Critical Analysis of Section 271AAD- Penalty for Fake Transactions – Part Two

The Authors in part one of the Article dealt with Historical Background and scope of Section 271AAD along with certain interesting issues. In this Article, the Authors would be addressing the other relevant issues in continuation to Part one.

Also Read- Critical Analysis of Section 271AAD – Penalty for Fake Transactions’ – Part one

Application of provisions of Section 273B

Section 273B of the IT Act provides that where the Assessee demonstrates that there was a reasonable cause for any failure, no penalty shall be imposed on the Assessee. The scope of Section 273B was enlarged with effect from 01.04.2017 on the recommendation of the Easwar Committee Report, to include penalties under Section 271 to 272BBB. This means that for penalties covered by those Sections, the Assessee will have a legal right to demonstrate that there was a reasonable cause for any failure. The rationale behind widening the scope of the Section, as per the Committee Report, was to ensure that penalties are not levied upon tax payers despite their claim being bonafide or for the reason that their view point on a question of law or interpretation of the provisions of the statute was not accepted by the Assessing Officer. The Committee also observed that the said amendment to Section 273B will cut wasteful litigation and also infuse a sense of responsibility and accountability both upon the tax payer and the revenue.

Going by the aforementioned intent, one would have expected that penalties under Section 271AAD would also be included within the ambit of Section 273B. Surprisingly, the legislature has not done that. Parallel to the insertion of Section 271AAD, no consequent amendment to Section 273B has been made. Therefore, it may be contended Section 271AAD bestows unfettered powers on the Assessing Officer to levy a penalty. This would certainly be quite harsh on a tax payer if the false entry might have been due to an inadvertent mistake.

If such a penalty is imposed in bonafide scenarios, it is possible to argue that Section 271AAD grants discretion to the Assessing Officer in levying penalty, which discretion must be judiciously exercised. Section 271AAD, which allows the Assessing Officer to impose a penalty begins with the word ‘may’ direct and not “shall”. The Hon’ble High Court of Delhi, in the case of P C Puri vs. CIT[1] observed that the use of the word ‘may’ imports a discretion and ‘shall’ an obligation. Therefore, one may argue that the Assessing Officer under the said provision has a discretion to impose or not to impose the penalty. Hence, this discretion should be exercised only after proper application of mind by the Assessing Officer and must not apply to genuine cases. To test this proposition, it may be of relevance to advert to certain landmark decisions rendered by Apex Court in the context of Section 271(1)(c) of the IT Act.

In the case of Dilip N. Shroff v. JCIT[2], the Hon’ble Supreme Court was dealing with Section 271(1)(c) and the application and import of the phrases “concealment of income” and “furnishing inaccurate particulars”. The Hon’ble Court went on to hold that in order to attract the penalty under Section 271(1)(c), mens rea was necessary, since the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. The Hon’ble Supreme Court finally held that Section 271(1)(c) provides a discretionary jurisdiction on the Assessing Authority in determining the penalty and therefore, element of mens rea was essential.

In a subsequent ruling, the Hon’ble Supreme Court in the case of UOI vs Dharmendra Textile Processors[3] after extensively analysing Section 271(1)(c), came to the conclusion that since Section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea[4]. The Hon’ble Supreme Court further went on to hold that the objective behind enactment of section 271(1)(c) read with its Explanations indicated that the said section was for providing remedy for loss of the revenue and such a penalty was a civil liability, and therefore, willful concealment is not an essential ingredient for attracting civil liability.

Since both the provisions, Section 271(1)(c) and Section 271AAD in stating that (i.e.) “the Assessing Officer may direct” and “ the Assessee shall pay”, in light of the above decisions, one may also contend that irrespective of whether it was willful or not on the part of the Assessee, the Assessing Officer must levy a penalty if he finds a false entry or omission of any entry in the books of accounts.  In other words, the discretion of the Assessing Officer ends at the point where he finds a false entry or omission of any entry.

To avoid a scenario where penalty stands levied even on genuine assessees, it would, however, serve the interests of justice if the Legislature included the provisions of Section 271AAD also within the ambit of Section 273B to avoid frivolous litigations clogging the time of Appellate authorities and Courts.

Can Section 271AAD be retrospectively or retroactively be applied?

In this regard, reference is first sought from the landmark decision of the Hon’ble Supreme Court in the decision of CIT v. Vatika Township (P.) Ltd.[5]; while considering the aspect of retrospective application of a provision, the Hon’ble Court held that the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication.

Going by the specific provisions and case laws discussed above, it is the author’s view that the provision is prospective and cannot be applied retrospectively or retroactively for offences which have occurred in the past.

Can penalty be simultaneously levied under any other Section?

Section 271AAD commences with the words “without prejudice to any other provision of this Act”; from the said words it can be inferred that penalty under this provision can be invoked simultaneously along with any other penal provision where the contravention may fit in.

For example, Section 270A of the Income Tax Act provides for penalty for under-reporting and misreporting of income. Subsection (8) to Section 270A provides that where under-reported income is in consequence of any misreporting by any person, the penalty shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

Sub-section (9) to Section 270A provides for scenarios that would lead to misreporting of income. Misreporting, as per this Section includes recording of any false entry in the books of accounts and failure to record any receipt in books of accounts, having a bearing on total income.

The relevant question here is can an assessee be subject to penalty under both the Sections? Sub-section (11) to Section 270A provides that no addition or disallowance of an amount shall form basis for imposition of penalty if such addition or disallowance has formed basis for imposition of penalty in the case of the person for the same or any other assessment year. This sub-section only seems to come to the rescue of an assessee in penalty being imposed twice under this Section for the same amount. As an example, an assessee could be denied a portion of an expenditure allowance during the course of original assessment proceedings on the ground that no tax was deducted, subsequently during the course or re-assessment, the entire expenditure could be denied on a different ground. The Section appears to only protect an assessee from penalty being imposed on the same amount, twice. There appears no immunity being granted where penalty is imposed under some other Section.

Therefore, for any false entry or an omission of any entry made in the books of accounts, penalty may be attracted simultaneously under multiple sections of the IT Act (besides penalty under Section 122 of the GST Act!). However, to emphasize again, the penalty under Section 270A will get attracted only in cases where the false entry or an omission of any entry leads to under-reporting of income. Whereas, penalty under Section 271AAD can be attracted even if the said false entry or omission does not result in any under-reporting of income.

Conclusion

The entire logic of bringing such harsh provisions can be summarized by a famous saying that sanction is a conditional evil to be incurred by disobedience of law. It is indeed a welcome step by the legislature towards curbing the menace of fake invoices by introducing the new penalty provisions. Considering that there are similar penalty proceedings under both GST law as also the IT Act, proper reconciliation of the books of accounts along with the GST returns would become essential in order to avoid any disputes in the future. At the same time, one should also not lose sight of the fact that the provision in its present form is fraught with dangers of misuse against genuine taxpayers committing bonafide mistakes. As they say, “with great power comes great responsibility”. The Board must pass suitable circulars/instructions clarifying the scope of this new provision and the manner and circumstances in which the tax officer should be exercising such extraordinary powers. This would help in smooth administration of the provisions and in avoiding un-necessary litigation.

Notes:-

[1] (1985) 151 ITR 584

[2] (2002) 161 Taxman 218 (SC)

[3] (2008) 174 Taxman 571 (SC)

[4] The Hon’ble SC in the decision of CIT v. Reliance Petroproducts (2010) 189 Taxman 322 (SC), followed the Dharmendra Textile case’s view of willful concealment is not an essential ingredient for attracting civil liability.

[5] (2014) 49 taxmann.com 249 (SC)

[6] 2003 (158) E.L.T 545 (S.C.)

[7] 2016 (338) E.L.T 225 (Del.). The said case pertained to the applicability of Section 5 of the Prevention of Money Laundering Act, 2002.