The Chartered Accountant | Direct Tax September 2024 • Pages 58–60

Block Assessment under the Income-tax Act, 1961

CA. Mahendra Chhajed & CA. Ayush Chhajed

Members of the Institute

The reintroduction of block assessment provisions, in cases where a search under Section 132 or requisition under Section 132A is initiated or conducted on or after 1^st September 2024, aims to streamline proceedings, reduce litigation costs for taxpayers, and eliminate the possibility of change of opinion with respect to the line of inquiry. This scheme has been reintroduced due to the lack of a legal requirement for consolidated assessments in search cases, which had resulted in only the time-barring year being reopened annually for the searched assessee, prolonging proceedings up to ten years.

The Evolution of Block Assessment: From Its Inception to Subsequent Revisions

The block assessment scheme was first introduced by the Finance Act of 1995 through the insertion of Chapter XIV-B (Sections 158B to 158BH) in the Income-tax Act, 1961, effective from 1^st July 1995. Under this scheme, undisclosed income was determined and computed over a block period of ten previous assessment years. Subsequently, the Finance Act of 2001 revised the definition of the 'block period' to encompass six previous years.

The Finance Act of 2003 introduced a sunset date for the special provisions under Chapter XIV-B, effective from June 1, 2003, by introducing Sections 153A, 153B, and 153C where the assessee was required to furnish returns for the preceding six assessment years.

The Finance Act, 2017 amended Section 153A to empower the Assessing Officer to issue notice to an assessee for periods beyond 6 assessment years but not exceeding 10 assessment years, provided he has evidence that the income, represented in the form of asset, escaping assessment exceeds Rs. 50 lakhs.

However, with the enactment of the Finance Act, 2021, the search assessment provisions were subsumed under the reassessment framework outlined in Sections 147 to 151A of the Income-tax Act for searches initiated on or after April 1, 2021. The Assessing Officer (AO) was empowered to reopen assessments for up to three years, or up to 10 assessment years if income escaping assessment represented in an asset exceeded Rs. 50 lakhs.

The New Procedure of Block Assessment

Block Period

If the search takes place on or after 01-09-2024, the total income of the block period shall be assessed. The block period consists of six assessment years preceding the previous year in which the search took place, plus the period from 1^st April of the search year to the date of execution of the last authorization for search. For example, if a search is conducted on 10-09-2024, the block period consists of assessment years relevant to previous years 2023-24, 2022-23, 2021-22, 2020-21, 2019-20, and 2018-19, and includes the period from 1^st April 2024 to the date of execution of the last authorization.

If any assessment, reassessment, or proceedings under Section 92CA are pending during the block period, it shall abate and be considered for assessment during the block period. If the block assessment is annulled in appeal, the abated assessment shall be revived.

Total Income & Rate of Tax

"Undisclosed income" includes any money, bullion, jewellery, or valuable items, as well as any expense or income based on any entry in the books of account or other documents, representing income/property not disclosed or incorrect expense/deduction claims.

The total income for the block period shall be reduced by the returned income, assessed income, and income determined for the current year. The remaining income shall be charged to tax under Section 113 at 60%, and a penalty of 50% of the tax on undisclosed income shall be levied unless a return is filed, tax is paid on declared income, and no appeal is filed in respect of that income.

Filing of Return & Assessment Procedure

The Assessing Officer shall issue a notice requiring the assessee to file the return within 60 days. Such return shall be considered as a return filed under Section 139, followed by a notice under Section 143(2).

Once proceedings are initiated under this Chapter, no proceedings under Section 148 shall be initiated. Assessment is conducted under sections 142, 143(2), 143(3), 144, 145, 145A, and 145B. Section 143(1) and Section 144C (DRP) shall not apply.

Computation Matrix

The total income of the block period is computed as follows:

Particulars of Income	Amount Calculation
Total income (ignoring loss) disclosed in return furnished under Section 158BC pursuant to search	[A]
Add: Total income (ignoring loss) declared in return of income filed under Section 139 / 142(1) / 148	[B]
Add: Total income (ignoring loss) assessed prior to initiation of search (u/s 143(3), 144, 148, 153A, 153C)	[C]
Add: Total income (ignoring loss) of current unended previous year up to date of last search authorization	[D]
Add: Undisclosed income determined by the AO based on evidence or information found during search	[E]
Total income for the block period	[F = A + B + C + D + E]
Less: Disclosed income for the block period	[G = B + C + D]
Total undisclosed income for the block period	[H = F - G]

Time Limit for Assessment

The assessment for the block period shall be completed within 12 months from the end of the month in which the last warrant of authorization was executed.

Key Distinctions Between the Old and the New Provisions

Under previous provisions, the block period extended up to the date of commencement of the search; under Section 158BC (new), it extends until the date of execution of the final authorizations.
The new provisions explicitly define "undisclosed income", but the taxable amount under the block assessment is total income rather than undisclosed income in isolation.
Under the previous scheme, undisclosed income included unrecorded entries; the proposed definition now explicitly includes recorded expenditures found to be false or incorrect.

Why the Need for Re-introduction of Block Assessment Procedures?

"In order to make the procedure of assessment of search cases cost effective, efficient and meaningful, it is proposed to introduce the scheme of block assessment... The main objectives for the introduction of this scheme are early finalization of search assessments, coordinated investigation during search assessments and reduction in multiplicity of proceedings."
— Memorandum to the Finance (No. 2) Bill, 2024

The term 'undisclosed income' was not defined in Section 153A, forcing Assessing Officers to assess regular as well as undisclosed income based on incriminating evidence. Although defined in penalty provisions (Section 271AAA/271AAB), that definition could not be imported for assessments u/s 153A.

Potential Issues that may Arise During the Block Assessment

Multiple Searches: In case of a pending block assessment from a first search, can a second notice u/s 158BC be issued, and can material from the second search be used in the first block proceeding?
Double Addition Risks: If income discovered during search is included in the Section 158BC return, will it still be treated as undisclosed income leading to double addition?
Loss Treatment: How will losses in the block period be treated, and how will set-off and carry-forward of losses apply?

Conclusion

The search provisions have increasingly become more complex regarding definitions, inclusion of incomes, and time limits. The shift from the previous block regime to Section 153A failed to achieve timely resolution, leading to prolonged litigation. It is hoped that the new block assessment scheme under Finance (No. 2) Act, 2024 will resolve these issues and facilitate timely finalisation of search assessments.