Question 1 (a)
The previous-year rule and its exceptions (as set, 1961 Act, AY 2022-23)
4 marks
- Time to write
- About 8 minutes
From an older CBCS paper
Question
Question 1 (a) · 4 marks"The income earned in the previous year is chargeable to tax in the assessment year." Does this rule have any exception?
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2022-23 (previous year 2021-22), with the dates as printed. No marks are printed for this part; 4 inferred (each question carries 11 marks, as the cover says that all questions carry equal marks).
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 The rule of section 4 with the two years defined 1 mark 1 min
- 2 The five exceptions (sections 172, 174, 174A, 175, 176) 2½ marks 4 min
- 3 Reason and example ½ mark 2 min
Short on time? Step 2 carries 2½ of the 4 marks: guard its minutes.
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Income tax is charged for each assessment year on the total income of the previous year (section 4). The previous year is the financial year just before the assessment year (section 3), and the assessment year is the twelve months from 1 April (section 2(9)). So the income Mr. A earns from 1 April 2021 to 31 March 2022 is assessed in the assessment year 2022-23, at the rates the Finance Act, 2022 fixes for that year (Finance Act, 2022, First Schedule, Part I, Paragraph A).
1Rent earned this year, Leela ji's tax notice comes next year—the usual rhythm.
Previous yearIncome is earned in one year and taxed in the next
2Not for the foreign ship's freight: it pays before the gangway lifts, it may never return.
Shipping business of non-residentsThe ship may never return, so the tax is settled before it leaves.
3And for the tenant migrating abroad, the year's account settles before the flight.
Persons leaving IndiaThe income up to the expected date of departure can be assessed in that same year.
The rule does have exceptions, in section 172, section 174, section 174A, section 175 and section 176. In these cases the income of the current year is assessed in that year itself, without waiting for the next assessment year:
| Case | Section | What is assessed early |
|---|---|---|
| A ship of a non-resident carrying passengers, livestock, mail or goods shipped at a port in India | 172 | 7.5% of the freight or fare for the voyage is deemed income accruing in India; the master files a return and the tax is settled before the ship leaves |
| An individual likely to leave India during the year or soon after, with no present intention of returning | 174 | the income up to the probable date of departure |
| An association of persons, body of individuals or artificial juridical person formed for one event or purpose and likely to be dissolved in the year | 174A | the income up to the date of dissolution |
| A person likely to sell, transfer or otherwise part with his assets so as to avoid tax | 175 | the income up to the date the Assessing Officer starts proceedings |
| A business or profession discontinued during the year | 176 | the income up to the date of discontinuance, at the Assessing Officer's discretion |
In each case the person, or the source of the tax, may not be within reach by the time the normal assessment comes round: the ship sails, the individual leaves, the body is wound up or the assets are moved. The income is still charged at the rates in force for the year in which it is assessed, so the exceptions change the timing of the assessment, not the measure of the income.
Example (our own): a German engineer working in Pune finishes his contract in September 2021 and books a one-way flight home. The Assessing Officer may assess his income from 1 April 2021 to the date of departure in the assessment year 2021-22 itself (section 174), instead of waiting until 2022-23.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | The rule of section 4 with the two years defined | 1 |
| 2 | The five exceptions (sections 172, 174, 174A, 175, 176) | 2.5 |
| 3 | Reason and example | 0.5 |
| Total | 4 |
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