CA
Tax Tutor
A

Section 142 — Inquiry Before Assessment

Think of Section 142 as the Assessing Officer's (AO's) investigation toolkit — the set of powers the AO uses before completing your assessment to gather information, scrutinise books, and if needed, call in an independent auditor. If Section 143(1) is a routine check, Section 142 is when the AO starts asking serious questions.

Section 142(1) — The Notice to Produce or File: The AO can issue a notice under 142(1) in two situations: (a) if you haven't filed a return — the AO can ask you to file one even after the due date; or (b) regardless of whether you've filed a return — the AO can ask you to produce books of accounts, documents, or furnish any information or statement in writing on any point. There is no time limit prescribed for issuing a 142(1) notice (unlike 143(2) which must be issued within 6 months). This is a favourite exam fact. Non-compliance is serious — the AO can proceed to make a best judgment assessment under Section 144, and you can face prosecution under Section 276D (imprisonment up to 1 year, or fine, or both).

Section 142(2A) — Special Audit (the powerful one!): This is asked in almost every attempt. If the AO believes your accounts are complex in nature — due to volume of transactions, specialised business, or doubts about correctness — the AO can, with the prior approval of the Principal Chief Commissioner or Chief Commissioner, direct you to get your accounts audited by a Chartered Accountant nominated by the Principal CIT/CIT. You cannot choose your own CA here. The cost of this special audit is borne by the Central Government (not you). The AO must give you a reasonable opportunity of being heard before issuing such a direction. The audit report must be furnished within the period specified in the notice (extendable by AO).

Section 142(3) — Opportunity of Being Heard: Before the AO uses any evidence or material collected during inquiry against you, they must give you a chance to explain. This is the natural justice principle embedded in the section. Don't ignore communications at this stage — anything used against you in assessment must first be put to you.

📊 Worked example

Example 1 — Notice u/s 142(1) after return filing

Ms. Priya Iyer runs a consultancy firm and filed her ITR for AY 2025-26 showing gross receipts of ₹38,00,000 and net income of ₹6,20,000. Six months later, the AO sends a notice u/s 142(1) asking her to produce: (a) all invoices above ₹1,00,000, (b) bank statements for all accounts, and (c) a written explanation of ₹12,50,000 credited to her savings account in March 2025.

Can the AO do this even though she already filed a return? Yes. Section 142(1) allows the AO to call for documents and information even from an assessee who has filed a return. The notice is valid.

What if she ignores it? The AO can make a best judgment assessment u/s 144, estimating her income at, say, ₹18,00,000. She also risks prosecution u/s 276D. Final answer: She must comply within the time stated in the notice.

---

Example 2 — Special Audit Direction u/s 142(2A)

Rajesh & Co. Pvt. Ltd. has a turnover of ₹420 crore for AY 2025-26 with complex inter-company transactions across 14 subsidiaries. The AO finds the accounts difficult to decipher and suspects understated income. The AO wants to order a special audit.

Step 1: AO must first obtain prior approval from the Principal Chief Commissioner (PCCIT). Without this approval, the direction is invalid.

Step 2: AO gives Rajesh & Co. a reasonable opportunity of being heard — the company can explain why a special audit isn't necessary.

Step 3: After approval and hearing, the AO directs the company to get accounts audited by CA Mr. Suresh Verma, nominated by the PCCIT. The company cannot substitute their own CA.

Step 4: Cost of the audit (say ₹8,00,000 in fees) is paid by the Central Government, not by Rajesh & Co.

Step 5: The audit report is submitted within the specified period. The AO then uses it to complete the assessment.

Final answer: Direction is valid. Cost = Nil to the company. CA = Nominated by PCCIT, not chosen by assessee.

⚠️ Common exam mistakes

  • Students think 142(1) can only be used if the return is not filed — Wrong. The AO can issue a 142(1) notice to any person, whether or not a return has been filed, to produce books, documents, or information. The 'file a return' part applies only to non-filers.
  • Confusing 142(2A) with a tax audit under Section 44AB — These are completely different. A 44AB audit is mandatory based on turnover thresholds and done by the assessee's own CA. A 142(2A) special audit is directed by the AO, requires PCCIT/CIT approval, and the CA is nominated by the department — not chosen by you.
  • Writing that the cost of special audit is borne by the assessee — This is a classic error. The cost under Section 142(2A) is borne by the Central Government. Don't confuse this with the 44AB audit, whose cost is the assessee's expense.
  • Missing the approval requirement for 142(2A) — Students often skip mentioning that the AO needs prior approval of the PCCIT or CIT before directing a special audit. In a 4-mark question, omitting this loses marks easily.
  • Ignoring the natural justice angle of 142(3) — In theory questions, students forget to mention that before using any material/evidence against the assessee, the AO must provide an opportunity of being heard. This point is often the differentiator in 6-mark questions.
📖 Reference: Section 142 — Income Tax Act 1961
Test yourself
Practice questions on this section, AI-graded with citations.
⚡ Practice now →