Today, the concept of the Previous Year and Assessment Year is discussed only with reference to Income Tax Law. For calculation of tax in any Financial Year on the income of a person, the Previous Year and Assessment Year play key roles. Whereby for any Income Tax Return filing (hereinafter referred as “ITR”) Assessment Year is considered important, as the income of that Previous Year will be assessed of whose Assessment Year has been mentioned.
Previous Year
As per the Income Tax law, the Previous Year is the year in which income is earned. Income earned in this year is taxable in the next year, known as the Assessment Year. In the layman’s language, the current Financial Year is known as the Previous Year. The Financial Year starts from 1st April and ends on 31st March of the next year. For Example, for the salary accrued in Financial Year starting from 1st April to 31st March 2020, the Previous Year would be 2019-20.
Income Tax law defines Previous Year, as defined in section 3 of Income Tax Act, 1961 (hereinafter referred to as “IT Act”). The Previous Year is the Financial Year immediately preceding the Assessment Year. In the case of business or profession newly set up, or a source of income newly coming into existence, in the said Financial Year, the Previous Year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said Financial Year.
For Example: Previous Year, in relation to the Assessment Year, commencing on the 1st day of April 2020, means the period which begins with the date immediately following the last day of the Previous Year relevant to the Assessment Year commencing on the 1st day of April 2019 and ends on the 31st day of March, 2020. Previous Year in case of continuing business shall be the Financial Year immediately preceding the relevant Assessment Year, whereas Previous Year in the cases of newly set up a business or for a new source of income shall be the period commencing from the date of new business set up or source of income coming into existence to the forthcoming 31st March of that Financial Year immediately preceding the relevant Assessment Year.
There are instances when the income of the Previous Year is assessed in the same year. These are shipping business of non-resident, the person leaving India, permanently having no intention of coming back, an association of persons, the body of individuals or any artificial juridical person established for a definite objective, discontinued business, a person is likely to transfer, sell or dispose of assets to avoid the payment of taxes.
In situations where the assessee (a person by whom any tax or any other sum of money is payable under IT Act, and includes deemed assessee) has adopted more than one period as the Previous in relation to the Assessment Year commencing on the 1st day of April, 2019 for different sources of his income, the Previous Year in relation to the Assessment Year commencing on the 1st day of April, 2020 shall be reckoned separately in the manner aforesaid in respect of each such source of income, and the longer or the longest of the periods so reckoned shall be the Previous Year for the said Assessment Year.
Charge on Income Accrued in Previous Year while Residing in India
Income tax charged for any Assessment Year at any rates, income- tax at the rate or those rates shall be charged for that year in accordance with and in respect of the total income of the Previous Year of every person. For this, the total income to be charged of any person who is Resident in Previous Year includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in India during such year, or accrues or arises to him outside India during such year.
In the case of a person Not Ordinarily Resident in India, total income accrued in the Previous Year includes income accrued or arose to him outside India only if it is derived from a business controlled in or a profession set up in India. A person is said to be not ordinarily resident in India in any Previous Year if such person is
(a) an individual who has been a non-resident in India in nine out of the ten Previous Years preceding that year, or has during the seven Previous Years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten Previous Years preceding that year, or has during the seven Previous Years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.
For a Non- Resident total income of any Previous Year of a person shall include all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or accrued or arose or is deemed to accrue or arise to him in India during such year.
For charging income tax to a person he or she should be the residence in India, an individual is said to be resident in India in any Previous Year, if he is in India for that year for a period or periods amounting in all to one hundred and eighty- two days or more or he or she has within the four years preceding that year been in India for a period for periods amounting in all to three hundred and sixty- five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
In the case of an individual, being a citizen of India, who leaves India in any Previous Year as a member of the crew of an Indian ship for the purposes of employment outside India, one hundred and eighty-two days residence in India shall be considered for calculating Income Tax for a Previous Year. For any person being a citizen of India, or a person of Indian origin who, being outside India, comes on a visit to India in any Previous Year, one hundred- and eighty-two-days period of stay in India shall be considered for calculating Income Tax for a Previous Year. A Hindu undivided family, firm or other association of persons is said to be resident in India in any Previous Year in every case except where during that year the control and management of its affairs are situated wholly outside India. A company is said to be a resident in India in any Previous Year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Every other person is said to be resident in India in any Previous Year in every case, except where during that year the control and management of his affairs are situated wholly outside India. If a person is resident in India in a Previous Year relevant to an Assessment Year in respect of any source of income, he shall be deemed to be resident in India in the Previous Year relevant to the Assessment Year in respect of each of his other sources of income.
Income Tax Law provides an exemption to certain incomes, part of total income accrued in the Previous Year, to be charged for, in the next Assessment Year. The exemption is given to Special Allowances or any allowance given to employees. It may include an allowance to judges of the Supreme Court and High Court, UNO employees, or to the employees working as government employees outside India, travel allowance, uniform allowance, academic research allowance, etc. Further, an exemption to Agriculture Income, on the income of HUF, for example, Rs. 10,00,000 earned by HUF members during the Previous Year 2017-18 shall not be liable for the tax.
Moreover, the exemption is given to profit-sharing from partnership firm, LLP, to NRIs on their earnings on bonds or on account of NRE in the individual taxpayer’s hands. Nonetheless, exemption on interest to non-resident account in India or to non-resident Indian earnings, travel concession to all the employees including Indian and foreign citizen. The exemption is also provided to remuneration to Indian citizens who are working outside India and representing India in that country or in foreign companies. The statutory provident fund relating to the contribution, amount and interest, LIC policy, perquisites all are exempted from income tax accrued in the Previous Year.
Assessment Year
It is assumed that Income cannot be taxed before it is earned. Therefore, Assessment Year always appears after the Previous Year or follows the Previous Year in which income is collected. Section 2 (9) of the IT Act defines Assessment Year as the period of twelve months commencing on the 1st day of April every year. Assessment Year is Financial Year whereby the income accrued by a person in Previous Year or in Year preceding this Financial Year shall be Taxed or assessed. Calculation of tax requires assessment, calculation and payment of taxes which shall be done in the 12 months period of Assessment Year. It is the period during which an assessee is required to file the return of income i.e. Income Tax Return (ITR) for the income earned in the Previous Year and the Income Tax Officer (ITO) has to initiate assessment proceedings for such returned income and tax thereon.
Income tax forms have an Assessment Year because the income for any Financial Year is evaluated and taxed in the following or next or subsequent year i.e. the Assessment Year. Hence, it made it mandatory to select Assessment Year while filing income Tax Returns. The selection of the correct Assessment Year is also very important because assessment may hamper by adverse situations that can come up either in the beginning, middle or end of a Financial Year. Therefore, to streamline the process of collection tax mentioning of correct Assessment Year is important.
Difference Between Previous and Assessment Years
In India, every Financial Year starts from 1st April and ends on the 31st March of the next year. This is because India resonates with the system of Financial Year followed in the United Kingdom. Post-independence India opted for following the same concept. It is further believed to be supported by the fact, that many regional calendars New Year starts from the month of April, also the crop season in India starts in April and ends in March. The yearend months like November and December were not chosen as the end of Financial Year owing to a festival celebrated in these months making it difficult to close the books of accounts during this period.
Therefore, the Previous Year is the Financial Year starting from 1st April to 31st March preceding the current Financial Year for taxation purposes. It is the period of 12 months just preceding Assessment Year. The time period in which income is earned which shall be taxed in the next year. Both Previous Year and Assessment Year-end in 31st March and begin on the 1st April. However, the Previous Year is the year in which businesspeople, salaried professionals and senior citizens earn their money while the following year which is the Assessments Year is the time when the income that has been previously earned gets evaluated. The following table draws the distinction between a Previous Year and Assessment Year for any Financial Year.
| S. No. | Period | Financial Year | Previous Year | Assessment Year |
| 1 | 1st April 2018 to 31st March 2019 | 2018-19 | 2018-19 | 2019-20 |
| 2 | 1st April 2019 to 31st March 2020 | 2019-2020 | 2019-20 | 2020-21 |
| 3 | 1st April to 31st March 2021
|
2020-21 | 2020-21 | 2021-22 |
There are many points of difference between two consequent years termed as Previous and Assessment Years. The Previous Year is the year for which the data and sources of income are collected and organized whereas the Assessment Year is one in which the data of the Previous Year is assessed, and Income tax is calculated. Previous Year can be less than or equal to 12 months depending upon when the nature of the activity if the activity is in continuation, or activity has started, or it has ended up in the Year. On the other hand, the Assessment Year has to be equal to 12 months. The activity is assessed in entire period. Previous Year is usually the Financial Year preceding the current Financial Year whereas Assessment Year is usually the current Financial Year.
Previous Year is when data is collected, and the Assessment Year is when data is analyzed and calculated for imposing Income Tax. The difference in both years is also according to the requirement of Income Tax Laws whereby the Income Tax Return Forms are known to use the term Assessments Year instead of Previous Year. ITR for taxation and evaluation is carried out for income which has been earned in the year prior to Assessment Year. This is because the income is always earned in the period known as the Financial Year, it cannot ever be taxed prior to having been earned. And this shall be evaluated for the purpose of taxation and the latter is what takes place during the Assessment Year.
References
1. https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx.
2. What are Assessments Year and Previous Years? https://www.moneycontrol.com/news/business/personal-finance/what-is-assessment-yearprevious-year-1273167.html.
3. Difference between Assessments Year and Financial Year, Previous Years, Fiscal Year in World, https://www.bemoneyaware.com/blog/financial-year-assessment-year-fiscal-difference/#:~:text=Year%20or%20PY.-,%E2%80%9CPrevious%20Year%E2%80%9D%20is%20defined%20in%20Section%203%20of%20the%20Income,used%20in%20other%20economic%20matters.
This Article is Authored by Shriya Kesharwani, BBA LLB (Hons.) at GNLU.
