Income Tax Search Assessment | Reintroduction of Block Assessment Procedures

A New Era in Taxation: Revisiting Block Assessment in the Income Tax Act

Introduction

The Finance Bill, 2024 reintroduces a significant mechanism in the Indian Income Tax landscape with the revival of block assessment provisions under Chapter XIV-B. This concept, which was prevalent until 2003, focuses on the assessment of undisclosed income discovered during search and seizure operations. The reinstatement of block assessment aims to streamline tax administration, reduce prolonged litigation, and improve the efficiency of handling search cases.

Key Provisions of the New Chapter XIV-B

Section 158B: Definitions and Key Concepts

1. Block Period: Definition: "block period" means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was initiated under section 132 or any requisition was made under section 132A and also includes the period starting from the 1st day of April of the previous year in which search was initiated or requisition was made and ending on the date of the execution of the last of the authorisations for such search or such requisition.

Analysis: The block period encompasses the previous years relevant to the six assessment years preceding the year in which a search under Section 132 or requisition under Section 132A is initiated. Additionally, it includes the period from April 1 of the year in which the search or requisition was initiated to the date of the execution of the last authorization for such action. This definition is critical as it determines the scope of the income that will be assessed under this chapter.

2. Undisclosed Income: Definition: "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any expenditure or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act, or any expense, deduction or allowance claimed under this Act which is found to be incorrect, in respect of the block period.

Analysis: The term "undisclosed income" includes any money, bullion, jewellery, or other valuable articles or things, as well as any income or expenditure entries in books of account or documents that have not been or would not have been disclosed for tax purposes. It also encompasses incorrect claims of expenses, deductions, or allowances made under the Act. The broad definition of undisclosed income ensures that all forms of tax evasion can be addressed. By including both tangible assets and document-based transactions, it covers a wide array of potential tax evasion methods.

Definition: the last of the authorisations shall be deemed to have been executed:

• in the case of search, on the conclusion of search as recorded in the last panchnama drawn in relation to any person in whose case the warrant of authorisation has been issued;
• in the case of requisition under section 132A, on the actual receipt of the books of account or other documents or assets by the Authorised Officer.

Analysis: This clarification ensures there is no ambiguity about when the search or requisition process is considered complete, which is essential for determining the end of the block period.

Section 158BA: Assessment of Total Income as a Result of Search

Section 158BA establishes the framework for block assessments, defining the procedure for assessing or reassessing total income when a search is initiated or assets are requisitioned under the Income Tax Act. This section overrides other provisions of the Act to ensure the streamlined assessment of undisclosed income discovered during searches.

Detailed Analysis of Section 158BA

Sub-section (1): Initiating Block Assessment

• Scope and Trigger: Section 158BA(1) specifies that when a search is initiated under section 132 or assets are requisitioned under section 132A, the Assessing Officer must assess or reassess the total income for the block period.
• Priority Over Other Provisions: This sub-section operates notwithstanding any other provisions of the Act, ensuring that the block assessment process takes precedence when a search or requisition occurs.

Sub-section (2): Abatement of Pending Assessments

• Automatic Abatement: Any ongoing assessments or reassessments for the assessment years within the block period automatically abate on the date of the search initiation or requisition.
• Implications: This means that these pending proceedings are effectively terminated, and the income for these periods will be assessed under the block assessment framework.

Sub-section (3): Treatment of Transfer Pricing Cases

• Inclusion of Transfer Pricing: If any references under section 92CA (related to transfer pricing) are pending during the assessment proceedings, these too will abate.
• Comprehensive Coverage: Ensures that all elements of the income assessment, including those involving international transactions, are included in the block assessment.

Sub-section (4): Subsequent Searches

• Sequential Assessments: If another search is initiated while a block assessment is pending, the initial assessment must be completed first. The subsequent assessment will follow, with an extension if the period for completion is less than three months.
• Extension Provision: Allows for an additional three months for the completion of the subsequent assessment to ensure thorough examination.

Sub-section (5): Revival of Abated Proceedings

• Revival on Annulment: If a block assessment order is annulled in appeal or any other legal proceeding, the previously abated assessments or reassessments for the assessment years within the block period are revived from the date the annulment order is received.
• Conditional Revival: This revival ceases to have effect if the annulment order is subsequently set aside.

Sub-section (6): Separate Assessment for the Ongoing Year

• Exclusion of Current Year Income: The total income (excluding undisclosed income) for the assessment year in which the search was conducted is assessed separately according to regular provisions of the Act.

Sub-section (7): Taxation of Block Period Income

• Unified Tax Rate: The total income for the block period is charged at the rate specified in section 113, irrespective of the previous years to which the income pertains.

Summary Table for Section 158BA

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Section 158BB: Computation of Total Income of the Block Period

Section 158BB of the Income Tax Act outlines the methodology for computing the total income of the block period.

Detailed Analysis of Section 158BB

Sub-section (1): Components of Total Income

• Total Income Disclosed: Includes income disclosed in the return furnished under section 158BC.
• Income Assessed Previously: Covers total income assessed under sections 143(3), 144, 147, 153A, or 153C prior to the search or requisition.
• Declared Income: Encompasses income declared in returns filed under section 139 or in response to notices under sections 142(1) or 148, not covered under the previous two clauses.
• Current Year Income: Includes income for the ongoing year, based on entries in books of account and other documents up to the date of the last authorization for search or requisition.
• Undisclosed Income: Encompasses undisclosed income determined by the Assessing Officer.

Sub-section (2): Basis of Computation

• Evidence-Based Assessment: Undisclosed income is computed based on evidence found during search or survey, requisitioned documents, and any other materials or information available to the Assessing Officer during the proceedings.

Sub-section (3): Exclusion of Certain Evidence

• Transfer Pricing and Domestic Transactions: Evidence related to international or specified domestic transactions found during the search, covering the period from April 1st to the date of the last authorization, is excluded from block period assessment. Such income is assessed separately under other provisions of the Act.

Sub-section (4): Special Provisions for Firms

• Firm’s Income Determination: For firms, income is assessed before allowing deductions for salary, interest, commission, bonus, or remuneration to non-working partners.
• Application of Sections 68 to 69C: These sections apply to undisclosed income determination, with references to "financial year" construed as "previous year" within the block period.
• Application of Section 92CA: Provisions related to transfer pricing apply, with "previous year" construed as the relevant previous year within the block period, excluding the period referred to in sub-section (3).

Sub-section (5): Tax Calculation

• Reduction of Certain Incomes: The tax is charged on total income as determined, reduced by income covered under clauses (ii), (iii), and (iv) of sub-section (1).

Sub-section (6): Treatment of Losses

• Ignoring Losses: Disclosed or assessed losses within the block period are ignored for the purpose of assessment under this chapter.

Sub-section (7): Carry Forward of Losses

• No Set-Off Against Undisclosed Income: Losses brought forward from previous years or unabsorbed depreciation cannot be set off against undisclosed income but can be carried forward for future set-off, considering the block period and assessment year.

Summary Table for Section 158BB

?Section 158BC: Procedure for Block Assessment

Section 158BC of the Income Tax Act specifies the procedure for block assessment. This section lays down the steps that the Assessing Officer must follow to assess or reassess the total income of the block period after a search or requisition has been initiated.

Sub-section (1): Initiation of Proceedings

• Issuance of Notice: When a search is initiated under section 132 or books, documents, or assets are requisitioned under section 132A, the Assessing Officer must issue a notice to the person requiring them to furnish a return within a specified period, not exceeding sixty days. First Proviso: The return furnished under this section is treated as if it was furnished under section 139, allowing subsequent proceedings under section 143(2). Second Proviso: A return furnished beyond the allowed period is not deemed a return under section 139. Third Proviso: No separate notice under section 148 is required for proceedings under this Chapter. Fourth Proviso: A person who has furnished a return under this clause cannot furnish a revised return.

Sub-section (1)(b): Determination of Total Income

• Application of Provisions: The Assessing Officer proceeds to determine the total income, including undisclosed income, in accordance with the provisions of section 158BB. Relevant sections such as 142, 143(2) & (3), 144, 145, 145A, and 145B apply to this determination process.

Sub-section (1)(c): Passing of Order

• Assessment Order: After determining the total income for the block period, the Assessing Officer passes an order of assessment or reassessment, and determines the tax payable. First Proviso: The provisions of section 144C do not apply to such orders. Second Proviso: For assessments or reassessments made in pursuance of section 158BD, the block period is the same as that for the person whose search initiated the proceedings.

Sub-section (1)(d): Dealing with Seized Assets

• Handling of Assets: Assets seized under section 132 or requisitioned under section 132A are dealt with according to the provisions of section 132B.

Sub-section (2): Exemption from Section 143(1)

• Exemption Clause: The provisions of section 143(1) do not apply to the return furnished under section 158BC.

Sub-section (3): Approval for Notice Issuance

• Prior Approval: Before issuing a notice under sub-section (1)(a), the Assessing Officer must obtain prior approval from the Additional Commissioner, Additional Director, Joint Commissioner, or Joint Director, as applicable.

Summary Table for Section 158BC

Section 158BD: Undisclosed Income of Any Other Person

Section 158BD deals with the assessment of undisclosed income that belongs to or pertains to any person other than the person with respect to whom a search was made under section 132 or whose books of account or other documents or assets were requisitioned under section 132A.

Identification of Undisclosed Income

• Assessing Officer's Satisfaction: The Assessing Officer must be satisfied that any undisclosed income belongs to or pertains to another person. This satisfaction is based on the evidence found during the search or requisition. The satisfaction must be derived from tangible evidence such as money, bullion, jewellery, other valuable articles, assets, expenditure, books of account, documents, or information contained therein.

Handing Over Evidence

• Transfer of Evidence: The evidence of undisclosed income is handed over to the Assessing Officer who has jurisdiction over the other person (the person to whom the undisclosed income belongs).

Procedure for Assessment

• Proceedings Under Section 158BC: The jurisdictional Assessing Officer proceeds under section 158BC against the other person. The provisions of Chapter XIV-B apply accordingly.

Summary Table for Section 158BD

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Section 158BE: Time-Limit for Completion of Block Assessment

Section 158BE specifies the time limits for completing the block assessment process.

Time-Limit for Passing Order

• Primary Time-Limit: The Assessing Officer must pass the order under section 158BC within twelve months from the end of the month in which the last of the authorizations for search or requisition was executed.

Extensions and Special Cases

• Extension for Transfer Pricing Cases: If a reference under section 92CA (Transfer Pricing) is made during the block assessment proceedings, the period available for passing the order is extended by twelve months.
• Computation of Limitation Period: Several specific periods are excluded when calculating the limitation period: Handing Over of Seized Items: The period between the search or requisition and the handing over of books of account, documents, or assets to the Assessing Officer is excluded, up to a maximum of 180 days. Stays and Injunctions: Any period during which assessment proceedings are stayed by a court order or injunction is excluded. International Information Exchange: The period taken for exchanging information under international tax treaties is excluded, up to a maximum of one year. Other Specific Scenarios: Several other specific periods are also excluded, such as the time taken for special audit directions, valuation officer reports, and the reopening of proceedings under section 129.

Additional Extensions

• Minimum Period After Exclusions: If, after excluding these specific periods, the remaining period for making the order is less than sixty days, it is extended to sixty days.
• End of Month Rule: If the extended period ends before the end of a month, it is further extended to the end of that month.

Section 158BF: Relief from Interest and Penalties for Block Assessment

Section 158BF of the Income Tax Act provides specific reliefs to taxpayers during the block assessment period. This section ensures that no interest under sections 234A, 234B, and 234C, or penalty under section 270A, is imposed on the undisclosed income assessed or reassessed for the block period.

Summary Table for Section 158BF

Section 158BFA: Levy of Interest and Penalty in Certain Cases

Section 158BFA of the Income Tax Act outlines the imposition of interest and penalties on assessees who fail to comply with the requirements of the block assessment procedure. Below is an analysis of each subsection within this provision:

Subsection (1): Imposition of Interest

Provision: This subsection mandates that if the return of total income, including undisclosed income for the block period, is not furnished within the specified time or is not furnished at all, the assessee shall be liable to pay simple interest. This interest is calculated at the rate of 1.5% of the tax on undisclosed income determined, for every month or part of a month from the expiry of the time specified in the notice until the date of assessment completion.

Subsection (2): Imposition of Penalty

Provision: This subsection empowers the Assessing Officer or the Commissioner (Appeals) to levy a penalty equal to 50% of the tax on the undisclosed income determined. However, this penalty shall not be imposed if the following conditions are met:

1. The return is furnished as required.
2. The tax payable based on the return is paid or adjusted against seized assets.
3. Evidence of tax payment is provided with the return.
4. No appeal is filed against the assessed income shown in the return.

If the undisclosed income determined exceeds the amount shown in the return, the penalty will be imposed on the excess amount.

Subsection (3): Conditions for Imposing Penalty

Provision: Penalties can only be imposed after giving the assessee a reasonable opportunity of being heard. Further, the Deputy or Assistant Commissioner, or Deputy or Assistant Director, requires prior approval from higher authorities if the penalty exceeds two lakh rupees. Specific timelines for imposing penalties based on various scenarios are also outlined.

Subsection (4): Exclusions from Limitation Period

Provision: This subsection outlines specific periods to be excluded when computing the limitation period for imposing penalties. These include time taken for rehearing opportunities and periods during which proceedings are stayed by court orders.

Subsection (5): Notification of Penalty Orders

Provision: An income-tax authority imposing a penalty, unless they are themselves the Assessing Officer, must send a copy of the penalty order to the Assessing Officer.

Summary Table for Section 158BFA

Key Provisions of Section 158BG | Tabular Representation

Section 158BH: Application of Other Provisions

Provision: Section 158BH states that, except as otherwise provided in Chapter XIV-B, all other provisions of the Income Tax Act shall apply to assessments made under this Chapter.

Analysis: Section 158BH ensures that the general provisions of the Income Tax Act continue to apply to block assessments under Chapter XIV-B, except where specific provisions in this Chapter override them. This section is a bridge that integrates the special procedures of block assessments with the general principles and provisions of the Income Tax Act.

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Section 158BI: Applicability of Provisions Based on Search Dates

Provision: Section 158BI specifies that the provisions of Chapter XIV-B do not apply to searches initiated under section 132, or requisitions made under section 132A, before September 1, 2024. In such cases, the proceedings will be governed by the other provisions of the Act.

Analysis: For searches or requisitions made before September 1, 2024, the previous procedural rules and assessment methods continue to apply

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Conclusion

The reintroduction of the block assessment system represents a significant overhaul of the search assessment process under the Income Tax Act. With detailed provisions ensuring comprehensive and systematic evaluation of undisclosed income, the scheme aims to streamline and strengthen the assessment procedure post-search and requisition. By reinstating the block assessment concept, the government seeks to address challenges in handling complex tax evasion cases efficiently. However, the true measure of its effectiveness and success will only become clear over time as the new system is put into practice and its impact on tax administration and compliance is fully realized.

Author - Sunil Maloo (JAIN) | [email protected]

Disclaimer - The views expressed in this article are personal and do not represent the official stance of any organization. This content is for informational purposes only and is not intended as legal advice. Consult a professional for advice specific to your situation. The author is not liable for any errors or omissions.