Search-detected income excluded from voluntary disclosure scheme remains liable to block assessment, with limited immunity on tax payment.

Income detected in a search under section 132 of the Income-tax Act, 1961 remained outside the voluntary disclosure scheme under section 64 of the Finance Act, 1997 where the statute excluded search-related income, so it could not be taken out of block assessment under Chapter XIV-B. The Commissioner's acceptance of disclosure did not override that statutory bar, and the Tribunal was wrong to exclude the searched income from block assessment. At the same time, because the scheme and search-assessment process had created genuine confusion, the assessees were protected from penalty, interest and prosecution if the differential tax was paid within the prescribed period. The Tribunal's common order was set aside and the block assessment orders restored, subject to that limited immunity.

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Issues: (i) Whether income covered by a search under section 132 of the Income-tax Act, 1961, could be brought within the voluntary disclosure scheme under section 64 of the Finance Act, 1997, so as to exclude it from block assessment under Chapter XIV-B of the Income-tax Act, 1961; (ii) whether, on the facts, the assessees could be visited with penalty, interest or prosecution after the differential tax was paid.

Issue (i): Whether income covered by a search under section 132 of the Income-tax Act, 1961, could be brought within the voluntary disclosure scheme under section 64 of the Finance Act, 1997, so as to exclude it from block assessment under Chapter XIV-B of the Income-tax Act, 1961.

Analysis: Section 64 of the Finance Act, 1997 granted relief only to income that could validly be disclosed within the scheme period, while sub-section (2) kept outside the scheme income referable to the previous year in which a search under section 132 was initiated or any earlier previous year. The earlier judgment construed that provision to mean that income detected in search proceedings did not qualify for the scheme, though other undisclosed income unrelated to such detected income could still be covered. The mere issuance of a receipt by the Commissioner under the scheme did not override the statutory exclusion or nullify proceedings under Chapter XIV-B.

Conclusion: The income covered by the search remained liable to block assessment under Chapter XIV-B, and the Tribunal was wrong in excluding it from that regime.

Issue (ii): Whether, on the facts, the assessees could be visited with penalty, interest or prosecution after the differential tax was paid.

Analysis: The overlap between the scheme proceedings and the search assessment created genuine confusion because even a senior departmental authority administering the scheme had accepted the disclosure for the searched amount. In that situation, the assessees could not fairly be exposed to penal consequences, even though the amount remained taxable under the block assessment provisions. Relief from penalty, interest and prosecution was therefore justified if the differential tax was paid within the stipulated time.

Conclusion: The assessees were protected from penalty, interest and prosecution, subject to payment of the differential tax within the prescribed period.

Final Conclusion: The common order of the Tribunal was set aside, the block assessment orders were restored, and the assessees were granted limited immunity from penal consequences on compliance with the tax payment direction.

Ratio Decidendi: Income specifically excluded by statute from a voluntary disclosure scheme because it was detected in search proceedings remains assessable under the ordinary search and block assessment regime, and administrative acceptance under the scheme cannot override that statutory bar.

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