Home / Income Tax Act 2025 / Section 268

Section 268 Income Tax Act 2025: Can Tax Officers Demand Records Before Assessment?

Section 268, titled Inquiry before assessment, authorises inquiries and information requests before assessment. It also lays down important procedural safeguards when the Assessing Officer requires a special audit or valuation of inventory.

Current legal position: The Income-tax Act, 2025 came into force on 1 April 2026. This guide addresses Section 268 of that Act, not Section 268 of the Income-tax Act, 1961, which dealt with exclusion of time taken to obtain copies.

What does Section 268 permit?

For assessment purposes, the Assessing Officer (AO) may call for an income-tax return, accounts, documents and written information, undertake inquiries, and in specified circumstances direct a special audit of accounts or valuation of inventory. The section must be read alongside the return-filing requirements in Section 263, the assessment provisions of Section 270 and best judgment assessment under Section 271.

Section 268 explained subsection by subsection

Section 268(1): Notice to furnish return, accounts or information

The AO 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. The notice may require, by the specified date: (a) a return in the circumstances described in the provision; (b) accounts or documents; or (c) verified written information on specified matters, potentially including a statement of assets and liabilities.

Section 268(2): Approval and three-year restriction

Prior approval of the Joint Commissioner is necessary before requiring a statement of assets and liabilities not included in the accounts. The AO cannot require production of accounts relating to a period more than three years before the relevant tax year under this subsection. The statutory restriction is specifically on production of accounts; it should not be presented as an absolute bar on every historical inquiry.

Section 268(3): Prescribed authority may issue return notice

A notice of the kind specified in subsection (1)(a) may also be served by the prescribed income-tax authority.

Section 268(4): General inquiry power

To obtain full information about a person's income or loss, the AO may make inquiries considered necessary for the assessment.

Section 268(5): Special audit and inventory valuation

Where justified by the nature or complexity of accounts, their volume, doubts about correctness, multiplicity of transactions, or the specialised nature of business activity, and having regard to revenue interests, the AO may direct an audit by an accountant, inventory valuation by a cost accountant, or both. A reasonable opportunity of being heard and prior approval of the specified senior Commissioner-level authority are required.

Section 268(6): Nomination of professional

The accountant or cost accountant undertaking the special assignment is nominated by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, as applicable.

Section 268(7): Existing audit does not prevent special audit

A direction under subsection (5) may be issued even where the accounts have already been audited under another law or otherwise.

Section 268(8): Time to furnish the report

The assessee must furnish the audit or valuation report within the period specified by the AO.

Section 268(9): Extension of time

For good and sufficient reason, the AO may extend the period on the AO's own motion or on the assessee's application, subject to the overall cap in subsection (10).

Section 268(10): Six-month overall limit

The original period and extensions together cannot exceed six months from the end of the month in which the assessee receives the special audit or inventory valuation direction.

Section 268(11): Who bears the cost?

Expenses of the special audit or inventory valuation, including incidental expenses and professional remuneration, are determined by the specified senior authority in accordance with applicable guidelines and are paid by the Central Government.

Section 268(12): Right to be heard on material used

Except where assessment is made under Section 271, the assessee must have an opportunity to be heard regarding material obtained through an inquiry under subsection (4) or a special audit or inventory valuation under subsection (5) that is proposed to be used in assessment.

Section 268(13): Cost accountant defined

For this section, a cost accountant is one defined under Section 2(1)(b) of the Cost and Works Accountants Act, 1959 who holds a valid certificate of practice under Section 6(1) of that Act.

Taxpayer rights and practical compliance steps

  • Read the notice carefully and identify the particular return, documents or verified information sought and the response date.
  • Keep copies of the notice, supporting documents and electronic submission acknowledgments.
  • Where a statement of unrecorded assets and liabilities is demanded, check the prior-approval safeguard under subsection (2).
  • Where special audit or inventory valuation is proposed, use the opportunity of hearing to explain any objection, factual error or duplication.
  • If more time is genuinely needed for a special audit report, seek an extension with reasons before expiry, mindful of the six-month statutory cap.
  • Respond to adverse material proposed to be used in assessment where the hearing safeguard applies.
Important: Failure to comply with a valid notice may have consequences under other provisions, including best judgment assessment. The correct response depends on the notice and facts of the case.

Relevant statutory definitions and terms

Assessing Officer: The income-tax authority empowered to perform assessment functions under the Act, subject to applicable jurisdiction and allocation rules.
Assessee: A person liable under the Act to pay tax or another sum, and other persons covered by the statutory definition in Section 2.
Tax year: The statutory period used for computing and assessing income under the 2025 Act; see the definitions and provisions of that Act.
Special audit: An audit directed under Section 268(5), distinct from an ordinary statutory audit, carried out by the nominated accountant.
Inventory valuation: Valuation of inventory by a nominated cost accountant under Section 268(5).
Best judgment assessment: An assessment under Section 271 in the circumstances provided there, including certain failures to comply with statutory requirements.

Practical examples

Example 1: Notice seeking bank statements

An AO reviewing a return seeks bank statements and business ledgers to verify turnover. Section 268(1) can support a properly issued information request. The taxpayer should submit complete records with a reconciliation explaining material differences.

Example 2: Complex inventory records

A manufacturing business has numerous stock categories and inconsistent inventory valuation records. Subject to the statutory grounds, hearing and prior approval, the AO may direct valuation by a nominated cost accountant under Section 268(5).

Example 3: Special audit extension

A special audit direction is received on 12 June. Under subsection (10), the total permitted period, including extensions, cannot extend beyond six months counted from the end of June. This example illustrates the outer limit, not an automatic entitlement to six months.

Frequently asked questions

Can an income-tax officer ask for records before assessment?

Yes. Section 268 permits the AO to require specified accounts, documents and verified information for assessment purposes.

Can the AO demand accounts older than three years?

Section 268(2)(b) restricts a demand for production of accounts relating to more than three years before the relevant tax year under Section 268(1). Other statutory powers require separate examination.

Is a hearing required before ordering a special audit?

Yes. Section 268(5) requires a reasonable opportunity of being heard and the specified prior approval.

Who pays for the special audit?

Under Section 268(11), the Central Government pays the determined expenses.

Can a special audit be ordered after a statutory audit?

Yes. Subsection (7) expressly provides that an earlier audit does not by itself prevent a direction under subsection (5).

Is Section 268 of the 2025 Act the same as Section 268 of the 1961 Act?

No. Section 268 of the 2025 Act addresses inquiry before assessment and broadly corresponds to Section 142 of the 1961 Act. Section 268 of the 1961 Act concerned exclusion of time taken for copies.

Statutory sources and further reading

Read the official Income-tax Act, 2025 as amended by the Finance Act, 2026, and the Income Tax Department's Act and Rules resource page. Refer to the enacted text, relevant rules and notifications for any specific proceeding.

Last reviewed: 11 November 2026. This article is general legal information and is not a substitute for advice on a specific notice.