In the past we seen that, the GST department endeavours  several cases whereas fraudulent input tax credit has been availed and claimed. GST department stated that, in all cases bogus invoices are been obtained by the suppliers and fraudulently claim the ITC taken to reduce tax liability. The bogus invoices has been issued by the racketeers who does not actually made any supply or physical delivery of goods as well as does not provided any kind of services. Even those fraudulent person does not engaged into any kind of business.

Finance Act 2020 to counter such practices introduced new section 271AAD in the Income tax Act, 1961( hereinafter referred to as ‘The Act’) which deal with such transaction by levy of penalty for making fraudulent claims of Input tax credit(ITC) under the GST Act, 2017.

The new provisions are read as under :


(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.’.

The above provisions are applicable from the Financial Year 2020-2021 relevant to A Y 2021-22 onwards.

While reading the Notes and Budget Speech of Finance Minister, it can be understand the objective behind the introduction of the new penalty section. FM says that the provision has been brought ‘to discourage taxpayers to manipulate their books of accounts by recording false entries including fake invoices to claim wrong input credit in GST, it is proposed to provide for penalty for these malpractices. Refer Para 6.8 of Budget Speech

The detailed analysis of the above provisions discussed hereunder: 

1. The provision starts with “Without prejudice to any other provisions of this Act”. Hence, the penalty u/s 271AAD can be imposed parallelly along with other penal provisions of the Income Tax Act, hence there are multiple penalty provisions for single offence. The following penalty provisions can be levied on single transaction : 

  • Penalty u/s 271AAC of Income Tax Act
  • Penalty u/s 271AAD of Income Tax Act
  • Penalty u/s 122(1) of CGST Act 

2. The provisions of Section 115BBE of the Act also applicable and hence the tax rate will be 78% over and above the penalty as per para above.

3. The section states that “if during any proceedings under this Act”, it means penalty can be levied if default identified during any proceedings i.e. assessment, re-assessment, search, survey or any other proceedings. In view of the above, the AO can levied the penalty after identification and satisfaction to the effect that books of accounts of the assesse contain false entry or omitted entry even without waiting any information from the GST department.

4. The provisions says that “it is found that in the books of account maintained by any person. The books of accounts has been defined u/s 2(12A) of Income Tax Act, 1961 which reads as under; 

“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; 

In the various case laws it is well settled that the bank statement also considered the books of accounts. The Apex Court in case of C.B.I. v/s V.C. Shukla And others [1998] 3 SCC 410 held that’Book’ ordinarily means a collection of sheets of paper or other material, blank, written, or printed, fastened or bound together so as to form a material whole.

Loose notings without any day to day transaction will not be considered as Books of Accounts.

5. Any person who causes to make False Entry or omit entry:-

The words “ Any person” in the initial lines of the provision as well as “Any other person” covered under sub section (2),means any person who causes the first person to make false entry or caused him to omit entry or himself omitted the entry.

In that case penalty will be imposed in the hands of the Facilitator of False Entry or Omission of Entry as well.  The main purpose of introducing such provision is discouraging the practise of Accommodation Entry Providers or Facilitators.

6. The main aspects of the provision is , found False Entry or omission of any entry in the books of accounts: –x 

False entry in the books of accounts shall include entry on the basis of-

1. Bogus / False and Forged documents: The AO during the course of assessment on its own discretionary opinion, found any documents non- bona fide, false and bogus.

2. In case actual supply of goods has not been taken place will be considered as false entry in books. It can be further verified through other documentary evidences i.e., E-Way Bill, Lorry Receipt, Stock Register, Inward Register. However in case of false entry related to services, the AO can find it difficult to justify that it is a false entry. Hence, in case of services, it is depend on the AO findings.

3. In case of supply of goods or services from the person, who is non-traceable/ non-exist can lead to levy penalty by the AO. Even, if the purchase was genuine at the time of buying the goods and the person is exist and identifiable, however during the course of assessment proceedings notice u/s 133(6) of the Act unserved, will flags the ingenuity in the view of AO.

Omission of any Entry recorded in books of accounts by the assesse with the intention of evasion of tax liability then penalty u/s 271AAD can be levied. It will be incumbent upon the Assessing officer to prove that there was a deliberate attempt on part of the assessee to omit the entry with the purpose of evasion of tax liability.

The intention of the legislature to curb the malpractices of bogus billing/ fake invoices or taking fraudulent input tax credit is welcome ,however at the same time Assessing officer can use this penal provisions as Thumb Rule for levy of penalty. In my opinion, Provisions of Sec 115BBE (Higher Tax Rate ) and such parallel  penalty provisions can create huge demand in income tax records and the recovery of the same will always questionable.

Author Bio

Qualification: CA in Practice
Company: SDG AND CO
Location: MUMBAI, Maharashtra, IN
Member Since: 16 Apr 2020 | Total Posts: 1

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April 2021