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Fake Invoice, False entry & omission to record any entry, now liable for penalty: Section 271AAD
With every passing year, family of penal provision is widening and its impact is getting harsh & stringent. One more draconian penal provision has been inserted by recent Union Budget – 2020 in the Income Tax Act by way of section 271AAD. The provision provide for levy of penalty for false entry, fake invoice or omission to record the bill in the books of accounts. The Section is drafted in a simple language and reads as under:
271AAD. (1) Without prejudice to any other provisions of this Act, if during any proceeding under this Act, it is found that in the books of account maintained by any person there is,-
(i) a false entry; or
(ii) an omission of any entry which is relevant for computation of total income of such person, to evade tax liability,
the Assessing Officer may direct that such person shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.
(2) Without prejudice to the provisions of sub-section (1), the Assessing Officer may direct that any other person, who causes the person referred to in sub-section (1) in any manner to make a false entry or omits or causes to omit any entry referred to in that sub-section, shall pay by way of penalty a sum equal to the aggregate amount of such false or omitted entry.
Explanation.––For the purposes of this section, “false entry” includes use or intention to use,
(a) forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or
(b) invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or
(c) invoice in respect of supply or receipt of goods or services or both from a person who does not exist.’.
The logic behind introduction of section 271AAD has been justified by the Government for following reasons:
- In the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent Input Tax Credit (ITC) claim have been caught by the GST authorities.
- It has been found that fake invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce their GST liability.
iii. These invoices are found to be issued by racketeers who do not actually carry on any business or profession. They only issue invoices without actually supplying any goods or services.
- The GST shown to have been charged on such invoices is neither paid nor is intended to be paid.
- Such fraudulent arrangements deserve to be dealt with harsher provisions under the Act.
Therefore, it is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any entry relevant for computation of total income of such person has been omitted to evade tax liability.
- The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It is also proposed to provide that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry.
The new penal provision will have a wider repercussion. The following discussion & illustrations may enable to taxpayers to know the intricacies of section 271AAD:
- There are already penal provisions in the Income Tax Act for mis-reporting of income, under-reporting of income, falsification of books of accounts, wrong entry, etc. The new penalty u/s 271AAB as discussed above is in addition to already existing penal consequences. In short, there could be multiple penalties for “one” default.
- Normally, penalty in various cases are linked to the amount of tax but penalty u/s 271AAD is linked with the quantum of the transactions & has nothing to do with the tax amount. For example, if the person has not recorded a sale of Rs. 1 Lakh then penalty u/s 271AAD would also be Rs. 1 Lakh.
- Penalty u/s 271AAD may have multiplying effect as it refer to “any other person who has caused the first mentioned person to enter false entry….. ” means that everyone connected with transactions whether as a broker, accountants, purchaser, seller, consultant, etc would also be liable for the penal consequences. In short, for one transactions or default, penalty may be imposed on entire group of persons connected directly or indirectly.
- If during the course of survey & search, unexplained excess stock is found, it will treated as “omission” on the part of taxpayers to record the purchases and will be made liable for penalty u/s 271AAB.
- Similarly, if during the course of survey & search, unexplained shortage in stock is found, it may treated as “omission” on the part of taxpayers to record the sales and may be liable for penalty u/s 271AAB. Same will be the treatment for excess or short cash in hand, fixed assets, expenses, etc.
- Thought the logic for incorporation of section 271AAB in the I.T. Act has been mentioned as the “fake invoice to avail ITC”, the wording used in section 271AAB will cover other transactions as well. Even the bogus claim of expenses, be it commission, rent, salary, etc will have additional penal consequences u/s 271AAB.
- There are various provisions in the Act which empowers Assessing Officer to give immunity from penalty if there exists a “Reasonable Cause”. However, there is no such discretion for penalty u/s 271AAD which means that one cannot escape penalty if there is a violation. The word “may” used in the section must be considered as cases
- There is an interesting to note one more distinguishing feature. In normal course, penalty is imposed by the jurisdictional assessing officer. However, section 271AAD (2) enables other assessing officer (non jurisdictional) also to impose the penalty on taxpayers. The word used in section 271AAD empowers “the assessing officer..” which means the same assessing officer who has initiated the proceeding on the first person. In short, in the present system of e-verifications and e-compliances, taxpayers need to be ready for getting notices & orders from AO across the country.
- One more interesting observation as far as the penalty u/s 271AAD is concerned is regarding the pre-requisite of having books of accounts. Penalty u/s 271AAD can be imposed only if the assessee is maintaining the books of accounts. There are various cases where assessees have been given immunity from maintenance of books of account under presumptive scheme of taxation. In such cases where assessee opts for presumptive scheme of taxation, it could mean that no penalty could be imposed u/s 271AAD.Question now arises is whether the penalty can be imposed if the AO wish to impose in the hands of “other persons” in accordance with 271AAD(2) even if such other person is not maintaining the books of accounts? It may be relevant here to read the beginning of section 271AAD which reads as under”“271AAD. (1) Without prejudice to any other provisions of this Act, if during any proceeding under this Act, it is found that in the books of account maintained by any person there is…..”
It’s the books of accounts by the first mentioned person is what is mandated by section 271AAD & not second or other persons. In short, if the first persons in whose case the proceeding is going on and the discrepancies of the nature mentioned in section 271AAD is noticed then penalty can be imposed on other persons even if they are not maintaining the books of accounts.
- One of the confusion is prevailing as to the applicability of the year of section 271AAD. Normally, whenever the new section is added, the date of applicability is mentioned usually with reference to “Assessment year” and not “Financial Year”. Taxpayers may note that most of the amendment of the FA 2020 has been made applicable from 01.04.2021 which means that all such provision would be applicable from AY 2021-22 i.e., FY 2020-21. However, applicability of section 271AAD has been mentioned as from 01.04.2020. Does this mean that it is applicable from AY 2020-21 i.e., FY 2019-20?
It is a common and logical to draw a conclusion that section 271AAD intends to cover all the default committed on or after 01.04.2020 and cannot cover the transactions of earlier period when the law was not in force. However, when a person reviews it after a gap of some-time say 4 to 5 years like in case of reopening u/s 148, Survey /search, etc, the AO will pleads its applicability from AY 2020-21.
Similar type of issue was covered by me in my earlier article when section 269ST was introduced in the Act with similar mentions about the date of applicability. The AO has started making its applicability for the earlier assessment year now.
With this background, tax professionals need to keep this mind about the year of applicability of section 271AAD in subsequent years. It may be worthwhile here to mention that the applicability of penal provision cannot have retrospective application.
- Though the explanatory memorandum to the finance bill explaining hte purpose of introduction of section 271AAD says one of the reason for introduction of section 271AAD as
“The GST shown to have been charged on such invoices is neither paid nor is intended to be paid”.
However, the section 271AAD has left it open ended. It means that even if the seller has paid the GST even then the penalty could be imposed if the bill is issued without actual supply of goods.
- Section 271AAD starts with the word“Without prejudice to any other provisions of this Act” which means that the penalty is not in exclusion of other penalties already which is there in the Act. In short, penalty can be imposed even if there are other penalties which are also levied for mis-reporting or under reporting of income, falsification of books of accounts, income of the nature mentioned in section 68,69A, 69B, 69C etc wherein tax is payable u/s 115BBE. In short, “one” default could have multiple tax consequences. (In a lighter note, one murder could be punished twice.)
- “Intention” or Mens Rea is not placed any value in case there is a “False entry”. However, for levy of penalty in in case of omission, it is mentioned that
“(ii) an omission of any entry which is relevant for computation of total income of such person, to evade tax liability..”,
In short, if omission is not relevant for computation of total income, no penalty u/s 271AAD can be levied.
- False entry need to be distinguished from “Wrong” entry. Every wrong entry may not be a false entry. Such false entry which isforged or falsified or in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both or invoice in respect of supply or receipt of goods or services or both from a person who does not exist, will be categorised as “false entry”. Meaning of word “false entry” in the explanation is given in an inclusive manner and so above instances may be taken as illustrative in nature and not exhaustive.
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