Relief for third parties caught in search cases, budget also tweaks timelines for block assessments

Seeking to ease procedural hardship in search-related tax cases, the finance bill has proposed a calibrated approach to block assessments for third parties, alongside changes to standardise limitation timelines — moves experts say could reduce disproportionate compliance burdens and bring greater predictability to the process.

Under the existing framework, when tax authorities uncover undisclosed income belonging to an “other person” during a search on a specified taxpayer, block assessment proceedings are initiated against that third party for the same block period as the searched person — even if the alleged linkage relates to just one tax year. This often results in a full-fledged block assessment for individuals or entities against whom no search was conducted.




A block assessment is a special tax proceeding triggered after a search, under which the income-tax department assesses undisclosed income for a defined “block period” covering multiple years in one consolidated exercise, instead of year-by-year scrutiny.

The finance bill now proposes to amend Section 295(2) of the Income-tax Act to allow a restricted block period for such “other persons”, instead of mechanically applying the same block period as the searched taxpayer. The change, effective for searches initiated on or after April 1, is aimed at reducing unnecessary compliance where third-party involvement is limited.

“The proposed amendment marks a significant procedural rationalisation in the block assessment regime,” said Hemal Shah, associate partner at Economic Laws Practice. “Extension of block assessments to other persons has often resulted in disproportionate compliance burdens, even where third-party involvement is merely incidental. Enabling a more calibrated block period aligns with 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 added, “This is a welcome move which resolves a settled law that the re-assessment should not be done unless there is incriminating material found during the search. Thus, in case of “other person” even if the incriminating material is only for one year, the block assessments were reopened for all the years leading to unnecessary litigation both on grounds of the additions itself and as regards the jurisdiction to reopen the cases. The budget proposal enables the assessing officer to re-open the assessment of the “other person” only for the year in which incriminating material is found. “

In a related move, the Budget also proposes changes to how limitation periods for completing block assessments are computed. Currently, the 12-month deadline is linked to the execution of the last search authorisation, which can lead to uneven timelines across group searches, where authorisations may be carried out at different stages. To address this, Section 296 of the I-T Act is proposed to be amended to anchor the limitation period to the initiation of search or requisition. At the same time, the statutory completion timeline will be extended from 12 months to 18 months, applicable to searches initiated on or after April 1, 2026.