Finance Bill Proposes Major Reforms to Streamline Tax Assessment Procedures
The finance bill has introduced significant amendments aimed at easing procedural complexities in search-related tax cases, particularly concerning third parties. The proposed changes focus on implementing a calibrated approach to block assessments and standardizing limitation timelines, which experts believe will substantially reduce disproportionate compliance burdens and introduce greater predictability into the tax assessment process.
Current Framework and Its Challenges
Under the existing income-tax framework, when authorities discover undisclosed income belonging to an "other person" during a search on a specified taxpayer, block assessment proceedings are automatically initiated against that third party for the same block period as the searched individual. This occurs even when the alleged connection between the third party and the undisclosed income relates to just a single tax year. Consequently, this often results in comprehensive block assessments being imposed on individuals or entities against whom no search was ever conducted, creating significant compliance challenges.
A block assessment represents a special tax proceeding triggered following a search operation. In this process, the income-tax department evaluates undisclosed income for a defined "block period" that covers multiple years through a consolidated exercise, rather than conducting year-by-year scrutiny. This mechanism, while efficient in some contexts, has frequently led to extensive procedural burdens for third parties with minimal involvement in the original search case.
Proposed Amendments to Section 295(2)
The finance bill now proposes to amend Section 295(2) of the Income-tax Act to allow for a restricted block period specifically for such "other persons," instead of mechanically applying the identical block period as the searched taxpayer. This change, which will become effective for searches initiated on or after April 1, is strategically designed to reduce unnecessary compliance requirements in situations where third-party involvement is limited or incidental to the primary search case.
Hemal Shah, associate partner at Economic Laws Practice, commented on the significance of this amendment, stating, "The proposed amendment marks a substantial procedural rationalisation within the block assessment regime. The extension of block assessments to other persons has frequently resulted in disproportionate compliance burdens, even in cases where third-party involvement is merely incidental. Enabling a more calibrated block period aligns with fundamental principles of proportionality and fairness, and should provide targeted relief where no search has been initiated against the third party."
Sandeep Bhalla, partner at Dhruva Advisors, further elaborated, "This is a welcome move that resolves a settled legal principle that reassessment should not occur unless incriminating material is discovered during the search. Thus, in cases involving 'other persons,' even if incriminating material is found for only one year, block assessments were reopened for all years, leading to unnecessary litigation regarding both the additions themselves and the jurisdiction to reopen cases. The budget proposal empowers assessing officers to reopen assessments of 'other persons' solely for the specific year in which incriminating material is identified."
Standardization of Limitation Timelines
In a related development, the Budget also proposes modifications to how limitation periods for completing block assessments are calculated. Currently, the 12-month deadline is linked to the execution of the last search authorization, which can create uneven timelines across group searches where authorizations may be carried out at different stages. To address this inconsistency, Section 296 of the Income-tax Act is proposed to be amended to anchor the limitation period to the initiation of the search or requisition itself.
Simultaneously, the statutory completion timeline will be extended from 12 months to 18 months, applicable to searches initiated on or after April 1, 2026. This extension aims to provide tax authorities with adequate time to conduct thorough assessments while maintaining procedural efficiency and reducing the likelihood of rushed decisions that could lead to further disputes.
Expert Analysis and Industry Implications
Tax professionals and legal experts have widely welcomed these proposed reforms, highlighting their potential to streamline tax administration and reduce litigation. The calibrated approach to block periods for third parties is expected to foster a more equitable tax environment, where compliance requirements are proportionate to the actual involvement of individuals or entities in search cases.
Furthermore, the standardization of limitation timelines and the extension of the completion deadline are anticipated to enhance procedural clarity and predictability for both taxpayers and authorities. These changes reflect a broader trend toward rationalizing tax procedures and minimizing unnecessary administrative burdens, which could ultimately contribute to a more efficient and transparent tax ecosystem in India.
The finance bill's proposals represent a significant step forward in addressing long-standing procedural challenges within the block assessment framework. By introducing targeted reforms that prioritize proportionality and fairness, these amendments aim to create a more balanced and predictable tax assessment process for all stakeholders involved.
