The term previous year is very important because it is the income earned during previous year which is to be assessed to tax in the assessment year. As the word ‘Previous’ means ‘coming before’, hence it can be simply said that the previous year is the financial year preceding the assessment year e.g. for assessment year 2014-15 the previous year should be the financial year ending on 31st March 2014.
In simple words, it may be said that the year in which income is earned is called previous year and the next year in which such income is computed and put to tax is known as assessment year: For example, income earned by an assessee in the previous year 2013-14 is taxable in the assessment year relevant to the previous year 2013-14 and so it is taxable in the assessment year 2014-15. The simple rule is that the income of a previous year is taxed in its relevant assessment year subject to certain exceptions.
(a) Previous year in case of a continuing business. It is the financial year preceding the assessment year. As such for the assessment year 2014-15, the previous year for a continuing business is 2013-14 i.e. 1-4-2013 to 31-3-2014.
(b) Newly set up business or profession. The assessee is free to set up a new business or start a new profession on any day and the first previous year in case of a newly set up business/profession or newly created source of income shall be on the day it is set up and end on 31st March next following. So the first previous year may be of 12 months or less than 12 months but all subsequent previous years shall be of 12 months duration and always be starting on 1st April each year.