Under the 1961 Act, the income earned in a year is taxed in the next year. The year
in which income is earned is termed as 'previous year' and the following year in which it is
charged to tax is termed as 'assessment year'.
For example if a person earns any income during the year beginning on 1 April 2006 and
ending on 31 March 2007, then 2006-2007 will be the previous year and the income shall be
assessed to tax in assessment year 2007-2008.
The use of the two expressions has caused confusion in both compliance and administration.
In order to simplify the provisions, the separate concepts of 'previous year' and 'assessment
year' will be replaced by a unified concept of 'financial year'.
The existing concept of assessment year will be done away with. Under the Code,
all rights and obligations of the taxpayer and the tax administration will be with
reference to the 'financial year'. This change will not change the existing system of
deduction of tax at source and payment of advance
tax in the year of earning of income and payment of self-assessment tax in the following year
before filing of tax return. This proposal will simplify the existing provisions.
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