Introduction
Through the Finance Bill of 2020, the already voluminous Income Tax Act was laden with another a new provision.This time the addition was triggered due to some events or practices under the GST Law.
Section 271AAD was inserted for imposing penalty for false entry or for omission of any entryin books of accounts, which is relevant for computation of total income of such person, with intent to evade tax liability.
Also Read-Critical Analysis of Section 271AAD- Penalty for Fake Transactions – Part Two
Historical Background
At the time of the roll-out of GST, it was widely expected that the technology driven matching of input and output taxes, would lead to a foolproof system where evasion of GST and recording of bogus transactions would not be possible.
However, with GST Returns 2 and 3 never seeing the light of the day, no foolproof systemto curb instance of tax evasion was effectively brought in place.As opposed to the credits being matched automatically with the supplier’s data,credits were being given to assessee on self-declaration basis, based on the returns filed in GSTR 3B.
This leadto a spike in the total cases of bogus transactions. In 2018-19, the central GST authorities registered over 1,600 cases involving an amount of Rs 11,251 crore, as against 5 cases involving an amount of Rs. 13 crore in the nine months ending 31 March 2018.Until November 2019, over 6,000 cases were filed by the authorities, clearly showing the increasing trends of frauds and enforcement action being taken[1].
It was in this background that the Parliament thought it fit to also impose penalty under the Income Tax Act (‘IT Act’).[2]In the same breath, amendments were also carried out under the GST Act[3] to widen the scope of penal provisions.The authors would like to cover the critical analysis of the newly introduced provision Section 271AAD in two parts. Therefore, in this Article, the authors would delve upon certain aspects the provisions of Section 271AAD and the rest would be covered under part two.
Scope of the provision
On a bare reading of the Section 271AAD, it can be understood that the intent of the legislature is to ensure that people engaging in fraudulent transactions through fake invoices are penalized heavily. The Section contemplates two scenarios which would lead to a penalty:(a) if there is a false entry in the books of accounts or b)if there is an omission of any entry with an intention to evade tax liability. For the sake of brevity, the provision is extracted below:
“(1) without prejudice to any other provisions of this Act, if during any proceedings 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.”
The explanation to the said provision provides an inclusive definition to false entry tostate that false entry includes use or intention to use –
a. forged or falsified documents such as 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 to or from a person who does not exist.
From a perusal of the said provision, a question arises as to whether the phrase ‘to evade tax liability’ is to be read only for scenarios of omission of any entry or evasion is a pre-requisite even in cases of a false entry. To interpret this clause, reliance in placed on the decision of the Hon’ble Patna High Court[4] which interpreted a similarly drafted section. While interpreting the definition of “Governmental authority” (as extracted below), the Hon’ble court observed that since the clause (i) is followed by “;” and the word “or”, each of the sub clauses are independent provisions.
“(s) “governmental authority” means an authority or a board or any other body;
(i) set up by an Act of Parliament or a State Legislature; or
(ii) established by Government,
with 90% or more participation by way of equity or control, to carry out any functions entrusted to a municipality under Article 234W of the Constitution;”
By applying the said interpretation made by the Hon’ble Patna High Court to Section 271AAD, it can be argued that since clause (i) is followed by “;” and the word “or”, a false entry can be penalized even absent any intent to evade tax!
What is false entry is also defined [5], albeit in an inclusive manner, thus paving way for the Department to cast its net really wide. A term that has such a wide import can potentially put even genuine assessees to unnecessary hardship.Even an assessee who inadvertently makes a wrong entry could be potentially made liable for a sum equal to the quantum of such wrong entry made. For example, a sale transaction takes place between two people for a consideration of Rs. 10,00,000. The buyer records it in his books of accounts correctly, but the seller inadvertently records it as Rs. 1,00,000 and subsequently realizes the error and rectifies the error in the following year. In such a scenario, notwithstanding the fact that the error was rectified suo motto by the Assessee, this would amount to false entry and a penalty of Rs, 9,00,000 could be imposed on the seller.
Consider another scenario where an Assessee issues a wrong sales invoice (for whatever reasons) and records it in his books of accounts. Be it assumed that this sale is duly included in the total income of the Assesseeand due taxes have been paid. In this circumstance also, penalty can be levied under the new Section. In this example, it is equally possible that a penalty is levied on the person to whom the invoice is issued too.
Therefore, considering the backdrop in which the Section is introduced read, it is definitely possible that the penal provisions may be applied in cases of “false entry”, whether or not there was an intention to evade tax. The question however, arises as to what is the plight of genuine assessees? Would they have an opportunity to prove their bonafidesor would levy of penalty be left to the mercy of the Assessing Officer? To answer this, it may be of interest to refer to the provisions of Section 273B of the IT Act.
Can penalty be imposed on two persons for the same offence?
Aside the person making the false entry or the omission, the provision also confers powers to the Assessing Officer to impose equal penalty on any other person who causes the said person to make a false entry or an omission. A plain reading of the provision would itself hint that it can lead to various conjectures through use of the word ‘causes’. What is the exact scope and ambit of this term is not clear. For example, if going by the adviseof a professional, the Assessee makes or refrains to make an entry in its books, can the Department make the professional liable for the entry made or not made by Assessee? Whether such an opinion amount to ‘causing’ an Assessee to make a false entry or omission in the books of accounts is something which needs to be considered.The position would be more debatable where the professional did not get any pecuniary benefit from the transaction other than his professional fee.
Can penalty be imposed for a different assessment year while proceedings may relate to another year?
To reiterate, sub-section (1) of Section 271AAD states that, if during any proceedings under this Act, it is found that in the books of accounts maintained by any person there is a false entry or omission of any entry to evade tax liability, the Assessing Officer may levy a penalty. A question may arise as to whether, during any proceedings under the Act for a particular assessment year, can direction be given for payment of penalty for a different assessment year? To illustrate, during the course of assessment proceedings for AY 2019-20, the Assessing Officer finds that a false entry is made in AY 2015-16 or that an entry was omitted in the books of accounts for Assessment 2015-16. Whether the Assessing Officer initiate penalty proceedings under Section 27AAD for Assessment 2015-16?The text of the provisions do appear to bestow such wide powers on the Assessing Officer.
Conclusion
The entire logic of bringing such harsh provisions can be summarized by a famous saying that sanction is a conditional evil to be incurred by disobedience of law.It is indeed a welcome step by the legislature towards curbing the menace of fake invoices by introducing the new penalty provisions. Considering that there are similar penalty proceedings under both GST law as also the IT Act, proper reconciliation of the books of accounts along with the GST returns would become essential in order to avoid any disputes in the future. At the same time, one should also not lose sight of the fact that the provision in its present form is fraught with dangers of misuse against genuine taxpayers committing bonafide mistakes. As they say, “with great power comes great responsibility”. The Board must pass suitable circulars/instructions clarifying the scope of this new provision and the manner and circumstances in which the tax officer should be exercising such extraordinary powers. This would help in smooth administration of the provisions and in avoiding un-necessary litigation.
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[1] https://theprint.in/economy/fake-firms-fake-invoices-and-credit-fraud-how-it-went-all-wrong-for-gst-in-just-2-years/349933/
[2] The Memorandum for the Finance Bill,2020 referred to several cases where fake invoices were obtained by suppliers registered under GST to fraudulently claim input tax credit (ITC) and reduce their liability.
[3] Amendments to Section 122 and Section 132 of the CGST Act were made to widen the penal provisions
[4] Shapoorji Paloonji & Company Pvt. Ltd. vs C.C., C. EX. & S.T., 2016 (42) S.T.T. 681 (Pat)
[5] Extracted supra
About Authors-
Article is authored by S Rahul Jain (Joint Partner) and Abhinov Vaidyanathan (Advocate and Associate). Authors are Associated with Lakshmikumaran & Sridharan- A full-service law firm based in India.
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