‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Q. ‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Ans. The year in which income is earned is known as previous year and the next year in which this income is taxable is known as assessment year. 

‘Income Tax is charged on the income of previous year’. This statement is generally true but not fully. Under the Income Tax Act, income earned in previous year is taxable in assessment year. This means that tax is not charged in the same year in which the income is earned. 

Income tax is charged on the income of the previous year. However, there are certain exceptions to this rule. In the following cases the assessee is liable to be assessed to tax in the same year in which he earns the income :

1. Income of non-resident from shipping business: In case of a non-resident carrying shipping business, any income derived from carrying passengers, livestock, mail or goods shipped at a port in India, will be taxed in the year of its earning. 7½% of the amount paid or payable on account of such carriage will be deemed to be the income. 

2. Income of persons leaving India: When an individual may leave India during the current assessment year or shortly after its expiry, and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be charged to tax in the assessment year.

3. Income of an association of persons or a body of individuals or an artificial juridical person formed for a particular event or purpose: Where any A.O.P or B.O.I or an artificial juridical person is formed or established or incorporated for a particular event or purpose and is likely to be dissolved in the assessment year in which it is formed or established or incorporated or immediately after such assessment year, the total income of such assessee for the period from the expiry of the previous year for that assessment year upto the date of its dissolution, shall be chargeable to tax in that assessment year.

4. Transfer of property to avoid tax: An assessee is likely to transfer his property to avoid tax, the total income of such person for the period from the expiry of the previous year for the assessment year to the date when assessing officer commences preceeding shall be chargeable to tax in the same assessment year.

5. On discontinuance of business or profession: In the case of discontinuance of a business or profession, the income of the period from the expiry of the previous year for the assessment year in which the business or profession is discontinued upto the date of such discontinuance may be charged to tax in the same assessment year. 

[C.W. General rule is that income of previous year is taxable in assessment year with some exceptions.

Exceptions to the general rule:

1. Income of non-resident shipping company: Shipping company is one which carry passengers from one port to another. 7.5% of the total freight shall deemed to be the income of non-resident shipping company.

2. Income of person leaving India: has no intention to come back will chargeable to tax in the same assessment year.

3. Income of AOI, BOI or artificial juridical person fall for a particular object.

4. Transfer of assets/shares to avoid tax liability: tax will be paid on same year.]

5. On discontinuance of business.