Budget 2025 Amendments: Block assessment for search & requisition cases

The proposed amendments to the provisions under Chapter XIV-B (sections 158B to 158BI) of the Income Tax Act focus on enhancing the efficiency, clarity, and scope of block assessments in cases of search and requisition under Section 132 and Section 132A. These amendments seek to modernize and streamline the block assessment process, including provisions related to undisclosed income, the treatment of virtual digital assets, and the time-limit for completion of block assessments. The amendments will take effect from 1st February 2025.

Amendments proposed in provisions of Block assessment for search and requisition cases under Chapter XIV-B

1. Introduction of Virtual Digital Asset under the Definition of ‘Undisclosed Income’ (Section 158B)

Key Change: The term “virtual digital asset” will be added to the definition of undisclosed income under Section 158B.

Rationale:

• The inclusion of virtual digital assets (such as cryptocurrencies) as undisclosed income is a response to the growing significance of digital assets in the global financial landscape. As these assets can be utilized for illicit financial activities, their inclusion within the definition of undisclosed income will ensure that they are subjected to appropriate scrutiny during the block assessment process.
• This revision underscores the government’s proactive stance in addressing the tax implications of emerging financial assets, thereby fortifying its commitment to preventing tax evasion via digital platforms and ensuring tax compliance within the ever-evolving financial ecosystem.

2. Alignment of Provisions Regarding Abatement of Pending Proceedings (Section 158BA)

Key Change: Amendments to Section 158BA will ensure a consistent approach by adding the terms “recomputation”, “reference”, or “order” to sub-section (5), which relates to the revival of abated assessments.

Rationale:

• The previous provisions created a degree of uncertainty regarding the revival of assessments, particularly with respect to the recomputation, references, or orders pending during a search or requisition. This amendment seeks to eliminate such ambiguities and ensure that proceedings are revived in a structured and comprehensive manner.
• By incorporating these terms into the provision, the amendment aims to standardize the procedural framework for reviving pending assessments, thus ensuring legal certainty and minimizing the potential for procedural discrepancies that may arise during the post-search phase.

3. Clarification of Assessment Procedures for Subsequent Searches or Requisitions (Section 158BA)

Key Change: The term “pending” in Section 158BA(4) will be replaced with “required to be made“, ensuring clarity even when the assessment is not technically pending during a subsequent search or requisition.

Rationale:

• The current language in Section 158BA could cause interpretative issues in cases where a subsequent search or requisition is initiated during the assessment process. By replacing “pending” with “required to be made,” the provision now clearly stipulates that assessments should proceed without delay, even if they are not officially pending when the subsequent search or requisition occurs.
• This amendment fosters clarity and efficiency by ensuring that the assessment process is not hindered by technicalities related to the timing of searches and requisitions. It provides a more precise and comprehensive framework for conducting assessments in cases involving multiple investigations.

4. Changes in Computation of Total Income for the Block Period (Section 158BB)

Key Change: The amendments to Section 158BB include:

• Replacing “total income disclosed” with “undisclosed income” in sub-section (1)(i).
• Amending the provisions regarding the declaration of income in returns filed under Section 139, Section 142(1), or Section 148 before the date of search or requisition.
• Omission of the word “total” in clauses (ii) and (iii) for accuracy in calculation.

Rationale:

• The revision of “total income disclosed” to “undisclosed income” ensures a more accurate reflection of the tax liabilities in the context of block assessments. This adjustment aligns the tax computation with the principle that undisclosed income is the primary focus of the block period, not income already disclosed and assessed.
• The amendments also provide for the recognition of income declared prior to the initiation of search or requisition, which will now be appropriately credited in the block assessment process. This change serves to prevent double taxation by ensuring that previously declared income is acknowledged during the block assessment, while excluding income that has already been subjected to regular tax provisions.
• By omitting “total” from clauses (ii) and (iii), the amendment enhances precision in the legal text and aligns the provision more closely with actual tax practice, minimizing potential inconsistencies.

5. Exclusion of Income from International Transactions in Block Period (Section 158BB)

Key Change: Income related to international transactions or specified domestic transactions will not be included in the block period for the purposes of block assessment.

Rationale:

• The difficulty of assessing arm’s length pricing for transactions that span part of the block period has long been recognized as a challenge. These transactions are subject to complex transfer pricing regulations, which may not align with the parameters of a block assessment.
• The exclusion of income related to international transactions and specified domestic transactions from the block period ensures that such transactions are assessed under the normal provisions of the Income Tax Act, where they are better suited to be scrutinized with the appropriate level of analysis.
• This amendment ensures that the block assessment process remains focused on undisclosed income and avoids the complexities of managing cross-border transactions under a framework that may not be optimal for such specialized assessments.

6. Extension of Time-limit for Completion of Block Assessments (Section 158BE)

Key Change: The time-limit for completing block assessments is proposed to be changed from twelve months from the end of the month in which the last search authorization was executed, to twelve months from the end of the quarter in which the last authorization for search or requisition occurred.

Rationale:

• The existing time-limit for completing block assessments, set on a monthly basis, has resulted in operational inefficiencies when multiple related cases are involved, especially in group investigations. Different cases in the same group often face differing time-bar deadlines, leading to administrative difficulties.
• By extending the time-limit to a quarterly basis, the proposed change introduces a more coherent and manageable timeframe for assessments, ensuring that related cases can be handled simultaneously, thus reducing the likelihood of delays or gaps in the investigative process.
• This adjustment aligns the block assessment framework with the practical realities of conducting coordinated investigations across multiple cases, improving the overall efficiency of tax administration.

7. Effective Date of Amendments

The proposed amendments will come into force from 1st February 2025.

Rationale:

• The transition period leading up to the 1st February 2025 effective date is designed to provide sufficient time for tax authorities and stakeholders to prepare for the changes. This timeline ensures that administrative systems, compliance procedures, and stakeholder awareness can be adjusted to accommodate the revised provisions.
• The additional time will also allow for the development and deployment of necessary updates to electronic filing systems and tax administration tools, ensuring a smooth implementation of the new block assessment provisions.