Section 271AAD Penalty for false entry in books of account

Penalty for false entry, etc., in books of account.

Recently, Finance Act, 2020 introduced penalty provision to curb malpractices of issuing fake invoice. As categorically explained by memorandum to Finance Bill, 2020 that after introduction of GST, several cases are found by GST authority where supplier are fraudulently claiming ITC on the basis of fake invoices to reduce their overall GST liabilities. These invoices are issued by racketeers who do not have any business or profession and invoices issued are without actual supply of goods or services.

FA, 2020 introduced Section 271AAD w.e.f 1^st April, 2020. That is provision of this section will apply from FY 2020-21 onwards.

 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.”

Analysis:

• This section start with “without prejudice to any other provision…”, hence penalty under this section shall be in addition to any other penalty under the Income-tax Act.
• There must be any proceeding under the act.
• Power to levy penalty is with assessing officer.
• Quantum of Penalty; a sum equal to aggregate of amount of false entries or omitted entries
• There must be books of account maintained by a person.
  1. In case of person who is not required to maintain books of account then in such case penalty may not be levied under this section.
  2. In case of person who is required to maintain books of account but such person had not maintained books of account. Then in such case, whether this penalty shall be levied?
• Further, Section 2(12A) defined books of account,

(12A) “books or books of account” includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;

• Penalty shall be levied on “any person”. The word used by legislature is any person and not any assessee.
• ­To levy penalty there must be either of following two occasion,
  1. false entry in books of account; or
  2. omission of any entry in books of account which is relevant for/ has impact on computation of total income, to evade tax liability
• Further, what is false entry is explained vide explanation as below,

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 to or from a person who does not exist.

• False entry include – use or intention to use
  1. forged documents or falsified documents (fake invoices)
  2. invoice in respect of supply or receipt of goods or services or both without actual supply or receipt thereof
     • E.g. K (seller) has invoiced to D (Buyer) of Rs 100K for goods he has sold. However, there is no actual supply or receipt of goods. Penalty shall be levied in hand of A as well as B of Rs 100K each.
     • Whether cases of bill to ship to model/ buyer-consignee model covered by clause (b) above?
     • In case of services, it is very difficult to prove actual supply or receipt thereof.
  3. invoice in respect of supply or receipt of goods or services or both to or from person who does not exist
• For false entry in books of account, it is immaterial whether it has impact on computation of income or not. If there is false entry in books of account, penalty shall be levied.
• For omission of entry in books of account, it must have impact on computation of income in order to attract penalty provision.
• To levy penalty, element of mens rea must be an essential ingredient. That is intention is paramount.
• Onus to prove false entry or omission of entry is on department.

271AAD. (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.

Analysis:

• Sub-section (2) empower assessing officer to levy penalty in case of person who causes person referred in sub-section (1), in any manner, to make false entry or omits or causes to omit any entry referred in sub-section (1)
• Quantum of Penalty; a sum equal to aggregate of amount of false entries or omitted entries
• It covers book keeper (accountant), consultant/ advisors etc.
• Whether statutory auditor is also covered?

Whether provision of this section is constitutionally valid?

Further, as per section 273B penalty shall not be imposed under the list of section mentioned therein if assessee prove that there was reasonable cause for the failure. However, section 271AAD is not included in section 273B.