Assessment of Search & Seizure: Concept of Block Assessments

Summary: The concept of block assessments in the Income Tax Act was first introduced through the Finance Act, 1995, aimed at resolving search-related assessments. However, the system led to numerous litigations due to procedural challenges. In 2003, the block assessment scheme was abolished and replaced with sections 153A to 153D. Despite these changes, litigations continued. The Finance Act, 2021, sought to streamline search assessments by integrating them with reassessment provisions under sections 147 to 151A. However, this led to new challenges such as piecemeal assessments and inconsistent investigation efforts, sometimes spanning a period of 10 years. In response, the Finance Act (No. 2), 2024, reintroduced block assessments, covering searches conducted after September 1, 2024. The key provisions, including sections 158B to 158BH, cover definitions, computation of income, the procedure for block assessment, time limits, and penalties. Notably, undisclosed income, assessed during searches, is now taxed at 60% plus surcharge, while procedural steps ensure coordination between assessing officers and jurisdictional authorities. This scheme aims to streamline assessments and reduce legal disputes in search and seizure cases.

The concept of block assessment related to search assessments was initially introduced in the Income Tax Act, 1961, through the Finance Act, 1995. Although these provisions aimed for an early resolution of search assessments, procedural issues related to block assessment proved to be highly litigation-prone.

Through the Finance Act, 2003, the concept of block assessment was abolished with the introduction of sections 153A, 153B, 153C, and 153D. However, these provisions also resulted in a number of litigations. To reduce these complexities, the Finance Act, 2021 reformed the system for assessing search-related cases.

In light of advancements in technology, the department has been collecting relevant information on taxpayers from third parties under section 285BA of the Act, as well as from other law enforcement agencies, the Finance Act, 2021 abolished the separate regime for search assessments, subsuming these assessments into the reassessment provisions. Sections 147, 148, 149, 151, and 151A of the Act were also amended to facilitate reassessment for searches or requisitions made on or after April 1,  2021. However, the amendment so made led to new Challenges due to

(i) Piecemeal assessments of reopening primarily due to reopening of only the time-barring cases in respective years.

(ii) Potentially spanning the assessment period over 10 years and leading to inconsistent assessments.

(iii) Creating hurdles for coordinated investigation,

To overcome these difficulties, vide finance Act (no.2) 2024, the search related assessments have once again brought under the ambit of “Block Assessment Scheme”

The salient features of the scheme are as under:

These provisions are discussed in detail below:

Definitions: Section 158B:

(a) Block period: The period pertaining to the previous six assessment years preceding the year in which a search under section 132 is conducted or up to the date on which the last of the authorizations for the search was executed.

(b) Undisclosed Income:

(i) Any money, bullion, jewellery or other valuable article or thing which has not been or would not have been disclosed.

(ii) Any income arising from money, bullion, jewellery, or other valuable articles or assets, either in whole or in part, that has not been disclosed or would not have been disclosed

(iii) Any expenditure arising from money, bullion, jewellery, or other valuable articles or assets, either in whole or in part, that has not been disclosed or would not have been disclosed

(iv) Any expense, exemption, deduction or allowance, related to block period, claimed previously and which are found to be incorrect.

Section 158BA: Assessment of total income.

(1) Provisions of this chapter will be applicable for the searches conducted on or after the 1st day of September, 2024.

(2) The assessment or reassessment if any, pertaining to the block period and pending on the date of search under section 132 shall abate.

(3) The assessment or reassessment or a reference made to TPO u/s 92CA(1) or the order passed u/s 92CA(3) has been passed shall abate.

(4) When an assessment under the provisions of this Chapter is pending for an assessee and another search was conducted on the assessee, the pending assessment shall be completed first. Thereafter the assessment related to the subsequent search shall be carried out under the provisions of this Chapter.

(5) If any search proceeding initiated under this Chapter is annulled in appeal then abated assessment or reassessment for any assessment year shall be revived from the date the Principal Commissioner or Commissioner receives the order of annulment.

(6) The total income (other than undisclosed income) for the year of the search shall be assessed separately in accordance with the other provisions of the Act

(7) The total income relating to the block period shall be charged to tax at the rate of 60 per cent as increased by the surcharge

S. 158BB: Computation of total income of block period.

(1) The total income for the block period shall be the aggregate of –

(i) Total income as per return furnished under section 158BC

(ii) Income assessed prior to the date of initiation of search

(iii) Total income declared in the return of income filed under section 139 or in response to a notice under section 142(1) or 148

(iv) total income determined on the basis of entries in the books of account and other documents maintained by the assessee.

(v) Undisclosed income determined by the Assessing Officer.

(2) The income computed on the basis of evidence found during search or any other information available with the Assessing Officer or come to his notice during the proceedings.

(3) The total income as above, however, shall exclude the income pertaining to any evidence relating to an international or specified domestic transaction for the period commencing from 1^st until the execution date of the last authorization.

(4) Total income shall be computed as per following manner:

a) For a firm before allowing deduction of salary, interest, commission, bonus or remuneration

b) The provisions of section 68, 69, 69A, 69B and 69C shall apply, to the extent possible, and any reference to “previous year” in that section shall be interpreted as the relevant previous year within the block period.

c) The provisions of section 92CA shall apply, to the extent possible, and any reference to “previous year” in that section shall be interpreted as the relevant previous year within the block period.

(6) Losses brought forward from prior years or unabsorbed depreciation shall not be set off against undisclosed income determined. However, such losses or depreciation may be carried forward and set off in the years following the assessment year in which the block period ends.

Section: 158BC: Procedure for block assessment.

(a) The Assessing shall issue a notice under Section 158BC(1), requiring the assessee to file their return of income, within a specified time not exceeding 60 days, with the prior approval of the Additional Commissioner. The return filed after the allowed time will not be considered as filed under Section 139. The return in response to the notice u/s 158BC(1) cannot be revised

(b) The Assessing Officer shall pass an order of assessment or reassessment However, nothing in the assessee has no option to approach the DRP as per the provisions of S. 144C

158BD: Undisclosed income of any other person.

Where the Assessing Officer is satisfied that any undisclosed income belongs to or pertains to or relates to any person, other than the person with whom search was made then such information shall be handed over to the Jurisdictional AO (JAO). Thereafter the JAO shall proceed under section 158BC against such other person.

158BE: Time-limit for completion of block assessment.

Twelve months from the end of the month in which the last authorisation for search was executed or requisition was made. However, if any reference is made under section 92CA(1), then period shall be extended by 12 months.

158BF: Certain interests and penalties not to be levied or imposed

No interest under section 234A, 234B or 234C or penalty under section 270A shall be levied in respect of the undisclosed income

158BFA: Levy of interest and penalty in certain cases.

(1) If the return of total income is not furnished within the specified time, the assessee shall be liable to pay simple interest at 1.5% per month on the tax determined on the undisclosed income.

(2) The Assessing Officer or the Commissioner (Appeals) may levy a penalty @50% in respect of the undisclosed income . However, no such penalty or penalty under section 271AAD or 271D or 271DA shall be imposed when:

(i) The assessee has filed a return in response to the notice u/s 158BC.

(ii) The tax payable on the basis of such return has been paid the assessee offers the valuable or any other assets so seized to be adjusted against the tax payable.

(iii) No appeal has been filed against the assessment.

158BG: Authority competent to make assessment of block period.

order of assessment for the block period shall be passed by an Assessing Officer not below the rank of a Assistant Commissioner without the previous approval of the Additional Commissioner.