Income Tax & GST Penal provisions for No entry or false entry in Books

New Penal provisions under Income tax Act Section 271AAD and under GST Section 122(1A) for No entry or false entry in Books of accounts and its consequences

The finance bill 2020 has introduced new penal provisions under the Income Tax Act and GST. The reason for introduction of the same is 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. In these cases, fake invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce their GST liability. 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. To penalize such fraudulent arrangements harsher provisions under both the Acts have been introduced.

We shall discuss here the provisions and its far-reaching impact on parties involved in the said transactions.

Income tax Act:

New Section 271AAD

Penalty for fake invoice.

Tt is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person(s) involved in the fake transactions:

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 propose 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 false entries is proposed to include use or intention to use –

(a) forged or falsified (fake) 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 do not exist.

This amendment will take effect from 1st April, 2020 i.e. from AY 2020-21. However any penal provision should not be given effect retrospectively. A person should not be penalized for an act done with a provision which was not in existence when the act was carried out.

Now the things do not end here only. For any such expense entered in the books of accounts by the assessee which is proved to be fake, the Assessing officer during the course of assessment proceedings will make an addition u/s. 69C of the Act as unexplained expenditure which in turn lead to tax liability u/s 115BBE of the Act which comes to 75% plus penalty u/s 271AAC @ 10%.

So say for example a false entry of Rs.100/- found in books of accounts, there will be tax liability including penalty for Rs.182.50 at the end of recipient (i.e. person booking the expense) and Rs.100/- to the person accommodating the false entry.

Now let us look at the provisions under GST:

New sub section (1A) inserted in section 122 as follows:

Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1)and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.”.

The transactions referred to in above are of following type as specified in Sec 122(1):

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;

(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made there under;

(vii) takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made there under;

(ix) takes or distributes input tax credit in contravention of section 20, or the rules made there under;

So for any of the above default both supplier and recipient will be liable for penalty equivalent to amount of tax evaded or input tax credit availed.

Now for the defaults mentioned above existing provisions are already there in GST as follows:

Existing penalties in Sec 122(1) for above offences:

1. If not with a reason of fraud or willful misstatement or suppression of facts etc to evade tax then 10000 or 10% of tax evaded whichever is higher

2. If with a reason of fraud or willful misstatement or suppression of facts etc to evade tax then 10000 or tax evaded whichever is higher

Also for the person assisting the such fake transaction i.e. at whose instance such transaction is conducted, there is existing provision –

Sec 122(3) : Any person who–– (a) aids or abets any of the offences specified in clauses (i) to (xxi) of sub-section (1);

shall be liable to a penalty which may extend to twenty-five thousand rupees.

So for a single fake entry in GST there will be penalties at two different sections and that is to both the parties involved in the said transaction.

Accordingly considering the quantum of penalties and tax liability that may arise as a result of single fake transaction, it is advisable to avoid such transaction.