The Finance Bill, 2020 proposes to amend the Income Tax Act, 1961 to provide for a new section 271AAD for imposing a penalty for fake invoicing, a penalty for false entries and a penalty for omitted entries in the books of accounts. A stiff penalty of a sum equal to the aggregate amount of such false and omitted entries is proposed to be imposed. The penalty will not only be imposed on the assessee but also on the other person who entices the assessee to commit such an act.
The penalty proposed under section 271AAD of the Income Tax Act, 1961 might be the first of its kind in which both the vendor and the client or the supplier and the buyer will be equally penalized for committing the same fraud of bogus sale and purchase transactions.
The introduction of such a stiff penalty was felt necessary in the backdrop of rising instances of fraudulent availment of Input Credit under the Goods & Services Tax Laws (GST) by involving in transactions of issuing fake invoices and recording bogus sales and purchases in the books of accounts.
Since the introduction of the GST Laws on 1st July 2017 many instances of fake GST invoices scam and fake GST input credit have been surfaced by the GST authorities.
In these cases, it was found that the registered suppliers have taken registrations using fake IDs using documents of unsuspecting individuals and generating good-less invoices and e-way bills to facilitate fraudulent Input Tax Credit (ITC) in order to defraud the Exchequer. Such suppliers then transfer the fraudulent ITC to a range of buyers who avail the same to discharge their GST liability on outward supplies, thus defraud the Exchequer.
In many instances, an organised racket of creating bogus firms, issuing fake invoices and bogus e-way bills to generate and encash tax credits were found.
This fact is also mentioned in the explanatory memorandum which is reproduced below.
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 are 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 does not exist.
For this purpose, a new section on penalty is proposed to be inserted in the Income Tax Act, 1961 vide clause 98 of the Finance Bill, 2020.
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, then
such person shall be liable to pay by way of penalty a sum equal to the aggregate amount of such false and omitted entries.
The 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.
Clause 98 reads as follows:
Penalty for false entry, etc. in books of account.
98. After section 271AAC of the Income-tax Act, the following section shall be inserted, namely:—
‘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.’.
Conclusion
Although it appears to be a simple provision but it is the most draconian provision of the Finance Bill, 2020. The problem is may not with the false or bogus entries in the books of accounts of a genuine taxpayer but saving one's genuine entry to be declared as false is one of the biggest challenges that an honest taxpayer will face.
Further, the genuineness of one's transaction is totally dependent on the recording of the same in other's books of accounts. Even in case of genuine sale of goods, the seller may find himself in a false situation where the buyer has not recorded the same in its books of accounts.
Even though the provision is inserted due to GST frauds, but its application is not limited to GST only. It extends beyond the GST frauds or scams. In case any bogus loan or investment is recorded in the books, the same will come under the purview of section 271AAD but has nothing to do with the GST laws.
Furthermore, this penalty is over and above other penalties prescribed under the Income Tax Act, 1961. In other words, this penalty will be levied in addition to other existing penalty provisions. Hence, it has multi-fold implications. Even no relief is proposed under section 273B if the person proves a reasonable cause for failure.
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