‘Previous Year’ u/s 3(1) means the financial year immediately preceding the assessment year. It is determined for income tax assessment in the following ways:
1) Previous year in case of newly-set up business:
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. EXAMPLE: Where A commences his business from 5th July, 1992, his previous year will end on 31st March, 1993. On the other hand, where B commences his business with effect from 15th March, 1993, his previous yearwillalsoandon31st March, 1993 and therefore duration of the previous you will be 16 days only in B’s case.
It may be clarified that under the provisions of the new section 3 of the Income-tax Act, there is no compulsion on any assesses to close the accounts on 3lst March only. All that the section requires is that for purpose of income-tax for and from the assessment year 1989-90 income will have to be declared for the year ending 31sL March. Therefore, though it would be convenient, both to the assesses as well as to the Department, if the assessees close their accounts on 31st March, yet if for any reason, personal, religious or on any other ground, an assessee still wants to continue to close his accounts on a date different from 31st March, he can still do so. In such a case, all that he would be required to do is to make up his accounts on 31st March also, for the limited purpose of submitting the income-tax return, (PIB Press Note 10.6,1988).
2) Previous year for Deemed Incomes :
The items enumerated below will be seemed to be the income of the assessee belonging to the previous year in which they have been found in possession of the assessee or credited in his books as per law:
1. Cash Credit  :
Sometimes while assessing and scrutining the accounts of an assessee, the Assessing Officer finds certain credits in some accounts which are not explained by the assessee to his satisfaction. The Assessing Officer will then treat such amounts as income of the assessee from undisclosed sources relating to the previous year during which such credits occur.
• A cash credit for the previous year shown in the assessee’s bank pass book but not shown in the cash book maintained by the assessee for that year does not fall within the ambit of section 68 of the Act and as such the sum so credited is not chargeable to tax as the income of the assessee of that year. CIT v Bhaichand H. Gandhi [ 1983] 141 ITR 67 (Bom).
2. Unexplained Investments  :
Where the investments are found in the possession of the assessee which he fails lo explain satisfactorily, or are not recorded in the books of account, they will be deemed to be income of the previous years in which they were made.
3. Unexplained Money etc. [69A] :
If the assessee is found to be the owner of some money, bullion, jewelry etc., which are not recorded in the books of account and which have not been properly explained by the assessee, they will be deemed to be the income of the financial year in which they have been found in the possession of the assessee.
4. Investments not fully disclosed [69 B] :
Where the assessee has made investments but has not disclosed them fully, and the Assessing Officer finds that the amount expended on such investments exceeds the amount recorded, the excess shall be deemed to be the income of the assessee of the year when the assessee made the investments.
5. Unexplained expenditure [69C] :
Where the assessee has incurred certain expenditure which he has not recorded in the books of account and has also not explained it satisfactorily, such expenditure shall be deemed to be the income of the year in which the expenditure was incurred.
6. Amount borrowed or repaid on hundi [69D] :
Where any amount has been borrowed on a Hundi from or has been repaid to any person otherwise than through an account payee cheque, it shall be deemed to be the income of the year in which the payment was thus made.