Previous year, and the cases where a year's income is taxed in that same year (as set, 1961 Act, AY 2018-19)

Previous year

Income is earned in one year and assessed in the next. The year in which it is earned is the previous year: the financial year (1 April to 31 March) immediately before the assessment year (section 3). For assessment year 2018-19 the previous year is 2017-18, that is 1 April 2017 to 31 March 2018.

A business or profession set up during a financial year, or a source of income that first comes into existence in it, has a shorter first previous year: it runs from the date of setting up, or the date the source begins, to 31 March of that year (proviso to section 3). A shop opened on 1 October 2017 therefore has a previous year of six months, ending 31 March 2018.

The general rule

Tax is charged for each assessment year on the total income of the previous year, at the rates the Central Act (the Finance Act) fixes for that assessment year (section 4(1)). So the income of 2017-18 is normally assessed in 2018-19.

Cases where income is taxed in the same year

In five cases the Act sets section 4 aside and charges the income of the current year in the current assessment year itself, without waiting for the next one, because waiting could mean the tax is never collected. Section 172 applies of its own force; sections 174, 174A and 175 apply when it appears to the Assessing Officer that their conditions are met; section 176 is at his discretion. The assessment need not be completed before the year ends: under section 172, for instance, the order may be made up to nine months after the end of the financial year in which the master's return is furnished (section 172(4A)).

1. Shipping business of a non-resident (section 172): a ship owned or chartered by a non-resident that carries passengers, livestock, mail or goods shipped at an Indian port. 7.5% of the freight paid or payable for that carriage is deemed to be income accruing in India (section 172(2)). The master files a return of the freight before the ship leaves the port (or, where the Assessing Officer so allows, a person he has authorised files it within thirty days of departure), the tax is assessed on it and the master pays it (section 172(3) and (4)); the ship gets no port clearance until the tax is paid or arranged for (section 172(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): an individual who may leave India during the current assessment year, or shortly after it ends, with no present intention of returning, is taxed in that year on his income from the end of the last previous year up to the probable date of departure (section 174(1)), with a separate assessment for each completed year or part of a year (section 174(2)).
3. Association of persons, body of individuals or artificial juridical person set up for a particular event or purpose (section 174A): where it is likely to be dissolved in the assessment year of its formation, or just after it, its income up to the date of dissolution is taxed in that year.
4. Persons likely to transfer property to avoid tax (section 175): where a person is likely to charge, sell, transfer or otherwise part with his assets to avoid any liability under the Act, his income from the end of the last previous year up to the date the Assessing Officer begins proceedings under the section is taxed in that year.
5. Discontinued business or profession (section 176): where a business or profession is discontinued in an assessment year, its income from the end of the last previous year to the date of discontinuance may, at the Assessing Officer's discretion, be taxed in that year (section 176(1)); otherwise it is assessed in the usual way. The person must give the Assessing Officer notice of the discontinuance within fifteen days (section 176(3)).

Why the exceptions exist

In each case the assessee, or the income, may not be within reach by the next assessment year: the ship sails away, the person emigrates, the association dissolves, the assets are transferred or the business closes. Taxing the income early protects the revenue. The tax charged under sections 174 to 176 is in addition to any tax due under the Act's other provisions (section 174(5), which sections 174A and 175 apply, and section 176(6)).