s.158BFA — Interest and penalty in block assessment
Charges interest at one and a half per cent a month on a late or missing block return, and provides a discretionary penalty of 50 per cent of the tax on undisclosed income, barred on four conditions for income declared in the return.
Applies to a search initiated, or a requisition made, on or after 1 September 2024; the date is in sub-section (1) itself. The Finance Act, 2025 amended sub-sections (1) and (4) with effect from 1 September 2024. Searches from 1 September 2024 to 31 March 2026 are under this section. The counterpart in the Income-tax Act, 2025 is section 298, which applies to a search initiated on or after 1 April 2026. Section 271AAB, which governed penalty in earlier search cases, applies under its sub-section (1A) only where the search was initiated "but before the 1st day of September, 2024", words inserted by the Finance Act, 2025, and has no place in a block assessment.
Income-tax Act, 1961
s.158BFA
Income-tax Act, 2025
s.298
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 158BFA of the Income-tax Act, 1961 does two things. Sub-section (1) makes an assessee who furnishes the block return late, or not at all, liable to simple interest at one and one-half per cent of the tax on the undisclosed income determined under section 158BC(1)(c). It runs for every month or part of a month from the day after the time specified in the notice expired to the date of completion of the assessment. Sub-section (2) provides that the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under the Chapter, "may direct" that the person shall pay by way of penalty a sum equal to fifty per cent of the tax leviable on the undisclosed income determined by the Assessing Officer. The first proviso bars an order imposing that penalty, or a penalty under section 271AAD(1), 271D, 271DA or 271E for the block period, where four conditions are met. The block return has been furnished. The tax payable on the basis of it has been paid, or seized money has been offered for adjustment. Evidence of tax paid is furnished along with the return. And no appeal is filed against the assessment of the part of income shown in the return. The second proviso lifts the bar where the income determined exceeds the income returned, and the penalty is then imposed on the excess. Sub-section (3) requires a hearing, requires previous approval of the Additional or Joint Commissioner or Director for a penalty above two lakh rupees imposed by a Deputy or Assistant Commissioner or Director, and fixes the time limit. Sub-section (4) lists the exclusions. The section applies to a search initiated from 1 September 2024 to 31 March 2026. For a search initiated on or after 1 April 2026 the counterpart is section 298 of the Income-tax Act, 2025, which is the same in substance. Section 158BF excludes interest under sections 234A, 234B and 234C and penalty under section 270A; section 297 of the 2025 Act does the same for sections 423, 424, 425 and 439.
What the provision does
Charges interest on a late or missing block return and provides the penalty on undisclosed income of the block, with a bar for income declared, paid for and not appealed. It does not grade the penalty by what was admitted, as section 271AAB did. It does not make the penalty mandatory. It does not protect the returned income if any one of the four conditions fails. It does not bar a penalty on income determined in excess of the return. And the block provisions contain no prosecution provision of their own.
Threshold questions
- Whether the block return was furnished, and within the time specified in the notice, since a late or missing return carries interest at one and a half per cent a month up to the date of the order
- Whether the tax payable on the basis of the return was paid or, where money was seized, the assessee offered it for adjustment against that tax
- Whether evidence of tax paid was furnished along with the return and not afterwards
- Whether any ground of appeal is directed against the assessment of income shown in the return, including the rate at which it is taxed
- Whether the undisclosed income determined exceeds the income shown in the return, in which case the penalty is computed on the excess
- Whether the assessee was heard and, where the penalty exceeds two lakh rupees, previous approval of the Additional or Joint Commissioner or Director was taken
- Whether the penalty order was made within the time limit in section 158BFA(3) or section 298(5)
In practice
The recurring disputes.
Whether the penalty is discretionary, including on the excess
The assessee's case is that the words are "may direct". On the same words in the old chapter the Bombay High Court held in CIT v. Anju R. Innani (ITA 2347 of 2009, 5 April 2010, paragraph 9) that "the imposition of a penalty is not mandatory merely because it is lawful". The Gujarat High Court held in CIT v. Becharbhai P. Parmar (Tax Appeal 2538 of 2009, 10 January 2012) that "may" cannot be read as "shall" (paragraph 8.3) and that the penalty is not mandatory (paragraph 9), even though section 273B does not mention the block penalty (paragraph 9.1). The Revenue's case is that the second proviso says the penalty "shall be imposed" on the excess, which leaves no discretion there. It will add that Becharbhai held that the case law on the concealment penalty does not apply, and that a Tribunal may not delete the penalty by doubting an addition that has become final (paragraphs 12 to 13.2). The Tribunal's order deleting the penalty was quashed and the matter remanded (paragraph 15). The assessee replies that Becharbhai was itself a case of income determined above the amount returned. The Court described the corresponding proviso as "merely in nature of clarification" (paragraph 8.2) and held the penalty discretionary. Both decisions are on the old chapter, whose penalty ranged from the amount of tax to three times that amount. With a fixed 50 per cent in place of a range, the discretion is now whether to impose the penalty at all, and how it applies to the excess has not been decided on the current text.
Whether a late block return satisfies the first condition of the bar
The first condition is that the person has furnished a return under section 158BC(1)(a) or section 294(1)(a). The assessee's case is that a return filed after the time in the notice is still, on the words, a return furnished in response to the notice, and the condition does not say that it must be in time. The Revenue may say that a late return is no return for this purpose. The point is open. On a late return the first condition of the bar is in doubt, and the assessee is left to the discretion in section 158BFA(2) or section 298(2) if the Revenue's reading prevails.
Whether an appeal on a legal ground forfeits the bar
The Revenue's case is that the fourth condition requires that no appeal be filed "against the assessment of that part of income which is shown in the return". Anju Innani reads that to include an appeal on the rate of tax, says the assessee "should not contest the assessment in appeal", and describes the bar as available to one who "accepts the assessment as final and pays the tax thereon". A challenge to the validity of the notice or the order attacks the assessment of the returned income along with everything else. The assessee's case is that the condition is aimed at an assessee who declares income and then disputes it. An appeal confined to the income determined in excess of the return is outside it. A jurisdictional objection is an objection to the proceeding, and Anju Innani concerned the rate on the declared income itself. The firm's view is that a ground which, if it succeeds, removes the returned income from assessment is at risk under the fourth condition. The bar matters only if the ground fails, and by then it has been lost. The choice has to be made before the appeal is filed: either the grounds are confined to the excess, or the assessee takes the jurisdictional point and relies on the discretion if it fails. A writ petition on jurisdiction is not an appeal and is not, on the words, within the condition.