Clause 98 of the Finance Bill 2020 has introduced Section 271AAD in the Income Tax Act relating to penalty for

(a) a false entry or

(b) any entry relevant to computation of total income of such person has been omitted with the intention to evade any tax liability in the books of account maintained by him.

The penalty under Section 271AAD payable shall be equal to the aggregate amount of false entries or omitted entries and shall be applicable w.e.f. 01-04-2020.

It is very important to note that penalty under Section 271AAD can also be levied on any other person who is in any manner involved in making such false entries meaning thereby that the person who issues a false invoice or causes to make the wrongful entry is also liable to penalty.

Section 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;

(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.

Text sign showing Penalty Notice.

The background for introducing the penalty provision has been made clear in the Memorandum explaining the provisions in The Finance Bill, 2020 which is reproduced as under:-

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. 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 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 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.

The intention of the legislature is further made clear in the notes on clauses annexed to the Finance Bill which is reproduced as under:-

Clause 98 of the Bill seeks to insert a new section 271AAD in the Income-tax Act relating to penalty for false or omission of entry in books of account. It is proposed to insert a new section 271AAD, under which penalty shall be levied on a person who is required to maintain books of account, if it is found that the books contain a false entry or that any entry has been omitted which is relevant for the computation of his total income. Such person shall be liable to pay by way of penalty a sum equal to the aggregate amount of such false and omitted entries. Penalty shall also be levied on any other person who causes the person required to maintain books of account to make or causes to make any false entry or omit or cause to omit any entry in books of account. The false entries shall include use or intention to use forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or 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 invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

The new penalty provision will have far reaching consequences under the Income Tax Act in addition to the consequences under the GST laws. The information under the Income Tax laws and GST laws is bound to be exchanged, so the provisions under GST laws are also relevant.

Under the GST Act  Section 122 provides that the person shall in addition to the tax evaded shall also be liable to penalty equal to the amount of tax evaded. Provision for punishment of offences has been provided under section 132 of CGST Act.

Corresponding amendments have also been made under CGST ACT through Finance Bill 2020. Section 122 of CGST Act relating to penalties has been amended to penalise the person who retains the benefit of a transaction and at whose instance such transaction is conducted. Section 132 of the CGST Act relating to punishment for offences has been amended to the effect that whosoever commits or causes to commit and retain the benefits arising out of the said offences shall also be liable to similar punishments.

The registration under the GST laws can also be cancelled under the given circumstances.

In nutshell the law has been further amended to give effect to the stringent punishment and penalty provisions under the Income Tax Act and the GST Laws for the person committing the mistake or the offence and the person who causes in any manner a person to make or cause to make such false entries or causes to omit any entry.

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