Block assessment 2.0: A sharper, fairer tax enforcement framework

Mint

07-05-2025

The reintroduction of block assessment regime in Finance Act (No 2) 2024 marked a significant evolution in tax enforcement framework. The regime, applicable to search and requisition proceedings initiated on or after 1 September, 2024, was aimed at reinforcing the government's efforts to curb tax evasion and bring greater focus to taxation of undisclosed income.
The initial structure of tax provisions raised concerns among taxpayers, particularly due to interpretational ambiguities and risk of additional taxation on already disclosed income. These concerns necessitated a timely recalibration of tax law and corresponding compliance filings.
Under Section 158BC(1) of the Income-tax Act, taxpayers subjected to search proceedings were previously required to disclose their "total income", including both undisclosed and previously disclosed components in tax return filed pursuant to block assessment notices.
Application of a flat 60% tax rate on the entire reported income resulted in undue hardship, particularly for those whose previously disclosed income was subjected to the same penal treatment as freshly unearthed undisclosed income.
This approach not only created inequitable tax outcomes but also contravened the broader principles of fair and proportionate taxation.
Recognising the need for corrective action, the Finance Act 2025 introduced a significant amendment by substituting the term "total income" with "total undisclosed income" in Sections 113 and 158 of the Income Tax Act. Although seemingly a minor semantic change, this amendment fundamentally altered the scope of block assessments.
It clarified that only income unearthed during search proceedings would be subject to an elevated tax rate, thereby safeguarding bonafide earlier disclosures from disproportionate penal consequences.
Importantly, while the 60% tax rate remains unchanged, its retrospective application from September reinforces the government's commitment to legislative clarity and equitable treatment of taxpayers.
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Complementing these legislative changes, the Central Board of Direct Taxes, through a notification on 7 April, 2025, introduced Rule 12AE in the Income-tax Rules, along with Form ITR-B.
This new form, tailored specifically for block assessments, is designed to streamline compliance and enhance transparency. By focusing solely on income pertaining to block period, Form ITR-B simplifies taxpayer reporting obligations while providing a structured framework for accurate reporting.
It requires detailed disclosure of undisclosed income, classified by heads of income, assessment year-wise, and assets segregated into specific categories such as money, bullion, jewellery, virtual digital assets, etc.
This granular level of reporting facilitates more efficient examination and assessment of unexplained assets and undisclosed income. Additionally, the form permits taxpayers to claim credit for TDS and TCS on such undisclosed income, subject to verification by the tax department.
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Unlike ITR-U, ITR-B is a paragon of precision, requiring only pertinent disclosures. This focused design ensures simplicity for taxpayers and enhances scrutiny efficiency for the Revenue Authorities. Yet few procedural inconsistencies could be seen in the verification section of Form ITR-B.
Despite being mandated for electronic filing for all category of taxpayers, the form still references manual signatures, receipt stamp number, and receiving official's seal – seemingly outdated requirements, that runs counter to broader objective of digital compliance. These discrepancies should be promptly addressed to avoid confusion and ensure consistency in procedural norms.
Collectively, the legislative and procedural reforms introduced regarding block assessments reflect a constructive effort by the government to enhance fairness and transparency in tax administration.
By distinguishing undisclosed and previously reported income and establishing a streamlined compliance mechanism, the new reporting framework strikes a measured balance between deterrence and fairness.
Moving forward, addressing residual anomalies, particularly in relation to the verification section of Form ITR-B, would be crucial in fostering taxpayers' confidence and ensuring effective implementation of the revised reporting regime.
Sandeep Jhunjhunwala is partner, Nangia Andersen LLP. Inputs from Sanjay Kumar, director, Nangia Andersen LLP. Views are personal.
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