What is Difference between Assessment Year and Previous Year in Income Tax?

Difference between Assessment Year and Previous Year are:

ASSESSMENT YEAR.

The definition of the assessment year is given in Section 2(9) of the Income Tax Act, 1961. The assessment year is the year in which the previous year’s taxable income of the assessee is being assessed. For example, the current year is 2017-2018. This is the assessment year. In this year, last year’s income, i.e income of 2016-2017 is calculated for taxation purposes.

The calculation is done for the duration 1, April, 2016 to 31, March 2017. The year 2017-2018 is the assessment year or the financial year in which the assessee pays the tax for the previous year. There are some exceptions to the previous years income being taxed only which will be discussed further.

PREVIOUS YEAR.

The year for which the salary is being calculated is the previous year and the year in which it is assessed is the assessment year. All government business is conducted in this previous year between April 1 of last year and March 31 of this year also known as the fiscal year. Before 1989-90, the assessee could consider any 12 months as the assessment year, it may be from a Diwali to the next Diwali or from one Dussehra to another Dussehra or any other year. From 1.4.1989. uniformity has been maintained and the assessment year is now from 1 April to March 31.

The following provisions of Section 3 after amendment in 1989-90 are as follows:

• The previous year refers to the year just preceding the assessment year.
• Previous year means the 12 months which just ends on any day during the financial year immediately before 1 April of the assessment year.

If in the previous year the assessee had different sources of income, he has to make separate assessment for each source in the assessment year. He cannot club all the sources.

The period for any source, would be a period of twelve months or less. The assessee cannot make a uniform accounting year. If the previous year exceeded 12 months, there could be changes in the monetary limit, depreciation allowance or rate of tax according to the tenth schedule.

If the assessee has set up a new business in the previous year before April 1, 2017 and after March 31, 2016, the assessment of his business would exceed twelve months extending up to March 31, 2018. The period of previous year would be from the starting date of the business in 2016-17 to March 31, 2018. For example:

If Vaibhav has founded a new business on 1.10. 2016, and does not close his financial year on March 31, 2017 but continues up to March 31, 2018, his period of assessment would be 18 months.

If Kamar Rahi was adopting 1 January to December 31 as financial year before 2017, and then stetted following the uniform year of April 1-March 31, his year of assessment would be from January 1, 2017 to March 31, 2018, which would be 15 months.

The above period was referred to as the transitional period. Due to the transition, the previous year’s duration became more than 12 months due to which the assessee might not get the benefit of exemptions, and other benefits. Such cases are dealt with in schedule 10 which allowed for the exemption limits to be increased. Presently, the previous year cannot exceed 12 months. For example, if a new business has been set up on November 1, 2016 and assessment year is 20.17-18, the previous year would be 1, 2016 to 31 March 2017, i.e. 5 months.