Summary: Section 268 of the Income-tax Act, 2025 consolidates the Assessing Officer’s powers to conduct inquiries before completing an assessment. It authorises the Assessing Officer to issue notices requiring a return of income, production of books of account, relevant documents, and written information, including statements of assets and liabilities. Prior approval of the Joint Commissioner is required before seeking details of unrecorded assets and liabilities, and records older than three years preceding the relevant tax year generally cannot be called for. The provision also empowers the Assessing Officer to order a special audit by an accountant or inventory valuation by a cost accountant after providing the assessee an opportunity of being heard and obtaining approval from the Principal Commissioner or Commissioner. Audit or valuation reports must generally be submitted within six months, with the cost borne by the Central Government. The provision also introduces Form 101 for inventory valuation, strengthens procedural safeguards, and preserves the assessee’s right to be heard before adverse material is used during assessment.
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1. What Section 268 Talks About
Section 268 of the Income-tax Act, 2025 governs the procedure relating to inquiry by the Assessing Officer (AO) before completing an assessment. The provision is designed to ensure that the income declared by an assessee is accurate, complete, and supported by adequate documentation.
Under sub-section (1), the AO is empowered to issue a notice to a person who has either filed a return under Section 263 or has failed to furnish the same within the prescribed time. Through such notice, the AO may require the assessee to:
- Furnish a return of income where the same has not been filed within the time allowed under Section 263(1);
- Produce books of account or other relevant documents for verification;
- Provide information in writing on specified matters, including a statement of assets and liabilities, even if such items are not recorded in the books of account.
This significantly widens the scope of inquiry and enables the AO to look beyond the financial statements submitted.
Sub-section (2) introduces important safeguards. The AO is required to obtain prior approval of the Joint Commissioner before calling for details of assets and liabilities not recorded in the books. Further, the AO cannot require production of records relating to a period earlier than three years preceding the relevant tax year, thereby preventing excessive or unreasonable scrutiny.
Sub-section (4) provides wide discretionary powers to the AO to conduct any inquiry considered necessary for determining the correctness of income or loss. This may include verification of transactions, cross-checking information, or seeking external confirmations.
A critical aspect of Section 268 is contained in sub-section (5), which deals with special audit and inventory valuation. Where the AO is of the opinion that the nature of accounts warrants deeper examination, he may direct the assessee to:
- Get the accounts audited by an accountant; and/or
- Get the inventory valued by a cost accountant.
Such direction can be issued only after:
- Providing the assessee a reasonable opportunity of being heard; and
- Obtaining prior approval from the Principal Commissioner or Commissioner.
The provision applies even if the accounts have already been audited under any other law, thereby emphasizing the independent power of tax authorities.
The report of such audit or valuation must be submitted within the time specified by the AO, subject to a maximum period of six months as per sub-sections (8) to (10). Importantly, the cost of such audit or valuation is borne by the Central Government under sub-section (11).
Finally, sub-section (12) ensures compliance with the principles of natural justice by requiring that the assessee be given an opportunity of being heard before any material gathered during inquiry or audit is used against him.
2. Difference between Income-tax Act, 1961 and Income-tax Act, 2025
“Enquiry” and “Inquiry” mean the same thing; the difference is mainly spelling—“Enquiry” is British English, while “Inquiry” is American English and commonly used in legal contexts. In taxation, “Inquiry before assessment” is preferred because it reflects a formal investigation by authorities. There is no change in meaning or impact, only a shift to more formal terminology.
Under the Income-tax Act, 1961, similar powers were contained primarily in Section 142, including provisions for inquiry and special audit. However, these provisions were fragmented and lacked structural clarity.
The Income-tax Act, 2025 consolidates these powers under Section 268 into a single, well-structured provision. The key differences can be understood as follows:
- Consolidation of Provisions: Section 268 combines multiple aspects of inquiry, information gathering, and audit into one comprehensive section, unlike the scattered provisions under the 1961 Act.
- Explicit Recognition of Inventory Valuation: The 2025 Act specifically provides for inventory valuation by a cost accountant under Section 268(5)(ii), which was not distinctly emphasised earlier.
- Enhanced Procedural Safeguards: Clear requirements of prior approvals, time limits, and opportunity of being heard have been codified.
- Clarity and Transparency: The language and structure of the new provision reduce ambiguity and improve ease of interpretation.
Overall, Section 268 represents a refined and modernised version of Section 142 of the 1961 Act, aligning with current compliance standards.
3. Form 101 – Inventory Valuation ( Income-tax Rules, 2026)
Where the Assessing Officer directs inventory valuation under Section 268(5)(ii), the assessee is required to furnish a report in Form 101 as prescribed under the Income-tax Rules, 2026. This form ensures standardisation and transparency in valuation practices. Note: As per the Income tax rules, 1962 it was under Form No. 6D
Form 101 broadly requires the following details:
i. Basic Information:
Name of the assessee, PAN, assessment year, and nature of business.
ii. Classification of Inventory: Details of raw materials, work-in-progress, finished goods, and stores & spares.
iii. Quantitative Details: Opening stock, purchases/production, consumption/sales, and closing stock along with quantities and values.
iv. Method of Valuation: Disclosure of whether inventory is valued at cost or net realisable value, along with the method adopted such as FIFO or weighted average, and consistency with earlier years.
v. Cost Components: Detailed break-up of material cost, labour cost, and overheads included in valuation.
vi. Adjustments: Treatment of obsolete or slow-moving inventory, write-downs, and abnormal losses.
vii. Reconciliation: Matching of inventory as per books, physical stock, and financial statements.
viii. Certification: The report must be duly signed and verified by the nominated cost accountant, ensuring reliability of the valuation.
4. Steps to be Taken in Case of Notice under Section 268
On receipt of a notice under Section 268, the assessee should adopt a systematic approach to ensure proper compliance. The first step is to carefully analyse the notice to understand the specific requirements, the clause invoked, and the time limit for submission.
The assessee should then compile all relevant records, including books of account, financial statements, stock registers, and supporting documents. It is essential to ensure that the information provided is accurate, complete, and consistent with previously filed returns.
The following key actions should be undertaken:
1. Verification of Records: Ensure that books of account and supporting documents are properly maintained and reconciled.
2. Preparation of Submission: Furnish the required details in writing, duly verified as prescribed.
3. Explanation of Variations: Provide clear justifications for any discrepancies, unusual transactions, or changes in accounting methods.
4. Compliance with Audit Direction (if any): In case of special audit or inventory valuation, fully cooperate with the nominated accountant or cost accountant and provide all necessary data.
5. Exercise of Right to be Heard: Respond to any adverse material or findings before final assessment, as guaranteed under Section 268(12).
Professional assistance should be sought where necessary to ensure that the response is legally sound and properly documented.
5. Situations Where Section 268 May Be Initiated
Section 268 may be invoked by the Assessing Officer in various circumstances where verification of income is considered necessary. Common situations include:
i. Failure to Furnish Return: Where the assessee has not filed a return within the time prescribed under Section 263(1).
ii. Incomplete or Defective Information: Where the return filed lacks adequate details or contains inconsistencies.
iii. Doubts Regarding Correctness of Accounts: Cases involving unusual accounting treatments, incorrect classification, or unreliable records.
iv. Complex or Specialised Business Activities: Industries requiring technical evaluation or involving complicated transactions.
v. High Volume or Multiplicity of Transactions: Businesses with large-scale operations requiring detailed verification.
vi. Inventory-related Issues: Significant variations in stock, abnormal write-offs, or inconsistencies in valuation.
vii. Risk-based Scrutiny or External Inputs: Cases selected through data analytics, or based on information from GST authorities, surveys, or search operations.
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