Section 298 of the Income-tax Act, 2025 — Levy of Interest and Penalty in Block Assessment (Search Cases)

In plain language

What Section 298 is about

Section 298 of the Income-tax Act, 2025 sits inside the "block assessment" chapter that applies when the Income-tax Department carries out a search under Section 247 (the 2025 equivalent of the old Section 132) or a requisition of books, money, bullion or assets. When undisclosed income is unearthed in a search, the department does not tax it year-by-year in the normal way. Instead it aggregates the concealed income of the whole block period (broadly the six tax years before the search plus the part of the current year up to the date of search) and taxes it at a flat penal rate of 60% plus surcharge. Section 298 is the machinery provision that adds two teeth to this regime: (a) interest for filing the block return late, and (b) a penalty where the assessee's declared undisclosed income falls short of what the Assessing Officer finally determines.

In short, Section 298 is the block-assessment cousin of the ordinary interest provisions (Sections 423/424/425) and the ordinary penalty for under-reporting (Section 439). It is the modern re-enactment of Section 158BFA of the Income-tax Act, 1961, and the substance is carried over almost unchanged.

The two charges under Section 298

• Interest for late block return (Section 298(1)): If a person does not file the block return within the time allowed in the notice issued under Section 294(1)(a), simple interest at 1.5% per month or part of a month is charged on the tax on undisclosed income. It runs from the day after the notice deadline until the block assessment is completed.
• Penalty on undisclosed income (Section 298(2)): The Assessing Officer may levy a penalty equal to 50% of the tax payable on the undisclosed income determined for the block period. Because tax on that income is itself 60%, the penalty effectively adds another 30 paise of tax for every rupee of concealed income.

Who it applies to

• Any person (individual, HUF, firm, company, LLP, trust, AOP/BOI) in whose case a search or requisition is initiated on or after the commencement of the 2025 Act.
• An "other person" whose undisclosed income is assessed under Section 295 because material found in someone else's search points to them.
• It does not apply to normal, non-search assessments — those attract interest under Sections 423/424/425 and penalty under Section 439 instead. Section 297 specifically bars those ordinary interest and penalty provisions from being applied on top of block income, so there is no double charge.

The safe harbour — how to escape the 50% penalty

Section 298 contains a valuable protection. No penalty is imposed on the undisclosed income assessed for the block period if all of the following are satisfied:

• The person furnishes a block return under Section 294(1)(a) declaring the undisclosed income;
• The tax on that declared income is paid, or the seized money is offered for adjustment against it;
• Proof of tax payment is furnished along with the return; and
• The person does not file an appeal against the assessment of that declared income.

Key point: even when these conditions are met, the shield only covers the income actually declared. If the Assessing Officer determines undisclosed income higher than what was declared, the 50% penalty bites only on the excess — the additional undisclosed income that was not voluntarily disclosed. This is a strong incentive to make a full and honest disclosure in the block return.

How it interacts with the rest of the block-assessment chapter

• Section 292 triggers the block assessment on a search/requisition and Section 293 computes the total undisclosed income of the block period (taxed at 60%).
• Section 294 lays down the procedure and the notice whose deadline decides when Section 298(1) interest starts.
• Section 297 switches off the ordinary interest (423/424/425) and penalty (439) so that only the Section 298 charges apply to block income.
• Section 296 fixes the time-limit for completing the block assessment, which also caps the interest period.

Practical implications

• File the block return on time and in full. Late filing invites 1.5% monthly interest that keeps accruing until assessment is complete.
• The 50% penalty is discretionary ("may direct"), so a genuine, fully paid disclosure with no appeal can eliminate it entirely on the disclosed portion.
• Keep proof of tax payment ready and consider offering seized cash for adjustment — both are conditions of the safe harbour.
• Decide the appeal strategy carefully: filing an appeal on the declared income can cost you the penalty immunity for that income.