Departmental Audit: Section 65

A notice in FORM GST ADT-01 says that the department has decided to audit the books for one or more years, and names a date to appear with them. Unlike a scrutiny notice, it does not list discrepancies. The audit team finds those itself, in the books, over the following weeks. What comes out at the end is a set of findings in FORM GST ADT-02. The findings are not a demand. But where tax is found short and not paid, they become the basis of a show cause notice, and the replies given during the audit often decide how that notice is framed.

This guide covers the audit under section 65 of the CGST Act and rule 101: who conducts it, the notice, where and how long, the stages set out in the Model All India GST Audit Manual 2023, the findings, and the move to a demand. The records an audit calls for are in Keeping the Records an Audit Will Ask For. Scrutiny of returns, a separate and lighter procedure, is in Scrutiny of Returns: ASMT-10, ASMT-11 and ASMT-12.

What an audit is

Section 2(13) defines audit as “the examination of records, returns and other documents maintained or furnished by the registered person”. The purpose is “to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance”.

Section 65(1) allows “the Commissioner or any officer authorised by him, by way of a general or a specific order”, to audit “any registered person for such period, at such frequency and in such manner as may be prescribed”. Rule 101(1) prescribes the period: “a financial year or part thereof or multiples thereof”. The words “or part thereof” were inserted by Notification No. 74/2018-Central Tax. Rule 101(3) sets the scope. The officer verifies the documents on which the books are kept and the returns filed, “the correctness of the turnover, exemptions and deductions claimed, the rate of tax applied”, the credit availed and used, refunds claimed and “other relevant issues”, and records observations “in his audit notes”.

The audit under section 65 is different from the special audit by a chartered or cost accountant under section 66, covered in the next guide.

Cancellation does not end exposure to audit. In LJ-Victoria Properties Pvt Ltd v Union of India (Bombay High Court, Division Bench, Writ Petition (L) No. 34267 of 2024, 19 November 2024), a company leasing commercial property was registered from March 2019. It applied for cancellation on closing the business, and the registration was cancelled from 1 April 2023. An ADT-01 for 2020-21 followed, and preliminary findings put the tax and interest at Rs 7,01,31,710. The company argued that section 65 applies only to a “registered person”, which it no longer was. The Court held that the definition in section 2(94) excludes only a holder of a Unique Identity Number. Read with section 29(3) and rule 101(1), section 65 allows audit of a period in which the person was registered. It “respectfully” disagreed with a single-judge decision of the Madras High Court, Tvl. Raja Stores, which had taken the opposite view, and dismissed the petition. The Model Manual, para 7.1.2, suggests that where registration was cancelled before the audit began, audit “need not be carried out” and the case be passed to the jurisdictional officer. That is guidance on whether to proceed, not a limit on the power.

Who audits

Central tax. Notification No. 2/2017-Central Tax appoints Commissioners of Central Tax (Audit) and vests them with the territorial jurisdiction of the executive Commissionerates. The Model Manual describes the central arrangement:

• registered persons are selected “based on the risk evaluation method prescribed by the Directorate General of Audit (DGA) in consultation with the Directorate General of Analytics and Risk Management (DGARM)”
• the list is “communicated to the Audit Commissionerates during the month of January/February of every year”, and Audit Commissionerates may add a share selected on local risk parameters
• Audit Commissioners allocate the selected taxpayers to audit circles, and circles to audit groups

State tax. Each State conducts audit under section 65 of its own GST Act, which mirrors the central provision. The Manual records that in the States the Commissioner fixes the selection criteria and cases go to a zonal audit head. The organisation varies by State, and some use the audit module built by GSTN.

Selection. The Manual lists the kinds of risk used: entity-level risks by sector, compliance behaviour such as late returns, ratios such as cash paid to output tax, and “exceptional reports”. These include credit in GSTR-3B against GSTR-2A/2B, turnover in GSTR-3B against GSTR-1, the income-tax return, TDS and TCS returns and e-way bills, and purchases from cancelled or non-existent suppliers. A share may be selected at random, and an officer may propose a suo motu audit for recorded reasons.

The notice: ADT-01

Section 65(3) requires the registered person to be “informed by way of a notice not less than fifteen working days prior to the conduct of audit”. Rule 101(2) prescribes FORM GST ADT-01. The form:

• names the financial years to be audited and says whether the audit will be “at my office/at your place of business”
• requires the person to “afford the undersigned the necessary facility to verify the books of account and records” and to “furnish such information as may be required and render assistance for timely completion of the audit”
• directs the person to attend “in person or through an authorised representative” on a stated date and place, with the books for those years
• warns that if the notice is not complied with, “it would be presumed that you are not in possession of such books of account”

The Manual asks officers to issue ADT-01 within five working days of allotment. It suggests sending with it a questionnaire, a list of documents and a letter asking for an initial set of statements on the first day, with the rest produced “in a staggered manner”. The Manual’s own version of ADT-01 adds a clause referring to these annexures. The form in the Rules does not have that clause.

Where, and how long

Place. Section 65(2) allows the audit “at the place of business of the registered person or in their office”. The Manual calls these field audit and desk audit. It adds that an administration may audit remotely “in the interest of public health, availability of audit resources, taxpayer’s facilitation or for any other reason which is fair and equitable”.

Three months, and six more. Section 65(4) requires the audit to be “completed within a period of three months from the date of commencement of the audit”. Where the Commissioner “is satisfied that audit in respect of such registered person cannot be completed within three months, he may, for the reasons to be recorded in writing, extend the period by a further period not exceeding six months”.

When the clock starts. The Explanation defines commencement as “the date on which the records and other documents, called for by the tax authorities, are made available by the registered person or the actual institution of audit at the place of business, whichever is later”. The three months do not start while records called for are withheld. One annexure to the Manual paraphrases this as “whichever is earlier”; the Act says “later”.

Findings within thirty days. Under section 65(6), “on conclusion of audit, the proper officer shall, within thirty days, inform the registered person … about the findings, his rights and obligations and the reasons for such findings”.

The stages, as the Model Manual describes them

The Model All India GST Audit Manual 2023 was prepared by a Committee of Officers constituted by the GST Council Secretariat, with members from CBIC, the States, GSTN and the Council Secretariat. It is a model for all tax administrations. Its disclaimer states that its examples and illustrations “are for the purpose of guidance of the departmental officers only” and “do not constitute any legal authority”. The stages it sets out are these.

1. Desk review. Before the first date in ADT-01, the officer studies the reasons for selection, the business, the return history and the exceptional reports, and calculates any late fee and interest. The Manual asks officers to read circulars from the original text, not “any truncated reference”.
2. Audit plan. The team prepares a plan, preferably within seven days before the first visit, which a higher authority approves. Changes later in the audit go back to the same authority.
3. Verification. The team examines the books against the plan, by sampling where volumes are large. The Manual tells officers that technical lapses with no revenue effect, arising “out of oversight or ignorance”, should be noted but not pursued.
4. Communication of discrepancies. Rule 101(4) allows the officer to inform the person of discrepancies, and the person “may file his reply”. The officer finalises the findings “after due consideration of the reply”. The Manual asks that each observation be a separate audit para, citing the circular, ruling or judgment it relies on. It asks that the auditee be given “at least seven (07) days” to reply and be told about paying through DRC-03.
5. Draft audit report. The team prepares a draft report “for internal administrative purpose and not for the auditee”, recording the replies.
6. Monitoring Committee Meeting. A committee chaired by the Commissioner meets monthly and may “review the audit objections raised by the Audit Teams and after discussions take a decision”. At the Centre, the Manual records, this committee of the Commissioner (Audit), the Additional or Joint Commissioner and the circle heads discusses and approves audit objections.
7. Final audit report in ADT-02. The findings are issued, preferably within thirty working days of approval.
8. Closure. The case closes when the dues are paid, “preferably within 30 days” in DRC-03, or when there is no revenue effect. Otherwise it is “taken up for initiation of demand and recovery proceedings”.

Portal steps

Where the audit is run through the GST portal’s audit functionality, the portal’s user manual and FAQs describe the case under Services > User Services > View Notices and Orders. It has NOTICES, REPLIES, PAYMENT DETAILS, ACKNOWLEDGEMENT (GST DRC-04), REPORT and REQUESTS tabs. In outline:

• Replying to ADT-01. On the REPLIES tab, choose to upload documents against the notice for conducting audit, generate a reply reference number, attach up to four PDF or JPEG files of 5 MB each, tick the declaration and file with DSC or EVC.
• Adjournment. From the same tab, request adjournment of the audit with a date and reasons. The FAQ states that adjournment can be requested only against ADT-01, that a second request is possible if the first is rejected, and that the maximum is “6 months from issuance of” ADT-01.
• Discrepancy notices. Reply to a “Notice for Discrepancy under rule 101(4)” in the same way, or request an adjournment of it.
• Payment. While replying, use “Proceed to Pay through DRC-03” to pay. Payment is possible against a discrepancy notice, an ADT-02 or a later DRC-01. The acknowledgement in DRC-04 appears on its own tab.

The Manual notes that CBIC and some States have built their own audit modules. Correspondence through those systems, or on paper, may not follow the portal’s screens.

The findings: ADT-02

Rule 101(5) requires the findings in FORM GST ADT-02. The form is headed “Audit Report under section 65(6)”. It sets out short payment of integrated, central, State or Union territory tax and cess, split into tax, interest and “any amount other”. The observations are attached as a PDF. It directs the person “to discharge your statutory liabilities … failing which proceedings as deemed fit may be initiated”.

Paying after the findings. Payment before a show cause notice is governed by the demand provisions. For years up to 2023-24, section 73(5) allows payment of tax and interest, and section 74(5) of tax, interest and fifteen per cent penalty. From 2024-25, section 74A(8)(i) and (9)(i) do the same. The payment is intimated in DRC-03, and an acknowledgement in DRC-04 is made available on the portal under rule 142(2). Interest on wrongly used credit runs under section 50(3).

From findings to a demand

Section 65(7) provides that where the audit “results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilised, the proper officer may initiate action under section 73 or section 74 or section 74A”. The ADT-02 is not itself a demand. The amount can be determined only through a show cause notice, reply and order under those sections, within their time limits. A DRC-01A intimation under rule 142(1A) may come first; it is optional. These stages are in Before a Notice: DRC-01A and Paying Voluntarily and Notices and Demands.

Three decisions show how the courts have treated the link.

A notice can follow quickly. In M/s Surya Business Pvt Ltd v State of Assam (Gauhati High Court, Division Bench, W.A. No. 321 of 2026, 22 September 2026), an audit for 2018-19 raised an observation of about Rs 27.25 lakh of excess credit on invoices missing from GSTR-2A. The company replied on 17 December 2023. ADT-02 issued on 8 January 2024 and a section 73 notice on 11 January 2024. The Court held that this “by itself shall not establish a predetermined mind”, because “an audit finding may legitimately form the basis for initiation of proceedings under Section 73”. The notice is the start of the adjudication, not its end. The company’s defences were left to the proper officer.

The order must still state the facts. In Treco Wire India Pvt Ltd v Additional Commissioner, Central Tax, Delhi North (Delhi High Court, Division Bench, W.P.© 583/2026, 29 September 2026), an audit for July 2017 to March 2021 led to an audit memo, an ADT-02, a DRC-01A and a section 74 notice. The order confirmed Rs 3,34,21,261 of credit on supplies from suppliers whose registrations had been cancelled retrospectively, with an equal penalty. It reproduced the audit objection but did not name the suppliers or give invoice dates, cancellation dates or amounts supplier by supplier. Nor did it record facts showing fraud or suppression. The Court set it aside and remanded the matter. It noted that the company had disputed the audit objections and that its defence had not been dealt with.

Revision is not a substitute. In M/s NL Tile Art Pvt Ltd v Additional Commissioner of Commercial Taxes (Karnataka High Court, W.P. No. 38051 of 2025, 18 December 2025), the department issued a revision notice under section 108 against audit reports, instead of proceeding under section 73 or 74. The Court, following its earlier decision in Navayuga Engineering, held that section 108 “cannot be invoked” to revise an audit report, given section 65(7). It quashed the notice and left the department free to proceed in accordance with law.

Interpretation disputes. CBIC’s Instruction No. 03/2024-GST applies paragraph 2(g) of Instruction No. 01/2023-24-GST (Inv.) to audit. Where an audit objection turns on an interpretation and the taxpayer has followed “a prevalent trade practice” in the sector, the zonal Chief Commissioner is to make a reference to the Board’s policy wing, ideally well before the due date for a show cause notice.

Rights and duties at each stage

Stage	The audit officer	The registered person
ADT-01	Must give at least fifteen working days’ notice, naming the years	May attend in person or by an authorised representative; may seek adjournment
During the audit	May require facilities to verify books and information under section 65(5); may call records under section 71(2)	Must provide access and information; records within fifteen working days of a demand under section 71(2), or a longer period allowed
Time limit	Must complete within three months of commencement, or up to six more with the Commissioner’s recorded reasons	The clock starts only when records called for are made available
Discrepancies	May communicate them and must consider the reply under rule 101(4)	May reply with evidence
ADT-02	Must inform findings, rights, obligations and reasons within thirty days of conclusion	May pay with interest, or contest in the demand proceedings
Demand	May proceed under section 73, 74 or 74A within their time limits	Has the reply, hearing and appeal rights of those sections

A person who does not co-operate faces penalties. Section 122(1)(xvii) covers failure to furnish information or documents called for. The Model Manual, para 7.1.7, suggests a show cause notice for penalty under section 125 and referral to the enforcement wing for inspection and search.

What can still be put right

• During the audit, a discrepancy accepted can be paid through DRC-03 with interest, and the reply to the rest can carry the documents.
• After ADT-02 and before a notice, payment of tax and interest under section 73(5) or 74A(8)(i) closes a non-fraud matter without penalty.
• After a notice, the reply and hearing are in Replying to a Show Cause Notice, and the Hearing. The order is limited to the grounds in the notice by section 75(7).
• Returns. Section 39(9) does not allow correction in a return of errors found “as a result of … audit”; see Correcting Mistakes in Returns.

The procedure in order

1. Note the date of ADT-01 and the years named, and check that at least fifteen working days are allowed before the date fixed.
2. Assemble the books, the reconciliations of books to GSTR-1, GSTR-3B, GSTR-2A/2B and GSTR-9, and the documents listed in the notice or the accompanying letter.
3. Attend on the date fixed, or request an adjournment, and record the date the records are made available. The three months run from then, or from the start of audit at the premises if later.
4. Reply to each discrepancy notice under rule 101(4) with evidence, and pay any accepted amount through DRC-03 with interest.
5. On receipt of ADT-02, compare each finding with the replies given, and pay or prepare to contest.
6. If a DRC-01A or show cause notice follows, respond within the time it allows. Under section 75(7), the order cannot go beyond the grounds in the notice.

The next guide covers the special audit under section 66, ordered where the books need examination by a chartered accountant or cost accountant nominated by the Commissioner.