What Is Previous Year In Income Tax: Section 3 Provisions And Exceptions For Taxation

‘Previous Year’ in the Income Tax Act, 1961 is an important concept associated with the payment of income tax in India. According to Section 3, the previous year is the year preceding the assessment year. Also known as the Financial year, it starts from 1st April to 31st March of the following year. 

Read on to know details about the previous year in income tax, its importance, the difference between financial and assessment years and exceptions for taxation. 

What is Previous Year in Income Tax?

Section 3 of the Income Tax Act has defined a previous year as the financial year. It is the period between 1^st April and 31^st March of the next year. If the income source or business is new, the ‘previous year’ for the new business will start from when it was set up and end on the 31^st March of said financial year.

What is an Assessment Year?

Section 2 (9) of the Income Tax Act has defined an assessment year as the 12 months starting from 1^st April and ending on 31^st March when an individual needs to file returns on the previous year’s income. Income Tax authorities assess an individual’s income earned in the previous year in the assessment year.

Provisions under Section 3 of the Income Tax Act

According to Section 3 of the Income Tax Act, the previous year will be considered from the date the source of income came into existence, if it’s a new business, till the 31^st March of the said financial year. This means that when a new business starts or a new source of income comes into existence, the previous year might be less than 12 months. However, the next financial year will be the entire 12 months (April to March).

Difference between an Assessment Year and a Previous Year

The table below provides key differences between the previous year and the assessment year:

Criteria of Comparison	Previous Year (Financial Year)	Assessment Year
Definition	The year when an individual earns income	The year when IT authorities assess the income
Financial Year	12 months or less	12 months
Time	12 months or less, depending upon when the income source started/stopped operating	12 months
Purpose	Important because the income is earned in this year. Therefore the data collected will be from this year	Significant because of analysing the submitted data and calculating the appropriate tax payable

Exceptions for Taxation of Income earned in Previous Year

Given below are exceptions for taxation of income earned in the previous year: 

1. Section 172 – Income earned by a non-resident through a shipping business in India

Section 172 of the Income Tax Act has incorporated guidelines for a Non-Resident Indian’s shipping business. 

Given below are its important features:

• If a non-resident’s ship transports passengers, livestock, mail and goods, authorities will allow its operations only after the requisite tax is paid. 

• Moreover, 7.5% of the amount paid to the owner or any person on his behalf for carriage, in or outside India, will be considered as income that is accruing in India.

• Additionally, the shipmaster needs to submit the amount and details of passengers/livestock/goods/mails ferried to the Assessing Officer. 

• Suppose the Assessing Officer sees that it isn’t possible for the master of the ship to submit the amount payable before the departure. In that case, he/she has the authority to allow the shipowner to pay the requisite amount within 30 days of the departure after making necessary arrangements. 

• After receiving the returns, Assessing Officer will analyse the income and determine the tax payable. 

2. Section 174 – Income earned by people who are leaving India permanently or for a long period of time

Section 174 of the Income Tax Act is applicable if an Assessing Officer feels that an individual might leave India in the present assessment year or thereafter. 

Critical features of this Section are enumerated below:

• An individual’s income up to the date of his/her departure from India will be subjected to tax in the ongoing year itself and not in the upcoming assessment year if he/she plans to not return for a long time. 

3. Section 174A – Income earned by those bodies which are formed for a short period.

Section 174A of ITA is applicable for bodies that are formed for a short period.

Its important feature is given below:

• IT authorities charge tax on incomes of bodies formed for a short time in the previous year. This is because these bodies might cease to exist before the beginning of the assessment year. 

4. Section 175 – Income earned by people who are likely to transfer their property to avoid tax

Section 175 of ITA is applicable for people who are most likely to transfer their properties to evade tax. 

Given below is its important feature:

• If the Assessing Officer feels that an individual might transfer/sell/part with their property to avoid payment of taxes, then he/she will charge tax in the previous year.

5. Section 176 – Income earned from a discontinued business

Section 176 of the Income Tax Act is for charging tax on incomes of discontinued businesses.

Its essential feature is enumerated below:

• As per this Section, the Assessing Officer can collect the taxable amount on incomes earned from a discontinued business in the previous year itself. 

• However, the Assessing Officer has the freedom to analyse and decide whether the tax will be charged in the previous year or the assessment year.

Also Read: Tax Relief Under Section 87A Of Income Tax Act: How To Claim Tax Rebate Under Section 87A

Final Word

The previous year in Income Tax is an essential concept that every individual should be aware of. Income earned in the previous year is taxable during the assessment year. The Indian government has carefully formulated the rules and guidelines of the Income Tax Act to promote transparency and curb tax evasion and avoid penalties.

FAQs on Previous Year

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