Undisclosed Income under Block Assessment: Scope of Charging & Computation Provisions

G C Das IRS(Retd), Advocate

Undisclosed Income under Block Assessment: Navigating the Scope of the Charging and the Computation Provisions

Summary: Block assessment is a special statutory procedure intended to bring to tax only undisclosed income arising within the prescribed block period, rather than reopen the assessee’s entire tax history. The scope of “undisclosed income” is examined through the charging provision, computation provision and inclusive statutory definition. The definition covers specified assets, expenditure, entries, documents and transactions representing income or property that has not been, or would not have been, disclosed, as well as incorrect claims of expenses, exemptions, deductions or allowances. The article emphasises that the inclusive nature of the definition does not permit an unlimited expansion of the expression. Sections 292, 293 and 301 of the 2025 Act are considered as an integrated statutory scheme, with the computation provision determining the quantum of income falling within the substantive charge rather than enlarging that charge. The evidentiary scope under the computation provision may extend to material or information available to the Assessing Officer, including material gathered through survey and other enquiries, but such material must establish that the income satisfies the statutory requirements of undisclosed income. The article also considers computation for the part-period of the year of search, the limits on estimation, the position of non-filers and the use of survey material. It concludes that block assessment cannot be converted into a parallel or roving assessment of the assessee’s total income.

1. Introduction

“Undisclosed income” lies at the heart of the special block-assessment regime. The Legislature has consciously placed it in Chapter XVI, with the heading “Special procedure in assessment of search cases”. The Chapter-heading, the charging section 292 read with 301 of 2025 Act [S158BA read with section 158B(b) of 1961 Act] and the computation provision in section 293 of 2025 Act[S.158BB of 1961 Act] are therefore central to determining its scope. The object of block assessment is not to reopen the assessee’s entire tax history, but to bring to tax only income that is undisclosed. The real difficulty lies in defining its precise boundary, which in practice is sometimes stretched to include income that does not, by its very nature, constitute undisclosed income.

2. Meaning and scope of “undisclosed income”

Section 301 of the 2025 Act [S.158B(b) of 1961 Act] contains an inclusive definition of “undisclosed income”. Broadly, it covers:

• money, bullion, jewellery, other valuable articles or things, and virtual digital assets;
• expenditure;
• income represented by entries in books of account or other documents; and
• transactions,

where such money, bullion, jewellery, valuable article or thing, entry, document or transaction represents wholly or partly income or property which has not been, or would not have been, disclosed for the purposes of the Act. The definition also covers any expense, exemption, deduction or allowance claimed under the Act which is found to be incorrect. The use of the expression ’would not have been disclosed’ points to intention on the part of the tax payer that but for the search undisclosed income or assets would not have come to light. The expression “has not been or would not have been disclosed for the purposes of this Act” is, therefore, significant. It distinguishes income which has already entered the tax framework from income which has remained outside it. The expression “would not have been disclosed” should, however, be applied with care. It should not be treated as a mere presumption arising from the fact that a search has taken place. The existence of a search does not, by itself, establish that every item subsequently examined by the Assessing Officer represents income which the assessee would not have disclosed. The conclusion must flow from the statutory definition and the material available in the particular case. Thus reasons for initiating a search, consequent discovery of evidence and framing of block assessment forms a single unbroken chain in making assessment.

3. Claim of any expense, exemption, deduction or allowance under the Act which is found to be incorrect

This statutory language is wider than the mere discovery of physical assets. Undisclosed income may emerge from claim of any expense, exemption, deduction or allowance under the Act which is found to be incorrect on examination of the material available in the search. At the same time, the definition cannot be divorced from the essential character of a block assessment. The fact that an item is capable of falling within one of the expressions used in the definition does not, by itself, make it undisclosed income. The statutory conditions must also be satisfied taking into account the definition and the import of charging section as a whole. Further in the new scheme introduced with effect from 1-09-2024, previous expression found to be ‘false’ has been replaced by the expression ‘incorrect’. This change makes interpretation of this part of the definition more elastic. But this change does not alter the interpretation of these terms altogether. “Incorrect” cannot reasonably mean that every debatable, erroneous or subsequently disallowed claim automatically becomes undisclosed income. The use of words ‘found to be incorrect’ places the initial evidentiary burden on the Assessing officer that the claim is ‘incorrect’ and hence comes within the ambit of undisclosed income.

4. Inclusive definition does not mean an unlimited definition

The definition of “undisclosed income” is inclusive. An inclusive definition is ordinarily intended to enlarge or clarify the meaning of the expression defined. It does not, however, justify an unlimited expansion of the expression divorced from the context of the enactment. The expression must be understood in the setting in which it occurs. “Undisclosed income” is not an isolated expression. It forms part of a special statutory scheme triggered by a search or requisition and governed by its own provisions relating to the block period, computation and assessment. Consequently, the inclusive nature of the definition does not mean that every item which can remotely be brought within one of its expressions can automatically be assessed as undisclosed income.

5. Charging provision and computation provision [S.292 and S.293 of 2025 Act [S.158BA &158BB of 1961 Act]

The distinction between the charging provision and the computation provision is fundamental in appreciating the scope of undisclosed income. Under the 2025 Act, section 292 provides the statutory basis for assessment of the total undisclosed income of the block period as a result of search or requisition. Section 293 then prescribes the manner in which such total undisclosed income is to be determined. Section 293(4) of 2025 Act [section 158BB(2) of 1961 Act] provides that the undisclosed income falling within the block period and forming part of the total undisclosed income shall be computed in accordance with the provisions of the Act on the basis of evidence found as a result of search or survey or requisition of books of account or other documents, and such other material or information as may be available with the Assessing Officer or come to his notice during the course of proceedings under this Chapter which commences only after a search or requisition. The deliberate use of the expression “any material or information” is undoubtedly significant. It reflects a legislative intent to broaden the evidentiary sweep of the provision and to permit reliance on material gathered from diverse sources, including survey proceedings, post-search investigations, third-party enquiries, departmental records and information received from other governmental agencies. Nevertheless, such material can be utilised only for establishing that the income in question falls within the ambit of section 301 of the 2025 Act [section 158B(b) of the 1961 Act]. The provision does not authorise the assessment of income which, though otherwise taxable under the Act, does not satisfy the statutory requirements of “undisclosed income” and provisions of charging section under the block assessment scheme. Accordingly, section 293(4) of the 2025 Act [section 158BB (2) of the 1961 Act] should be viewed as an evidentiary and computational provision and not as a charging enlargement. The reconciliation between sections 292, 293(4) and 301 of the 2025 Act [sections 158BA, 158BB(2) and 158B(b) of 1961 Act] lies in recognising that while the legislature has expanded the sources of material available for computation, it has not expanded the substantive nature of income chargeable to tax under the block assessment provisions.Thus the computation provision must operate harmoniously with the charging provision and the definition section, and cannot be construed so as to enlarge the charge beyond what section 292 read with section 301 authorises. The charging and computation provisions form an integrated statutory scheme. If an item does not fall within the charge of undisclosed income, the computation provision cannot, by itself, convert that item into undisclosed income. Conversely, once an item falls within the statutory charge, its quantum must be determined in accordance with the prescribed computation mechanism. The Supreme Court’s decision in CIT v. S. Ajit Kumar [2018] 93 taxmann.com 294 (SC) particularly significant in this context. The Hon’ble Court observed as under:

“Section 158BB has prescribed the boundary which has to be followed. No departure from this provision is allowed; otherwise, it may cause prejudice to the assessee. Needless to say, it is the canon of tax law that it should be interpreted strictly.”

Thus, block assessment must remain within the statutory framework prescribed.

6. Computation section specifically speaks of determination of undisclosed income [Section 293 of 2025 Act]

The heading of the section, as well as its substantive provisions, makes it clear that the section specifically mandates the computation of the total undisclosed income for the block period. Sub-section (2) excludes regular income which has already been processed or assessed from the ambit of undisclosed income. However, sub-section (3) expressly permits the Assessing Officer to recompute the undisclosed income embedded in the income referred to in sub-section (2)(c). Thus, the scheme does not contemplate a complete exclusion of undisclosed income merely because the assessee has filed a return or such income has already been assessed under the regular provisions. What is excluded is the regularly disclosed or assessed income, not income which is subsequently found, as a result of search. The legislative scheme, throughout, is therefore directed towards the identification and computation of undisclosed income for the block period. Merely because a taxpayer has filed a return and has been assessed, that fact cannot, by itself, insulate him from taxation of undisclosed income detected as a result of the search.

7. Undisclosed income for the part period of the year of search?

Although the regular income of the year of search is excluded, there is exception relating to the part-period of the year in which the search is initiated. In such a case the undisclosed income embedded therein is assessable under the block assessment. Income truthfully recorded in the books is excluded under section 292(6).

8. Whether estimation of undisclosed income is permissible?

Undisclosed income under section 293 of the 2025 Act [section 158BB] must be computed, on the basis of material found during search and other relevant material or information, and not estimated on guesswork or surmises. However, where seized material establishes an undisclosed transaction but not the precise income embedded therein, the Assessing Officer may reasonably quantify the income, such as by applying an appropriate profit margin, provided the computation has a direct nexus with the evidence. Thus, ad-hoc estimation is impermissible, but evidence-based quantification is not.

9. Case of a non-filer and undisclosed income

In the case of ACIT v. A.R. Enterprises [2013] 29 taxmann.com 50 (SC), it was held that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act. If this is not done, an “undisclosed income” would signify income not stated in the return. In other words, filing of a return showing the income is a requirement to go out of the ambit of undisclosed income. The only exception is provided in section 293 (2)( c) [ S.158BB(IA)(c) in cases where the previous year has ended but due date for filing return has not expired.

10. A survey case and undisclosed income

Search operations are often accompanied by consequential surveys at connected premises for gathering evidence. The question is whether material so collected can be relied upon in block assessment. The Supreme Court inCIT v. S. Ajit Kumar [2018] 404 ITR 526 (SC) affirmed that material gathered during survey can validly be used in block assessment proceedings. However, no independent block assessment proceeding can be initiated in such cases.

11. Conclusion

Block assessment is a special procedure intended to tax undisclosed income .The statutory scheme, therefore, does not permit the block assessment to be converted into a parallel or roving assessment of assessee’s total income.