Previous year and assessment year: the double role of a financial year, section 3, the exceptions, and a new business (as set, 1961 Act, AY 2020-21)

The double role of a financial year

Income-tax is charged for an assessment year on the total income of the previous year (section 4(1)). The assessment year is the twelve months beginning on 1st April each year (section 2(9)), and the previous year is, as a rule, the financial year just before it (section 3). So the same financial year plays two parts at once:

• it is the previous year for the income earned in it, which is assessed in the year after; and
• it is the assessment year in which the income of the year before it is assessed.

Example. Take the financial year 2019-20 (1 April 2019 to 31 March 2020). The income earned in it is the income of the previous year 2019-20, assessed in the assessment year 2020-21. During the same twelve months the Income-tax Department assesses the income of the financial year 2018-19, because 2019-20 is also the assessment year 2019-20.

Previous year: section 3

Section 3 defines the previous year as the financial year immediately preceding the assessment year. Its proviso deals with a new business or profession, or a new source of income: for the financial year in which it is set up or comes into existence, the previous year starts on that date and ends on 31st March of that financial year. A first previous year can therefore be shorter than twelve months, but it never runs past 31st March, and every previous year after the first is the full financial year. Apart from that shorter first period of a new business or source, every source of income of the assessee shares the same previous year, the financial year.

Cases where the income is taxed in the previous year itself

As a rule the income of the previous year is taxed in the assessment year that follows (section 4(1)); its proviso allows income of another period to be charged where a provision of the Act so requires. In the cases below the income is charged in the previous year itself, because waiting for the next assessment year could put the tax beyond recovery. 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, and the income is then chargeable; only section 176 leaves the charge to the officer's discretion.

1. Shipping business of non-residents (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 of persons or body of individuals formed for a particular event or purpose (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)).

Under sections 174 to 176 each completed previous year (or part) is charged at the rates in force for the assessment year then current; under section 172 the rate is that for a company that has not made the section 194 arrangements.

The new business

The question asks which previous year is relevant to the assessment year 2020-21 when a new business is set up on 28.03.2018, or on 28.03.2019. Assessment year 2020-21 begins on 1 April 2020, so its previous year must end on 31 March

2020. The special first previous year of the proviso to section 3 arises only for the financial year in which the business is set up.

Set up on 28.03.2018

• First previous year: 28.03.2018 to 31.03.2018 (four days), assessed in assessment year 2018-19.
• Next: 2018-19 (1.4.2018 to 31.3.2019), assessed in assessment year 2019-20.
• For assessment year 2020-21, the previous year is 2019-20: 1 April 2019 to 31 March 2020.

Set up on 28.03.2019

• First previous year: 28.03.2019 to 31.03.2019 (four days), assessed in assessment year 2019-20.
• For assessment year 2020-21, the previous year is again 2019-20: 1 April 2019 to 31 March 2020, a full twelve months, since the business was not set up in that financial year.

In both cases the relevant previous year is the same; the date of setting up changes only the length of the first previous year and the assessment year in which it is assessed.