Section 158BC of Income tax Act 1961

👉What is 158BC

Section 158BC of the Income Tax Act, 1961, prescribes the block assessment procedure when a search under section 132 has been made or books of accounts, documents, or assets have been requisitioned under section 132A. This section forms part of the special provisions (Sections 158B to 158BI) relating to assessment of undisclosed income found during search and seizure operations.

Major Provisions of Section 158BC

Notice to File Return:

Following search or requisition, the Assessing Officer serves a notice upon the concerned individual, mandating him to file income return for "block period" (usually the last six assessment years along with the period up to the date of search).

Block Period:

Block period involves six years prior to the search year, plus the period up to the search date in the block year.

No Requirement of Section 148 Notice:

Proceedings of this chapter are not required to have any separate notice under section 148 (concerning income escaping assessment).

Tax Rate:

Hidden income for the block period is charged a special rate of 60% (under section 113), with harsh penalties and interest if not complied with. 

No Revised Return:

After filing the return under this section, the assessee will not be able to file a revised return for the block period.

Penalties and Interest:

In case the return is not filed within the said time limit, penalties and interest are charged under section 158BFA.

Purpose

Section 158BC ensures a speedy, special assessment of all undisclosed income discovered during search operations with tight timeframes, higher rates of taxation, and restricted rights to amend returns, thus enhancing the Income Tax Department's capability to counter tax evasion.

Return Format and Verification:

The return should contain total income, including hidden income, during the block period, in a specified format and verified as required.

Assessment Process:

The return is dealt with as if filed in section 139. The Assessing Officer can issue additional notices and hold inquiries like regular assessments, but some regular provisions (such as revised returns) do not hold.

👉What does section 158BC provide for the process of block assessment—-

Section 158BC of the Income Tax Act provides for the process of block assessment after a search and requisition of documents. The following are the main points it prescribes:

Initiation:

In case a search under section 132 is made or documents/assets are requisitioned under section 132A, the Assessing Officer (AO) is required to serve notice on the person concerned.

The AO directs the individual to furnish a return of income for the "block period" (usually the six assessment years preceding the year of search, plus the period up to the search date) within a set time limit, not later than 60 days from the notice date.

Return Treated as Section 139 Return:

The return filed is considered as filed under section 139, and the assessment proceedings are initiated accordingly.

No Revised Return:

Once a return is filed under this section, the assessee cannot submit a revised return for the block period.

Assessment Procedure:

The AO computes the entire undisclosed income for the block period according to section 158BB, with regard to provisions of sections 142, 143(2) & (3), 144, 145, 145A, and 145B.

No Section 148 Notice Required:

Proceedings under this chapter are not accompanied by a notice under section 148 (income escaped assessment).

Tax Rate and Penalties:

Undisclosed income detected is charged at a higher tax rate (60%), and severe penalties for non-adherence or delayed filing.

Time Limit

The block assessment has to be made within a determined time period, usually twelve months from the completion of the quarter during which the last search/requisition authorization is made.

Briefly, Section 158BC provides for a time-bound, tight process for evaluation of unreported income found in searches, with unique rules regarding filing, assessment, and penalties to enforce compliance and prevent tax evasion.

👉How does section 158B apply to undisclosed income and penalties—

Section 158B of the Income Tax Act is the definition section for block assessment proceedings. It clearly defines two important terms:

Block Period: 

The assessment period for which undisclosed income is determined, normally six assessment years ending in the year of search plus the period until the date of search.

Undisclosed Income: Any income, assets, or expenses which were not or would not have been disclosed for taxation purposes, found as a consequence of search or requisition.

Relation to Undisclosed Income and Penalties

Undisclosed Income: 

Section 158B states what constitutes "undisclosed income" for block assessments. These are assets, money, bullion, jewelry, or expenses not recorded or disclosed in normal books or returns, and also income or transactions realized during search operations that were not disclosed earlier.

Tax and Penalties:

Tax Rate: Any undisclosed income that is found during a block assessment is taxed at a special, elevated rate of 60%.

Penalties:

Along with tax, penalties are stringent. For default or failure to file the return, as per Section 158BFA, the penalty can be between 50% and three times the tax on the unaccounted income, depending upon the situation and compliance (delay in filing the return).

Interest: Simple interest at 1.5% per month could also be levied for late filing of returns for the block period.

Safeguards: Provided the taxpayer submits the return in time, pays the tax, and fulfills other requirements, some of the penalties may not be imposed.

In short:

Section 158B provides the meaning of undisclosed income for block assessment and, together with accompanying sections, ensures that such income is charged at a higher rate and imposes severe penalties in order to discourage tax evasion and ensure compliance.

👉Why is 60% rate important in section 158B assessments---

The 60% rate in Section 158B block assessments is important because it is a special higher rate payable only on undisclosed income found during search and seizure operations under the Income Tax Act. The higher rate has several important purposes:

Deterrent Against Tax Evasion: The level rate is a strong deterrent and is economically punitive to tax authorities that try to hide their income. It prevents hiding of income or assets, as such amounts uncovered during a search operation will be taxed heavily compared to regular income.

Clarity and Uniformity: Charging a standard 60% rate (along with surcharge and cess, where chargeable) prevents disputes about how much tax to pay on such income and ensures uniformity. The lucidity simplifies the assessment and lessens litigation.

Special Assessment Mechanism: Block assessments are meant to only address income revealed through search operations, not routine income reported in annual returns. The 60% rate is specific to this situation and has no usual set-offs, exemptions, or deductions provided in ordinary assessments.

Extra Penalties: Along with this tax, severe penalties can be imposed—between 50% and three times the tax on undeclared income—thereby enhancing compliance and the gravity of non-disclosure.

In conclusion, the 60% rate is a conscious policy instrument to deter and punish tax evasion, simplify administration, and treat income discovered on search different from normal income.

👉How are losses handled in a block assessment under section 158BB—

In a block assessment under section 158BB, the handling of losses is subject to certain rules:

Losses Declared or Assessed Within the Block Period:

If the income returned or assessed in any year of the block period is a loss, losses in such years are not considered when calculating total income for the block period. This implies that losses in the block period cannot offset the undisclosed income arrived at during the block assessment.

Brought Forward Losses and Unabsorbed Depreciation:

Losses carried forward from preceding years before the block period and depreciation not absorbed are not set off against unrecorded income revealed during the block assessment. These losses and depreciation, however, are carried forward and set off in later years according to the normal provisions of the Income Tax Act.

Set-off Within Block Period

Court rulings have settled the position that set-off of losses and unabsorbed depreciation over the years within the block period is allowed in the calculation of unascertained income, subject to the condition that the losses must be substantiated with proper vouchers and were accounted for prior to the date of search. But this does not hold good for losses carried forward from outside the block period.

👉What occasions a block assessment under section 158B—

A block assessment under section 158B occurs when the Income Tax Department searches under section 132 or requisitions books, documents, or property under section 132A, usually as a result of suspicion relating to undisclosed income. This distinctive assessment procedure is intended to fully assess all income, expenses, and deductions during a specified "block period"—six assessment years immediately prior to the search year, plus from the beginning of the current year to the search authorization date of the latest search.

The impetus for a block assessment is therefore:

Initiation of search or requisition by the tax authorities under sections 132 or 132A based on evidence or suspicion of evasion of tax or under-reporting of income.

When set off, the block assessment enables authorities to examine unaccounted income, assets, or false claims during the block period and tax the same at a higher rate, with severe penalties in case of default.

Author

Shabnam