Budget 2025 Expectations : Reomove Ambiguity in the New Block Assessment Scheme 

This article discusses an ambiguity in the New Block Assessment Scheme under the Income Tax Act, 1961, regarding the classification of additions made during the assessment process. Here’s a breakdown:

New Block Assessment Scheme:

• Scope: Introduced in 2024, it allows for the assessment of “total income” (both disclosed and undisclosed) during a block period of six years.
• Abatement of Pending Proceedings: Any pending assessments or reassessments within the block period are abated under this scheme.
• Potential for Additions: The assessing officer (AO) can still make additions to the total income during the block assessment, including those related to disclosed income.
• Classification Issue: The issue arises when such additions involve legal issues or disallowed claims that are not inherently undisclosed. In the absence of clear guidance, these additions may inadvertently be classified as “undisclosed income,” which attracts a higher tax rate and other penalties.

Existing Provisions:

• Section 158BA(1): Defines the block period and the assessment of “total income.”
• Section 158BB(1): States that any income not excluded under Section 158BB(5) is considered “undisclosed income.”
• Section 158BB(5): Outlines certain exclusions, but doesn’t explicitly address legal or bona fide claims.

Potential Consequences:

• Unintended Treatment: The current structure may lead to legitimate additions being treated as undisclosed income, subjecting them to higher tax rates and penalties.
• Loss of Set-Offs: Under the block assessment scheme, losses incurred during the block period or prior periods cannot be set off against undisclosed income. This can be unfair in cases where legitimate additions are reclassified as undisclosed.

Suggestions:

• Explicit Provision: It is suggested that amending the New Block Assessment Scheme to include a separate provision explicitly allowing the AO to make regular assessments (including transfer pricing issues) for abated and other years. This would ensure that legitimate additions are not treated as undisclosed income.
• Alternative: If this amendment is not feasible,it is  suggested to modify the scheme to explicitly state that it only covers the assessment of undisclosed income for the block period, aligning it with the old block assessment scheme.

Conclusion:

The passage highlights an ambiguity in the New Block Assessment Scheme that could lead to unintended consequences for taxpayers. The author proposes solutions to clarify the classification of additions made during the assessment process, ensuring fairness and consistency in the application of the law.