Section 295 of the Income Tax Act, 2025 (the Act) provides that where the Assessing Officer (AO) of the person searched under section 247 or requisition made under section 248 is satisfied that any undisclosed income belongs to or relates to any person other than the person searched, then any money bullion jewellery etc.  relating to such undisclosed income shall be handed over to the AO having jurisdiction over such other person and that AO shall proceed under section 294 of the Act against such other person and the provisions of this part shall apply accordingly. In turn, section 294  provides for filing of return for the block period by the searched person, pursuant to notice,  setting forth his undisclosed income and further mandates that the AO of the searched person shall determine the total undisclosed income of the block period.

The term `block period’ has been defined in section 301(a) of the Act to mean the aggregate of (i) the period comprising six tax years preceding the tax year in which the search was initiated or any requisition was made; and (ii) the period starting from the 1st April of the tax 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.

Section 295,  requiring the assessment of the other person to be made in terms of section 294,  effectively means that the other person has to be proceeded against in the same manner as the searched person requiring the assessment for the full block period comprising of the six tax years preceding the year of search and the period of the year of search notwithstanding that the undisclosed income may be pertaining to only one or more of the preceding six tax years and a part of the tax year of search.

The predecessor of the current section 295 of the Act - during the period of search initiated or assets requisitioned between 1.6.2003 and 31.3.2021, dealing with the assessment of the `other person’ - has been section 153C of the IT Act, 1961;  and the predecessor of the current section 294 - dealing with the assessment of the `person searched’ - has been section 153A of the IT Act, 1961.  Section 153A provided for making of assessment for the six assessment years and the relevant assessment year or years and by virtue of section 153C of the IT Act, 1961, the assessment of the `other person’ was to be made in accordance with the provisions of section 153A of the IT Act, 1961, that is for the six assessment years and the relevant assessment year or years.

An issue arose as to whether the assessment of the `other person’ should be made for all the years en bloc or be restricted to only such years for which there existed some incriminating material.  Noticing that the material disclosed pertained only to certain years, it was held that section 153C of the IT Act, 1961 action initiated for other years,  would not sustain.  It has also been held that section 153C would apply only to such assessment years where the jurisdictional AO was satisfied and had incriminating material for those assessment years. [CIT VS. Sinhgad Technical Education Society [TS-358-SC-2017]; Saksham Commodities Ltd. v. ITO [TS-246-HC-2024(DEL)]; ITO vs. Saksham Commodities Ltd  [2025]

In the absence of any statutory provision reiterating the above ratio, the assessment in the case of `other person’ u/s 295 of the Act was likely to be hit by the roadblock of the language of the section. The Parliament has come out with a welcome step through the Finance Bill, 2026 proposing to amend section 295 by inserting clauses (c) & (d) to section 295(2) to provide that where the undisclosed income of the other person – (i) pertains only to the period commencing from the tax year (herein referred to as the specified year) immediately preceding the year of initiation of search or requisition; and ending on the date of initiation of search or making of requisition, then irrespective of the provisions of section 301(a), the block period in respect of such other person shall comprise of the specified year and the period starting from the 1st April of the tax 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; and (ii) pertains  to  a single tax year out of the five tax years preceding the specified year, then irrespective of the provisions of section 301(a), the block period in respect of such other person shall comprise of only that single tax year. The language clearly seems to be referring to `a single tax year’ and not multiple tax years out of five tax years.

Albeit section 13 of The General Clauses Act provides that `words in the singular shall include the plural, and vice versa’, but this section  opens with the caveat that: `In all (Central Acts) and Regulations, unless there is anything repugnant in the subject or context’. When the text of section 295(2)(d) is manifestly referring to `a single tax year’, it may be a little difficult to invoke section 13 of the General Clauses Act to embrace more than one year in the expression `a single tax year’.  

The Memorandum explaining the provisions of the Finance Bill, 2026 explains the rationale of the amendment by providing that:  `it  has  been  considered  that  where  undisclosed  income  pertaining  to  a  third  person  relates  only  to  a  single  tax  year,  the  third  person  is  nonetheless  required  to  undergo the full block assessment procedure, resulting in an increased compliance burden on a person against whom no search or requisition was initiated.’ Although, the intention of the Parliament is unequivocal and forthcoming of reducing unnecessary inconvenience, but the language of the amendment seems to defeat the purpose in cases:-

1. Where the undisclosed income pertains to the specified year along with the period up to the date of search  AND one or more of the other five tax years immediately preceding the specified year ; and
2. Where the undisclosed income pertains to more than one of the five tax years immediately preceding the specified year.

The raison d’etre is that clauses (c) and (d)  to section 295(2) of the Act have been worded like two water tight compartments not admitting of any intermingling.

There can still be another situation not echoing the intention of the Parliament as emanating from the Memorandum, that is, where undisclosed income belongs either only to the specified year or the period of the year of search. This will again witness the block period automatically expanding to the specified year AND the period of the year of search notwithstanding the fact that the undisclosed income belonged to only one of them.

Implementation of the proposed amendment to section 295 of the Act is likely to be an uphill task because of the difference in phraseology of section 295 vis-à-vis one of its predecessor sections, that is, section 153C of the IT Act, 1961. It would be pertinent to accentuate that  the language of section 153C provided for recording two satisfactions – the first by the AO of the persons searched that undisclosed income etc. pertains to the other person; and the second, on receipt of  books of account or documents or assets etc. by the AO of the other person, by such AO also getting satisfied that the books of account or documents or assets have a bearing on the determination of the total income of the other person. In contrast, section 295 of the IT Act 2025 or its immediate predecessor section 158BD of the IT Act 1961 provide only for the recording of the satisfaction by the AO of the person searched and has dispensed with the satisfaction of the AO of the other person. Such satisfaction in section 153C of the IT Act, 1961, in addition to acting as a safeguard against the arbitrary exercise of power by the AO of the person searched,  helped in identifying the years to be excluded for the purposes of assessment of the other person. Now with the intention of the Parliament to restrict the scope of block period confined only to the tax years having undisclosed income, it is suggested that section 295 be suitably amended to add an analogous provision for recording of satisfaction by the AO of the `other person’ on the lines of the section 153C of the IT Act, 1961, which would facilitate the identification of the tax years to be ignored from the block period for the assessment of the `other person’ and also provide cushion against the capricious one-sided exercise of power by the AO of the searched person in arbitrarily branding the material pertaining to the `other person’, which actually does not.

Another amendment has been made to section 296 of the Act dealing with the  time limit for completion of block assessment. Section 296(1)(a) provides that: `irrespective of the provisions of section 286, the order under section 294 shall be passed within twelve months from the end of the quarter in which the last of the authorisations for search was executed, or requisition was made.’ This section has two limbs for passing a block assessment order,  viz., first, a period of twelve months; and second, the starting point for such period, being,  the end of the quarter in which the last of the authorisations for search was executed, or requisition was made. Both the limbs are proposed to be changed by the Finance Bill, 2026. The first limb is a period of eighteen months; and the second, is the starting point for such period, being,  `the end of the quarter in which the search was initiated or requisition was made’. There may not be any dispute on the `date of initiation of the search’ in case of `other person’,  as it has been specifically referred to in section 295(3)  of the Act as the date on which such money, bullion…. or information relating to the aforesaid undisclosed income were received by the Assessing Officer having jurisdiction over such other person’.  The problem may crop up in the assessment of the `person searched’ within the scope of section 294, wherein no precise definition of the expression has been given.  Considering the past controversy and there being no precise definition of the expression `the date of initiation of search’ , it will be interesting to see how it is interpreted – whether the date of actual search, that is, the date of execution of search warrant or the date of signing of warrant of authorisation (Nilesh Hemani VS. CIT [TS-6092-HC-1998(Calcutta)-O]; Nirmal Gosh VS. DCIT [TS-5024-ITAT-2002(Kolkata)-O].