Penalty for Fake Invoices and False Entries – Section 271AAD under Income Tax Act, 1961 & Section 122 of CGST Act, 2017

Various cases of fraudulent input tax credit claims have been caught by the GST Authorities nowadays. In most of the cases fake invoices are used to claim fraudulent input tax credit which is then utilised for the payment of GST Liability. These invoices have been found to be introduced by racketeers who do not carry any actual business and issue invoices without actual supply of goods and services. The purpose of issuing such invoices is to pass on fake input tax credit and the tax is never intended to paid to the revenue authorities in such cases. In the light of the above cases the govt has introduced section 271AAD vide Clause-98 of Finance Bill-2020 & also brought amendment in the section 122 of the GST Act vide Clause-124 of Finance Bill-2020.Both the amendments are to applicable from 01.04.2020.

Section 271AAD  of Income Tax Act, 1961

The Bare reading of the section 271AAD is as follows

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

‘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 to or from a person who does not exist.

Analysis of Section 271AAD

  • “Without prejudice to any other provisions of this Act” means that the penalty under this section can be imposed in addition to any penalty imposed on the assessee under any other provisions of this Act. In Simple words, penalty under this section cannot be avoided on the ground that penalty has already been imposed under any other section.
  • Maintenance of Books of Accounts by the assessee is mandatory, as evident from wordings used in section “books of account maintained by any person”. So in cases where the assessee is covered under presumptive taxation scheme and maintenance of books is not required, will there be any applicability of this section?
  • The Word “False entry” has been defined under the Explanation. However, the word Omission has not been defined. For E.g. if a purchase invoice is reflecting in GSTR-2A of a person but has not been recorded in purchase register in the books of accounts, then in that case will the same qualify as an Omission?
  • The word “may direct” means that the assessing officer has been given a discretionary power to impose penalty. Therefore, in a case where an Assessing Officer has, exercising the discretion, not levied penalty no fault may be found with such an action of the Assessing Officer.
  • “Any other person” means not necessarily the assessee but any other person who causes the assessee to make a false entry or omit an entry. This means that any other person can also include accountants and employees of the assessee and they can also be liable for penalty along with assessee.
  • The amount of penalty is aggregate amount of false entry or omitted entry. Since the penalty under this section is in addition to penalty under other provisions of the Act, the penalty is harsh in nature and, in several cases, may even lead to a financial disaster as the amount of penalty is not linked to the profit which one has made but to the amount of the entry / omission.

Section 122 of CGST Act, 2017

Section 122 deals with the penalty relating to offences which are not covered in section 73 & 74 of the GST Act. It contains a list of various offences under which a person shall be liable to penalty of an amount specified in the section. In the view of growing cases of fake invoices amendment has been brought in section 122 vide Finance Bill 2020 under new subsection 1A which reads as below:

(1A) Any person who retains the benefit of a transaction covered under clauses (i),(ii),(vii) or clause (ix) of subsection(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 clauses as mentioned above read as follows:

Clause of Section 122(1) Description
(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;

It means that for any of the defaults mentioned above both the beneficiary as well as the wrongdoer will be liable for penalty for an amount equal to the tax evaded or ITC availed.

If we do the conjoint reading of both the sections 271AAD & 122(1A) then we will find that there may be situations that can lead to imposition of penalty under both the sections for the assessee. The same has been explained in the table below:-

Situations Section 271AAD of Income Tax’1961 Section 122(1A) of GST Act’2017.
(i)Supplies any goods or services or both without issue of any invoice Assessing Officer may invoke penalty under clause(ii) of section 271AAD(1) as this transaction can be classified as an omission of any entry which is relevant for computation of Total Income of such person.(Supply without Invoice will lead to lower Turnover and hence lower profits declaration by assessee and hence omission of entry necessary for computation of total income) The person can be held as beneficiary of a transaction covered under Clause (i) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A)
(ii)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. Assessing officer may under clause(i) of section 271AAD(1) classify the transaction as a “False Entry” & may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry. (Refer Pt-b of definition of “False Entry”). The person can be held as beneficiary of a transaction covered under Clause (ii) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A).
(iii)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; The Assessing Officer may under clause(i) of section 271AAD(1) classify the transaction as a “False Entry” & may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry. (Refer Pt-b of definition of False Entry). The person can be held as beneficiary of a transaction covered under Clause (vii) of Section 122(1) and hence liable for penalty equivalent to the amount of ITC availed u/s 122(1A).
(iv)Forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence The Assessing Officer may under clause(i) of section 271AAD(1) classify the transaction as a false entry & may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry.(Refer Pt-a of definition of False Entry). The person can be held as beneficiary of a transaction covered under Clause (i) of Section 122(1) and hence liable for penalty equivalent to the amount of tax evaded u/s 122(1A).

The above table lists only few of the instances. There can be many more situations where the assessee may get covered in both the sections. In both the sections the onus for default has been placed on the beneficiary as well as the initiator of the transaction.

Section 271AAD(2)of Income Tax Act states that any person who causes the person referred to in sub-section (1) [hereafter referred to as “other person”] to make a false entry or omits or causes to omit any entry then such other person shall also be liable to pay penalty equal to aggregate amount of such false or omitted entry. Hence, provision has been made for imposing penalty on the assessee as well as any other person involved in making the false entry or omission of any entry in books of assessee.

Similarly, Section 122(1A) of GST Act states that “Any person who retains the benefit of a transaction covered under clauses (i),(ii),(vii) or clause (ix) of subsection(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.” Here also, the objective of this amendment is to penalise the beneficiary and the wrongdoer of the transactions specified in clause (i),(ii),(vii) or clause (ix) liable for penalty.

From above discussions, we can make out that accounting and book keeping needs to be done by also keeping above points in mind. Proper reconciliation of books with GSTR-2A and GST Returns is very much necessary in order to avoid any disputes in future. Any mistake or negligence on the part of the assessee can expose him to penalties under Income tax as well as GST. For E.g. Even where the assessee is maintaining proper records of all purchase invoices but the vendor has not maintained any records to enable the department to cross verify and establish its correctness, in such cases the assessee can be a defaulter due to no fault of his own. Hence background check & cross verification of vendors is also necessary. This was just one of the cases and there can be several examples like this.

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