When to craete a new Project Area

Project Area are excluded from each other. I think in this case you should use same project area for single application. It will be also helpful to generate reports based on history.

Using one application as a sample, we have like 1-3 releases going to production ea year for that particular application.

Now i am not sure how we should represent ea release for this application. We could either create a separate Project Area for ea release, or use the same but create a separate Test Plan for ea release.

What is the best way in this case? Any idea is welcome.

I would agree with the previous comment. If you need to reuse the assets created for one project release with another, you should maintain the releases in the same project instance. RQM doesn't currently provide a way to share assets between different project repositories. In 2.0 we have sort of enabled that feature but its restricted primarily to moving a "requirement" asset between projects.