Chapter XVI - Procedure for Assessment
Section 298
Section 298: interest and penalty in block assessments
Section 298 distinguishes interest for a late or missing block return from the separate penalty on tax on determined undisclosed income. Returned-income protection, excess assessed income and procedural safeguards must be checked separately.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where the return of undisclosed income as required under a notice under section 294(1)(a), is not furnished within the period specified in such notice, or is not furnished, then,— (a) the assessee shall be liable to pay simple interest at the rate of 1.5% of the tax on undisclosed income determined under clause (c) of said sub-section; (b) the interest in clause (a) shall be paid for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in said notice, and ending on the date of completion of assessment under clause (c) of said sub-section.
(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Part, may direct that the person shall pay by way of penalty a sum which shall be equal to 50% of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under section 294(1)(c).
(3) The order imposing penalty under this section or section 444(1) or 450 or 451 or 453 shall not be made for the block period in respect of a person, if— (a) such person has furnished a return under section 294(1)(a); (b) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable; (c) evidence of tax paid is furnished along with the return; and (d) an appeal is not filed against the assessment of that part of income which is shown in the return.
(4) The provisions of the sub-section (3) shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined, which is in excess of income shown in the return.
(5) The order imposing a penalty under sub-section (2) shall not be made— (a) unless an assessee has been given a reasonable opportunity of being heard; (b) by the Deputy Commissioner or Assistant Commissioner or the Deputy Director or Assistant Director, where penalty exceeds ₹ 200000 except with the previous approval of the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director; (c) in a case where the assessment is the subject-matter of an appeal under section 357 or 362,— (i) after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed; or (ii) six months from the end of the financial year in which the order of the Commissioner (Appeals) or the Appellate Tribunal is received by the jurisdictional Principal Commissioner or Commissioner, whichever period expires later; (d) in a case where the assessment is the subject-matter of revision under section 377, after the expiry of six months from the end of the financial year in which such order of revision is passed; (e) in any case other than those mentioned in clause (c) and (d), after the expiry of the financial year in which the proceedings, in the course of which notice for the imposition of penalty has been issued, are completed, or six months from the end of the financial year in which notice for imposition of penalty is issued, whichever period expires later.
(6) In computing the period of limitation under this section, the following period shall be excluded–– (a) the time taken in giving an opportunity to the assessee to be re-heard under section 244(2); or (b) the period commencing on the date on which stay on proceeding under sub-section (2) was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by jurisdictional Principal Commissioner or Commissioner.
(7) Where immediately after the exclusion of the period referred to in sub-section (6), the remaining period of limitation referred to in sub-section (5) available to the Assessing Officer for making an order under sub-section (2) of this section is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.
(8) If after exclusion of the period referred to in sub-section (7), the remaining period of limitation for making of an order for imposition of penalty expires before the end of a month, such remaining period shall be extended to the end of such month.
(9) An income-tax authority on making an order under sub-section (2) imposing a penalty, unless he is himself an Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer.
Introduction
Section 298 identifies the specific block-assessment situations where interest or penalty can still arise despite the exclusions in the preceding provision.
The trigger and calculation depend on the person’s block return and the final determination.
Key takeaways
Late-return interest
Missing the time in a section 294(1)(a) notice can attract simple interest at 1.5% of tax on undisclosed income for each month or part-month up to completion of assessment.
Specific penalty
The Assessing Officer or Commissioner (Appeals) may direct a penalty equal to 50% of tax on the undisclosed income determined in block assessment.
Return-and-payment protection is conditional
The section limits penalty where the special return, tax payment, proof and no-appeal conditions are all met; income determined above the returned amount remains exposed.
What triggers this section
Where the return of undisclosed income required under a notice issued under Section 294(1)(a) is not furnished within the period specified in that notice - or is not furnished at all - simple interest of 1.5% of tax on the undisclosed income determined in the block assessment applies for every month or part-month from the day after the notice period expires until assessment is completed. A separate 50% penalty may also be directed, subject to statutory conditions and hearing safeguards.
Why this matters
Section 298 supplies its own specific block-assessment interest and penalty rules. The penalty protection for declared income requires a return under section 294(1)(a), tax payment (or offered adjustment of seized money), evidence of payment and no appeal against the assessment of that declared income. Any excess undisclosed income determined by the Assessing Officer remains exposed to penalty.
Returned income and excess assessed income
Subsection (3) requires a section 294(1)(a) return, payment of tax or an offer to adjust seized money, payment evidence with the return and no appeal against assessment of the declared part. It does not itself add the words within the notice period. Lateness can still trigger subsection (1) interest.
Subsection (4) applies the penalty to undisclosed income determined in excess of the returned income. Subsection (5) requires a reasonable hearing, specified previous approval and compliance with penalty-order time limits; subsections (6) to (9) address exclusions, adjustments and transmission of the order.
Step-by-step flow for interest and penalty under Section 298
- 1
Was the return of undisclosed income under the Section 294(1)(a) notice furnished within the period in the notice?
- Yes: No interest arises under Section 298(1); go to step 3.
- No, or not furnished at all: Go to step 2.
- 2
Compute interest under Section 298(1)
Simple interest at 1.5% of the tax on undisclosed income determined under Section 294(1)(c), for every month or part of a month from the day after the notice period expires to the date the assessment is completed.
- 3
Is a penalty proposed under Section 298(2)?
The Assessing Officer or the Commissioner (Appeals) may direct a penalty equal to 50% of the tax leviable on the undisclosed income determined under Section 294(1)(c).
- 4
Is the Section 298(3) protection available?
No penalty under this section or Section 444(1), 450, 451 or 453 for the block period if all four conditions hold: return under Section 294(1)(a) furnished; tax on it paid (or seized money offered for adjustment); evidence of payment filed with the return; no appeal against the returned part. Under Section 298(4), where the income determined exceeds the income returned, penalty is imposed on the excess portion.
- 5
Check the procedure and time limit
A reasonable opportunity of being heard is required. A Deputy or Assistant Commissioner or Director needs prior approval of the Additional or Joint Commissioner or Director where the penalty exceeds ₹2,00,000. Time limits are in Section 298(5)(c) to (e), with exclusions and the sixty-day and month-end rules in Section 298(6) to (8). A non-Assessing Officer authority must send a copy of the order to the Assessing Officer (Section 298(9)).
Practical checklist
Do
- Compare undisclosed income in the block return with the final assessment.
- Check the statutory condition and calculation before accepting an interest or penalty demand.
Avoid
- Assume every difference from the block return attracts the same levy.
Illustrative example
Worked example: timely return, but a higher income is determined
Hypothetical facts (illustration only, not a real taxpayer): After a search, a firm furnishes its return under Section 294(1)(a) within the notice period, showing undisclosed income of ₹30,00,000 (assumed). It pays the tax on it, attaches proof of payment and does not appeal against that part. The Assessing Officer determines undisclosed income of ₹40,00,000. Assume the tax on the ₹10,00,000 excess is ₹3,00,000; Section 298 does not state the tax rate.
Interest
The return was within the notice period, so Section 298(1) interest does not arise.
Protection for the returned part
All four Section 298(3) conditions are met for the ₹30,00,000 shown in the return.
Excess portion
Under Section 298(4), ₹40,00,000 − ₹30,00,000 = ₹10,00,000 is outside the protection, so any penalty is on that portion.
Penalty amount
If a penalty is directed, it equals 50% × ₹3,00,000 = ₹1,50,000 (based on the assumed tax).
Approval
₹1,50,000 does not exceed ₹2,00,000, so the Section 298(5)(b) prior approval is not triggered; a hearing is still required.
Outcome
- Penalty exposure is limited to the excess income: ₹1,50,000 on the assumed tax.
- Had the return been late, Section 298(1) interest would also need to be computed.
Frequently asked questions
What happens if I don't file my block-period return in time?
Simple interest at 1.5% of tax on the determined undisclosed income applies for each month or part-month of delay from the day after the notice period expires until completion of assessment. A separate 50% penalty on tax on determined undisclosed income may apply, subject to the section's protections and procedure.
Which notice does Section 298 relate to?
The notice issued under Section 294(1)(a), which requires a person to furnish a return of undisclosed income for the block period following a search or requisition.
Does lateness automatically remove subsection (3) protection?
Subsection (3) states that a return under section 294(1)(a) must have been furnished; it does not itself use a within-the-notice-period condition. All its other conditions must still be satisfied, and subsection (1) interest can apply to a late return.
Need help applying this provision to your situation?
Get help responding to a block assessment noticeLast updated 10 October 2026