When the Authorities Find Hidden Income – Section 113 Means Flat 60 % Tax

During the 1990s, income-tax searches and raids often uncovered large sums of unreported money & assets. Yet, before 1995, there was no separate method for taxing such income. Officers had to fit these amounts into regular assessment years, often leading to disputes & under-taxation. To address this gap, the government introduced the “block assessment scheme” through Chapter XIV-B of the Income Tax Act. Under this mechanism, all undisclosed income detected in a search is assessed collectively for a specific period — usually ten previous years.

Section 113 is the core tax charging section for that block. It decides the rate of tax applicable to the total undisclosed income of the block period determined under Section 158BC. In simple terms, if you are subject to a search under Section 132 or a requisition under Section 132A, & the department discovers income that was not disclosed in your regular returns, Section 113 governs how that amount is taxed.

Understanding the Concept of ‘Block Assessment’

Before diving into tax rates, it helps to grasp how block assessment works.

A block period refers to ten previous years prior to the search date, plus the period up to the search day. All income that escaped assessment during those years & was discovered in the search is pooled together. The Assessing Officer then computes the total undisclosed income of the block period under Section 158BC and taxes it as a single unit under Section 113. Regular slab rates or deductions don’t apply here — the law treats it as tainted income that must be taxed separately & swiftly.

Core Provision of Section 113

The section states that the total undisclosed income of the block period, determined under Section 158BC, shall be charged to tax at the rate of sixty per cent.

This flat rate applies irrespective of the amount of income or the status of the assessee — whether individual, firm, company, or trust. There are no exemptions, no rebates, no deductions. So, if a raid reveals ₹1 crore of undisclosed income spanning multiple years, the entire ₹1 crore is taxed at 60 per cent under Section 113 — plus surcharge and cess where applicable.

Also Read: Long-Term Capital Gains Tax on Shares and Equity Mutual Funds

Purpose and Rationale

The legislature’s intent was clear: to create a strict & deterrent framework for taxing black money. Unlike regular assessments where taxpayers get time & deductions, a search operation is meant to reveal concealment.

Hence, the law removes leniencies like:

• Carry forward of losses
• Set-off of speculative or business losses"
• Basic exemptions & slab rates

This makes Section 113 an instrument of enforcement rather than routine tax collection.

Treatment of Losses and Set-offs

A frequent question is whether a taxpayer can reduce undisclosed income by setting off past losses or speculative losses. The answer is no.

Although the Income Tax Act generally provides for set-off & carry forward of losses from speculation business, Section 113 operates independently. It taxes the undisclosed portion in isolation.

For example:
If an assessee has a recorded business loss of ₹10 lakh but a search reveals ₹50 lakh in unrecorded cash sales, the full ₹50 lakh is taxed at 60 per cent — no set-off allowed. This approach was confirmed by several judgments including CIT v. Suresh N. Gupta (2008) 297 ITR 322 (SC).

Surcharge Controversy and Retrospective Amendment

For years, one of the most debated issues around Section 113 was the applicability of surcharge. Before 1 June 2002, the section did not specify whether surcharge was to be added. Some courts ruled that in the absence of explicit mention, no surcharge applied to search assessments for periods before that date. To end the dispute, the Finance Act 2002 inserted an Explanation stating that surcharge is applicable to all block period assessments, effective from 1 June 2002. However, the department claimed it was clarificatory & thus retrospective, while taxpayers argued it could not apply to searches before 2002.

The Supreme Court, in CIT v. Suresh N. Gupta & later in CIT v. Vatika Township Pvt Ltd. (2014) 367 ITR 466 (SC), settled the issue by holding that the amendment was prospective — surcharge applies only to search assessments after 1 June 2002. This judgment brought much-needed clarity for both taxpayers and the department.

Also Read: Short-Term Capital Gains Tax on Equity Shares & Mutual Funds

Computation of Tax Under Section 113

Here’s a simple illustration of how tax is computed on undisclosed income found in a search:

No deductions, no rebates — only flat-rate taxation.

Interplay with Sections 158BC and 158BD

• Section 158BC lays down the procedure for block assessment after a search.
• Section 158BD deals with cases where undisclosed income belongs to another person connected to the search.

Once the total undisclosed income is determined under these sections, Section 113 steps in to specify the tax rate.

Together, they create a complete framework for detecting, computing, & taxing black money unearthed in raids.

Case Law Insights

Several cases have helped shape how Section 113 is applied:

1. CIT v. Suresh N. Gupta (2008) — Held that surcharge applies prospectively from 1 June 2002.
2. CIT v. Vatika Township Pvt Ltd. (2014) — Reaffirmed that amendments increasing tax burden cannot be retrospective.
3. CIT v. Rajesh Jhaveri Stock Brokers Pvt Ltd. (2007) — Clarified that income from speculation business cannot be set off against undisclosed income of a block period.
4. CIT v. M. K. E. Menon (2003) — Held that interest under Sections 234A/B/C does not apply to block assessments unless specifically provided.

These judgments collectively reinforce that Section 113 is a self-contained charging provision — stand-alone & strict.

Also Read: A Deep Dive into Charitable and Religious Income Exemptions

Practical Challenges in Application

From a CA’s perspective, Section 113 cases are among the most sensitive in tax practice. Key issues include:

• Determining what qualifies as “undisclosed income.”
• Reconciling seized documents with books of accounts."
• Valuing assets found during the search.
• Computing tax when some income relates to years already assessed.

Any error can result in heavy tax & penalty exposure. That’s why professional representation during post-search proceedings is crucial.

Example Scenario

Suppose a builder is searched in March 2025. The department finds undisclosed cash & documents showing unaccounted sales over the last eight years amounting to ₹4 crore.

Under Section 158BC, the Assessing Officer computes ₹4 crore as total undisclosed income for the block period.

Tax under Section 113 = 60% of ₹4 crore = ₹2.4 crore.
Add surcharge @ 10% = ₹24 lakh.
Add cess @ 4% = ₹10 lakh.
Total liability ≈ ₹2.74 crore.

This illustrates how harsh the provision is — it’s designed to penalize concealment, not encourage compliance after the fact.

Comparison with Normal Tax Assessments

Penalty and Prosecution

Section 113 deals only with tax computation, but failure to disclose income can also trigger penalties under Sections 271(1)(c), 271AAB, or even prosecution under Section 276C for willful attempts to evade tax."

The tax rate under Section 113 is already steep, so further penalty exposure can be financially crippling. Full disclosure during search proceedings & timely payment of tax often help mitigate these consequences.

Also Read: Modes of Investment for Charitable & Religious Trusts

Key Takeaways

Conclusion

Section 113 of the Income Tax Act, 1961 serves as a powerful tool against tax evasion. It specifies the tax rate on undisclosed income discovered during a search, ensuring that such income is taxed at a high flat rate without deductions or reliefs. By linking it to the total undisclosed income of the block period determined under Section 158BC, the law creates uniformity & certainty in search-based assessments. For individuals or businesses facing search cases, accurate computation under Section 113 is critical to avoid over-taxation or penalty disputes. That’s where expert advice matters.

At CallMyCA.com, our team of tax professionals specializes in handling search & block assessment cases with precision — from documentation to representation before the authorities.