Existing Provisions

Amendment Proposed

Our Analysis

Amendments relating to Procedure of Search and Block Assessment under Chapter XIV-B

Definition of “undisclosed income” u/s.158B(b):

The existing provisions does not specifically include the “virtual digital assets”.

It is proposed to amend the definition of “undisclosed income” to include “virtual digital asset” as undisclosed income. 

Though, the said amendment shall take effect for virtual digital assents unearthed during search conducted on or after 1st February, 2025, the definition of "undisclosed income" is inclusive in nature. Consequently, even in cases where the search was conducted prior to 1st February, 2025, a virtual digital asset may still be treated as undisclosed income if the source of its acquisition or investment is not satisfactorily explained to the AO.

However, It is pertinent to note that no corresponding amendment has been introduced in Clause (c) of Sub-section (1) of Section 132. This omission may create ambiguity in the drafting of a satisfaction note/ "reason to believe" sine qua non to initiate a search action, particularly in cases involving potential undisclosed virtual digital assets.

Computation of total income of Block Period u/s. 158BB(1):

Total Income of Block period includes:

(i) Total income disclosed in return to be filed u/s 158BC.

(ii) Total income assessed u/s 143(3)/144 or 147, 153A/153C prior to the date of Initiation of Search  

(iii) Total returned income u/s. 139 or in response to notice u/s. 142(1) or 148 and  not included in (i)/(ii) supra

(iv)  Total income determined of previous year not ended based on entries of income or transactions recorded in books of account or other documents maintained in normal course of business before the execution of last authorization. 

(v) Undisclosed income determined by  Assessing Officer over and above items referred at (i) to (iv) supra

It is proposed to substitute Sub-section(1) of Section-158BB which provides that following income shall be aggregated to determine total income of block period:

(i)  Undisclosed income declared in return u/s. 158BC

(ii)  Income assessed u/s 143(3)/144 or 147, 153A/153C prior to the date of Initiation of Search  

(iii)  Income declared in return filed u/s. 139 or in response to notice u/s. 142(1) or 148 PRIOR to the date of initiation of search and not included in (a)/(b) supra.

(iv) Three Categories:

1. Income determined based on regular books of account or document for the previous year ended on the date of search for which the due date of filing of return is not expired.
2. Income determined based on regular books of account or document for the period commencing from 1^st day of April of the previous year in which the search is initiated and ending on the day immediately preceding the date of initiation of the search. 
3. Income determined based on regular books of account or documents for the period commencing from the date of initiation of the search to the date of execution of the last of the authorization. 

(v) Undisclosed income determined by  Assessing Officer over and above items referred at (i) to (iv) supra

In the existing sub-section (1) of Section 158BB, the term "total income" is used, which creates the impression that normal income might also be required to be disclosed in the return to be filed under Section 158BC(1)(a).

However, the proposed amendment in 158BB(1)(i), substitutes the term "undisclosed income" in place of "total income" for income as per return u/s 158BC. This clarification ensures that only undisclosed income, as declared in the return filed under Section 158BC, will be included in the total income of the block period.

However, in Clause (a) of sub-section (1) of Section 158BC, it is still stated that the assessee is required to disclose total income, including undisclosed income, for the block period. To maintain consistency, a corresponding amendment is yet to be made in Clause (a) of Section 158BC(1) so that it aligns with Clause (i) of Section 158BB(1), which explicitly provides that only undisclosed income declared in the return under Section 158BC shall be included in the total income of the block period.

Under the existing provisions of Clause (iii) of Sub-section (1) of Section 158BB, total income declared in a return filed under Section 139 or in response to a notice under Section 142(1) or Section 148 is not subject to the 60% tax rate, as it is specifically excluded under Sub-section (5) of Section 158BB.

However, Clause (iii) does not explicitly require that the return must be filed prior to the initiation of the search. Consequently, income disclosed in such a return, even if filed after the search, may still qualify for exclusion under Sub-section (5) of Section 158BB, thereby escaping the 60% tax rate.

To eliminate this possibility, it is proposed that only income (word “total” removed) declared in a return filed under Section 139, Section 142(1), or Section 148 PRIOR to the date of initiation of the search shall qualify for exclusion from the higher 60% tax rate u/s 113.

Under the existing provisions of clause (iv) of sub-section (1) of Section 158BB, read with sub-section (5) of the same section, there was no explicit exclusion of income determined based on books of account and documents maintained in the normal course of business for the previous year already ended on the date of initiation of search but due date for filing of return is not expired. This ambiguity created an impression that such income, even if part of the regular business operations, would be subjected to tax at the special rate of 60% u/s 113 applicable to undisclosed income under block assessment. However, the fundamental premise of block assessment is to bring to tax undisclosed income, and not the regular income duly recorded in the books of account.

In consonance with this legislative intent, it is now proposed that income determined based on books of account and documents maintained in the normal course of business for the previous year already ended on the date of initiation of search, where the due date for filing the return of income has not expired prior to the date of search initiation, shall be excluded from the purview of levy of higher tax rate of 60%. However, the amendment does not explicitly specify that the "due date" refers to the due date under Section 139(1) of the Income Tax Act, 1961. A plain reading of the amendment suggests that even a return filed belatedly under Section 139(4) may be considered for exclusion from block assessment within the meaning of clause (iv) of sub-section (1) of Section 158BB, read with sub-section (5) of the same section.

Further, the proposed amendment divides the period from April 1 of the previous year (non-ended as of the date of search initiation) until the execution of the last search authorization into two distinct phases:
 

(i) April 1 to the date of search initiation; and
(ii) Date of search initiation to the execution of the last search authorization.

This clarifies the legislative intent to exclude normal income from taxation under Section 113’s higher rate of 60%, restricting such liability solely to undisclosed income unearthed during the search.

The said amendment shall take effect from 1^st February 2025. 

Dealing with the International Transaction or Specified Domestic Transaction of the previous year in which last authorisation of search is executed :

Sub-section (4) of Section 158BB provides that the provisions of section 92CA shall, so far as may be, apply and references to "previous year" in that section shall be construed as reference to the relevant previous year falling in the block period excluding the period referred to in sub-section (3) which deals with the International Transaction or Specified Domestic Transaction of period commencing from 1^st April of the previous year in which last authorisation of search is executed till the date of execution of last authorisation.

The proposed amendment to sub-section (3) of Section 158BB clarifies that income arising from international transactions or specified domestic transactions under Section 92CA, pertaining to the period between April 1 of the previous year in which the last search authorization was executed and the date of execution of the last authorization, shall be excluded from the block period income.

Income from international/specified domestic transactions (pertaining to the period from April 1 of the previous year to the execution of the last search authorization) continues to be excluded from block period calculations and assessed under regular provisions. The amendment intends to remove any ambiguity in interpretation of existing sub-section (3).

Time limit to Complete the Block  assessment :

Section 158BE of the Act provides the time-limit for completion of block assessment as twelve months from end of the month in which the last of the authorisations for search has been executed.

Sub-section (1) of Section 158BE is proposed to be amended to provide that the time-limit for completion of block assessment will be twelve months from end of the quarter in which the last of the authorisations for search or requisition has been executed.

Section 158BE of the Act stipulates that the block assessment must be completed within twelve months from the end of the month in which the last search/requisition authorization is executed. However, in practice, search proceedings often involve groups of interconnected cases requiring coordinated investigations and assessments. The current framework creates multiple time-barring dates within a single group of cases, leading to administrative complexities and hindering the timely resolution of proceedings. To address this, the amendment proposes revising the time limit to twelve months from the end of the quarter (instead of the month) in which the last authorization for search/requisition is executed. This ensures a standardized timeline for all cases within a group, streamlining coordination and enabling authorities to conclude proceedings efficiently.

Retention of Books of account u/s.132(8):

Prior to the Finance Bill, 2025, the AO was permitted to retain seized books of accounts or other documents for a period of 30 days from the date of the assessment, reassessment, or re-computation order.

Section 132(8) of the Income Tax Act, 1961, is proposed to be amended to provide that the AO may retain seized books of account or other documents for a period of one month from the end of the quarter in which an assessment, reassessment, or re-computation order has been passed. The requirement for the AO to record reasons in writing for retaining the seized books of account or documents beyond this period, along with the necessity of obtaining prior approval from higher authorities, shall continue to apply as per the existing provisions.

The retention of seized books of account or other documents is essential because, during search assessment proceedings in group cases, the assessment order for one assessee may be finalized before that of another assessee to whom the seized records are relevant.

Furthermore, this amendment aims to remove the challenges faced by assessees in segregating seized books of account or other documents. Moreover, in many cases, records from a completed assessment may need to be re-examined during subsequent assessment proceedings of other group entities.