Assessment Year, Previous Year

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Assessment Year and Previous Year

Assessment Year (Section 2(9))

Definition:

  • The "assessment year" refers to a period of 12 months starting from April 1st to March 31st of the following year.

Purpose:

  • The assessment year is the financial year during which the income earned in the previous year is assessed and taxed by the Income Tax Department.

Process:

  • Taxpayers file their income tax returns for the previous year during the assessment year. The income tax department processes these returns, verifies the income declared by the taxpayers, calculates the tax payable, and issues an assessment order.

Example:

  • For income earned from April 1, 2019, to March 31, 2020 (previous year 2019-20), the assessment year would be from April 1, 2020, to March 31, 2021 (assessment year 2020-21).

Previous Year (Section 2(34) read with Section 3)

Definition:

  • The "previous year" refers to the financial year immediately preceding the assessment year. It is the year in which income is earned and which is assessed to tax in the subsequent assessment year.

Purpose:

  • The income earned during the previous year is calculated and taxed in the assessment year.

Example:

  • For the assessment year 2020-21, the previous year would be 2019-20 (April 1, 2019, to March 31, 2020).

Types of Previous Year:

  • Continuing Business:
    • For an ongoing business, the previous year is always the financial year preceding the assessment year.
    • Example: For the assessment year 2020-21, the previous year is 2019-20 (April 1, 2019, to March 31, 2020).
  • Newly Set Up Business or Profession:
    • When a new business or profession is set up, the first previous year starts from the date of commencement and ends on the next March 31st.
    • Subsequent previous years will be full financial years (April 1st to March 31st).
    • Example: If a business is set up on July 1, 2019, the first previous year will be from July 1, 2019, to March 31, 2020. The next previous year will be from April 1, 2020, to March 31, 2021.
  • Newly Created Source of Income:
    • For a newly created source of income, the previous year starts from the date the source comes into existence and ends on the next March 31st.
    • Example: If a new source of income starts on September 1, 2019, the previous year will be from September 1, 2019, to March 31, 2020.

Additional Facts:

  • Tax Calculation: The income earned in the previous year is calculated and taxed in the corresponding assessment year.
  • Exceptions: Although the general rule is to tax the income of the previous year in the assessment year, there are specific exceptions where income might be taxed in the same year it is earned. These exceptions include cases like shipping businesses of non-residents, persons leaving India, etc.

Summary:

  • Assessment Year: The financial year in which the income earned in the previous year is assessed and taxed (April 1st to March 31st).
  • Previous Year: The financial year immediately preceding the assessment year in which the income is earned (April 1st to March 31st).
  • New Business/Profession: The first previous year begins from the date of commencement and ends on the following March 31st, with subsequent previous years being full financial years.
  • New Source of Income: The first previous year starts from the date the source of income is created and ends on the following March 31st.