Advanced Direct Tax Laws and Practice · Tax Audit

Section 348 Audit and Special Audit by Assessing Officer

Updated 11 October 2026 · Fact-checked

Section 348 requires a registered non-profit organisation whose total income, before applying its exemption provisions, exceeds the basic exemption limit to get its accounts audited and file the audit report. A special audit is different: under section 268(5), the Assessing Officer, with senior approval, can direct an audit in complex cases, paid for by the Government.

Understand Audit under Section 348 and Special Audits

Two audits sit in this topic. They look alike but work very differently, so keep them apart from the start.

Section 348 audit is a compulsory audit for a registered non-profit organisation. The test is simple. Take the total income without giving effect to the provisions of this Part (the Part that gives the exemption). If that income exceeds the maximum amount not chargeable to income-tax in the tax year, the accounts must be audited by an accountant. The person receiving the income must furnish the audit report by the prescribed date, in the prescribed form, signed and verified by the accountant. The audit is triggered by the size of income, not by any notice.

Special audit is a discretionary audit under section 268(5). It sits in the section on inquiry before assessment. The Assessing Officer (AO) can direct the assessee to get accounts audited by an accountant, or inventory valued by a cost accountant, or both. This happens during assessment, only in difficult cases, and the AO must follow a set procedure.

The AO can use this power only when, having regard to the interests of the revenue, he forms the opinion that it is necessary because of one or more of these:

nature and complexity of the accounts
volume of the accounts
doubts about the correctness of the accounts
multiplicity of transactions in the accounts
specialised nature of the assessee's business activity

The safeguards matter as much as the power. The assessee gets a reasonable opportunity of being heard. The AO needs previous approval of the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner. The auditor is nominated by that authority, not chosen by the assessee. The Government pays the cost. The power applies even if the accounts are already audited under another law.

The key difference from a normal tax audit: a tax audit is a compulsory audit that the assessee arranges and pays for, linked to turnover or income. A special audit is ordered by the department, done by a nominated accountant, and paid for by the Government.

Key rules to remember

Section 348 trigger: Total income of registered non-profit organisation (without giving effect to this Part) > maximum amount not chargeable to tax in the tax year → audit by an accountant; Compare income before exemption, not income after exemption. If the income is exactly at the limit, the audit is not triggered, because the test is 'exceeds'.
Section 348 report: Report in prescribed form, signed and verified by the accountant, furnished by the prescribed date; The duty to furnish the report is on the person in receipt of the income.
Grounds for special audit, section 268(5): Nature and complexity, volume, doubts about correctness, multiplicity of transactions, specialised nature of business + interests of revenue; The AO must be of the opinion that a direction is necessary. Any one ground with the interests of revenue is enough to be considered.
Procedure conditions, section 268(5) and (6): Reasonable opportunity of being heard + previous approval of PCCIT / CCIT / PCIT / CIT + auditor nominated by that authority; Missing any of these makes the direction open to challenge.
Report time limit, section 268(8) to (10): Period fixed by AO; extension for good and sufficient reason; total period ≤ 6 months from the end of the month in which the direction is received; The AO may extend on his own motion or on the assessee's application. Count the six months from the end of the month of receipt.
Expenses, section 268(11): Audit or inventory valuation expenses (incl. incidental expenses and remuneration) = determined by the approving authority per guidelines + paid by the Central Government; The assessee does not bear the cost.
Other points, section 268(7) and (12): Applies whether or not accounts are audited under any other law; assessee must be heard on material proposed to be used; The hearing on material is not needed where assessment is made under section 271.

How to solve Audit under Section 348 and Special Audits questions

Use this order for any question on section 348 or a special audit. It follows the pattern examiners reward: provision, facts, conclusion.

1Identify which audit the question is about: a compulsory audit of a registered non-profit organisation (section 348) or an AO-directed audit during assessment (section 268(5)).
2For section 348, compute total income without giving effect to the exemption provisions and compare it with the maximum amount not chargeable to tax. State clearly whether it exceeds the limit.
3For a special audit, test the facts against the five grounds: complexity, volume, doubts about correctness, multiplicity of transactions, specialised business. Name the ground that fits.
4Check procedure: was the assessee heard, was previous approval taken from the right senior authority, and was the auditor nominated by that authority?
5Check timing: period fixed by the AO, any extensions, and the outer limit of six months from the end of the month of receipt of the direction.
6Deal with costs: the Government pays, as determined by the approving authority under guidelines.
7Note that earlier audit under another law does not stop the direction, and that the assessee must be heard on material gathered before it is used.
8Write a clear conclusion: audit required or not, direction valid or defective, and the consequence.

Quickest way: Four-question check for audit questions

When to use it: Use when time is short and the facts are long. It covers most short-answer and case-based parts.

Who orders the audit? Law itself (section 348) or the AO (section 268(5))?
What is the trigger? Income above the exemption limit before exemption, or one of the five grounds plus revenue interest?
What safeguards apply? Hearing, senior approval, nominated auditor.
Who pays and by when? Government pays; report within the AO's period, total not more than six months from the end of the month of receipt.

Common mistakes in Audit under Section 348 and Special Audits

Testing the section 348 limit on income after exemption.
Students compute taxable income by habit and forget the test is on income without giving effect to the exemption Part.
Fix: Write 'income before exemption' in your answer and compare that figure with the basic exemption limit.
Saying the assessee appoints the auditor in a special audit.
Students mix it up with a tax audit, where the assessee appoints the auditor.
Fix: Remember that the Commissioner-level authority nominates the accountant or cost accountant.
Saying the assessee pays for a special audit.
Tax audit fees are borne by the assessee, so students assume the same here.
Fix: State that expenses are determined by the approving authority under guidelines and paid by the Central Government.
Counting the six-month limit from the date of the direction or from the end of the assessment year.
The wording 'end of the month in which the direction is received' is easy to skim.
Fix: Count six months from the end of the month in which the assessee receives the direction. Include original and extended periods together.
Assuming a special audit cannot be ordered if accounts are already audited.
Students think a second audit is duplication.
Fix: Quote the rule that the power applies irrespective of whether accounts are audited under any other law.
Ignoring the prior hearing and approval conditions.
Students focus on the grounds and forget procedural safeguards.
Fix: List all three conditions every time: hearing, previous approval, nominated auditor.

Worked examples

Example 1

Shri Ram Seva Trust, a registered non-profit organisation, has total income of ₹4,80,000 for the tax year before giving effect to the exemption provisions. Assume the maximum amount not chargeable to income-tax is ₹3,00,000 for this purpose. After exemption, its taxable income is nil. Is an audit required under section 348?

Show the solution

Identify the provision: section 348 applies to a registered non-profit organisation.
Apply the test: use total income without giving effect to the exemption Part. That is ₹4,80,000.
Compare: ₹4,80,000 exceeds ₹3,00,000.
The nil taxable income after exemption is irrelevant to the trigger.

Answer: Yes. The accounts must be audited by an accountant, and the trust must furnish the audit report in the prescribed form, signed and verified by the accountant, by the prescribed date.

Example 2

Mehta Textiles Ltd has many branches and a high volume of transactions. The Assessing Officer doubts the correctness of its accounts, which were already audited under the Companies Act. After hearing the company and getting the Commissioner's previous approval, he directs a special audit on 12 March. The company receives the direction on 14 March. The AO fixes 90 days for the report. Examine the validity, the latest possible date for the report and who bears the cost.

Show the solution

Grounds: volume of accounts, multiplicity of transactions and doubts about correctness are all listed grounds, along with the interests of revenue.
Procedure: the company was heard and the Commissioner's previous approval was obtained. The auditor must be nominated by the Commissioner.
Earlier audit: audit under the Companies Act does not bar the direction, as the power applies irrespective of other audits.
Time limit: the direction was received in March. The end of that month is 31 March. Six months from 31 March ends on 30 September.
The fixed period of 90 days is within this limit. Even with extensions for good and sufficient reason, the total cannot go beyond 30 September.
Cost: expenses, including remuneration of the accountant, are determined by the Commissioner under guidelines and paid by the Central Government.

Answer: The direction is valid. The report must be furnished within the period fixed by the AO, and with all extensions it cannot go beyond 30 September. The Central Government bears the cost. The company must be given an opportunity of being heard on any material from the audit before it is used in assessment, unless assessment is made under section 271.

Exam tips

Always state the section: 348 for non-profit organisation audit, 268(5) for special audit. Mixing them costs easy marks.
Write the five grounds in full. Examiners often ask you to list them or match them to facts.
In case studies, check procedure first: hearing, previous approval, nominated auditor. Many questions hide a defect there.
When a question asks for the difference between tax audit and special audit, compare who orders, who appoints, trigger and who pays, in a short table-like list.
Do the date arithmetic explicitly: end of month of receipt, plus six months.

Practice questions from Tax Audit

Audit under Section 348 and Special Audits in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit under Section 348 and Special Audits: frequently asked questions

What is the difference between a tax audit and a special audit?

A tax audit is a compulsory audit that the assessee gets done by an accountant it appoints, and the assessee bears the cost. A special audit is directed by the Assessing Officer during assessment, done by an auditor nominated by a senior authority, and paid for by the Government.

When can the Assessing Officer direct a special audit?

When he thinks it necessary in the interests of revenue because of the nature and complexity of accounts, their volume, doubts about correctness, multiplicity of transactions, or the specialised nature of the business. He must hear the assessee and get previous approval of the senior authority.

What is the time limit for a special audit report?

The AO fixes the period and may extend it for good and sufficient reason. The total period, including extensions, cannot exceed six months from the end of the month in which the assessee receives the direction.

Who pays for a special audit?

The Central Government. The approving Commissioner-level authority determines the expenses, including incidental costs and the auditor's remuneration, according to guidelines.

Does section 348 apply to every charitable trust?

It applies to a registered non-profit organisation whose total income, without giving effect to the exemption provisions, exceeds the maximum amount not chargeable to tax in the tax year. Below that level, this audit is not triggered.