Chapter XVI - Procedure for Assessment
Section 268
Section 268: inquiry before assessment
Section 268 gives the Assessing Officer the tools to gather information before finalising an assessment - issuing notices for a return, accounts, documents or a statement of assets and liabilities, making general inquiries, and, in complex cases, directing a special audit or inventory valuation by an independent accountant or cost accountant.
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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) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 263 or in whose case the time allowed under section 263(1) for furnishing the return has expired, a notice requiring him, on a date to be specified therein,— (a) where such person has not made a return within the time allowed under section 263(1) or before the end of the financial year succeeding the relevant tax year, to furnish a return of his income or the income of any other person in respect of which he is assessable under this Act, in such form and verified in such manner and setting forth such other particulars as may be prescribed; (b) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require; (c) to furnish in writing and verified in the manner as may be prescribed information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require.
(2) For the purposes of sub-section (1),–– (a) the previous approval of the Joint Commissioner shall be obtained by the Assessing Officer before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts; (b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the relevant tax year.
(3) A notice under sub-section (1)(a) may also be served by the prescribed income-tax authority.
(4) For the purposes of obtaining full information in respect of the income or loss of any person, the Assessing Officer may make such inquiry as he considers necessary.
(5) If, at any stage of the proceedings before him, the Assessing Officer, having regard to–– (a) the nature and complexity of the accounts; or (b) volume of the accounts; or (c) doubts about the correctness of the accounts; or (d) multiplicity of transactions in the accounts; or (e) specialised nature of business activity of the assessee, and interests of the revenue, is of the opinion that it is necessary so to do, he may, after giving the assessee a reasonable opportunity of being heard, and with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of the following:— (i) to get the accounts audited by an accountant, and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require; (ii) to get the inventory valued by a cost accountant, and to furnish a report of such inventory valuation in the prescribed form as duly signed and verified by such cost accountant and setting forth such particulars, as may be prescribed, and such other particulars as the Assessing Officer may require.
(6) The accountant or the cost accountant as referred to in sub-section (5) shall be nominated by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner for the purposes of the said sub-section.
(7) The provisions of sub-section (5) shall have effect irrespective of whether or not accounts of the assessee have been audited under any other law for the time being in force or otherwise.
(8) Every report under sub-section (5) shall be furnished by the assessee to the Assessing Officer within such period as specified by the Assessing Officer.
(9) The Assessing Officer may, on his own motion, or on an application made in this behalf by the assessee and for any good and sufficient reason, subject to the provisions of sub-section (10), extend the period referred to in sub-section (8) by such further period or periods as he thinks fit.
(10) The aggregate of the period originally fixed under sub-section (8) and the period or periods so extended, as referred to in sub-section (9), shall not, in any case, exceed six months from the end of the month in which the direction under sub-section (5) is received by the assessee.
(11) The expenses of any audit or inventory valuation under sub-section (5) (including incidental expenses and remuneration of the accountant or the cost accountant) shall be— (a) determined by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner as per such guidelines issued in this behalf; and (b) paid by the Central Government.
(12) The assessee shall, except where the assessment is made under section 271, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (4), or any audit or inventory valuation under sub-section (5) and proposed to be utilised for the purposes of the assessment.
(13) For the purposes of this section, “cost accountant” means a cost accountant as defined in section 2(1)(b) of the Cost and Works Accountants Act, 1959 and who holds a valid certificate of practice under section 6(1) of the said Act.
Introduction
Section 268 gives the Assessing Officer notice and inquiry powers before assessment, including requests for returns, accounts, information and special audit-related directions.
Each notice or direction has its own subject, time and approval conditions; the taxpayer should respond to the particular power invoked.
Key takeaways
Assessment inquiries
The Assessing Officer may call for returns, accounts or information and make inquiries needed to assess income or loss.
Special audit has safeguards
A direction for special audit or inventory valuation is subject to the stated reasons, approval and hearing requirements.
Use of gathered material
Except in a best judgment assessment under section 271, the assessee must have a hearing opportunity on material gathered under this section.
Notice requiring return, accounts or information
The Assessing Officer may serve a notice on a person who has filed a return under Section 263, or whose time to file under Section 263(1) has expired, requiring them (by a specified date) to:
- Furnish a return of their income (or of income of another person they are assessable for), where none was filed within time or before the end of the financial year succeeding the relevant tax year
- Produce, or cause to be produced, accounts or documents the Assessing Officer requires
- Furnish, in writing and verified as prescribed, information on points the Assessing Officer requires - including a statement of all assets and liabilities, whether or not included in the accounts
Limits on this power
Before requiring a statement of assets and liabilities not included in the accounts, the Assessing Officer needs the Joint Commissioner's prior approval.
The Assessing Officer cannot require production of accounts relating to a period more than three years before the relevant tax year.
A notice requiring a return may also be served by the prescribed income-tax authority.
General power of inquiry
To obtain full information about a person's income or loss, the Assessing Officer may make any inquiry considered necessary.
Directing a special audit or inventory valuation
Where, having regard to the nature/complexity of the accounts, their volume, doubts about correctness, multiplicity of transactions, or the specialised nature of the business (and the interests of revenue), the Assessing Officer considers it necessary, they may - after giving the assessee a hearing and with prior approval of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner - direct the assessee to:
- Get the accounts audited by an accountant and furnish a report in the prescribed form
- Get the inventory valued by a cost accountant and furnish a report in the prescribed form
Who nominates the auditor, and how long it can take
The accountant or cost accountant for this special audit/valuation is nominated by the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner. This applies regardless of whether the assessee's accounts have already been audited under any other law.
The report must be furnished within the period specified by the Assessing Officer, which may be extended (on the Officer's own motion or the assessee's application, for good and sufficient reason). The aggregate of the original period and any extensions cannot exceed six months from the end of the month in which the assessee received the audit direction.
Cost of the special audit
The expenses of any audit or inventory valuation ordered under this section (including incidental expenses and the accountant's/cost accountant's remuneration) are determined by the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner as per guidelines, and paid by the Central Government.
Opportunity of being heard
Except where the assessment is made under Section 271 (best judgment assessment), the assessee must be given an opportunity of being heard on any material gathered through an inquiry, audit, or inventory valuation under this section, before it is used for the assessment.
Definition
"Cost accountant" means a cost accountant as defined in Section 2(1)(b) of the Cost and Works Accountants Act, 1959, holding a valid certificate of practice under Section 6(1) of that Act.
Step-by-step flow for an inquiry under Section 268
- 1
Has the person furnished a return under section 263, or has the time under section 263(1) expired?
A notice under Section 268(1) can be served only on such a person.
- Neither: No notice can be served under Section 268(1) yet.
- Either: Go to the next step.
- 2
What can the notice require?
(a) A return, if none was made within the time under section 263(1) or before the end of the financial year after the relevant tax year; (b) accounts or documents; (c) written, verified information, including a statement of all assets and liabilities. A notice under clause (a) may also be served by the prescribed income-tax authority (Section 268(3)).
- 3
Check the limits on the notice
A statement of assets and liabilities not included in the accounts needs the Joint Commissioner's previous approval (Section 268(2)(a)). Accounts for a period more than three years before the relevant tax year cannot be required (Section 268(2)(b)). The AO may also make any inquiry he considers necessary (Section 268(4)).
- 4
Is a special audit or inventory valuation directed under Section 268(5)?
The AO considers the nature, complexity or volume of the accounts, doubts about their correctness, multiplicity of transactions or a specialised business, and the interests of the revenue. He must hear the assessee and get the previous approval of the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner.
- No: Skip to the hearing step (step 6).
- Yes: Go to the next step.
- 5
Get the audit or valuation done and file the report in time
The accountant or cost accountant is nominated by the senior authority (Section 268(6)), even if the accounts are already audited under another law (Section 268(7)). The report is due within the period the AO fixes; extensions are allowed, but the total cannot exceed six months from the end of the month in which the direction is received (Sections 268(8) to (10)). The expenses are determined by the senior authority and paid by the Central Government (Section 268(11)).
- 6
Is material from the inquiry, audit or valuation to be used in the assessment?
Under Section 268(12), the assessee must be heard on that material, except where the assessment is made under section 271.
Practical checklist
Do
- Read the section and subsection cited in the notice and list the records requested.
- Respond by the specified date, or seek an extension through the permitted process.
- Keep copies and acknowledgment of every submission.
Avoid
- Assume all section 268 notices ask for the same information or have identical consequences.
Illustrative example
Worked example: a notice and a special audit direction
Hypothetical facts (illustration only, not a real taxpayer): A trading firm filed its return for tax year 2026-27. The Assessing Officer issues a notice under Section 268(1) asking for its books for tax years 2022-23 to 2025-26 and for a statement of all its assets and liabilities, including those outside the books. Later, citing the volume of transactions, he directs a special audit. The firm receives the direction on 10 August 2027.
Period of accounts
Section 268(2)(b) bars accounts for a period more than three years before the relevant tax year. On a plain reading, books for 2023-24 to 2025-26 can be required, but not those for 2022-23.
Assets outside the books
Asking for assets and liabilities not included in the accounts needs the Joint Commissioner's previous approval under Section 268(2)(a). The firm can ask whether that approval was obtained.
Audit deadline
The outer limit is six months from the end of August 2027, i.e. 29 February 2028 (2028 is a leap year). Any extension the AO grants under Section 268(9) must stay within that date.
Cost and hearing
The auditor is nominated by the senior authority and the Central Government pays the cost. Before any audit finding is used, the firm must be heard under Section 268(12).
Outcome
- The firm need not produce 2022-23 books under this notice and should file the audit report by 29 February 2028 at the latest.
- The firm bears neither the audit fee nor the incidental expenses under Section 268(11).
Frequently asked questions
How far back can the Assessing Officer ask for my accounts?
Not more than three years prior to the relevant tax year - Section 268(2)(b) specifically limits this.
How long can a special audit under Section 268 take?
The aggregate of the period originally fixed by the Assessing Officer and any extensions granted cannot exceed six months from the end of the month in which the assessee received the audit direction.
Who pays for a special audit ordered under this section?
The Central Government pays the expenses of the audit or inventory valuation, including incidental expenses and the accountant's/cost accountant's remuneration, as determined by the relevant senior tax authority.
Do I get a hearing before the AO uses information gathered under this section?
Yes, except where the assessment is being made under Section 271 (best judgment assessment) - otherwise the assessee must be given an opportunity of being heard on material gathered through inquiry, audit, or inventory valuation before it is used in the assessment.
Need help applying this provision to your situation?
Get help responding to an assessment inquiryLast updated 10 October 2026