As per Section 3 of the Income Tax Act, 1961, Previous Year is the Year immediately preceding the assessment year. Previous year is also known as Financial Year. It basically means the period starting from April 1 and ending on March 31 of the next year. For the income earned in the previous/financial year, tax is paid in the assessment year.

However, in those cases, where a new business/profession/ new source of income, is set up in a particular previous/financial year, then in such cases,  the previous/financial year will not begin/calculated from 1st April but will begin/ calculated from the date when the new business/profession/ new source of income was set up.

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YEAR 2020-21

For the year 2020-21, if it is considered to be the previous year, then in this case, the previous year begins on 1st April 2020 and will end on 31st March 2021. And the assessment year for this  previous/financial year will be 2021-22, i.e, will be from 1st April, 2021 to 31st March 2022.

Similary if the year 2020-21 was the assessment year, then the year 2019-20 would have been the previous / financial Year.

Tax on Income earned in the previous year is paid in the assessment year. However, there are a few exceptions where the tax on Income earned in the previous year is paid in the previous year itself. These exceptions are:

  • Income earned by a non resident through a shipping business in India

As per Section 172 of the Income Tax Act, 1961, the income earned by a non-resident from a shipping business in India, has to be taxed in the previous year itself. The non resident in this case either has to own the ship or has to charter the ship. The ship in this case should carry passengers/livestock/mail/goods, which are shipped to Indian Port. The rationale behind this provision is that the person /non resident may or may not have agent in India, and once he leaves India, it will get difficult to recover tax from him. In this cases it is mandatory for the Assessment Officer to charge Tax.

  • Income earned by the person who is leaving India permanently or for a long period of time.

As per Section 174 of the Income Tax Act, 1961, probable income up-till the probable date of departure of the person leaving, is taxable. Again the rationale behind this  provision is that once the person leaves the country it might get very difficult to recover the tax from him. In this cases it is mandatory for the Assessment Officer to charge Tax.

  • Income earned by those bodies which are formed for a short period of Time.

As per Section 174A of the Income Tax Act, 1961, the tax on income from those bodies which are formed for a very short period are collected in the previous year itself. The rationale behind this is that these bodies may be dissolved before the beginning of the assessment year and then collection of tax from them might get difficult. In this cases it is mandatory for the Assessment Officer to charge Tax.

  • Income earned by those person who are likely to transfer their property in order to avoid tax

As per Section 175 of the Income Tax Act, 1961, those people who are suspected to transfer their property before the beginning of the assessment year, in order to avoid tax, the income of those people are collected in the previous year itself. In this cases it is mandatory for the Assessment Officer to charge Tax.

  • Income earned from a discontinued business.

As per Section 176 of the Income Tax Act, 1961, the tax on Income from a business which has been discontinued in that previous year can be collected in that previous year itself. However, this is completely on the discretion of the Assessment Officer and it is not mandatory for him to charge in the previous year itself.

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