TaxTMI 
TaxTMI 
Assessment of Third-Party Undisclosed Income : Clause 295 of the Income Tax Bill, 2025 Vs. Section 158BD of the Income-tax Act, 1961
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.... Both Clause 295 and Section 158BD operate within the context of special assessment procedures triggered by search and seizure actions under the Income Tax Act. Their practical relevance is underscored by the increasing sophistication of tax evasion methods and the necessity for robust legal tools to bring undisclosed income within the tax net, even when it is found in the possession or records of persons other than the primary subject of a search. 2. Objective and Purpose The legislative intent behind both Clause 295 and Section 158BD is to ensure that undisclosed income, which is discovered in the course of a search or requisition but belongs to a person other than the one searched, does not escape assessment. The rationale is rooted in the principle that tax liability should attach to the true owner or beneficiary of the income, regardless of in whose possession the incriminating material is found. Historically, search and seizure provisions were designed to counter large-scale tax evasion by empowering authorities to conduct surprise inspections and seize assets or documents. However, it was observed that in many cases, incriminating materials or assets discovered during a s....
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....y be contested, especially in the absence of explicit procedural safeguards or timelines for recording such satisfaction. * Scope of "Any Information": The breadth of "any information contained therein" could potentially encompass a vast range of data, raising questions about relevance and admissibility, especially with the proliferation of electronic records. * Jurisdictional Challenges: The process of transferring seized material across jurisdictions may lead to logistical and legal complications, particularly in cases involving multiple stakeholders or overlapping assessments. d) Relationship with Section 294 Clause 295 mandates that the assessment of the third party be conducted u/s 294. While the text of Section 294 is not provided, it is reasonable to infer that it sets out the detailed procedure for block assessments in search cases, replacing the earlier Section 158BC. This linkage ensures procedural continuity and clarity. 4. Practical Implications The practical effect of Clause 295 is to close loopholes that might otherwise allow undisclosed income to escape assessment merely because it is found in the possession or records of someone other than the person searche....
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....eference: Section 158BD refers to Section 158BC for the assessment procedure, while Clause 295 refers to Section 294, indicating a reorganization and possible updating of the procedural framework in the new Bill. b) Procedural Safeguards and Judicial Interpretation Section 158BD has been the subject of significant judicial scrutiny, particularly with regard to the timing and manner in which the AO's "satisfaction" must be recorded. Courts have held that the AO must record satisfaction in writing before proceeding against the third party, and that such satisfaction must be based on tangible material. Delays or failures in recording satisfaction have led to assessments being quashed. While Clause 295 does not explicitly codify these procedural safeguards, it is likely that similar judicial principles will be read into its operation, unless the new Bill or accompanying rules provide otherwise. The absence of explicit timelines or procedural steps for recording satisfaction could be a point of contention and may require clarification through subordinate legislation or judicial interpretation. c) Block Period and Related Provisions Section 158BD contains detailed provisions reg....
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....s may challenge assessments on the grounds of procedural lapses, lack of jurisdiction, or inadequate satisfaction by the AO. The absence of explicit timelines or procedural steps in Clause 295 could be a source of ambiguity, necessitating judicial clarification or the issuance of detailed rules by the tax administration. 6. Comparative Analysis in Table A detailed comparison reveals both continuity and change: Aspect Clause 295 of the Income Tax Bill, 2025 Section 158BD of the Income-tax Act, 1961 Trigger AO's satisfaction that undisclosed income "belongs to or pertains to or relates to" any person other than the searched person Same language: AO's satisfaction that undisclosed income "belongs to or pertains to or relates to" any person other than the specified person Scope of Assets Money, bullion, jewellery, virtual digital asset, other valuable article or thing, assets, books of account, other documents, or any information contained therein Money, bullion, jewellery, virtual digital asset, other valuable article or thing, books of account, other documents, or any other material or information relating to the undisclosed income Procedure Post-Transf....