Income of a previous year taxed in the same year: the exceptions (as set, 1961 Act, AY 2018-19)

The general rule

Tax for an assessment year is charged on the total income of its previous year (section 4(1)), and the previous year is the financial year just before the assessment year (section 3). So the income of previous year 2017-18 is assessed in assessment year 2018-19, after the year has ended. (A business or profession newly set up, or a source of income newly arising, during a year has a first previous year running from that date to 31 March: proviso to section 3.)

Yes, there are exceptions

The proviso to section 4(1) allows the Act to tax the income of some other period where a provision so directs. In the following five cases the income of the current year is charged to tax in the current assessment year itself, without waiting for the next one, because waiting a year might leave nobody in India from whom the tax can be recovered. 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 itself need not be completed before the year ends (for section 172, see the time limit below).

1. Non-resident shipping business (section 172)

Where a ship owned or chartered by a non-resident 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)). Before the ship sails, its master must give the Assessing Officer a return of the freight (section 172(3)), and the Assessing Officer assesses the income and the tax on it, which the master pays (section 172(4)); if the master cannot file before departure, the officer may accept a return filed within thirty days of departure by a person the master has authorised (section 172(3), proviso). The order must be made within nine months from the end of the financial year in which the return is furnished (section 172(4A)). 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. Individual leaving India (section 174)

If the Assessing Officer believes an individual may leave India during the current assessment year, or soon after it ends, with no present intention of coming back, his income from the end of the last previous year up to the likely date of departure is taxed in the current assessment year (section 174(1)), at the rates in force for that year, with a separate assessment for each completed year or part of a year (section 174(2)). The officer may estimate the income where it cannot readily be worked out (section 174(3)) and may require a return by a notice allowing not less than seven days (section 174(4)); sections 174A and 175 apply these rules too.

3. Association or body formed for one event (section 174A)

An association of persons, a body of individuals or an artificial juridical person set up for a particular event or purpose, which is likely to be dissolved in the assessment year of its formation or just after it, is taxed on its income up to the date of dissolution in that same year.

4. Person likely to transfer assets to avoid tax (section 175)

If any person seems likely to sell, transfer, charge or otherwise part with his assets in order 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 is taxed in the current assessment year.

5. Discontinued business or profession (section 176)

When a business or profession is discontinued in an assessment year, the Assessing Officer may, at his discretion, tax the income from the end of the last previous year up to the date of discontinuance in that year itself (section 176(1)). The person must give notice of the discontinuance within fifteen days (section 176(3)).

Why the exceptions exist

In each case the person, or the income, may not be within reach of the Department once the normal assessment year comes. The tax charged under sections 174, 174A and 175 is in addition to any tax due under other provisions (section 174(5), which the other two sections apply).