The block assessment scheme under Chapter XIII-B of the Income-tax Act, 2025 is designed to assess undisclosed income detected during search or requisition proceedings in a consolidated manner. Under this framework:
- Section 294 lays down the procedure for block assessment;
- Section 295 governs cases where undisclosed income belongs to a person other than the searched person (“other person”); and
- Section 296 prescribes the time limits for completion of block assessments.
Clauses 64 and 65 of the Finance Bill, 2026 seek to rationalise both:
- the scope of block assessment for third parties, and
- the time limit for completing block assessments, particularly in group search cases.
Clause 64: Amendment to Section 295 Undisclosed Income of “Other Person”
Existing Position under Section 295
Section 295 applies where, during a search under section 247 or requisition under section 248:
- the Assessing Officer is satisfied that seized material belongs to, pertains to, or relates to
- a person other than the searched person.
In such cases:
- the material is transferred to the Assessing Officer having jurisdiction over the other person; and
- block assessment proceedings are initiated against that other person under section 294.
Crucially, under the existing law, the block period applicable to the other person is the same as that applicable to the searched person, regardless of whether the incriminating material relates to multiple years or only a single year.
What Clause 64 Changes
Clause 64 amends section 295(2) to narrow the block period in specified circumstances.
Scope of the Amendment
Where:
- the undisclosed income of the other person, based on incriminating material,
- relates only to one tax year,
the block assessment for such other person shall be restricted to that single tax year, namely:
the tax year immediately preceding the tax year in which the search is initiated or requisition is made.
⚠️ Important clarification: This restriction applies only where the incriminating material has a bearing on undisclosed income of a single tax year. If the material relates to more than one year, the normal block assessment provisions will continue to apply.
Implications of Clause 64
- Targeted assessment for third parties: Third persons are no longer automatically subjected to a full block assessment when the material concerns only one year.
- Reduced compliance burden: Persons against whom no search or requisition has been conducted are protected from disproportionate proceedings.
- Alignment with proportionality principles: The amendment ensures that the scope of assessment corresponds to the scope of alleged undisclosed income.
- Lower litigation exposure: Disputes arising from mechanical application of block periods to third parties are expected to reduce.
Clause 65: Amendment to Section 296 Time Limit for Completion of Block Assessment
Existing Time-Limit Structure
Under the existing section 296:
- Searched person: Block assessment to be completed within 12 months from the end of the quarter in which the last search authorisation was executed or requisition made.
- Other person: Block assessment to be completed within 12 months from the end of the quarter in which notice under section 294 is issued pursuant to section 295.
This framework has led to:
- multiple limitation dates within the same search group; and
- operational difficulties in coordinated assessments.
What Clause 65 Changes
Clause 65 amends section 296 to introduce two key changes:
1. Uniform Reference Point: The date of initiation of search or requisition becomes the reference point for computing limitation.
2. Extended Time Limit: The time limit for completion of block assessment is increased to “18 months from the end of the quarter in which the search is initiated or requisition is made”.
This revised limit applies uniformly to:
- the searched person, and
- other persons covered under section 295.
Implications of Clause 65
- Single limitation timeline for group searches: Eliminates multiple, misaligned deadlines arising from staggered authorisations or notices.
- Improved quality of assessments: Additional time enables comprehensive examination of seized material, especially in complex group cases.
- Reduced technical challenges: Clearer limitation rules reduce the risk of assessments being invalidated on procedural grounds.
- Administrative certainty: Enhances predictability and coordination for both taxpayers and tax authorities.
Combined Effect of Clauses 64 and 65
| Aspect | Pre-Amendment | Post-Amendment |
| Block period for other person | Same as searched person | Restricted to single year (where applicable) |
| Trigger for limitation | Last authorisation / notice date | Initiation of search |
| Time limit | 12 months | 18 months |
| Compliance burden on third parties | High | Rationalised |
| Risk of limitation disputes | Significant | Reduced |
Applicability and Effective Date
- Effective from: 1 April 2026
- Applies to: Searches initiated or requisitions made on or after 1 April 2026
- Relevant tax year: 2026-27 onwards
- Nature: Prospective amendment
Conclusion
Clauses 64 and 65 of the Finance Bill, 2026 introduce measured and technically sound refinements to the block assessment regime under the Income-tax Act, 2025. By:
- restricting block assessments for third parties to relevant years only, and
- rationalising and extending assessment timelines based on search initiation,
the amendments enhance fairness, proportionality, and administrative efficiency without diluting the enforcement framework.
These changes are likely to reduce avoidable litigation, protect non-searched persons from excessive proceedings, and improve the overall functioning of the search assessment mechanism.
Related Posts: