• Harmehak Kaur Anand

Section 3 of the Income Tax Act, 1961- "Previous Year" defined

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Section 3 of the Income Tax Act, 1961 defines the term “previous year” for the purposes of this act. According to this section “previous year” is defined as “the financial year immediately preceding the assessment year”. Assessment year is defined in Section 2 (9) of the Act. It refers to the 12-month period beginning on April 1 of each year.


Basically, for the purpose of income tax, a year begins on April 1 and ends on March 31 of the next year. The year that income is earned is referred to as the previous year, and the year that it is taxed is referred to as the assessment year.


Let’s now understand this with an example. If the year 2021–22 is regarded as the previous year, then in this situation the previous year starts on April 1st, 2021, and ends on March 31st, 2022. Subsequently, the assessment year for the previous or financial year 2021-22 will start on April 1st, 2022, and ends on March 31st, 2023. In other words, assessment year will be 2022-23.


There is also a proviso clause mentioned in Section 3 which provides for a newly established business or profession or newly established source of income in the said financial year. It states that in such a situation, the previous year is the period starting with the date the business or profession was established, or, as applicable, the date the source of income first became operational, and ending with the said financial year. Simply said, for a newly established business or profession or source of income, the first previous year can be of less than 12 months.


Exceptions:

In certain exceptional cases, tax on income received in the previous year is paid in that year itself.

  • Income of a non-resident earned by a shipping business. (Section 172)

The income of a non-resident from an Indian shipping business must be taxed in the year it was generated, i.e., the previous year. The non-resident must either own the ship or charter it and the ship is expected to carry livestock, passengers, mail or goods to the Indian Port.

  • Income of an individual who is departing India permanently or for an indefinite time. (Section 174)

In this situation, income that is likely to be received up until the person's anticipated departure date is taxed.

  • Income generated by those bodies that are only created temporarily for a short time-period. (Section 174 A)

The reason is to collect the tax payable before such a body is dissolved.

  • Income of persons who are likely to transfer their property to avoid paying taxes. (Section 175)

Any person suspected of transferring his property before the start of the assessment year in order to avoid paying taxes, is taxed in the previous year only.

  • Income earned from a business that has been discontinued. (Section 176)


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