Section 271AAD – Fair Interpretation and applicability

[Hemant Gupta]

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 01^st 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. 1981 (9) TMI 1 - SUPREME COURT, 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: -

• 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 (11) TMI 1453 - SUPREME COURT.

• 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.

• 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:

• • Any forged document, false documents, fake invoice, false invoice.
  • Any invoice for inward supply of goods or service, wherein no goods or services are actually received.
  • 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.

• 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.