Finance
Act,2020 has been enacted on 27th March,2020 after receiving assent of The President
of India. Through this act section 271AAD has been inserted in Income Tax
Act,1961 through Chapter-III of Finance Act,2020. In this article we have made
an effort to interpret the section in a fair manner and in true spirit of legislation.
The said section shall be applicable for the period 01st April,2020
onwards (i.e. for Financial Year 2020-2021 and onwards)
Although
it may have been read many times by the readers but for the purpose of explanation
Section 271AAD is reproduced herein under: -
``Section 271AAD Penalty for false entry, etc. in
books of account.
(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;
(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.``
On general reading of the section it reveals
that if the assessing officer, in the course of assessment, finds any false
entry or any omission of entry in the books of account, he can levy penalty which
shall be equal to the amount of that false entry or omitted entry. The said
false entry can be any sort of entry in the whole books of accounts which to
the satisfaction of the Assessing Officer is not correct, not true or not allowable
as expense.
It is a matter of prudence that at a point of
time when there are already so many penal provisions under Chapter-XXI of the
Income Tax Act,1961, why such section need to be inserted alongwith all the
other existing sections? And how the Section 271AAD shall be interpreted so
that to justify in true spirit of legislation?
In this regard we should also go through the
Memorandum which was released alongwith the Finance Bill (https://www.indiabudget.gov.in/doc/memo.pdf).
Herein under the Head ``H. PREVENTING TAX ABUSE``, explanation and need for insertion
of Section 271AAD has been given. Relevant extract of the paragraphs is
reproduced below: -
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.
This amendment will take effect from 1st April, 2020.
Accordingly,
the interpretation of the section shall be done so that to achieve true purpose
of the legislature instead of literal interpretation. Hon`ble Supreme Court of
India has also given its ruling in the case of K.P. Varghese v.
Income Tax Officer, Ernakulam & Anr. 131 ITR 0597 (SC),
wherein the matter was for the interpretation and application of Section 52(2)
of Income Tax Act 1961. Hon`ble court held that: -
``We must not adopt
a strictly literal interpretation of s. 52, sub-s. (2), but we must construe
its language having regard to the object and purpose which the Legislature had
in view in enacting that provision and in the context of the setting in which
it occurs. We cannot ignore the context and the collection of the
provisions in which s. 52, sub-s. (2), appears, because, as pointed out by
judge Learned Hand in the most felicitous language : interpret "... the
meaning of a sentence may be more than that of the separate words, as a melody
is more than the notes, and no degree of particularity can ever obviate
recourse to the setting in which all appear, and which all collectively create."
Hence, to our fair opinion penalty under Section
271AAD shall be limited and restricted only to the matters wherein cases related
to issuance or receiving of fake GST invoices are found to claim fake Input Tax
Credits.
Having explained as above, moving further, we
should also understand essential elements of Section 271AAD, and conditions to
invoke this section. On reading through the section following important words
shall emerge: -
ü during any proceeding
It is pertinent to mention here that there should be proceedings
(i.e. assessment proceedings) going on in the case of assessee. No penalty can
be levied or initiated until there is an assessment proceedings and satisfaction
shall be recorded in the assessment order to levy of penalty. These facts were
also held by Hon`ble Supreme Court of India in the case of CIT v. Jai Laxmi
Rice Mills Ambala City (2015) 379 ITR 0521.
ü books of account
There should be books of account, maintained by assessee on
whom penalty has to be levied. That is, say if, any assessee has been found indulged
in activity of issuance or receiving fake GST invoices, however, books of
account are not maintained by him. Certainly, if books of account are not maintained
penalty u/s 271A can be imposed on the assessee. However, no penalty can be
imposed u/s 271AAD.
ü false entry
There should be any false entry found in the course of
assessment, i.e. assessing authority shall come out with any entry from books
of account alleging it to be false. Importantly it should be noted that onus to
prove any entry to be false shall be on the assessing authority. In accordance
to the explanation to the section 271AAD false entry shall include:
o Any forged document, false documents, fake
invoice, false invoice.
o Any invoice for
inward supply of goods or service, wherein no goods or services are actually received.
o Any invoice from a person
who does not actually exist i.e. the named supplier of goods or service as per
the invoice does not exist in reality.
ü omission of any
entry
During the course of assessment assessing authority should
have observed/found any entry that has not been included in the books of
account and which shall affect computation of income of the assessee.
As per all the observations, narrated above
and to conclude, penalty u/s 271AAD shall be invoked only in the instance where
cases of fake GST invoices are found and all the necessary ingredients as
mentioned above are found in the case.
Disclaimer: The
entire above stated article is squarely based on our opinion, derived from the
interpretation of the respective sections, rules and circulars as amended and other
notifications. The observations are the personal view and the authors do not
take responsibility of the same and this cannot be quoted before any authority.
