Section 271AAD, which was inserted by the Finance Act 2020 to levy penalty for ‘existence of any false entry’ or ‘omitting any entry’ has given rise to a controversy as to whether it applies to the assessment year 2020-21 or later. There is also debate on the precise meaning of the term “false entry”. CA. Pankaj Agrwal has considered both aspects and expressed his opinion in a clear manner
The Finance Act 2020 has inserted a new section 271AAD and has created flutter in professional circles for several reasons. I have the privilege of going through the views of eminent professional through their write up and presentation in webinars. I ponder on the subject and wish to complement with my views.
Applicability
One view is that as the amendment is from 1st April 2020 it shall apply to Assessment year 2020-21 and other view, which in my view is the correct view, is it will apply to transactions covered which are accounted for or dealt with after 1st April 2020.
Income-tax Act as regards charging of income is concerned has no independent existence. It may be called ‘schedule’ to the Finance Act which provides for methodology for computation of income. Section 4 of the Income tax provides as under:
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person :
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
There will be no chargeability to tax in case Finance Act does not provide for charging of Income-tax. Every Finance Act, hence, provides for two parts one for the assessment year and other for advance tax. For this reason, when rates were enhanced by ordinance after the demonetization, it was opined that it does not amount to retrospective amendment.
Charging section 4 provides that tax shall be charged ‘subject to the provisions (including provisions for the levy of additional income-tax) of, this Act, in respect of the total income of the previous year of every person. This is one aspect of the Income-tax Act, which may be said to be ‘Schedule’ providing for the methodology for computation of income.
Other part of the Income-tax Act, 1961 deals with non-acceptance or non-payment in cash, TDS provisions and other compliance provisions.
By the Finance Act, new sections or provisions are made by inserting, amendments are made by making deletion or substitutions. The effective date of such amendments is as per sub-section (2) of section 1 which provides as under:
Save as otherwise provided in this Act, —
(a) sections 2 to 104 shall come into force on the 1st day of April, 2020;
Section 271AAD is being inserted by section 100 as under
100. After section 271AAC of the Income-tax Act, the following section shall be inserted, namely:—
There are some amendments particularly TDS, TCS provisions and consequent penalty provisions with specified dates which does not create any issue as specific date other than 1st April is given.
Present discussion is arising as to whether 1st April 2020 be taken as the first day of the assessment year or the beginning date for the coming into force of the penalty.
There are one set of provisions in the Act which govern the computation of total income and any change in law will be in respect of assessment year beginning with that date or thereafter. The court has also held that the law as on the first day of the assessment year shall apply to the assessment year.
It is also trite law that penalty is to be levied as per the law as on the date of default. For applicability of penalty provisions, it is pertinent to see what is the default for which penalty is being levied and when such default may be said to have been committed.
The following case laws has been referred to in support that the provisions will be applicable to Assessment year 20-21.
CIT Vs. Smt. Kamla Devi Rathi 213 ITR 177 (PAT) (FB)
CIT v. ONKAR SARAN AND SONS [1992] 195 ITR 1 (SC)
On reading the judgments, one can easily discern the following:
a. This judgment is in the context of section 271(1)(c)
b. The occasion of default is held to be filing of return of income
c. The law as prevailing on the date of filing of the original return will apply.
d. It is now well known that a decision is an authority for what it decides and not what can logically be deduced therefrom
Now we should see what default is envisaged under section 271(1)(c) and can the ratio decidendi of above case laws be applied to the present issue. Section 271(1)(c) is as under :
If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person:
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income
Here, the default is of concealment of the particulars of income or furnishing inaccurate particulars of such income. How such default can be committed. It can only be either by filing the return and not disclosing or non filing of the return.
Hence, the default will be committed on the date when return is filed or if not filed, when ought to have been filed. Therefore, the law as prevalent on date of filing the return will be the law.
Now see section 271AAD. It levies penalty for ‘existence of any false entry’ or ’omitting any entry’. Such acts are not linked with the determination of total income or filing of the return. Such defaults may be penalized independent of assessment of income. Hence, any default committed after 1st April 2020 will get attracted and not the defaults made prior to 1st April 2020. It is similar to penal provisions for non-compliance with cash payment provisions like section 269ST read with penal provisions of section 271DA. Both these provisions were brought on statute by the Finance Act, 2017. Memorandum explaining provisions and notes on clauses also does not say it is applicable to assessment year 2020-21. Section 270A which levies penalty for under-reporting and misreporting was brought by the Finance Act, 2016 with effect from 1st April 2017. As it was relating to income, it has to be with reference to return of income for AY 2017-18 as under reporting and misreporting can be only with reference to filing of return of income and in memorandum also it was specifically mentioned that it shall apply for the Assessment year 2017-18. Further, penal provisions
False Entry:
The second issue for our interpretation is what is ‘false entry’. The explanation defines false entry in inclusive manner. It means it expands its normal meaning. Hence, first we need to determine what is its natural meaning. According to Legal Lexican, False Entry is as under:
“An entry which is either totally fictitious, or fictitious to some extent, an untrue incorrect entry, contradistinction to ‘correct’ entry. (U.S. V. Potter, 56 Fed. 83, 94). An entry would be a false entry or a statement in a record or document would be a false entry, if it does either by reason of some false additions or of some material omissions misrepresents the truth. The omissions may be illegal or may not be illegal. The thing to consider is what is the effect of the omission on the entry as made or on the statement as occurring in a document.”
A matter falsely entered in any record or register, account books etc. (S. 15 iII(b), Indian Evidence Act, 1872)
(The Major Law Lexicon by P. Ramnatha Aiyar).
The dictionary meaning of term ‘false’ is ‘not true or correct’, erroneous, tending to deceive or mislead, deceptive, not genuine, counterfeit.
False entry is used in Income-tax Act, itself in section 270A and 276C and in 277A the term ‘false entry’ is not used but the import of the use of the words “makes or causes to be made any entry or statement which is false” is the same. However, no definition is available in any of the above sections.
Section 271AAD is as under:
‘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 byany 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 ofsuch 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.’
In my view to be a false entry, it has to be false from the perspective of the person who is being fastened with the charge of existence of false entry in his books of account. If such person is able to establish that the entry is genuine and correct, it cannot be said to be false entry unless it falls in the expanded meaning of false entry. It will not be out of context to state that the extended meaning will not apply to the provisions of section 270A and 276C. The onus to prove that it is false entry will be on the revenue.
Explanation: As the definition given in explanation, expands the meaning of false entry, hence, each of the clauses discussed herein below:
(i) Clause (i) refers to forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence. Will the principle of ejusdem generis apply here for ‘a false piece of documentary evidence’. In my view it will not apply. Firstly, this maxim applies when ‘certain things are enumerated and then a phrase is used to include other things’. Here only false invoice is stated and thereafter, false piece of documentary evidence has been mentioned. In my view it will not be restricted to only false invoice. There may be cases of payments like commission or brokerage for which there may not be invoices but some letters etc. They will fall in the category of ‘false piece of documentary evidence’. Though memorandum explaining the provisions of the Finance Bill 2020, refers to the menace of fake invoicing etc. but that cannot help in view of the plain meaning of the section.
(ii) Clause (ii) refers to invoice devoid of any supply of goods or services. Here, the onus on the assessee, in case of services particularly, will be very high to establish that service is actually received.
(iii) Clause (iii) refers to invoice of goods or services from a person who does not exist. At which point of time he should be in existence. At the time of making entry or at the time when some enquiry is made. In my view, it is at the time of making entry. There will not be any problem if the person is GST registered as one can download his status and if thereafter, such person is not found or is found to have closed his business, one cannot be charged with for ‘false entry’. However, if the person has been unregistered, the onus will be very heavy to establish its existence when the transaction took place.
In any case, the onus is on the department to establish the factum of the ‘false entry’.
Omission of entry
The second default envisaged in this section is of an omission of any entry which is relevant for computation of total income of such person, to evade tax liability. There can be omission of credit entry as well as debit entry. For suppression of income, any entry might have been omitted or any purchase might have been omitted to be entered to avoid accounting of corresponding credit. This will be a matter of fact based on evidence in possession of the department and the department will have to establish omission to fasten the penalty.
Other Person
Sub-section (2) makes other person who causes to make a false entry or omit a entry.
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