Clause 98 of the Finance Bill, 2020 proposes to introduce section 271AAD in the Income-tax Act, 1961 (“the Act”). The Explanatory Memorandum explains the rationale of introducing the provision as under –
“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 proposed 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.”
The explanation for proposed insertion of this section is given in the Explanatory Memorandum under the caption “Penalty for fake invoice”. The marginal note to the section is captioned “Penalty for false entry, etc. in books of account”. Therefore, a cursory look at the caption in the memorandum and the title as stated in the marginal note suggests that the scope of the provision is much wider than what has been stated in the Explanatory Memorandum.
Section 271AAD is a proposed to be inserted in Chapter XXI of the Act which is captioned “Penalties Imposable”. Salient features of the provision, as is proposed to be inserted, are as under –
i) the provisions of this section are without prejudice to any other provisions of the Act;
ii) the penalty under this section can be imposed by the Assessing Officer;
iii) there has to be a finding during any proceeding under the Act;
iv) the finding has to be to the effect that in the books of account maintained by any person there is –
a. a false entry; or
b. an omission of any entry which is relevant for computation of total income of such person, to evade tax liability;
v) the term “false entry” is defined in an Explanation to this section;
vi) the levy of penalty appears to be discretionary;
vii) the quantum of penalty is a sum equal to the aggregate amount of such false or omitted entry;
viii) any other person who causes the person to make a false entry or omits or causes to omit any entry can also be directed to pay a penalty of a sum equal to the aggregate amount of such false or omitted entry;
ix) since this is a provision in Chapter XXI, provisions of sections 274 and 275 are applicable to penalty under this section.
Each of the above are explained in the subsequent paragraphs.
Who can impose the penalty: The Assessing Officer may direct that a person shall pay a penalty under this section. Unlike section 270A, the Commissioner (Appeals), Principal Commissioner or Commissioner does not have a power to direct payment of penalty under this section.
In a case where jurisdiction has been conferred on a Joint Commissioner or an Additional Commissioner to do an assessment then in such a case, such a Joint Commissioner or Additional Commissioner will be an ₹Assessing Officer’ and consequently will be empowered to levy penalty under section 271AAD.
Since the penalty under this section is based on a finding during ₹any proceeding under this Act’, a question arises as to how can an Assessing Officer direct penalty in the course of appellate proceedings or revision proceedings. Does one conclude that it can be based on a finding in the proceedings before the Assessing Officer? In order to avoid litigation on this, it is advisable that a suitable amendment be made to the language of the provision before its enactment or in the alternative, CBDT may clarify that the provisions of this section will apply only in the course of proceedings before the Assessing Officer and not any other tax authority.
What is the penalty for? The penalty under this section is for—
(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.
in the books of account maintained by a person.
For the purpose of this section, the term “false entry” is defined in an Explanation to section 271AAD. The Explanation defines the term “false entry” inclusively as follows –
“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 of 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.
Quantum of penalty — A sum equal to the aggregate amount of such false or omitted entry.
Since when is the provision effective — Section 1(2) of the Finance Bill, 2020 provides that save as otherwise provided in this Act sections 2 to 104 shall come into force on 1st April, 2020. Section 98 of the Finance Act, 2020 inserts section 271AAD. There is nothing contrary stated in section 98 of the Finance Act, 2020. Therefore, the provisions of section 271AAD are inserted with effect from 1.4.2020. The Explanatory Memorandum to the Finance Bill, 2020 states that this provision will take effect from 1st April, 2020. A question arises as to whether the provision is effective from Assessment Year 2020-21 and therefore it will also apply to even acts done before the enactment of the provision. Since this is a penal provision which has not been expressly made retrospective a better view appears to be that this section will apply to entries made or omission of an entry after the date of enactment of the provision. It is a principle of interpretation of a penal provision that the penalty on the date of committing the offence will apply. In the cases covered by section 271AAD the offence is recording of a false entry or omitting an entry which is relevant for computation of total income with a view to evade tax liability. In the event the act or omission is before 1.4.2020, it is possible to argue that the provisions of section 271AAD should not be made applicable to such acts / omission.
Without prejudice to any other provisions of this Act — The provisions of this section are without prejudice to any other provisions of the Act meaning thereby that the penalty under this section can be in addition to any other penalty, if any, to be levied under any other provision of the Act. In other words, penalty under this section cannot be avoided on the ground that a penalty under some other provision of the Act has already been levied on the person.
Delhi High Court in Apogee International Ltd. vs. UOI [(1996) 220 ITR 248 (Delhi)] has, for the purpose of section 143(2) of the Act, explained the meaning of “without prejudice to” as follows –
“From a bare reading of clause (i) to sub-section (1)(a) of section 143, it is evident that giving of intimation in terms of provisions is ₹without prejudice’ to the provisions of sub-section (2), which means that an intimation sent to the assessee specifying the sum payable by him in terms of that sub-section does not preclude the operation of the provisions of sub-section (2). By force of the expression ‘without prejudice’, the jurisdiction of the assessing authority to proceed under sub-section (2) of section 143 is preserved despite intimation under sub-section (1).”
Madhya Pradesh High Court, in CIT vs. Regional Soyabean Products Co-op. Union Ltd., [(1999) 239 ITR 217 (MP), cited in CIT vs. H.E.G. Ltd. [(2002) 255 ITR 251 (MP)] has, for the purpose of section 143(1) of the Act, held as under –
“But, the expression ₹without prejudice to the provisions of sub-section (2)’ appearing in the section would mean that once a notice has been issued under sub-section (2), then in that case the Assessing Officer shall not resort to section 143(1)(a)(i). The expression ₹without prejudice to the provisions of sub-section (2)’ means that it saves the action already initiated under section 143(2) of the Act. If the Legislature really intended to give full power to the Assessing Officer under section 143(1)(a)(i), then they would not have saved the action under section 143(2). In fact, this expression has carved out an exception that the Assessing Officer can send intimation to the assessee if the Assessing Officer has not exercised the power under section 143(2) of the Act.”
In the circumstances, it appears that the penalty under this section will be irrespective of the fact that a penalty under any other provision of the Act has been initiated or levied. Action taken under this section shall not be adversely affected by the action taken under any other provision of the Act.
‘during any proceeding under this Act’ – The phrase ₹during any proceeding under this Act’ is very wide and can mean proceedings for assessment, survey, search, appeal, revision, rectification, passing an order to give effect to an appellate order, etc. They would even cover proceedings under section 133(6). However, since the power to direct payment of penalty is only with the Assessing Officer and not the other authorities like Commissioner (Appeals) or the Principal Commissioner or Commissioner it could be debated as to whether this phrase should be read to mean only those proceedings which are before the Assessing Officer. Taking a different view would mean that the Assessing Officer can direct payment of penalty on the basis of finding of a different authority.
‘books of account maintained by any person’ – The penalty is not on an assessee but on a person. While every assessee is a person, every person may not necessarily be an assessee. The person should be maintaining books of account. The term ₹books or books of account’ is defined in section 2(12A) of the Act.
A question arises as to whether penalty can be levied for a false entry or for omission of an entry from the books of accounts in a case where a person is not mandatorily required to maintain books of accounts say e.g. a case where a person chooses to be governed by the provisions of presumptive taxation or where the requirement of maintaining books of account is not applicable to the person. Such a person may choose to maintain books of account to comply with the requirements of some other law. In such a case, will such a person be liable for penalty under this section, in case there is a false entry in such books of account or an omission of an entry which is relevant for computation of total income of such person to evade tax liability.
₹may direct’ – The language of the section is the Assessing Officer ‘may direct’. This is similar to the language of section 271 and several other penalty provisions. In the context of provisions of levy of penalty under section 271(1)(c) of the Act, the phrase ₹may direct’ has been explained to confer a discretion on the Assessing Officer. It appears that here also the phrase ₹may direct’ will mean that a discretion has been conferred on the Assessing Officer. Therefore, in a case where an Assessing Officer has, exercising the discretion, not levied penalty no fault may be found with such an action of the Assessing Officer.
Is scope of the section confined to only cases of ‘fake invoice’ – The Explanatory Memorandum has the rationale for introduction of this section under the caption ₹Fake Invoice’. The rationale, as given, is that certain racketeers are issuing invoices without supplying goods or services so as to enable a person who receives such an invoice to claim Input Tax Credit on the basis of the invoice so issued. The GST on the supply mentioned in such invoice is not paid to the government. However, the person in whose books purchase entry is recorded on the basis of such an invoice fraudulently claims ITC. It is with a view to punish such persons harshly that the provision has been introduced.
However, sub-section (1) provides that the penalty under this section may be levied in one of the two situations mentioned in sub-section viz. (i) there is a false entry in the books of account maintained by any person; or (ii) in the books of account maintained by a person there is an omission of any entry which is relevant for computation of total income of such person, to evade tax liability. Entries other than those of recording fake invoice could also qualify as ₹false entry’. Moreover, the term ₹false entry’ has been inclusively defined. Therefore, the scope of the provision is much wider than what has been explained in the Explanatory Memorandum.
A question arises as to whether the courts will hold that the scope of the provision be restricted to the intention mentioned in the Explanatory Memorandum. In view of the clear language of the provision it appears that it may be difficult to hold that the scope of the provision be restricted only to those cases which are covered by the Explanatory Memorandum.
Meaning of ‘false entry’ – Having a false entry in the books of accounts maintained by a person and such a false entry being found in the course of any proceeding under the Act empowers the Assessing Officer to direct levy of penalty under section 271AAD.
As has been stated, the term ₹false entry’ has been inclusively defined in the Explanation to the section. The three cases mentioned in clauses (a) to (c) of the Explanation are undoubtedly cases of ‘false entry’ but it may be argued, on behalf of the revenue, that even a case other than the one covered by the three clauses of the Explanation is also covered by the term ‘false entry’ since the definition is inclusive and not exhaustive. It appears that though the term ₹includes’ has been used, the definition has to be taken as an exhaustive definition and not an inclusive definition. A definition which uses the word ‘includes’ can also be regarded as an exhaustive definition if the words which follow the word ‘includes’ are those which would be covered by the natural meaning of the term sought to be defined. As has been stated above, the three circumstances mentioned in Explanation are undoubtedly cases of ₹false entry’. Since what has been stated in the inclusive part is what even otherwise would have been covered by the natural meaning of the term ₹false entry’, relying on the ratio of the following decisions it is possible to argue that the definition is an exhaustive definition.
i) Commissioner of Customs vs. Caryaire Equipment India Private Limited (2012) 4 SCC 645
ii) Urmila Devi vs. U P Power Corporation and Ors. 2003 (53) ALR 643
iii) Jeramdas Vishendas vs. Emperor, AIR 1934 Sindh 96
In other words it appears to be possible to contend that only in the three cases mentioned in the Explanation be regarded as cases of ‘false entry’ and not any other case.
While clause (ii) of sub-section (1) dealing with omission to make an entry, makes a reference to an entry which is relevant for computation of total income and also that the omission is to evade tax liability, these two pre-requisites are missing in clause (i). Therefore, even if a false entry is not relevant for computation of total income and/or it is inadvertently recorded in the books of account, still the requirement of clause (i) of sub-section (1) will be regarded has having been satisfied and the person will be covered by the provisions of this section.
Meaning of ‘omission’ – While the term ₹false entry’ is defined, ₹omission’ is not defined. Webster’s Dictionary explains the meaning of ₹omission’ as “1. The act of omitting; 2. The state of being omitted. 3. Something left out, not done, or neglected; an important omission in a report.”
The Advanced Law Lexicon, 3rd Edition, 2005, explains the meaning of ‘Omission’ inter alia as –
“Omission” with reference to the performance of a duty involves the idea of conscious or wilful omission. Lond & S. W. Ry. vs. Flower. 45 LJCP 54. See also 11CPLR (Cr.) 16.
For the purposes of s. 153(1) of the Employment Protection (Consolidation) Act 1978 (c. 44) “omission” has to be given its ordinary and natural meaning, so that the non-payment of money or the denial of a benefit can be an “omission”, notwithstanding that there was no obligation on the part of the employer to make
the payment or grant the benefit [National Coal Board vs. Ridgway [(1987) 3 All E.R. 582]
The expression ‘omission’ does not connote any obligation. ‘Omission’ is a colourless word which merely refers to the not doing of something and if the assessee in fact does not make a return, it is an omission on his part, whether the law casts any obligation upon him to make a return or not. [Pannalal nandlal Bhandari vs. CIT, AIR 1956 Bom 557, 558. [Income-tax Act (11 of 1922), S. 34(1)].
A person cannot be said to have omitted or failed to disclose something when, of such thing, he had no knowledge. P. R. Mukherjee v. CIT, AIR 1956 Cal. 197, 200.
An “omission” to perform a duty involves the idea that the person to act is aware that performance is required or needful (London & South Wester Railway Flower, 1 CPD 77). See DONE. Cp. Somerset v. Wade, (1894) 1 QB 574, cited SUFFER. See also per KENNEDY J., Nathan v. Rous, (1905) 1 KB 527, cited BY WHOSE.”
In the circumstances, it appears that the “omission” referred to in clause (ii) of sub-section (1) is not recording an entry which a person was obliged to record and therefore it there is no duty on a person to record a particular entry, omission thereof may not qualify for levy of penalty. Therefore, in a case where an assessee is not required to maintain books of accounts a person cannot be said to have omitted all the entries.
Clause (ii) of sub-section (1) refers to omission of an entry which is relevant for computation of total income of such person and is to evade tax liability. Therefore, omission of an entry which is not to evade tax liability will not attract the rigors of section 271AAD.
Penalty under other provisions – An entry / omission which qualifies for levy of penalty under section 271AAD may also attract penalty under other provisions of the Act. Therefore, a question arises as to whether a person can be penalised twice for the same offence. Relying on Article 20 of the Constitution an argument of ₹double jeopardy’ may be sought to be taken up. While double jeopardy is an argument which will work in criminal proceedings / criminal offences, it has been stated in H. M N. Seervai : Constitutional Law of India (3rd Edition), Vol. 1, p. 759, quoted in Shiv Dutt Rai Fateh Chand and Others vs. Union of India (1983) 3 SCC 529 that “… Article 20 relates to the constitutional protection given to persons who are charged with a crime before a criminal court. In the following cases, it has been held that ₹double jeopardy’ does not apply to tax cases –
i) ITO vs. Sultan Enterprises [(2002) 256 ITR 185 (Bombay)];
ii) CIT vs. Ram Chandra Singh [(1976) 104 ITR 77 (Patna)].
Amount of penalty – The amount of penalty is aggregate amount of false entry or omitted entry. Since the penalty under this section is in addition to penalty under other provisions of the Act, the penalty is draconian and in several cases may even lead to a financial disaster as the amount of penalty is not linked to the profit which one has made but to the amount of the entry / omission.
Penalty on other person as well – Sub-section (2) of the Act is without prejudice to the provisions of sub-section (1). Under sub-section (2) any person who causes the person referred to in sub-section (1) [hereafter referred to as “other person”] to make a false entry or omits or causes to omit any entry then such other person shall also be liable to pay penalty equal to aggregate amount of such false or omitted entry.
While implementing the provisions of sub-section (2) an issue may arise as to whether the Assessing Officer of a person in whose books a false entry is recorded or an omission of an entry is found comes to a conclusion that ₹other person’ has caused the person to make a false entry and such other person also needs to be penalised under sub-section (2), then how will such an Assessing Officer levy penalty on the other person because the Assessing Officer may not have jurisdiction over the other person and/or there may be no proceedings which may be going on in the case of the other person unless of course the conclusion is arrived at in the course of a survey on the other person or in proceedings under section 133(6), etc. However, even in such cases the issue of jurisdiction could still be there.
Appeal against order levying penalty: An appeal against the order imposing penalty under section 271AAD shall lie to CIT(A) by virtue of the provisions of Section 246A(1)(q) of the Act.
No amendment to section 273B: A penalty which is leviable under the sections mentioned in section 273B of the Act shall not be levied if a person has reasonable cause. Consequent to insertion of section 271AAD no amendment is proposed to section 273B. Therefore, it appears that ₹reasonable cause’ as a plea cannot be taken as a statutory right.
Opportunity of being heard: Section 274 and 275 shall apply to a penalty to be levied under section 271AAD and therefore, before penalty is levied an opportunity of being heard shall be provided to the person.
Conclusion: The provision as is proposed is draconian to say the least. The provision needs to be amended drastically to provide clarity in implementation of the provision. Also, it needs to be stated that the same transaction will not attract provision under more than one provisions of the Act. Therefore, if there is undisclosed income as a result of false entry then penalty may be levied only under section 271AAB and not under this section. One can only hope that if the suitable amendments are not made, CBDT issues a Circular diluting the rigors of the provision.