The Finance Act,2020, has introduced a new section 271AAD in Chapter XXI – Penalties Imposable to discourage taxpayers to manipulate his books of accounts by recording false entries including fake invoices to claim wrong input credit in GST/VAT. The said section has been inserted following the investigation of Maharashtra Sales Tax Department,who had unearthed a scam of fictitious invoices in excess of Rs.10,000/- Crores claiming input credit of VAT under the Sales Tax Act. Even under the GST regime, the GST department unearthed few big scams of bogus invoices amounting to more than Rs.1,000/- crores, involving availing of GST Input Credit. The new section will be effective from 1st April 2020 . The sub-section (1) read as under –
“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—
|1.||a false entry; or|
|2.||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.”
Under this section an assessing officer can levy penalty when an assessee :
i. has passed a ‘false accounting entry’ in his books of accounts maintained; or
ii. has omitted to pass an accounting entry which has resulted into evasion of income tax.
The quantum of penalty shall be the sum equal to the aggregate amount of such false or omitted entry.
2. The scope of this section is very large which gives very wide power to an Assessing Officer, as he can levy penalty under this section apart from any penalty initiated or levied under section 270A or 271AAC. Further, penalty under this section can also be initiated when the assessment proceedings under section 143 or reassessment proceedings under section 147 are going on. So assessing officer can initiate penalty proceedings under this section even when the assessment proceedings are not yet completed.
3. For the purpose of this section, the term ‘false entry’ is defined in the Explanation to the section which includes use or intention to use of :
(a) forged or falsified document such as a false document ; or
(b) Invoice for supply or receipt of goods or services without actual supply or receipt of the same; or
(c) Invoice for supply or receipt of goods or services or both to or from a person who does not exist.
Thus, the meaning of the term ’false entry’ is very wide, i.e., use or even intention to use a ‘bogus invoice’ shall result into ‘false entry’. Thus, assessing officer may initiate penalty proceedings under this section merely on the ground that an assessee has ‘an intention to use’ a bogus invoice. Therefore, a clarification from C.B.D.T. is required on this issue.
4. Besides, this section also gives power to an assessing officer to initiate penalty proceedings under this section on any person other than an assessee who :
i. causes the assesse to make a false accounting entry in his books of account maintained ;or
ii. causes an assessee to omit any entry in his books of accounts which resulted into evasion of income tax.
So, an accountant of an assessee makes a false entry or omits an accounting entry in the books of an assessee which results in evasion of tax, then the assessing officer can initiate penalty under this section on both ,i.e. the assesse and his accountant as well.
5. The provisions of this section shall also be applicable to an assessee who files his return of income under sec 44AD or Section 44ADA on presumptive basis .
6. The term ‘intention to use’ false documents is not defined under this section which otherwise, gives wide power to an assessing officer to initiate penalty proceedings under this section merely on surmise. Therefore, a clarification from C.B.D.T. is required on this issue.
7. Further, a genuine buyer of goods or services will face a great hardship under this section due to conduct of seller and supplier of such goods and services who failed to pay the GST/VAT although the transaction is a genuine one .
8. For initiation of penalty under this section, the time limit is as provided under Sec 275(1)(c ) of the Act, i.e. no order under Sec 271AAD can be passed after the expiry of the financial year in which the proceedings under this section has been initiated, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later.
9. Grant of immunity :
Another important point to be noted is that section 273B is not amended to grant immunity from levy of penalty for failure in compliance of any provisio, if assessee proves that there was a reasonable cause.
10. No Appeal against the order U/sec 271AAD:
Any order of levying Penalty U/sec 271AAD are not appealable as corresponding amendment to Sec 246 of the Income Tax Act,1961 is not made by the Finance Act,2020. Therefore, there is no remedy available in the form of an appeal against such order levying penalty U/sec 271AAD is passed. Therefore, in the interest of justice, the C.B.D.T. ought to amend section 246 (1)(l)(iii).
The intention of the legislature in inserting this new section is to curb fraudulent practices of inflating expenses or taking input tax credit under the GST/VAT Act but will also punish a genuine assesse for the causes of someone. Besides, understanding of an assessing officer of accounting entries is very crucial else, he may initiate penalty under this section as he has been given wider power under this section. Therefore, clarifications from the C.B.D.T. is required on the grey areas discussed above else the new section will be a punishment to a genuine assesse.