Previous year, assessment year and the cases taxed in the year of earning (as set, 1961 Act, AY 2022-23)

1. Previous year

The previous year is the financial year immediately before the assessment year (section 3). It runs from 1 April to 31 March. Where a business or profession is newly set up during the financial year, or a source of income newly comes into existence in it, the first previous year runs from the date of setting up (or the date the source comes into existence) to the end of that financial year (proviso to section 3). For the assessment year 2022-23 the previous year is 2021-22 (1 April 2021 to 31 March 2022).

2. Assessment year

The assessment year is the period of twelve months starting on 1 April every year (section 2(9)). It is the year in which the income of the previous year is assessed and charged: the income of 2021-22 is assessed in the assessment year 2022-23, which runs from 1 April 2022 to 31 March 2023.

3. The general rule

Section 4 charges tax for an assessment year on the total income of the previous year, at the rates the Finance Act of that year lays down (for 2022-23, Finance Act, 2022, First Schedule, Part I, Paragraph A). So income is earned in one year and taxed in the next. The proviso to section 4(1) allows income of some other period to be charged where a provision of the Act so requires (the cases below), and under section 4(2) the tax is still deducted at source or paid in advance wherever the Act makes it so deductible or payable.

4. Cases where the income is taxed in the previous year itself

In a few cases the tax would be hard to collect if the department waited for the assessment year, so the income of a previous year is assessed in that same year:

1. Shipping business of a non-resident (section 172): the section applies of its own force to a ship belonging to or chartered by a non-resident that carries passengers, livestock, mail or goods shipped at an Indian port. 7.5% of the amount paid or payable for that carriage to the owner or charterer, or to anyone on his behalf, whether in or out of India (demurrage, handling and similar charges included), is deemed income accruing in India (section 172(2), (8)). Before the ship leaves the port, the master files a return of the full amount paid or payable for all carriage shipped there since the ship last arrived; if the Assessing Officer is satisfied that this is not possible and the master has made satisfactory arrangements for another person to file the return and pay the tax, the officer may treat a return filed by that person within thirty days of departure as sufficient compliance (section 172(3), proviso). The tax is assessed at the rate for a company that has not made the arrangements under section 194, and is payable by the master; the order must be made within nine months from the end of the financial year in which the return is filed, and port clearance waits until the tax is paid or secured (section 172(4), (4A), (6)). The owner or charterer may instead claim, before the end of the relevant assessment year, a regular assessment of his total income, the tax paid under the section then counting as advance tax (section 172(7)).
2. Persons leaving India (section 174): when it appears to the Assessing Officer that an individual may leave India during the current assessment year or shortly after it ends, with no present intention of returning, his total income from the end of the previous year up to the probable date of departure is chargeable in that assessment year. Each completed previous year or part is assessed separately, at the rates in force in that assessment year; the officer may estimate the income where it cannot readily be determined, and may by notice require a return, in the form and verified in the manner of a section 142(1)(i) return, within a time of not less than seven days, showing the total income of each completed previous year and the estimated income of any part of a year. The tax is in addition to any other tax under the Act (section 174(1)-(6)).
3. Association or body formed for a particular event (section 174A): where it appears to the Assessing Officer that an association of persons, a body of individuals or an artificial juridical person, set up for one particular event or purpose, will probably be dissolved in the assessment year of its formation or immediately after that year, its income from the end of the previous year up to the date of dissolution is chargeable in that assessment year, with section 174(2)-(6) applying.
4. Persons likely to transfer property to avoid tax (section 175): where it appears to the Assessing Officer during the current assessment year that a person is likely to part with any of his assets (by charging, selling, transferring or disposing of them, or otherwise) so as to avoid paying any liability under the Act, his income from the end of the previous year up to the date on which the officer commences proceedings under the section is chargeable in that year, with section 174(2)-(6) applying.
5. Discontinued business or profession (section 176): when a business or profession is discontinued in an assessment year, its income from the end of the last previous year up to the date of discontinuance may, at the Assessing Officer's discretion, be charged in that year, each completed previous year or part separately at the rates in force in that year (section 176(1)-(2)). The person must give notice of the discontinuance within fifteen days (section 176(3)); sums received after a business is discontinued, or after a profession ends on cessation, retirement or death, are taxed in the year of receipt if they would have been income before (section 176(3A), (4)); the officer may serve a notice with any of the requirements of a section 142(1)(i) notice on the person, on anyone who was a partner of a firm when it was discontinued, or on a company's principal officer (section 176(5)); the tax is in addition to any other tax (section 176(6)); and where section 176(1) applies, a section 142(1)(i) or section 148 notice about any other tax may fix a period for the return of not less than seven days (section 176(7)).

Example (our own): a Singapore shipping line loads cargo at Kandla for a freight of ₹60,00,000; ₹4,50,000 (7.5%) is treated as its income from that voyage, returned by the master before the ship sails and assessed under section 172.