Concept of “Previous year”, Assessment year”

LEARNER – 1 and related issues CHAPTER - 1

‘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.’

Particulars Detailed explanation

Nature of definition Definition of previous year is exhaustive in nature and no other meaning except what is
assigned in that section can be given.
Meaning Previous year is a financial year which immediately precedes the assessment year.
What is a financial The term ‘financial year’ is not defined anywhere in the Income tax Act, 1961. It means
year? a period commencing from 1st of April in a year and ending 31st March of the next year.

From the assessment year 1989-90 onwards, all assesses are required
? to follow financial year as the previous year. This uniformity shall be
abided through all the heads of income.

Financial year for a. For the assessment year 2022-23, income earned by X Ltd during the previous year
Income tax vs Books 2021-22 (i.e., April 1, 2021 to March 31, 2022) is chargeable to tax. It is, however, not
of accounts necessary that X Ltd should maintain books of account on the basis of the financial
year.
b. It is not necessary that X Ltd should close books of account on March 31 every year. X
Ltd may maintain books of account on the basis of any other year but for the purpose
of income-tax, income of the previous year 2021-22 (i.e., April 1, 2021 to March 31,
2022) is taxable for the assessment year 2022-23.
Proportionate 1. There must be either –
previous year in a. a newly setup business or profession or
certain cases b. a new source of income coming into existence.
2. In such a case, the previous year shall –
a. START – with date of setting up of business or profession or new source coming
into existence and
b. END – with the said financial year.
Therefore, the 1st previous year can have less than 12 months in it. But
from the second and subsequent years onwards, the period starting
? from April 1st of a year to March 31st of next year shall apply. But in no
case previous year can have more than 12 months in it.

Where an assessee is already having an existing income source say,

house property income and a new source of income comes into
existence in the form of business or profession during the year, such
an assessee will have two previous years for the assessment year

? namely-
 Financial year – For existing income source and
 Period starting from new source to end of financial year – For new
income source.

Q1 KMR Ltd maintains books of accounts on the calendar year basis and information w.r.t its
income is as follows –
Quarterly break-up
Calendar Year Income as per books
Jan – March April - Dec
2020 ₹ 5,00,000 ₹ 1,00,000 ₹ 4,00,000
2021 ₹ 10,00,000 ₹ 2,00,000 ₹ 8,00,000
2022 ₹ 15,00,000 ₹ 5,00,000 ₹ 10,00,000
From the aforementioned information calculate the taxable income under Income Tax Act,
1961.
Assessment Year Previous year Taxable income
S
2020-2021 2019-2020 ₹ 1,00,000 (for 3 months)
Period Income
April 1st, 2020
to December ₹ 4,00,000
2021-2022 2020-2021 31st 2020
1st January 2021
to 31st March ₹ 2,00,000
2021
 ₹
Period Income
April 1st, 2021 to
December 31st ₹ 8,00,000
2022
2022-2023 2021-2022 1 January
st
2022 to 31st ₹ 5,00,000
March 2022
₹

X joins an Indian company on August 23, 2021. Prior to August 23, 2021, he is not in
Q2 employment. He does not have any other source of income. What are the previous years for
the assessment years 2022-23 and 2023-24?

Previous years for the assessment years 2022-23 and 2023-24 will be as under:
S
Assessment Year Previous Year
2022-23 August 23rd 2021 to March 31st 2022 (A period less than 12 months)
2023-24 April 1st 2022 to March 31st 2023 (A period of 12 months)

The income of X comprises of only property income up till March 10, 2021. On March 10,
Q3 2021, he starts a new profession as a Chartered Accountant. From the data given below, find
out the taxable income of X for the assessment years 2020-21 to 2022-23.
Property income: ₹ 42,000 every year.
Professional income: ₹ 69,000 from March 10, 2021 to March 31, 2022 (out of which ₹ 10,000
is for the period ending March 31, 2021)

S Source of Income Assessment Year Corresponding previous Year Amount (₹

2020-21 2019-20 42,000
Rental income 2021-22 2020-21 42,000
2022-23 2021-22 42,000
2020-21 2019-20 NA
Professional income 2021-22 March 10, 2021 to March 31, 2021 10,000
2022-23 2021-22 59,000
2020-21 2019-20 42,000
52,000
2021-22 2020-21 (42,000 +
Total Income 10,000)
1,01,000
2022-23 2021-22 (42,000 +
59000)
Note:
For the assessment year 2021-22, the assessee has income from house property which can be said to be
his existing source of income during the previous year. His new source of income comes into existence
in the form of business income from March 10, 2021. Therefore, the assessee has two previous years for
assessment year 2021-22. For the property income which is his existing source, the previous year is
2020-21. For the business income, which is his new source of income, the previous year is a period
commencing from March 10, 2021 to March 31, 2021. For computing taxable income for the assessment
year 2021-22 (or any subsequent year), the income from both the previous years will be aggregated.

"Assessment year" means the period of twelve months commencing on the 1st day of April every year.

Particulars Detailed explanation

Nature of definition Definition of assessment year is exhaustive in nature and no other meaning except what
is assigned in that section can be given.
Meaning Assessment year means the period of 12 months starting from April 1st of every
year and ending on March 31st of the next year.
Nature of assessment Assessment year is fixed by the statute.
year
Relevance of A.Y. Income of the previous year of an assessee is taxed during the following assessment year
at the rates prescribed for such assessment year by the relevant Finance Act. (subject to
some exceptions set out in concept 2.2).
In the following cases, the income of previous year is not assessed in the following assessment year but in the
same previous year –
Section Summary of concept covered
172 Shipping business of non-residents
174 Assessment of persons leaving India.
174A Assessment of association of persons or body of individuals or artificial juridical person formed for a
particular event or purpose.
175 Assessment of persons likely to transfer property to avoid tax.
176 Discontinued business

The rule that the income of the previous year is assessable as the income of immediately following assessment
year has certain exceptions. These exceptions have been incorporated in order to ensure smooth collection of
income-tax from these taxpayers who may not be traceable if tax assessment procedure is postponed till the
commencement of normal assessment.

(1) The provisions of this section shall, notwithstanding anything contained in the other provisions of this Act,
apply for the purpose of the levy and recovery of tax in the case of any ship, belonging to or chartered by a
non-resident, which carries passengers, livestock, mail or goods shipped at a port in India.
(2) Where such a ship carries passengers, livestock, mail or goods shipped at a port in India, seven and a half
per cent of the amount paid or payable on account of such carriage to the owner or the charterer or to any
person on his behalf, whether that amount is paid or payable in or out of India, shall be deemed to be income
accruing in India to the owner or charterer on account of such carriage.
(3) Before the departure from any port in India of any such ship, the master of the ship shall prepare and
furnish to the Assessing Officer a return of the full amount paid or payable to the owner or charterer or any
person on his behalf, on account of the carriage of all passengers, livestock, mail or goods shipped at that port
since the last arrival of the ship thereat:
Provided that where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish
the return required by this sub-section before the departure of the ship from the port and provided the master
of the ship has made satisfactory arrangements for the filing of the return and payment of the tax by any other
person on his behalf, the Assessing Officer may, if the return is filed within thirty days of the departure of the
ship, deem the filing of the return by the person so authorised by the master as sufficient compliance with this
sub-section.
(7) Nothing in this section shall be deemed to prevent the owner or charterer of a ship from claiming before the
expiry of the assessment year relevant to the previous year in which the date of departure of the ship from the
Indian port falls, that an assessment be made of his total income of the previous year and the tax payable on
the basis thereof be determined in accordance with the other provisions of this Act, and if he so claims, any
payment made under this section in respect of the passengers, livestock, mail or goods shipped at Indian ports
during that previous year shall be treated as a payment in advance of the tax leviable for that assessment year,
and the difference between the sum so paid and the amount of tax found payable by him on such assessment
shall be paid by him or refunded to him, as the case may be.
(8) For the purposes of this section, the amount referred to in sub-section (2) shall include the amount paid or
payable by way of demurrage charge or handling charge or any other amount of similar nature.

Condition Content covered

1 There is a non-resident.
2 Such non-resident owns a ship or a ship is chartered by a non-resident
3 Such ship carries passengers, livestock, mail or goods shipped at a port in India.
(Operations may be made either by non-resident himself or may be by any agent)
4 If all the conditions are satisfied, 7.5% of the amount paid or payable on account of such carriage to
the owner or the charterer or to any person on his behalf, shall be deemed to be income accruing in
India to the owner or charterer on account of such carriage.
Note: The term carriage includes the amount paid or payable by way of demurrage charge or handling
charge or any other amount of similar nature.

Sl.no Explanation
1 This section shall have overriding effect over all the conflicting provisions of this Act. However, this section
does not override the section 90 of the Act as central government has signed agreements with other
countries for giving relief to residents of contracting party and that agreement shall prevail over the
provision of the income tax act.
2 Section covers not only the levy of tax but also its recovery as per the provisions of this Act.
3 Procedure involved:
a. Master of the ship shall prepare and furnish to the Assessing Officer a return of the full amount paid or
payable to the owner or charterer or his agent before its departure from a port in India.
b. Amount of tax shall be paid at the rates of tax as applicable to a foreign company.
4 Differential tax regime: (Refer topic 3.1.3, 3.1.4 and 3.1.5 for more emphasis)
a. The owner of the ship or charterer of the ship shall before the expiry of the assessment year relevant to
the previous year in which the date of departure of the ship shall claim that an assessment be made of
his total income of the previous year and the tax payable on the basis thereof be determined in
 accordance with the other provisions of this Act. (Refer section 44B).
b. If he so claims, any payment made under this section in respect of the passengers, livestock, mail or
goods shipped at Indian ports during that previous year shall be treated as a payment in advance of the
tax leviable for that assessment year.
c. The difference between the sum so paid and the amount of tax found payable by him on such
assessment shall be paid by him or refunded to him, as the case may be.

(1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being
a non-resident, engaged in the business of operation of ships, a sum equal to seven and a half per cent of the
aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such
business chargeable to tax under the head "Profits and gains of business or profession".
(2) The amounts referred to in sub-section (1) shall be the following, namely :—
(i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on
account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and
(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the
carriage of passengers, livestock, mail or goods shipped at any port outside India.
Explanation.—For the purposes of this sub-section, the amount referred to in clause (i) or clause (ii) shall
include the amount paid or payable or received or deemed to be received, as the case may be, by way of
demurrage charges or handling charges or any other amount of similar nature.

Condition Content covered

1 Assessee is a non-resident.
2 Such assessee is engaged in the business of operation of ships.

Sl.no Explanation
1 The provisions of section 28 to 43A are not applicable.
It should be noted that section 44B overrides the provisions of sections 28 to 43A and,
accordingly, other provisions (including those relating to aggregation of income and set
? off or carry forward and set off of losses) will be applicable in the case of non-residents
deriving profits from shipping business.

2 The following amounts are treated as incomes –

a. Amount paid or payable to the assessee or to his agent on account of carriage of passengers, livestock,
mail or goods shipped at any port in India.
Note: Amount may be actually paid in or outside India.
b. The amount received or deemed to be received in India by or on behalf of the assessee on account of the
carriage of passengers, livestock, mail or goods shipped at any port outside India.
Note: Amounts as aforesaid shall include demurrage charges or handling charges or any other amount of
similar nature.
3 The amounts as aforesaid shall be deemed to be the profits and gains of such business chargeable to tax
under the head "Profits and gains of business or profession.
4 On a presumptive basis, a sum equal to 7.5% of the aggregate of the amounts specified in point 2 above,
shall be deemed to be the profits and gains of such business.
5 Tax shall be paid at the rates applicable to non-resident.
 Particulars Detailed explanation
Logic of Section 172 entails recovery mechanism for non-residents engaged in a shipping business. However,
sections1 such assessee can opt for being governed by the provision of section 44B, and accordingly, in such
cases taxes paid under section 172 shall be adjusted in light of the tax liability computed under
section 44B.
Comparative Point of difference Section 172 Section 44B
differences Overriding effect It overrides all the provisions of this It overrides section 28 to 43A.
Act.
Scope It covers amount on account of It covers amount on account of
carriage of goods, passengers etc. carriage of goods, passengers etc.
shipped at port in India only. shipped at Port in India as well as
Port outside India.
Setoff and carry Not available Available (except unabsorbed
forward of losses depreciation)
Deductions u/s Not available Available
80C to 80U
Tax Liability At the rate applicable to a foreign At the rate applicable to a non-
company. resident.
Note: 7.5% of amount received on Note: 7.5% of such collection is taken
account of carriage is taxable. as business income. Other provisions
will be applicable to find out taxable
income which will be taxable at the
rate applicable to a non-resident.

X (62 years), a non-resident, is engaged in the business of shipping. During the previous
Q year 2021-22, one of the ships owned by X collects freight as follows:
(a) on August 6, 2021, a sum of ₹ 40 lakh for shipping goods from Cochin Port (it includes
demurrage of ₹ 10,000 and handling charges of ₹ 60,000); and
(b) on January 10, 2022, a sum of ₹ 25 lakh for shipping goods from Bombay (it is paid to X
in New York).
Besides, X collects ₹ 42,70,000 in India on March 3, 2022 for shipping goods from Karachi to
California.
Barring the cases noted above, X does not have any other income in India. X incurs an
expenditure of ₹ 2,40,000 in India (out of which ₹ 65,000 is paid in cash). X has brought
forward loss of ₹ 5,000 from a trading business in India which was discontinued in 2020.
Compute the tax liability of for the assessment year 2022-23. Ignore section 115BAC
pertaining to alternative tax regime.

S The given illustration can be answered by applying section 172 and section 44B as the case may be and
it is as under –

₹ ₹
Carriage collection 39,30,000 25,00,000
Demurrage charges 10,000 -
Handling charges 60,000 -
Total
Adhoc income
(7.5%)
Tax payable
(41.6%)
Note:
 Expenses are not deductible and brought forward business loss can’t be set off since section 172
overrides all the provisions of this Act.
 Total tax liability is ₹2,02,800 u/s 172.
₹

₹
Collection made in India for carriage made outside India 42,70,000
Adhoc income (7.5%)
Less: B/f business loss
Net income
Tax payable at the rate applicable for individual

1
Refer illustration in topic 3.1.7
 ₹
Sum received on goods shipped from Cochin port 40,00,000
(It includes demurrage charges and handling charges)
Sum received on goods shipped from Bombay port 25,00,000
Sum received in India on goods shipped from Karachi port to California port 42,70,000
Less: Expenses incurred (not allowable since section 44B overrides section 28 to -
43A)
Total profit under the head PGBP
Presumptive income (7.5%) (Deemed as business income)
Less: Business loss (applicable since it is not overridden) (5000)
Net income from business
Tax on presumptive income (as per rates applicable to non-resident)
[₹ 12,500 + 20% (TI – ₹ 5,00,000)] + 4% Cess
[₹ 12,500 + 20% (₹ 8,02,750 – ₹ 5,00,000)] + 4%
[₹ 12,500 + ₹ 60,550] + 4%

₹
Tax liability u/s 44B 75,972
Tax paid on ad hoc basis u/s 172 2,02,800
1,26,828
Excess tax paid over the sum payable u/s 44B (or)
1,26,830 (R.O)

Condition Content covered

1 It appears to the Assessing Officer that any individual may leave India during the current assessment
year or shortly after its expiry.
2 He has no present intention of returning to India.

Condition Content covered

1 The total income of such individual for the period from the expiry of the previous year for that
assessment year up to the probable date of his departure from India shall be chargeable to tax
in that assessment year.
2 The total income of each completed previous year or part of any previous year included in such period
shall be chargeable to tax at the rate or rates in force in that assessment year, and separate assessments
shall be made in respect of each such completed previous year or part of any previous year.

X, a foreign citizen, is residing in India since 2004. While completing his assessment for
Q the assessment year 2021-22, on February 14, 2022, the Assessing Officer comes to know
that X will leave India on April 12, 2022 with no intention of returning. What are the
assessments that an assessing officer can initiate in this regard?
In this case, the Assessing Officer will make 3 assessments for the assessment year 2021-22.
S a. regular assessment for the previous year 2020-21 (i.e., income of the period April 1, 2020 to March
31, 2021);
b. assessment for the income of the period April 1, 2021 to March 31, 2022; and
c. assessment for the income of the period April 1, 2022 to April 12, 2022.
The above three income assessments shall be completed separately. For the first assessment, tax shall
be chargeable at the rates applicable for the assessment year 2021-22. For the second and third
assessments, tax shall be chargeable at the rates applicable for the assessment year 2022-23 which
are given in Part I of the First Schedule to the Finance Act, 2022.

Notwithstanding anything contained in section 4, where it appears to the Assessing Officer that any
association of persons or a body of individuals or an artificial juridical person, formed or established or
incorporated for a particular event or purpose is likely to be dissolved in the assessment year in which such
association of persons or a body of individuals or an artificial juridical person was formed or established or
incorporated or immediately after such assessment year, the total income of such association or body or
juridical person for the period from the expiry of the previous year for that assessment year up to the date of
its dissolution shall be chargeable to tax in that assessment year, and the provisions of sub-sections (2) to (6)
of section 174 shall, so far as may be, apply to any proceedings in the case of any such person as they apply in
the case of persons leaving India.
 Condition Content covered
1 There is an association of persons or a body of individuals or an artificial juridical person, formed or
established or incorporated for a particular event or purpose.
2 Such entity as aforesaid is likely to be dissolved in the assessment year in which such association of
persons or a body of individuals or an artificial juridical person was formed or established or
incorporated or immediately after such assessment year.
Note: The above-mentioned circumstance shall appear in the opinion of A.O.

Particulars Detailed explanation

Assessment of The total income of such association or body or juridical person for the period from the expiry of
total income2 the previous year for that assessment year up to the date of its dissolution shall be chargeable to
tax in that assessment year.
Overriding effect This section shall have overriding effect over section 4 which covers charge of income tax.

X Co. is an association of two individuals X and Y. It is formed on April 10, 2020 for the
Q purpose of completing a contract given by a French company in India. It is likely to be
dissolved on September 10, 2021. While processing return submitted by the association for
the assessment year 2021-22, the Assessing Officer comes to know on August 6, 2021
about the probable date of dissolution. What are the assessments applicable for the
assessment year 2021-22?
In this case, the Assessing Officer will make two assessments for the assessment year 2021-22:
S

For the previous year 2020-21 (i.e., Tax shall be chargeable at the rates
Regular assessment income of the period April 10, 2020 to applicable for the assessment year
March 31, 2021. 2021-22.
2nd assessment u/s For the total income from April 1st 2021 to Tax shall be chargeable at the rates
applicable for the assessment year
174A September 10th 2021. 2022-23 which are given in Part III.
Note: The above two income assessments shall be completed separately.

Notwithstanding anything contained in section 4, if it appears to the Assessing Officer during any current
assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of his
assets with a view to avoiding payment of any liability under the provisions of this Act, the total income of such
person for the period from the expiry of the previous year for that assessment year to the date when the
Assessing Officer commences proceedings under this section shall be chargeable to tax in that assessment
year, and the provisions of sub-sections (2), (3), (4), (5) and (6) of section 174 shall, so far as may be, apply to
any proceedings in the case of any such person as they apply in the case of persons leaving India.

Conditions Content covered

1 Section applies to any person.
2 It shall appear to the A.O. during any current assessment year that any person is likely to charge, sell,
transfer, dispose of or otherwise part with any of his assets with a view to avoiding payment of any
liability under the provisions of this Act.

Particulars Detailed explanation

Charge of tax The total income of such person for the period from the expiry of the previous year for that
assessment year to the date when the Assessing Officer commences proceedings under this
section shall be chargeable to tax in that assessment year.
Applicability of The provisions of sub-sections (2), (3), (4), (5) and (6) of section 174 shall, so far as may be, apply
section 174 to any proceedings in the case of any such person as they apply in the case of persons leaving
India.
(1) Notwithstanding anything contained in section 4, where any business or profession is discontinued in any
assessment year, the income of the period from the expiry of the previous year for that assessment year up to
the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that
assessment year.
(2) The total income of each completed previous year or part of any previous year included in such period shall
be chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be
made in respect of each such completed previous year or part of any previous year.
(3) Any person discontinuing any business or profession shall give to the Assessing Officer notice of such
discontinuance within fifteen days thereof.
(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be
deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum
would have been included in the total income of the person who carried on the business had such sum been
received before such discontinuance.
(4) Where any profession is discontinued in any year on account of the cessation of the profession by, or the
retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall
be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum
would have been included in the total income of the aforesaid person had it been received before such
discontinuance.

Conditions Content covered

1 Section applies to a person carrying on business or profession.
2 Business or profession is discontinued in any assessment year.
Note: Any person discontinuing any business or profession shall give to the Assessing Officer
notice of such discontinuance within 15 days thereof.

Particulars Detailed explanation

The income of the period from the expiry of the previous year for that assessment year up to
Charge of tax the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to
tax in that assessment year.
Income shall be chargeable to tax at the rate or rates in force in that assessment year, and
Rate of tax separate assessments shall be made in respect of each such completed previous year or part of
any previous year.
Where any business (or) profession is discontinued in any year and any sum received after the
discontinuance shall be deemed to be the income of the recipient and charged to tax
Subsequent
accordingly in the year of receipt, if such sum would have been included in the total income of
receipt
the person who carried on the business had such sum been received before such
discontinuance.

X discontinues his business on August 10, 2021. State the provisions w.r.t Income tax Act how the
Q assessment may be made.

The assessment may be as under:

S
For the previous year Income of the previous year 2020-21 will Tax shall be chargeable at the rates
2020-21 be taxable in the assessment year 2021- applicable for the assessment year
22. 2021-22.
Income of the period commencing on
April 1, 2021 and ending on August 10,
2021 may be taxable at the discretion of
the Assessing Officer in the assessment
year 2021-22.
2nd assessment u/s Tax shall be chargeable at the rates
176 applicable for the assessment year
On the other hand, the Assessing Officer 2022-23 which are given in Part III.
may wait till the commencement of the
normal assessment year and then
income of the period : April 1, 2021 to
August 2021, shall be taxed in the A.Y.
2022-23.
Note: The above two income assessments shall be completed separately.