This article is written by Lahari Vennam of KL University, Andhra Pradesh, an intern under Legal Vidhiya.
ABSTRACT
Taxes on income must be paid to the government by all income earners. Taxes on all types of income, such as wages, profits from enterprises, and capital gains, are covered.
The amount of tax paid is determined by the income received as well as how much was taxed before. The Income Tax Department sends taxpayers an annual statement that includes all deductions used to determine their taxable income as well as their total taxable income for the year.
When addressing the ideas of the prior year and assessment year, only income tax legislation is mentioned today. Tax on a person’s income for any Financial Year is determined in part by the Prior Year and Assessment Year. Since the income from that Previous Year will be evaluated of whose Assessment Year has been provided, the Assessment Year is considered essential for any Income Tax Return filing (henceforth referred to as “ITR”).
Keywords: Tax, year, Income Tax, Previous year, Assessment year, Business, Revenue, Exemption, Financial Records, Tax Payers.
INTRODUCTION
Assessment Year’s Meaning: Section 2(9) Income Tax[1]
According to S.2(9) of the Income Tax Act of 1961, an “assessment year” is defined as the 12-month period beginning on April 1st of each year, unless the context clearly dictates otherwise.
As a result, the assessment year is essentially the 12-month period beginning on April 1 during which the assesses must file an income tax return (ITR) for the previous year and the ITO must begin the assessment procedure for the associated tax. Because income taxes are dependent on gains from a previous financial year or period, tax filing and assessment may begin later. For that reason, it is most frequently referred to as an evaluation year or period.
Meaning of Section 2(34) and Section 3 Income Tax[2] for the Previous Year
According to Section 2(34) of the Income Tax Act of 1961, “previous year” implies the preceding year as specified in Section 3 unless the context clearly dictates otherwise.[3]
The Income Tax Act of 1961’s Section 3 specifies the following meaning of the term “previous year” in light of the aforementioned.
With regard to this Act, the financial year that concluded immediately before to the assessment year is referred to as the “previous year”:
In essence, the term “Previous Year” therefore refers to the year or period of time before to another. Assesses are required to submit their income tax returns following the conclusion of the prior year, commonly referred to as the financial year, during which earnings were made.
For example, the prior year corresponding to the assessment year 2021-22 is the prior financial year, i.e., 2020-21 (01/04/2020 to 31/03/2021), even though the prior year can start later in the event of a new business or source of revenue (i.e., from 01/04/2020 or any day thereafter up until 31/03/2021). The preceding year would thus run from October 1, 2020, to March 31, 2121, which is merely a fraction of the fiscal year 2020–21. A new firm might be created on October 1, 2020.
Understanding the Previous year’s Financial year in Relation to the Assessment year
Since “previous year” merely refers to the period up to 12 months previously to the evaluation year, it is easy to comprehend. The term “previous year” is used in the context of income tax to describe sources of income that begin after the start of the financial year and end before the end of the financial year because the financial year is always a period of 12 months, but sources of income may have a shorter span or tenure than that. Whatever the situation, any income or revenue does not necessarily have to be distributed throughout the whole fiscal year; it might alternatively be a fraction of the same and be recorded as a prior year.[4]
To prevent situations where income is liable to taxation under the same rules as income from the previous year but receives no assessment.
In the case of some assessments, the prior year, and occasionally the prior year and assessment year, are treated as one:
- When it comes to non-residents, income from shipping business in India [Section 172];
- Assessment of people leaving India permanently or for a long time [Section 174];
- Evaluation of a group of individuals (AOP), a group of individuals (BOI), or an artificial juridical person (AJP) that was established for a certain duration, occasion, or objective and dissolves during the same prior year [Section 174A];
- Assessment of people whose property is thought to have been transferred to avoid paying taxes [Section 175]; and
- Assessment of income from a business that was shut down the prior year [Section 176].
The terms Assessment Year and Previous Year are essential when filing income taxes and understanding them. This page, which also defines what an assessment year is for income tax purposes, has further information on these two.
The Income Tax Act of 1961 regulates it. All those who reside in India for any portion of the year are covered by the statute. The amount of income tax a person must pay is based on their yearly income. Additionally, a person may benefit from a number of tax exemptions. Depending on their eligibility, individuals may get a variety of tax exemption advantages under the Income Tax Act of 1961. Knowing what income tax assessment is necessary for submitting tax returns.[5]
It is crucial to follow all laws and regulations while submitting an income tax return.
What is Assessment year?
The year that follows the fiscal year (FY) is the assessment year (AY). The assessment and taxation of the income received during the FY takes place at this time. FY and AY both begin on April 1 and terminate on March 31. For example, the assessment year for FY 2022–23 is AY 2023–24.
If the years 2020–21 are regarded as the previous years, then in this situation the previous year starts on April 1st, 2020, and ends on March 31st, 2021. Additionally, the evaluation period for the previous/financial year will run from April 1 through March 31 of 2021–2022. Similarly, if the evaluation year were 2020–21, then the previous/financial year would have been 2019–20.
This is justified by the possibility that these organizations will disintegrate before to the start of the assessment year, making it more challenging to collect taxes from them. In certain circumstances, the Assessment Officer is required to impose tax.’ Earnings of persons whose property will likely be transferred in order to avoid taxes According to Section 175 of the Income Tax Act of 1961[6], those who are accused of transferring their property before the start of the assessment year in order to avoid paying taxes have their income from the prior year itself seized. In certain circumstances, the Assessment Officer is required to impose tax. income from a closed down firm. The tax on income from a business that was discontinued in the prior year may be collected in accordance with Section 176 of the Income Tax Act, 1961[7], in the same year that the business was terminated.
However, the Assessment Officer has free discretion over this and is not required to charge in the prior year.[8]
Assessment Year
Since income cannot be taxed before it is earned, this is presumed to be true. As a result, the Assessment Year always follows or comes after the Previous Year in which income is received. The 12-month period beginning on April 1st of each year is referred to as the Assessment Year under Section 2(9) of the IT Act. The assessment year is the fiscal year in which a person’s income from the prior fiscal year or the year before to this fiscal year is taxed or assessed. Tax assessment, computation, and payment must be completed within the Assessment Year’s 12-month time frame in order to calculate taxes.
It is the deadline by which a taxpayer must submit an income tax return (ITR) for money earned the year before in order for the income tax officer (ITO) to start figuring out how much tax is owed on the money that was returned.
Due to the fact that the income for any Financial Year is assessed and taxed in the Assessment Year, income tax forms contain an Assessment Year. As a result, it became necessary to choose the Assessment Year when submitting income tax returns. The right assessment year must be chosen since assessments may be hampered by unfavourable circumstances that might arise at any time during a financial year—in the beginning, middle, or end.
Therefore, it’s crucial to provide the exact Assessment Year in order to speed the tax collecting procedure.
According to the money Tax Act, money earned during one fiscal year is taxable throughout the following fiscal year. Therefore, the fiscal year in which the individual made money is the preceding year. The fiscal year during which the tax owed on the individual’s income is calculated, however, is known as the Assessment Year.
We are all aware that the calendar year always begins on January 1 and concludes on December 31. However, since “Financial Year” is utilized for accounting and taxes purposes, the calendar year is irrelevant.
A company’s financial statements are created and reported globally, according to the fiscal year. It is a 12-month period that begins on April 1 and concludes on March 31.
Meaning of the previous year
The fiscal year that ended just before the assessment year is referred to as the “Previous Year”. It is the year that a person or business produces income that is liable to tax in the assessment year. ‘Previous year’ is defined in Section 3 of the Income Tax Act of 1961[9].
A newly created firm or profession will have a preceding year that is shorter than 12 months long, starting on the first day of operation and ending on March 31 of that financial year.
It is normal to review the revenue from the prior fiscal year in the following year. There are, however, a number of circumstances in which the current year’s income is determined using the preceding year’s revenue. Those are:
- Shipping enterprise run by a non-resident.
- A person who leaves India permanently and has no plans to return.
- Association of people, a group of people, or any artificial legal entity created with a specific purpose.
- Discontinued operations
- To avoid paying taxes, a person is likely to transfer, sell, or dispose of assets.
Definition of Assessment Year
During an assessment year, a person’s income is calculated, or validated, and taxed. A single person, a Hindu Undivided Family (HUF), an association of people (AOP) or a body of people (BOI), a partnership firm, a local government, a corporation, or any other artificial legal structure are all acceptable uses of the term “person” in this context.
The word “assessment year” is defined in Section 2(9) of the Income Tax Act of 1961[10] as a 12-month period beginning on April 1 of each year.
As a result, the assessment year is the financial year that immediately follows the financial year in which the assessee’s income is assessed, an income tax return is filed, the tax due is determined, and a payment is required. The financial year to which the income relates is therefore referred to as the preceding year.
Additionally, during the assessment year, the following dates will serve as the due dates for submitting income tax returns for the previous year:
- For individuals, AOPs, BOIs, and HUFs who do not require an audit of their finances, the 31st of July,
- For companies, partners (workers) in a firm, or people whose financial records must be audited due to legal requirements, the deadline is September 30. For companies that must file a transfer pricing report, the deadline is November 30.
Following are the key distinctions between the prior year and the assessment year:
The previous year might be seen as the assesses profitable fiscal year.
The fiscal year is the one in which revenue from the preceding year is subject to taxation.
The previous year is the one that deals with the income that is subject to taxation.
The prior year might be less than 12 months, though typically it is. On the other hand, the evaluation year is usually a yearlong period.
Example
Mr. X received an income of Rs. 40 lakhs in the fiscal year 2018–19, which is taxable in the year after, or 2019–20. In this case, the prior year will be 2018–19 since Mr. X generated income during that year. However, the assessment year will be 2019–20 because that is the year in which Mr. X’s prior year income will become taxable. The money earned in 2019–20 will also be evaluated and taxed in the next fiscal year, or 2020–21.
Section 3 of the Income Tax Act of 1961 offers a definition of how income taxes are handled for the previous year. The fiscal year that ended just before the assessment year is referred to as the Previous Year. The Previous Year is the period starting with the date on which the business or profession was established, or, as the case may be, the date on which the source of income newly came into existence, and ending with the said Financial Year in the case of a newly established business or profession or newly established source of income in the said Financial Year.
For instance, “Previous Year” refers to the time frame beginning on the day immediately after the final day of the Previous Year relevant to the Assessment Year commencing on April 1, 2019, and ending on March 31, 2020, in the context of the Assessment Year beginning on April 1, 2020. The period from the date of establishment to the upcoming 31st March of that Financial Year immediately preceding the relevant Assessment Year is defined as the Previous Year for newly established businesses or new sources of income; however, in cases of continuing business, it is the Financial Year that is immediately preceding the relevant Assessment Year.
Data is collected in the prior year, and in the assessment year, it is analyzed and calculated for income tax reasons. The two years are distinguished in line with the Income Tax Laws, which mandate that the term Assessments Year, rather than Previous Year, be used on Income Tax Return Forms. ITR is utilized for taxes and evaluation for income earned in the year prior to the assessment year. This is because revenue is always earned during the period known as the Financial Year and can never be taxed before it is created. And during the Assessment Year, this will be evaluated in order to determine taxes.
Assessment Year’s Importance in ITR:
The calendar year for which a tax return must be filed is known as the income tax assessment year. The Income Tax Department determines the assessment year based on your income from prior years and other important considerations. The assessment year for a person runs from April 1 of one fiscal year to March 31 of the next.
Taxpayers and the income tax division can evaluate and verify the correctness of the prior year’s income at any time throughout the assessment year. When submitting a tax return, this is favorable. The evaluation period runs from April 1 to March 31.
What Does Income Tax Prior Year Mean?
Section 3 of the Act defines previous year in income tax. It is the time frame immediately before the assessment year, running from April 1 through the following March 31. Whether a firm is an established one or a new one will also affect how the Previous Year is decided. Let’s see how to determine the previous year in these circumstances: –
- Actively conducting business or having an established source of revenue: In this context, “Previous Year” refers to the 12 months immediately prior to the Assessment Year.
- New business: In this situation, the previous year—begins on the date the business or profession is established and ends on March 31 of the specified financial year.
- New source of income: In this scenario, the previous year starts on the day the new source of income is created and ends on the 31st of March of the relevant financial year.
CONCLUSION
With a few exceptions, which we have previously covered in this article, Every Previous is the assessment year for the immediately prior financial year, or Previous Year.
Because income for a certain financial year is calculated and taxed only in the assessment year, you may have noticed that Assessment year rather than Previous year is shown on income tax forms. This is because tax cannot be collected on income that has not yet been generated.
The financial year may start in the middle or the end when assessees quit their jobs, find new ones, make new investments, start receiving income from new sources, etc. And for this reason, assessment begins following the conclusion of the fiscal year in which the revenue is produced. As a result, while completing their return, the assessees must select their assessment year.
You must understand the terminology and the detailed procedure before submitting income tax returns. The phrases assessment year and prior year are crucial when preparing income tax returns. The assessment year is the year in which a person’s yearly income is calculated for the purpose of filing income taxes. The year in which the revenue is generated is the prior year. The evaluation year comes after the preceding year.[11]
[1] S. 2(9), Income Tax Act, 1962.
[2] S. 2(34) and S.3, Income Tax Act, 1962.
[3] https://taxguru.in/income-tax/previous-year-under-income-tax-act-1961.html
[4] https://sortingtax.com/previous-year-and-assessment-year-in-income-tax/
[5] https://www.lawtool.net/post/previous-year-under-income-tax-act-1961
[6] S. 175 of the Income Tax Act of 1961.
[7] S. 176 of the Income Tax Act, 1961.
[8] https://www.caclubindia.com/forum/assessment-year-previous-year-289852.asp#:~:text=In%20an%20assessment%20year%2C%20you,Assessment%20Year%20is%202013%2D14.
[9] S. 3 of the Income Tax Act of 1961.
[10] S. 2(9) of the Income Tax Act of 1961.
[11] https://vakilsearch.com/blog/previous-year-and-assessment-year-in-income-tax/#:~:text=This%20year%20is%20known%20as,paid%20in%20the%20assessment%20year.
0 Comments