Section 3: Meaning of “Previous Year” Under Income Tax Act, 1961

By | July 14, 2015

As Per Income Tax Act, 1961 “Previous Year” is defined as:

“Previous year” means the financial year immediately preceding the Assessment year.

Related Cases:

Business expenditure—IT Act, 1961—The expression “setting up of the business in the previous year” as per S. 3 of IT Act, 1961 is different from commencement of the business and in the case of a company engaged in rendering financial services, the business is set up when the directors, staff, such as regional and branch managers are appointed and their salaries are paid, computers are acquired and installed and the company is ready to commence business. Hence, the approach of the Assessing Officer that the business is set up only when the bank account is opened, is not sustainable—CIT vs. Whirlpool of India Ltd. [2010] 229 CTR 435 (Delhi)

S. 2(13), 3 & 37(1) of the IT Act, 1961—Business expenditure—Since the another concern business have been merged with the assessee fulfilling all the formalities of merger and High Court vide order dt. 2nd Nov., 2001 have sanctioned the de-merger w.e.f. 1st Jan, 2002, therefore, expenditure incurred after setting up of business i.e., after 2nd Nov., 2001 as revenue expenditure though business commenced from 1st Jan. 2002—DHL Express (I)(P) Ltd. vs. ACIT (2009) 124 TTJ 108 (ITAT-Mumbai)

S. 36(1)(viia) of the IT Act, 1961, S. 5(c),5(d) & 56 of Banking regulation Act, 1949, S. 3 of Companies Act, 1956—Business expenditure—The benefit of S. 36(1)(viia) is made available w.e.f. 1st April 2007 by amendment proposed by Finance Act, 2007 earlier which was not available—Mansarovar Urban Co-operative Bank Ltd. vs. DCIT.

S. 69A of the IT Act, 1961, S. 3(c), 37(3) of FEMA 1999—Unexplained money—Since the assessee does not have any unexplained money at any point of time during the assesment and the Assessing Officer also did not make any independent inquiry regarding alleged unexplained money, assessment u/s 69 is not justified—Ibrahim Vittal alias Ibrahim K.V. vs. ITO (2009) 312 ITR 87 (ITAT-Banglore)

Income Tax Act, 1961, sub-section 3(4) & 32, Income Tax Rules, 1962, rule 5—Depreciation—The following question of law was referred:—”Whether, the Tribunal is right in law and on facts in confirming the order made by the CIT(A) allowing the assessee’s claim for depreciation and investment allowance at the higher rate on proportionate basis when the provisions of Rule 5 had been deleted with effect from 2.4.1987?” While leaving the question unanswered, the High Court of Gujarat held that:—”If provisions of Section 32 of the Act and Rule-5 of the Rules are read in isolation, what is contended by the Revenue may become acceptable. But, section 3 of the Act, more particularly sub-section (4) of the said section, has not been either amended or substituted with effect from 1.4.1988 or 2.4.1987. In fact, section 3 of the Act has been substituted by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1.4.1989, that is, as applicable for Assessment Year 1989-90 and subsequent Assessment Years. Thus, once an assessee is entitled to vary the previous year in terms of Section 3(4) of the Act, the larger income from business or profession stands included in the total income of the extended previous year, and is brought to tax. Accordingly, the corresponding depreciation for the extended period cannot be denied. The position in law is well settled that depreciation allowance is a provision for normal wear and tear of assets which have been used during the previous year for earning income which is brought to tax.” CIT vs. Crown Products [2007] 7 ITCD 61 (Guj.)

S. 3,12,13, of Kerala Agricultural IT Act, 1991—Agricultural income-tax—Assessee changing option to regular assessment from payment of tax under compounding scheme. Once an assessee, who has been paying tax under system of compounding under sub-section (1) of S. 13, reports to pay tax in accordance with S. 3, such assessee would not be entitled to the benefit of carry forward of loss or any depreciation notwithstanding the other provisions of the Act otherwise provided for it. No depreciation would be available on assets acquired prior to the previous year in which the assessee changed from compounding to payment of tax u/s 3 of the Act—Cottanad Plantations Ltd. vs. IAC (2009) 316 ITR 172 (Kar)

S. 3 of the IT Act, 1961—Previsous year—As per the provisions of S. 3(4), the assesee has option to choose his accounting year ending on any date within the preceding financial year as his ‘previous year’. Once he execrcises this option, the meaning of the expression ‘previous year’ as applicable to him is determined and he cannot exercise this option again so as to vary the meaning of the expression ‘previous year’ as then applicable to him, except with the consent of the Assessing Officer and upon such conditions as the Assessing Officer may think fit to impose. Rule 5(1) provides for depreciation allowable to the assessee according to which the assessee is entitled to full depreciation as the said depreciation is allowable to the assessee under s. 32 at the prescribed rate irrespective of the period of user of the assets. Therefore, when in terms of rule (5) of IT Rules 1962, depreciation is allowable to an assessee u/s 32 at prescribed rate irrespective of the period of user of assets, any condition to contrary imposed by the Assessing Officer while permitting a change in ‘previous year’ cannot be made applicable to assessee even if it has filed no appeal against such condition—CIT vs. Maltax Malsers Ltd. [2010]

Section 3 of the Income-tax Act, 1961—Previous year—CIT vs. L.G. Electronic (India) Ltd. [2005]


As Per Section 3, of the Income Tax Act, 1961-

Section 3: Definition of Previous year

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.

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