Previous year under section 3 of the 1961 Act, and the exceptions to the year-later rule

Previous year under section 3 of the Income-tax Act, 1961

Under the 1961 Act, income is earned in one year and taxed in the next. The year in which the income is earned is the previous year: under section 3, it is the financial year (1 April to 31 March) just before the assessment year. The assessment year is the following twelve months, starting on 1 April, in which that income is assessed and taxed. So income earned from 1 April 2023 to 31 March 2024 (previous year 2023-24) is taxed in assessment year 2024-25.

A business or profession set up, or a new source of income that first arises, during a financial year has a shorter first previous year: it runs from the date the business is set up, or the source comes into existence, to 31 March of that financial year. A shop opened on 10 November 2023 thus has a first previous year of 10 November 2023 to 31 March 2024. Every later previous year is a full financial year.

Is the statement fully correct?

As a general rule, yes: under the charging section (section 4 of the 1961 Act), tax for an assessment year is levied on the total income of the previous year, so a year's income is normally taxed only after that year is over. But the statement is not fully correct. In a few situations the revenue would risk losing the tax if it waited until the next year, so the 1961 Act charges the income to tax in the same year in which it is earned. These are the exceptions.

Exceptions: income taxed in the year in which it is earned (1961 Act)

1. Shipping business of non-residents (section 172). When a ship owned or chartered by a non-resident carries passengers, livestock, mail or goods from an Indian port, 7.5% of the amount paid or payable for that carriage is treated as income earned in India; the amount counts demurrage, handling charges and any similar sum (section 172(8); section 316(2)(b) of the 2025 Act). Port clearance is not granted until the tax has been paid or satisfactory arrangements have been made for its payment (section 172(6); section 316(8) of the 2025 Act). The ship may never return, so the tax is settled before it leaves. The owner or charterer may still claim to be assessed on his total income under the normal provisions, within the year after the tax year of the ship's departure (under the 1961 Act, by the close of the matching assessment year); the sum paid at the port then counts as advance tax for that year, and any difference is paid by him or refunded to him (section 172(7); section 316(9)-(10) of the 2025 Act).
2. Persons leaving India (section 174). If the Assessing Officer believes that an individual may leave India during the year, or soon after it ends, with no intention of returning, the income up to the expected date of departure can be assessed in that same year. Once this appears to the Assessing Officer, that income is chargeable to tax in that year, not at his option (section 317(1)). Each completed year, and any part of a year, in that period is assessed separately and taxed at the rates in force in that tax year (section 317(2) of the 2025 Act); under section 174(2) of the 1961 Act, at the rates in force in the assessment year in which it is assessed. The Assessing Officer may estimate the income where it cannot readily be worked out (section 174(3); section 317(3) of the 2025 Act), and may by notice call for a return within the time he fixes, which cannot be less than seven days (section 174(4); section 317(4) of the 2025 Act).
3. Bodies set up for one event or purpose (section 174A). If an association of persons, a body of individuals or an artificial juridical person set up for a single event or purpose, for example a committee formed to run one exhibition, is expected to wind up within the year or immediately after it ends, its income up to the date of dissolution is chargeable to tax in that year.
4. Persons likely to transfer property to avoid tax (section 175). If it appears that a person is about to sell, transfer or otherwise part with assets so as to escape the tax, the income from the start of the current year up to the date on which the Assessing Officer begins proceedings under the section is chargeable to tax at once.
5. Discontinued business or profession (section 176(1)). When a business or profession is discontinued, the income from the start of the year to the date of discontinuance may, at the Assessing Officer's discretion, be taxed in that same year, again with a separate assessment for each completed year or part year (section 176(2); section 320(2) of the 2025 Act). The person who discontinues must inform the Assessing Officer within fifteen days of doing so (section 176(3); section 320(3) of the 2025 Act). A sum received after a business has been discontinued is taxed as the recipient's income in the year it is received, if it would have been part of the business's income had it come in before the discontinuance (section 176(3A); section 320(4) of the 2025 Act); the same rule applies to a profession that ends because the person carrying it on ceases to practise, retires or dies (section 176(4); section 320(5) of the 2025 Act).

Under these sections the income is assessed in that same year, at the rates in force for it; for persons leaving India, section 174(5) adds that the tax so charged is in addition to tax chargeable under any other provision of the Act, and section 176(6) says the same for a discontinued business.

Position under the Income-tax Act, 2025 (tax year 2026-27 onwards)

The 2025 Act has no previous year or assessment year. Section 3(1) uses a single tax year: the financial year starting on 1 April. Section 3(2) keeps the shorter first year for a new business, profession or source of income (from the date of setting up, or the date the source arises, to the end of that financial year). Section 4(2) charges tax on the total income of the tax year, and that income is still assessed after the tax year ends. So the 1961 definition has no direct equivalent: the two-year language is gone, though the practice (earn in the year, assess after it) continues.

All five exceptions survive, each overriding the charging section 4, so that the income of the current tax year is taxed within that year:

Conclusion

I do not fully agree with the statement. It states the general rule of the 1961 Act, that a previous year's income is taxed in the assessment year that follows, but sections 172, 174, 174A, 175 and 176 tax income in the very year in which it is earned, to protect the revenue where waiting would put the tax at risk. Under the 2025 Act the same idea is expressed through the tax year, with the same five exceptions in sections 316 to 320.