Section 268 · Assessment
Section 268 of the Income-tax Act, 2025 — Inquiry Before Assessment (Notice, Special Audit & Statement of Assets)
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XVI
📜 What the law says — Section 268, Income-tax Act 2025
268. (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 prescribe
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 Ch
In plain language
What Section 268 actually means
Section 268 of the Income-tax Act, 2025 is the modern re-write of the old Section 142 (including 142(2A) and 142A) of the Income-tax Act, 1961. It is titled "Inquiry before assessment" and it is one of the most-used weapons in an Assessing Officer's (AO) toolkit. In plain words, it lets the tax officer gather information, ask questions, call for documents and, in complex cases, order a special audit or inventory valuation — all BEFORE finalising your assessment. A notice under Section 268 is not a demand for tax and it is not a penalty. It is the department formally saying: "Explain this, show us your papers, or file the return you missed."
Who it applies to
- People who filed a return — the AO can ask you to produce accounts, documents and written explanations on specific points.
- People who did NOT file a return but were required to — the AO can issue a notice directing you to file the return within the time stated.
- Any person (individual, HUF, firm, LLP, company, trust) whose income the AO is examining, including where you are being asked about someone else's income you are connected to.
The three core powers under sub-section (1)
- Furnish a return — where a return was not filed on time, the AO can require you to file it.
- Produce accounts and documents — but the AO cannot demand accounts relating to a period more than three years before the relevant tax year. This is an important taxpayer protection carried into the 2025 Act.
- Furnish information in writing — on any points the AO specifies, including a statement of all assets and liabilities (whether or not they appear in your books).
Statement of assets and liabilities — the safeguard
Asking a taxpayer to lay bare all assets and liabilities is intrusive, so the law builds in a check. Prior approval of the Joint Commissioner is mandatory before the AO can require a statement of assets and liabilities that are not already recorded in the books of account. This prevents fishing expeditions and adds a layer of senior oversight.
Special audit and inventory valuation — sub-section (5)
Where the accounts are complex, voluminous, doubtful in accuracy, or the business is specialised, or where the AO doubts the correctness of inventory valuation, the AO can direct:
- a special audit by a nominated Chartered Accountant, or
- an inventory valuation by a nominated Cost Accountant.
Two big safeguards apply: (a) the taxpayer must be given a reasonable opportunity of being heard before such a direction, and (b) the direction needs the prior approval of the Principal Chief Commissioner / Chief Commissioner / Principal Commissioner / Commissioner. The auditor/valuer is nominated by the tax authority, not chosen by the taxpayer.
Time limits and who pays
- The audit/valuation report must be furnished within the period fixed by the AO. Extensions are allowed, but the total period cannot exceed 180 days (6 months) from the date the direction is received.
- Crucially, the Central Government bears the cost of the special audit/inventory valuation. Under the old law this often fell on the taxpayer; the 2025 Act settles it in the taxpayer's favour.
Opportunity of being heard — sub-section (12)
Any material gathered during the inquiry (including the special audit report) must be shared with the taxpayer, who gets a chance to respond before it is used against them in the assessment. This codifies the principle of natural justice.
How it works in practice today
Under the faceless regime, a Section 268 notice is not served by a local officer. It is issued centrally through the National Faceless Assessment Centre (NFAC) and lands in your Income-tax e-filing account, registered email and the mobile app. There is no single universal deadline — the exact date and time to reply is written inside the notice itself (often 15 days, sometimes shorter).
What happens if you ignore it
- Best judgment assessment — the AO can complete the assessment to the best of his judgment under Section 271 of the 2025 Act (the successor to old Section 144), often on unfavourable estimates.
- Penalty — a penalty of ₹10,000 for each failure can be levied for not complying with a notice (successor to old Section 272A(1)).
- Prosecution / further scrutiny — persistent non-compliance can escalate to scrutiny under Section 270 (regular assessment) and, in extreme cases, prosecution.
Bottom line: a Section 268 notice is an opportunity, not a punishment. Respond fully and on time with clean documentation and you usually close the matter without any addition to your income.
💡 Example
Worked example 1 — Non-filer notice. Rakesh, a freelance consultant, earned ₹9,80,000 in FY 2025-26 but did not file his return. The AO issues a Section 268(1) notice through NFAC directing him to file the return within 15 days. Rakesh files, declaring gross receipts of ₹9,80,000, claims ₹1,20,000 of genuine business expenses, and offers taxable income of ₹8,60,000. Because he responded, the assessment proceeds on his own figures. Had he ignored it, the AO could have made a best judgment assessment under Section 271, possibly taxing the full ₹9,80,000 and adding a ₹10,000 penalty.
Worked example 2 — Special audit. A trading company reports turnover of ₹90 crore with unusually thin margins and tangled inter-company entries. The AO, after giving the company a hearing and obtaining the Principal Commissioner's approval, directs a special audit under Section 268(5). A nominated Chartered Accountant is appointed; the report is due within 180 days. The audit fee of, say, ₹4,50,000 is paid by the Central Government, not the company. The audit report is then shared with the company for its response before the assessment is finalised.
A short story. Meena, a salaried professional, panicked when a "Notice u/s 268(1)" appeared on the e-filing portal — she assumed she owed a penalty. Her CA calmed her down: the department had simply spotted a ₹3,10,000 mutual-fund redemption not reflected in her return and wanted an explanation. Meena uploaded her capital-gains statement showing the gain was already taxed under her broker's TDS, replied within the deadline, and the case was closed with zero additional tax. The scary-looking notice was really just a request to explain.
| Aspect | Section 268, Income-tax Act 2025 | Old Section 142 / 142A, Act 1961 |
|---|
| Purpose | Inquiry before assessment | Inquiry before assessment (same) |
| Ask to file return | Yes — s.268(1) | Yes — s.142(1)(i) |
| Produce accounts limit | Not older than 3 years before tax year | Not older than 3 years |
| Statement of assets/liabilities | Needs prior approval of Joint Commissioner | Prior approval of Joint Commissioner |
| Special audit / inventory valuation | s.268(5) — CA or Cost Accountant | s.142(2A) / 142A |
| Opportunity of being heard | Mandatory before audit direction | Mandatory |
| Approval for special audit | Pr. CCIT / CCIT / Pr. CIT / CIT | Pr. CCIT / CCIT / Pr. CIT / CIT |
| Max time for audit report | 180 days (6 months) incl. extension | 180 days |
| Who bears audit cost | Central Government | Central Government (post-2007 amendment) |
| Consequence of non-compliance | Best judgment u/s 271 + ₹10,000 penalty | Best judgment u/s 144 + s.272A(1) |
Related sections
Section 270 — Assessment (scrutiny / regular assessment) Section 271 — Best judgment assessment Section 263 — Return of income Section 280 — Faceless assessment Section 268(5) — Special audit and inventory valuation Section 341 — Penalty for failure to comply with notice
Forms under this section
Income-tax forms (2025) prescribed under Section 268:
Frequently asked questions
Is a Section 268 notice a demand for tax or a penalty?
No. It is only an inquiry before assessment — the department is asking you to file a missing return, produce documents, or explain a point. No tax or penalty is levied by the notice itself; that only follows if you fail to comply.
Section 268 is equivalent to which section of the old Income-tax Act, 1961?
It corresponds to Section 142 (inquiry before assessment), including the special-audit power of Section 142(2A) and the inventory/valuation power of Section 142A. The 2025 Act consolidates these into one clean provision.
How much time do I get to reply to a Section 268(1) notice?
There is no single statutory deadline. The exact date and time is written inside the notice itself — commonly around 15 days. Always follow the specific deadline stated in your notice.
Who pays for a special audit ordered under Section 268(5)?
The Central Government bears the entire cost of the special audit or inventory valuation. The taxpayer does not pay the fees of the nominated Chartered Accountant or Cost Accountant.
Can the Assessing Officer ask for very old records?
No. Under Section 268 the AO cannot require you to produce accounts relating to a period more than three years before the relevant tax year, which protects you from open-ended demands.
What happens if I ignore a Section 268 notice?
The AO can complete a best judgment assessment under Section 271 (often on unfavourable estimates) and levy a penalty of ₹10,000 for each failure. Persistent default can escalate to further scrutiny or prosecution.
How is a Section 268 notice delivered now?
Under the faceless system it is issued centrally by the National Faceless Assessment Centre (NFAC) and appears in your income-tax e-filing account, registered email, and the mobile app — not through a local officer.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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