Professional Friends Beware and Be careful of Penal Provision u/s. 271AAD of The Income Tax Act

Upendra Bhatt, Advocate

  1. PreambleSection 271AAD was included in Chapter XXI which starts with section 270 and ends with section 275.

    Section 271AAD was inserted by the Finance Act 2020 wef 01/04/2020. As explained in the memorandum by the Honorable Finance Minister that several cases were found of fraudulent ITC claimed which were caught by the GST authorities. The suppliers obtained fake invoices from the fake dealers who obtained GST number but who do not actually carry on business or profession. The invoices were issued without supply of goods or services. Such racketeers actually who do not carry any business or profession. They issue invoices without supply of goods or services. In the invoices GST was charged which was neither paid nor intended to be paid. Nowadays it is noticed that GST number or PAN obtained in the name of servant or a person having no source of income. If assessment was made on such person there was no chance of recovery of tax.

    To deal with such activity, A penal provision is introduced to penalise a person who passes false entries. Any other person who causes in any manner to make a false entry or omits such entry shall also be liable to penalty. Penalty in both the cases will be equal to the amount of invoice.

    In some cases, it is noticed that either accountants or even tax practitioners entered into such unhealthy practice. It is advised to the dealers, accountants, professional friends or mediators not to enter in to such activity which will harm them

    as almost all the information is received from different agencies by the Government.

  2. SECTION 271AAD PENALTY FOR FALSE ENTRY, ETC., IN BOOKS OF ACCOUNT
    1. Without prejudice to any other provisions ofthis 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.
    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.2.1 Explanation For the purposes of this section, “false entry” includes use or intention to use—
      1. forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence ; or
      2. 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
      3. invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.
  3. Extract of Notes on Clauses annexed to Finance Act, 2020 – Clause 98Clause 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.

  4. Extract of Memorandum to Finance Act, 2020 – Section 271AADPenalty 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.
  5. Meaning of certain words used in this section
    1. Prejudice : causing harm
    2. Books of accounts Section 2(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.
    3. False : Artificial not genuine
    4. Falsified : To present falsely or to misrepresent
    5. Omission :To fail or neglect to do something
    6. Entry :Item written in diary list and account book
    7. Forged : Copy of something in order to deceive people
    8. Invoice :List of goods sold with the price charged especially send as a bill
    9. Document :To prove or support something with document
    10. Cause to omit : To inspire for not disclosing income
    11. Turnover :Amount of business done by a company within a certain period of time
  6. Issues arises out of this section are replied in question answer form
      1. From which date / assessment year this section will be applicable?
          1. This section will be applicable from 01/04/20 means from FY 2020- 21.Thus, it will be applied for AY 2021-22 and onwards. In the notes and clauses in the Finance Bill 2020 wherever it was necessary, the assessment year is mentioned, while in this section the assessment year is not mentioned but in clause 98 it is mentioned that this section will be effective from 01/04/20. Thus, if the offence is committed after 01/04/20 this section will be applicable and it cannot be applicable for AY 2020-21.
      2. This section starts with the wording, “without prejudice to any other provisions of this act….” What is the meaning of this?
          1. The meaning of this word is, it overrides the other provisions of this act.So, this is an independent section. Thus, if penalty proceedings under any other section is initiated or the income is taxed either at normal rate or special rate, still the provision of this section will be applicable because the intention of the legislature is clear to penalise persons who are involved in receiving and issuing fake or bogus invoices.Thus, even if the amount of bogus entry is considered for addition in the returned income, still this penalty will be leviable. Even if there is penalty leviable under any other section, still penalty under this section will be leviable.

            Assessee cannot take plea that as he is liable to pay tax or penalty under any other provision, no penalty is leviable under this section because the intention of the legislature is to curb use of bogus or fake invoices.

      3. What is the meaning of, “during the proceedings under this act”?
          1. During the proceedings under this act means it may be assessment proceedings, reassessment proceedings, appellate proceedings etc.When there is assessment or reassessment proceedings, penalty proceedings will be initiated by the assessing officer because it will be satisfaction of the assessing officer. When in the appellate proceedings it is noticed by CIT(A) regarding breach of this section, notice of penalty should be issued by the CIT(A) and penalty will be also levied by CIT(A).
            1. It was held in the case of CIT v. Shadiram Balmukund reported in 84 ITR 183 Allahabad that the income tax officer has no jurisdiction to impose penalty when addition is made in the assessed income by appellate authority or CIT. Thus, penalty order of the assessing officer was quashed.
            2. Similar issue arose in the case of CIT v. Manjunath Cotton and Ginning Factory reported in 359 ITR 565 Karnataka and 263 CTR 153 Karnataka.In this case addition on account of undisclosed investment was deleted by CIT(A) but addition was made on the ground of under valuation of stock. Thus, penalty proceedings should be initiated by CIT(A). As the penalty order was passed by assessing officer, the same was cancelled on the ground that the notice was not in accordance with law as the subject matter of penal proceedings was the order of appellate authority and the order was passed by the assessing officer, order of penalty was cancelled.

              A question arises if the proceedings in the case of the assessee is not pending, still whether the AO can initiate penal proceedings under this Act?

              According to my view the AO can initiate penal proceedings under this Act because in the case of an individual assessee who is involved in issuing fake invoices who does not have taxable income and who does not file return, still penalty under this section can be levied because this section is a separate section and introduced in the statute book with the intention to punish entry providers which is explained in detail in the memorandum of this section.

      4. What is the meaning of books of accounts maintained?
          1. Definition of books of accounts is given in section 2(12A). It 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 sheets or scrapes of paper cannot be termed as “book” as it can be easily detached and replaced (reference from the judgement Sunilkumar Sharma v. DCIT 448 ITR 485 Karnataka).
      5. What is meaning of any person?
          1. Word person is defined in section 2(31) which includes
            1. an Individual
            2. a Hindu Undivided Family
            3. a Company
            4. a Firm
            5. an Association of Person
            6. a Local Authority etc.
      6. What is the meaning of false entry?
          1. This section is included in the statute book with regard to false entry. Explanation regarding false entry is also given in this section. Kindly see sr.no.2 of this article.
      7. What is an omission of entry?
          1. As per this section, omission of entry has direct nexus with computation of total income with the intention to evade tax liability.
      8. Who can levy penalty?
          1. As per this section, either the assessing officer or CIT(A) may direct to pay penalty.
      9. What is the quantum of penalty?
          1. Amount of penalty shall be a sum equal to the aggregate amount of such false or omitted entry.
      10. Any other person is also responsible to pay penalty as per the provision of this section?
          1. Yes, as per section 271AAD(2) any other person who causes the person referred in section(1) in any manner to make a false entry or omits any entry shall also be liable to penalty a sum equal to the aggregate amount for false or omitted entry.This section was introduced even for the person other than the assessee to levy penalty for issuing fake invoice. Thus accountant, tax practitioner etc. being an abettor is also liable to pay penalty under this section.

            A question will arise regarding jurisdiction to levy penalty. For example, if the entry provider is situated at Calcutta and the assessee is situated in Bombay, assessing officer of Calcutta will issue notice for penalty under this section if he is satisfied on the basis of the information received from assessing officer of Bombay that a person from Calcutta was involved in providing fake entry and will levy penalty if satisfied.

      11. When the penalty is deleted in appeal, what will happen as far penalty in the case of other person is concern?
          1. According to my view if penalty is cancelled in the case of the assessee, penalty in the case of other person cannot survive because the basis on which the penalty notice was issued on assessee is deleted consequentially the penalty in the case of another person shall be deleted.
      12. Like old section 271(1)(c) penalty was leviable either for concealment of income or furnishing inaccurate particulars of income, similarly as per section 270A penalty is leviable for under reporting of income or misreporting of income, whether similar provision is there in section 271AAD?
          1. Yes, in the notice under this section, charge should be specific. Whether the notice was issued for false entry or on account of an omission of any entry. If the charge is not specific, penalty cannot survive as held by Honorable Supreme Court and various High Courts dealing with penalty leviable u/s.271(1)(c).
      13. During any proceeding under this act, if it is noticed by AO or CIT(A) that assessee is liable for false entry relating to previous year whether he can issue notice for the year for which the proceedings are before him?
          1. No, for the year for which the proceedings are going on he cannot issue notice u/s.271AAD. For levy of penalty for previous year, proceedings for reassessment may be initiated within the time prescribed as per amended section 148A applicable wef 01/04/2022.
      14. As per this section, “during any proceedings under this act from the books of account it is noticed that there is false entry or omission of any entry”, what will happen when the books of accounts are not maintained by the assessee and assessee has shown the income u/s.44AD etc.?
          1. This is a penal provision and it is to be strictly interpreted. When the books of account are not maintained, no penalty under this section is leviable. If the assessee is liable to maintain books of account as per section 44AA of the act, separate proceedings may be initiated for not maintaining books of account but penalty under this section cannot be levied looking to the wording of this section.While filing return on presumptive basis certain details like cash on hand, sundry debtors, sundry creditors, stock in trade is required to be disclosed while uploading the return but it cannot be presumed that the books of account are maintained because the details are maintained for the purpose of collecting the amount from the debtors or payment to creditors. The details are maintained because in the subsequent year if the assessee is liable to compulsory audit, the balance sheet can be drawn.
      15. When false invoices issued consisting of GST and other charges including the cost of material, on which amount penalty shall be levied? On the amount of material supplied or on the amount of entire invoices?
          1. Word invoice means, “List of goods sold with the price charged especially send as a bill”. Thus, the amount of other charges cannot be segregated. Thus penalty will be leviable on the amount of invoice.In the case of CHOWRINGHEE SALES BUREAU P. LTD. v. COMMISSIONER OF INCOME-TAX, WEST BENGAL-I reported in 110 ITR 385 Calcutta, the issue was in relation to trading receipt. When the sales tax realised was credited in separate account, it was held in this case that sales tax collected was part of trading receipts. Similarly amount of invoice will be including of GST etc.
      16. An entry operator who issued fake invoices but does not file return as the income was below the taxable limit and who does not maintain books of accounts, whether the penalty will be leviable on such entry operator?
          1. Yes, Penalty will be leviable on such person because in this section the word written is any other person. Thus, it has nothing to do with the income of any other person.
      17. When the assessee received fake invoices and some of the invoices are shown as goods return, whether the penalty will be levied on entire amount of invoices or only on the invoices other than goods returned?
          1. As per intention of the legislature to bring this section fake invoices were issued including GST but though the GST was collected but not paid for such transactions. When the goods are returned, no question of penalty arises. As per this section the omission of entry should relate to computation of total income to evade tax liability. By showing goods returned, there will not be any effect on computation of total income and it cannot be termed as omission of an entry.
      18. What is the distinction between false entry and omission of entry?
          1. Meaning of false entry is, “artificial not genuine invoice”. Thus, in case of false invoice penalty shall be leviable because it has nothing to do with the income of the assessee.Omission of entry means, “to fail or neglect to do something” and as per this section and the intention of omission should be to evade tax liability. Thus, when it is proved that the intention was not to evade any tax but it was a purely omission, penalty is not leviable.
      19. When invoice for bogus salary or commission is entered in the books by the assessee, whether penalty will be leviable?
          1. Yes, penalty will be leviable because as per explanation of false entry in (b), there is mention of receipt of goods or services without supply of goods or services. Thus, when the services are not received and simply false entry is passed in the books of accounts. There may be other view in favour of the assessee.
      20. There is provision in this section to levy penalty when the invoice is issued in the name of person who does not exist. How the assessee can know whether the bill issued by any person is alive or not?
          1. To levy penalty under this provision, the assessing officer has to prove that the invoice issued was in the name of non- existing person. For the assessee it will become difficult to ascertain, whether the person was alive or not when the bill was issued because he is a buyer. In genuine cases also if the bill is issued in the name of the person who is not live, the assessee may be requires to face legal proceedings.
      21. In case of entry provider for fake invoice, how he will be assessed for income tax purpose and whether penalty will be levied in relation to income assessed or invoices issued?
          1. As per income tax act income is to be assessed on the basis of concept of real income. As per section 5 of the Income Tax Act which deals with scope of total income, income tax is payable on the real income either it is accrued, receive or receivable. Thus, the racketeers who issued fake invoices will be liable to pay tax on the amount of real income earned but as per this section penalty on such person will be to the tune of fake invoices issued.The intention to bring this section in the statute book was with the intention that fake invoices were issued in the names of persons who were paid token amount but fake invoices of crores of rupees were generated and issued in the name of such poor people. To warn such people, this provision is introduced. Still it will be a difficult task for the Government to catch hold of the real culprits.
      22. How the burden will be discharged by the AO / CIT(A) to prove that the invoice is fake?
          1. The burden is always on the department to prove that the invoice is fake or bogus. For this purpose, cogent evidences will be required to be gathered by the I T Authorities. If the notice at the address shown or summons is issued which is not served or there is report of I T Inspector that the party is not available will not serve the purpose unless something more is gathered by the assessing officer.It is very well known that any confession during survey has no evidential value because that statement is not recorded on oath. Thus, when the penalty is to be levied, cogent and acceptable evidences are required to be gathered before penalty is levied. This will be applicable even in case of levy of penalty on any other person or deceased person.
      23. Penalty is not leviable as per section 273B? If the assessee proves that there was a reasonable cause for the said default. Whether this benefit will be available in case of penalty leviable under this section?
      1. No, if the sections mentioned in this section 273B are looked into, after section 271AA, there is mention of section 271B. Thus, section 271AAD is intentionally not included in this section to deal harshly with such entities.
  7. Conclusion

This is the recent section and there are many grey areas which were not considered while introducing this section. Certain clarifications are also required to avoid future litigation. The view expressed by me in this paper is my personal view and there may be other possible view.

Hope that this paper may be useful to my professional friends.

I am thankful to Shri Pankaj Ghia President of All India Federation of Tax Practitioners for giving me this opportunity to write a paper on the burning issue which may invite litigation.

(Source : Article published in Souvenir released at National Convention 2022 held at Jaipur on 17th & 18th December, 2022)

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