 to 31/03/2021, which in fact is just a part of the financial year 2020-21.
c) Concept of Previous Year & Financial Year vis-a-vis Assessment Year
Understanding concept of previous year is very simple, it’s basically a period of upto 12 months just preceding the assessment year. Since financial year is always a period of 12 months and income/ source of income may be of smaller span/ tenure than of 12 months, so the concept/ term of previous year is used under Income Tax to cover income or source of income coming into existence after the commencement of financial year and to cover income or source of income coming to an end before completion of the financial year. Either way any income or source of income is not required to be spread to the whole of financial year, it may be part of the same and the same may be called a previous year.
Accordingly Previous Year in the case of a continuing business shall be the Financial Year immediately preceding the relevant Assessment Year, whereas Previous Year in the cases of newly set up business or for new source of income shall be the period commencing from the date of set up of new business or from the date of coming into existence of any source of income, to the forthcoming 31st March of that Financial Year immediately preceding the relevant Assessment Year.
It may not be out of place to mention that now even under Companies Act 2013 all the companies are required to have a uniform financial year. In other words, normally a period of upto 12 months ending on 31 March every year, however in the case of first accounting period, the same may be of less than 12 months and may extend upto 18 months with prior approval of the ROC.
However, there are few exceptions to the rule that income of previous year is chargeable to tax in the immediately following assessment year. In such cases income of the previous year is subject to charge of tax in the same previous year, wherein previous year and assessment year are considered as the same in the case of certain assessees to avoid situations of income escaping assessment:
a) Income from Shipping business in India in the case of non-residents [Section 172];
b) Assessment of persons leaving India permanently or for longer duration [Section 174];
c) Assessment of association of persons (AOP) or body of individuals (BOI) or artificial juridical person (AJP), which are formed for a particular short period of time/ event/ purpose, i.e. which are dissolved within the same previous year [Section 174A];
d) Assessment of persons suspected to transfer their property to avoid tax liability [Section 175]; and
e) Assessment of income from a business which has been discontinued during the previous year [Section 176].