Penalty For False Entry In Books Of Account Or Fake Invoices Under The Income-tax Act And The GST Act

Advocate Narayan Jain, LL.M, has explained in detail the provisions of section 271AAD of the Income-tax Act, 1961, which provides for the imposition of penalty. He has also dealt with the corresponding provisions in the GST Act. He has cautioned taxpayers to cross-check all entries with the vendors and customers as any negligence or mistake can expose them to imposition of heavy penalties under the Income tax as well as under GST

1. Introduction:

The Finance Act, 2020 has introduced new penalty provision under section 271AAD to curb malpractices of issuing fake invoice. Section 271AAD shall apply with effect from 1st April, 2020.

2. Object

The Explanatory Memorandum to the Finance Bill, 2020 has stated that in the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent claims of Input Tax Credit (ITC) have been caught by the GST authorities. It has been revealed in these cases that 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.

The penalty provision has been inserted to discourage taxpayers to manipulate their books and claim wrong input credit under GST.

3. Penalty in what circumstances           

The new provision has been inserted to provide for levy of penalty on a person, if it is found during any proceeding under the Act that in the books of account 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.

Thus the new section 271AAD has been inserted to penalise person maintaining books of account in case of a false entry or omission of an entry relevant for computing total income.

4. Quantum of Penalty under section 271AAD 

The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It has also been provided 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.

5. What will be considered “false entries” for the purpose of penaltyunder section 271AAD           

What is false entry is explained vide explanation below the said section 271AAD. The false entries will 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.

Therefore false entries will include forged or falsified documents, false invoices, receipt of goods or services without actual supply or receipt of such goods or invoices using fake IDs.   

Thus we may summarise that False entry include use or intention to use:

(i) forged documents or falsified documents (such as false or fake invoices)

(ii) invoice in respect of supply or receipt of goods or services or both without actual supply or receipt thereof

(iii) invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist

It may be noted that in case of false entry in books of account, it is immaterial whether it has impact on computation of income or not. If there is false entry in books of account, penalty shall be levied.

However in case of omission of entry in books of account, it must have impact on computation of income in order to attract penalty provision under section 271AAD.

6. Penalty shall also be levied on any other person who causes any false entry etc.

In view of section 271AAD (2), 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. For the purpose of this section such other person may cover an accountant or book keeper, consultant or advisors etc.

7. Section 271AAD of the Income tax Act : Provisions

For ready reference the newly inserted section 271AAD reads as under :

Sub section (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.”

Sub- section (2) of section271AAD reads as under :

“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.”

8. Important Points relating to section 271AAD

This section 271AAD begins with “without prejudice to any other provision…”, hence penalty under this section shall be in addition to any other penalty under the Income-tax Act.

a) The penalty can be imposed  if during any proceeding under this Act, it is found that in the books of account maintained by any person there is either a false entry; or an omission of any entry, to evade tax liability.

b) Penalty how much :  a sum equal to aggregate of amount of false entries or omitted entries

c) Power to levy penalty is with Assessing Officer

d) There must be books of account maintained by a person. That implies that in case of person who is not required to maintain books of account then in such case penalty may not be levied under section 271AAD. Further a question will arise whether this penalty can be levied in case of person who is required to maintain books of account but such person had not maintained books of account

e) Penalty shall be levied on “any person”. The word used by legislature is any person and not any assessee.

f) To levy penalty there must be either of following two conditions should be satisfied (i) false entry in books of account; or (ii) omission of any entry in books of account which is relevant for/ has impact on computation of total income, to evade tax liability.

9. Definition of books of account under section 2(12A) of the Income tax Act

It is quite important to refer to the definition of Books of account which is provided in section 2(12A) of the Income tax Act.

“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.

10. Onus to prove

To levy penalty, element of mens rea must be an essential ingredient. That means intention is paramount. It is important to note that false entry or omission of entry re the basic ingredients and onus to prove the same is on the Revenue/ department.

11. Benefit of section 273B

As per section 273B,  penalty shall not be imposed if assesseecan prove that there was reasonable cause for the failure. However,  section 271AAD is not included in section 273B.

12. Penalty provisions under the GST Act

The Finance Bill 2020 vide Clause 124 has amended section 122 of the GST Act to make the mediator/ beneficiary liable with the same degree of penalty as a taxable person i.e. supplier or transporter etc. when the question of fakeinvoicingcomes. Sub-section (1A) has been inserted in section 122 of the GST Act. It may be noted that the GST Act provides, vide its Section 122, provisions for levy of penalty for various offences, which are not covered in section 73 and 74 of the GST Act. The concerned  person shall be liable to penalty of an amount specified in the said section 122.

Relevant provisions of said section 122 of the GST Act are mentioned here.

122 (1) Where a taxable person who––

(i) supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;

(ii) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;

(vii) takes or utilises input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;

(ix) takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;

(x) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information or return with an intention to evade payment of tax due under this Act;

Such person shall be liable to pay a penalty of Rs.10,000 or an amount equivalent to the tax evaded or input tax credit availed of or passed on or distributed irregularly, or the refund claimed fraudulently, whichever is higher.

Sec 122 (1A) : Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.[Inserted by the Finance Act, 2020 ]

Sec 122(3): Any person who aids or abets any of the offences specified in sub-section (1); shall be liable to a penalty which may extend to Rs.25,000.
It is important to note that on going through the above provisions, it is evident that for any of the defaults mentioned above both the beneficiary as well as the wrongdoer will be liable for penalty for an amount equal to the tax evaded or Input Tax Credit availed.

On a conjoint reading of both the sections 271AAD of Income tax Act and section 122(1A) of the GST Act, we will find that there may be situations that can lead to imposition of penalty under both the sections for the assessee.

The provisions applicable in various circumstances vis a vis relevant sections of the Income Tax Act and GST Act are analysed here below.

Sl.	Circumstance	GST Act, 2017 Section 122(1A)	Income Tax Act Section 271AAD
1.	Supply of any goods or services or both without issue of an invoice	The person can be treated as beneficiary of a transaction covered under Clause (i) of Section 122(1) and thus liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act	Supply without Invoice will lead to lower Turnover and hence lower income declaration by assessee resulting in  omission of entry necessary for computation of total income. The Assessing Officer may levy penalty under sec 271AAD(1)(ii).
2.	Issue of Invoice, by the person or any other person without actual supply or receipt of such goods or services or both	The person can be treated as beneficiary of a transaction covered under Section 122(1) (ii) and thus liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act	Under sec 271AAD(1)(i) the Assessing officer may classify the transaction as a False Entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry.
3.	Taking or utilising input tax credit (ITC) without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of the relevant Act or the Rules made thereunder	The person can be treated  as beneficiary of a transaction covered under sec 122(1)(vii) and hence liable u/s 122(1A) for penalty equivalent to the amount of input tax credit (ITC) availed	Under sec 271AAD(1)(i) the Assessing Officer may classify the transaction as a False Entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry
4.	Forging or falsifying of documents such as a false invoice or, in general, a false piece of documentary evidence	The person can be treated  as beneficiary of a transaction covered under section 122(1)(i) and hence liable for penalty equivalent to the amount of tax evaded under sec 122(1A) of GST Act	Under sec 271AAD(1)(i) the Assessing Officer may classify the transaction as a false entry and may direct such person to pay by way of penalty a sum equal to the aggregate amount of such false entry

In addition to above instances, there can be many more situations where the assessee may get covered in both the sections. In both the sections the onus for default has been placed on the beneficiary as well as the initiator of the transaction.

13. Penalty against other person(s)

Section 271AAD(2)of  the Income Tax Act states that 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. Hence, provision has been made for imposing penalty on the assessee as well as any other person involved in making the false entry or causing omission of any entry in books of assessee.

Similarly, section 122(1A) of GST Act states that “Any person who retains the benefit of a transaction covered under clauses(i),(ii),(vii) or clause (ix) of sub-section(1) of Section 122and at whose instance such transaction is conducted shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit (ITC) availed of or passed on.” Here also, the objective of this amendment is to penalise the beneficiary and the wrongdoer of the transactions specified in clause (i),(ii),(vii) or clause (ix) of section 122(1) liable for penalty.

14. Prosecution provisions under sec. 132 of the GST Act

The Finance Act, 2020 vide its Clause 125 has also amended section 132 of the GST Act, which provides for Punishment for certain offences related to Fake Invoicing. The purpose is to extend punishment under this section  to a person who causes to commit such offence and also to a person who retains benefit of such offences mentioned in section 132. It further makes the offence of availing ITC without lawful invoice a cognizable and non bailable offence.

Provisions of Section 132(1) of the GST Act as substituted by the  Finance Act, 2020 are discussed below.

Sec 132(1)  provides : Whoever commits, or causes to commit and retain the benefits arising out of, any of the following offences], namely:-

…..

(b) issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act, or the rules made thereunder leading to wrongful availment or utilisation of input tax credit or refund of tax;

(c) avails input tax credit using the invoice or bill referred to in clause (b) or fraudulently avails input tax credit without any invoice or bill; [as substituted by the Finance Act, 2020 ].

(e) evades taxor fraudulently obtains refund and where such offence is not covered under clauses (a) to (d); [as substituted by the Finance Act, 2020 ].

(f) falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information with an intention to evade payment of tax due under this Act;

(j) tampers with or destroys any material evidence or documents;

(l) attempts to commit, or abets the commission of any of the offences mentioned in clauses (a) to (k) of section 132 of the GST Act.

Such person shall be punishable as below in cases where the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or the amount of refund wrongly taken :

i. if the amount exceeds Rs. 5 Crore, with imprisonment for a term which may extend to 5 years and with fine;

ii if the amount exceeds Rs.2 Crore but does not exceed Rs. 5 Crore, with imprisonment for a term which may extend to 3 years and with fine;

iii. if the amount exceeds Rs.1 Crore but does not exceed Rs. 2 Crore, with imprisonment for a term which may extend to one year and with fine.

15. Imprisonment not less than 6 months and the Offence is cognizable and non-bailable under the GST Act

Section 132 of the GST Act also provides that the imprisonment referred to above shall, in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court, be for a term not less than 6 months. Further notwithstanding anything contained in the Code of Criminal Procedure, 1973, the offences specified in clause (a)/(b)/(c) or (d) of sec. 132(1) of the GST Act, shall be cognizable and non-bailable.

16. Scope of the term “tax” under the GST Act

It maybe noted that for the purposes of prosecution under section 132 of the GST Act, the term “tax” shall include the amount of tax evaded or the amount of input tax credit wrongly availed or utilised or refund wrongly taken under the provisions of this Act, the State Goods and Services Tax Act, the Integrated Goods and Services Tax Act or the Union Territory Goods and Services Tax Act and cess levied under the Goods and Services Tax (Compensation to States) Act.

17. Conclusion

From the above discussion, we can make out that accounting and book keeping needs to be done by keeping above points in mind. Proper reconciliation of books for the purpose of Income tax as well as for the purpose of GST and the Returns filed (Income tax and GST Returns) is vital in order to avoid any inconvenience. Any negligence or error or mistake on the part of the assessee can expose him to imposition of penalties under the Income tax as well as GST. It is important to periodically check and make cross verification of vendors as well as customers/ clients.

Advocate Narayan Jain is author of famous books “How Handle Income Tax Problems” and “Income Tax Pleading & Practice”. He is Hony Co-ordinating Editor of Taxman and a Life Member of AIFTP.

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