Decoding Section 271AAD – Penalty for false entry / fake invoices [inserted vide Finance Act, 2020 – w.e.f. 01.04.2020]
Chapter XXI of the Income Tax Act, 1961 is well-stocked with Penal provisions imposing penalties for breach of statutory provisions. Sec.271AAD is a new addition to this family, which imposes penalty for “false entry in the Books of account” [w.e.f. 01.04.2020]. The author here attempts to interpret this section and share his views/ opinion with respect to the same.
Before we interpret any section, one must know the very intention of the Legislature in inserting the same. Penalty provisions in taxing statutes are civil in Nature. Our courts have reiterated time and again that the rule of STRICT INTERPRETATION applies to Penal provisions. The Penal provisions have to be construed strictly and narrowly and not widely but with the object of advancing the intention of the Legislature.
For the sake of clarity, Section 271AAD is extracted below;
[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.]
On a plain reading of this section (supra), it is very clear that the penalty is imposed on 2 different persons as stated below;
|
Sub-Section (1) to Section 271AAD |
|
| On a person (who maintains Books of Account – (ASSESSEE) | If there is a false entry in the Books of account maintained |
| An omission of an entry relevant in computing tax – to evade tax liability. | |
|
Sub-Section (2) to Section 271AAD |
|
| On any other person, who causes the person as mentioned under Sub-Sec(1) | In any manner to make a false entry |
| Or omits or causes to omit any entry | |
Penalty equivalent to a sum equal to the aggregate amount of such false entry or omitted entry is levied.
Since this is a New Section, we need to peruse the Memorandum & notes on clauses in the first place. Before we DECODE.
Extract of Memorandum to Finance Act, 2020 – Section 271AAD
Penalty for fake invoice.
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.
This amendment will take effect from 1st April, 2020.
[Clause 98]
Extract of Notes on Clauses annexed to Finance Act, 2020 – Clause 98
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.
This amendment will take effect from 1st April, 2020.
DECODING:
[Sub-Section (1)]
> This Section starts with “Without prejudice to any other provisions of this Act” which literally means that this provision for penalty will be in addition to any other penalty levied or tax imposed under any other section of the Income Tax Act.
> Say, for instance, if ‘A’ has been levied penalty u/s.270A for misreporting or underreporting of income which is quantified based on false entries, there is no immunity from levy of penalty u/s. 271AAD. Section 271AAD will also hit ‘A’ for false entry and it cannot be said that there was any case of double jeopardy.
Also, one can find the words “during any proceeding under this Act”. This has a wider meaning which includes any proceedings but only with respect to proceedings under the Income Tax Act. The proceeding might be with respect to Search u/s. 131 or any other. For instance, if there is a proceeding by the TDS officer and he finds that there are certain discrepancies found with the Assessee, he can intimate the respective AO who then will proceed within the four corners of law in levying penalty. The very intention of this Section is to tax the false entry., this has come up since in the new GST era, people raise fake invoices for which no supply of goods happened and this helps them in claiming Input Tax Credit (ITC) to reduce the GST tax liability.
In this Scenario, when GST authorities catch hold of the Assessee raising fake invoices to reduce tax burden, this itself will not automatically impose penalty u/s.271AAD. Here, the GST authority ought to bring this particular fact to the knowledge of the Jurisdictional AO and thereafter, if the AO initiates any proceedings under the Income Tax Act, this will pave way to impose penalty u/s.271AAD.
Pre-requisite condition;
> The words “Found” ‘in the Books of Account maintained by any person’ as envisaged under this section clearly depicts that maintenance of books of account is a pre-requisite to levy penalty u/s.271AAD. Books of Account needs to be maintained as stipulated u/s.2(12A) of the Income Tax Act, 1961. For non-maintenance of proper Books of Account, separate penalty u/s.271A will come into play, but the Assessee may not be liable to penalty u/s.271AAD.
Therefore, Penalty u/s.271AAD will not come into play for Assessees who are not obliged to or not maintaining Books of Account as stipulated under the Income Tax Act.
It is expedient to reproduce Sec.2(12A) of the Income Tax Act, 1961;
(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;
There may be scenarios, where;
(a) An Assessee who has opted under presumptive taxation u/s.44AD, whose turnover during the previous year fell short of the threshold limit and when during any proceedings under this Act is found to have raised fake invoices, the assessee will be liable to levy of Penalty.
(b) When certain invoices are not recorded in the Books of Account maintained by a person, which came to be found during the course of any proceeding under the Act, the Penalty is levied on the person since the omission to make the entry has an intention to evade tax liability.
Usage of words – False entry / omission of an entry
> On a plain reading of the Sub-section(1), it is clear that Penalty under this sub-sec may be imposed on a person maintaining books of account, if there is found to be a ‘false entry’ OR Omission of an entry.
> Here, the Legislature has drafted in a manner which says what will amount to ‘Evading tax liability’. The usage of ‘ ; ’(Semi-colon) followed by the word ‘OR’ after ‘False entry’ as shown below;
(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, and then moves on to the clause (ii) wherein the words “to evade tax liability” is brought in by the legislature, which means that the act of Evading tax liability will only mean by the action of “omission of entry” and not FALSE ENTRY.
But Penalty is leviable, if any one of these conditions is found during the proceeding.
[Sub-Section (2)]
> This Sub-Sec starts with “Without prejudice to the provisions of Sub-Sec(1)” which would mean that this Sub-Sec comes into play irrespective of Sub-Sec(1). In other words, when Penalty is imposed under Sub-Sec(1) on any person, this Sub-Sec(2) is not an immunity, but this will get hold of ‘any other person’.
> Se. 271AAD(2) imposes penalty on “any other person [other than the person mentioned under Sub-Sec(1)] who in any manner causes the person mentioned u/s 271AAD(1) to enter a fake invoice or omit to enter the same”.
Definition of ‘false entry’
> The Explanation to Sec.271AAD gives an inclusive definition to the term ‘false entry’. The same is extracted below for reference.
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.]
Immunity u/s.273B – Reasonable cause
Since this section comes into play only on fake invoices raised, which is an intentional act, one cannot take shelter u/s.273B raising a plea of reasonable cause.
Burden of Proof
Since the false entry or omission of entry is a pure question of fact, which can only be proved thorough scrutiny of books of account, the burden rests on the shoulder of the Department to establish the existence of false entry or an omission of entry. It is then, that the Assessee would be afforded an opportunity of being heard as mandated u/s.274(1) of the Act to establish his case.
Nature of Penalty
The word ‘may’ used in this section, clearly depicts that the penalty is discretionary in nature and is left to the authority to use his discretion to levy penalty on a case to case basis.
Conclusion
This Section has been brought in, considering the malpractices that had crept out post GST legislation to evade tax liability and to keep track of those fake invoices/omission of entry and to seal this loophole. This is a Welcome move from the Government.
This is just an attempt to give some inputs/information about the new penal provision in town.
Author Bio
Sir, this penalty is to be levied by Jt CIT and above??
Regards