Ok, you are very curious to know the difference between “Assessment Year” and “Previous Year”.
And why not.
If you are a taxpayer or a student then you are familiar with these terms.
However, in order to proper Income tax Return, you must have proper idea about the difference between these two important terms.
Let’s start our discussion.
- 1 Assessment year
- 2 Previous Year
- 3 When Income of the Previous Year is taxed in the same year?
- 4 Final Word.
You know friend, the term “assessment year” looks so small but the concept of this term has deep impact on your financial life.
As a person, your income will be assessed in the assessment year.
If you are liable to pay the tax or other sums of money then you will be treated as an assessee in the eyes of Income Tax.
For your knowledge:
Now see the following:
What do you mean by the term “Year”?
Or if I ask you more specific then what is the period of a year?
Your simple reply will be from 1st January to 31st December i.e. a calendar year.
Oh, it’s so easy, right?
But if you talk about the financial year then the answer is a little different.
The period of the financial year starts from 1st April of the current year and will end on 31st March of the next year.
For example, the financial year 2019-20 means from 1st April 2019 to 31st March 2020.
You will liable to pay tax for the income earned in a financial year.
So, whenever you will talk about a financial year you have no confusion about the period.
What is Assessment Year?
According to the provisions of Section 2(9) of the Income Tax Act 1961 the term “Assessment Year” means a period of 12 months commencing on 1st April of every year and ending on 31st March of the next year.
For example, the assessment year 2019-20 commenced on 1st April 2019 and will end on 31st March 2020.
Assessment means evaluation or judgment of something.
In the case of income tax, the term assessment means an evaluation of the income of the assessee.
On the basis of such evaluation, the total tax liability of such assessee will be decided.
Assessment Year is the year of evaluation of such income of the assessee.
You can say the “assessment year” is the year in which the income of an assessee of the previous year is assessed or evaluated. On the basis of such an assessment or evaluation, the tax liability will be decided.
Assessment Year for ITR
If you see any income tax forms, you can find the assessment year for ITR i.e. the assessment year for which such income tax return is filed.
See the below image:
Now you can see the assessment year for ITR here.
In the ITR form, only the assessment year is shown because of your income of the previous financial year will be assessed in that assessment year.
At the time of return filing, you have to select the proper assessment year relevant to your ITR.
Or you can say the “financial year”.
Let’s know the term previous year very clearly.
Definition of Previous Year
According to the provisions of section 3 of the Income Tax Act 1961, the term “Previous Year” means the financial year immediately preceding the assessment year.
Income earned in the previous year will be assessed in the next assessment year.
For example, the previous year for the assessment year 2019-20 is 2018-19. Therefore, the income earned in the previous year 2018-19 will be assessed in the assessment year 2019-20.
Previous Year for a newly set up business or profession.
It is very clear that the period of the previous year is commencing on 1st April and ending on 31st March.
But there may be a difference in some cases.
What are those cases?
Previous Year when a business or profession is first time set up
It may happen that you have started your very first business or profession or any other income sources in the previous year.
For example, Mr. Avishek has started his business on 1st December 2018.
In this case, the period of the previous year is commencing on the first day on which such business is started i.e. on 1st December 2018 and ending on 31st March 2019.
For the next year, the previous will be the general previous year i.e. starts from 1st April and will end on 31st March.
Previous year when new income source starts
You have already your business or profession. But for boost up your income you have started another income source on 1st December 2018.
But in this case, your previous year will be the normal year i.e. starts from 1st April 2018 and will end on 31st March 2019.
Because you already have your one source of income throughout the year.
When Income of the Previous Year is taxed in the same year?
The income of the previous year shall be assessed in the subsequent assessment year.
This is a general rule.
But this rule has certain exemption. And they are:
- Shipping business of a non-resident.
- Person Leaving India.
- AOP or BOI or AJP formed for a particular event or purpose.
- Transfer of property to avoid tax.
- Discontinued Business.
Ok, we discuss these, one by one.
Income from Shipping Business of a Non-Resident
In case of the shipping business of a non-resident, the master of the ship should file his return of income before the departure of the ship. And also pays the tax as per assessment.
However, if the Assessing Officer satisfies, then he can file his return within 30 days of the departure.
The main point is he has to file his return in the year of his income and the assessment is mandatory.
Income of Persons leaving India
It may happen that the person may leave India during the previous year and he has no such intention to return back immediately.
In that case, his total income up to date of his departure shall be assessed in the same previous year.
For example, Mr. Avishek has the intention to leave India on 3rd December 2018. In that case, his income from 1st April 2018 to 3rd December 2018 will be assessed in the same year i.e. 2018-19.
Income of AOP or BOI or Artificial Juridical Person (AJP) formed for a particular event or purpose
It may happen that an AOP or BOI or AJP is established for a particular event or purpose and likely to dissolve in the year of establishment.
In that case, the total income for the period from the date of establishment up to the date of dissolution shall be chargeable to tax in the same year.
Now read the bellow example very carefully.
Let Mr. Avishek and Mr. Abhijit form a BOI on 1st April 2018 for a particular purpose.
On 31st July 2019, they dissolve the BOI due to the completion of such purpose.
In this case, there will be two assessments in the year 2019-20.
The BOI was established on 1st April 2018. From 1st April 2018 to 31st March 2019 was it’s first previous year. Therefore the assessment year will be 2019-20.
So, this is the first assessment.
Again they dissolve the BOI on 31st July 2019.
The previous year for the income earned during the period of 1st April 2019 to 31st March 2020 is 2019-20.
But that BOI will not exist after 31st July 2019.
Another assessment will be required for the income earned between 1st April 2019 and 31st July 2019.
In this case, the assessment will be done on the previous year and not in the next assessment year.
So, in 2019-20 there will be two assessments.
One is for the income earned in 2018-19 and another is for the income earned in 2019-20.
Income of Person likely to transfer property to avoid tax
It may happen that a person is likely to transfer, charge or sell any of his assets during the current financial year.
The purpose of such transfer is the avoidance of tax.
In that case, the AO may serve notice to such person for the assessment of that person’s income from the 1st day of the previous year up to the date of transfer of such asset.
For example, Mr. Avishek is likely to transfer his asset on 1st January 2019 for the purpose of tax avoidance. The AO may serve a notice to him for furnishing a return of income for the period from 1st April 2018 up to 31st December 2018.
Hence assessment year and the previous year are the same.
Income of a discontinues Business
If any business or profession is discontinued in any financial year, the AO may serve a notice to furnish the return of income earned from the 1st April of that year up to the date of such discontinuation.
However, the AO may assess the income as per regular assessment.
So, now you have a proper idea about the topic.
In case of any doubt, feel free to ask me.
I am here always with you.
See you soon.