Sections 2(9)/ 2(34) of Income Tax defines the ‘Assessment Year’ and ‘Previous Year’, for better understanding of the concept of Previous Year & Financial Year vis-a-vis Assessment Year by a layman;
a) Meaning of Assessment Year: Section 2(9) Income Tax
As per S.2(9) of the Income Tax Act, 1961, unless the context otherwise requires, the term ‘assessment year’ means the period of twelve months commencing on the 1st day of April every year.
Therefore, basically the Assessment year is considered to be a 12 months period starting from April 1, during which an assessee is required to file the return of income (ITR) for the previous year and the ITO has to initiate assessment proceedings for such returned income and tax thereon. Since Income Tax is on income of a financial/ previous year or period, so tax filings and assessment can start thereafter. Probably, that’s why it’s called assessment year/ period.
For example, Assessment Year 2020-21 is a period of 12 months starting from 1 Apr. 2020 and ending with 31 March 2021.
b) Meaning of Previous Year: Section 2(34) & Section 3 Income Tax
As per S.2(34) of Income Tax Act, 1961, unless the context otherwise requires, the term ‘previous year’ means the previous year as defined in section 3. In view of above, we need to visit Section 3 of Income Tax Act, 1961, which defines the term previous year as under:
“For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year:
Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.”
Therefore, basically the Previous Year indicates the year/ period prior to another. Under Income Tax, the returns are filed by by assessees after end of the year/ period during which earnings are made and that period is called previous year/ financial year. However, when such earnings are subjected to assessment/ review by ITO in the subsequent period/ year, the same is called assessment year/ period.
For example, previous year corresponding to assessment year 2020-21 means the preceding financial year, i.e. 2019-20 (1 Apr. 2019 to 31 Mar. 2020), however the previous year may begin from a later date in the case of new business/ source of income. In case a new business is set-up on 1 Oct. 2019, then previous year will be 1 Oct. 2019 to 31 Mar. 2020, which is a part of financial year 2019-20.
c) Concept of Previous Year & Financial Year vis-a-vis Assessment Year
Understanding concept of previous year is very simple, it’s basically a period of upto 12 months just preceding the assessment year. Since financial year is always a period of 12 months and income/ source of income may be of smaller span/ tenure than of 12 months, so the concept/ term of previous year is used under Income Tax to cover income or source of income coming into existence after the commencement of financial year and to cover income or source of income coming to an end before completion of the financial year. Either way any income or source of income is not required to be spread to the whole of financial year, it may be part of the same and the same may be called a previous year.
Accordingly Previous Year in the case of a continuing business shall be the Financial Year immediately preceding the relevant Assessment Year, whereas Previous Year in the cases of newly set up business or for new source of income shall be the period commencing from the date of new business set up or source of income coming into existence to the forthcoming 31st March of that Financial Year immediately preceding the relevant Assessment Year.
It may not be out of place to mention that now even under Companies Act 2013 all the companies are required to have a uniform financial year. In other words, normally a period of upto 12 months ending on 31 March every year, however in the case of first accounting period, the same may be of less than 12 months and may extend upto 18 months with prior approval of the ROC.