Reason for Introduction of such provision

• Due to fraudulent claim of input tax credit (ITC) under the Goods and Services Tax (GST) Act, this provision has been introduced as explained by the Memorandum to the Finance Bill, 2020.
• Some of the suppliers registered under GST obtain fake invoices to claim ITC fraudulently for reducing their GST liability.
• The GST on such invoices is neither paid nor is intended to be paid.
• This provision provides the right to assessing authorities to impose penalty and prosecution for the same matter under different law and provisions without providing him opportunity of being heard.

1. False entry or omission of any entry - Scope and applicability of penalty provision

There are two types for the newly introduced section in respect of provision of penalty i.e.

Amount of penalty – If the assessing officer finds any entry or omission of entry in the books of accounts during any proceedings under the Act, then the penalty is equal to the aggregate amount of such false and omitted entry. Further, this penalty can also be imposed on the person who causes the person as mentioned above to make a false entry or causes to omit any entry.

Following are the aspects to understand and analyze the scope and applicability of the penalty provision.

1. False Entries which has no impact on computation of Income.

   If a person enters 'fake invoices' by way of its sales, it may not be evading any income tax liability, but the fact is that such person has made 'false entry' in his books of accounts, that should be sufficient to charge him with the penalty under section 271AAD.

2. Appealability of Penalty Order before the Commission of Income-tax (Appeals) ('CIT(A)').

   Section 246A of the Act contains provision related to appeal against the order passed by the assessing authorities before CIT(A). Section 246A contains the residual provision under clause (q) of the section under which appeal can be filed before the CIT(A) for any penalty imposed under chapter XXI which contains section 271AAD. Hence, it can be concluded that the penalty u/s 271AAD is appealable before the CIT(A).

3. Penalty can be imposed during any proceeding under this Act.
   • The AO may levy the penalty without waiting for any information from GST department if he finds any such default.
   • After the completion, assertion, and satisfaction of any misdemeanor on part of the Assessee in any preceding, Penal Proceedings are followed.
   • Penalty proceedings u/s 271AAD could be initiated against the assessee, only after identification and satisfaction to the effect that books of accounts contain false entry or omitted entry in any proceedings under the Act,
4. Intention of the assessee is enough to impose the penalty.
   • The AO may levy penalty on the basis that the assessee has intention to use such falsified documents to enter the false entry in the books of accounts, in a situation, where books of accounts are not drawn up to the date of survey or search and therefore, such falsified documents were not entered in books of accounts.
   • Penalty u/s 271AAD could be imposed for mere existence of fake invoice or falsified documents might be considered as intention to use the same.
5. Penalty can be imposed on any other person who is indirectly involved.

   The assessing officer can also levy the penalty on "any other person" as defined in Sub-section (2) of section 271AAD, who causes the first person required to maintain books of account to make any false entry or omit any entry in books of account. For the purpose of this section such other person may cover an accountant or bookkeeper, consultant, or advisors etc.

2. Immunity from penalty on the basis of reasonable cause under section 273B.

If assessee proves that there is a reasonable cause for his actions, Section 273B grants immunity from levy of penalty for failure in compliance of any provision,

However, corresponding amendment on introduction of Section 271AAD in Section 273B has not been made. Accordingly, even if for reasonable cause, any false entry is passed or any entry is omitted, then assessee cannot take shelter u/s 273B of the Act.

3. Applicability of penalty provision only in the case of fake/falsified invoices.

Section 271AAD imposes penalty in respect of a false entry or omission of any entry where 'Explanation' to section 271AAD which seeks to explain 'false entry' appears to go far beyond fake or false invoice as clause (a) of Explanation refers to 'a false piece of documentary evidence' also. But, reading all the clauses viz. clause (a), (b) and (c) of 'Explanation' would show that the term 'false entry' refers to false invoice of goods or services, or invoices without actual supply of goods or services, or such invoices to or from a non-existent person. Therefore, the term 'false entry' should be read to convey falsity in and around the invoice only.

4. Imposition of penalty in case Books of Accounts are not maintained.

Definition of Books of account is provided in section 2(12A) of the Act. It defines that,

"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."

Only the books which are regularly kept by the assessee can be considered for the purpose of Books of Accounts.

5. Levy of penalty under other sections of the Act or other statues simultaneously.

Penalty under other provision of the Income-tax Act,

• Section 270A - penalty for under reporting and misreporting of income.
• Section 270A (8) - where under-reported income is in consequence of any misreporting by any person, the penalty shall be equal to 200% of the amount of tax payable on under reported income.
• Section 270A (9) -exhaustive list of cases where under-reported income shall be construed as being committed due to misreporting thereof.

1. misrepresentation or suppression of facts
2. failure to record investments in the books of account.
3. claim of expenditure not substantiated by any evidence.
4. recording of any false entry in the books of account.
5. failure to record any receipt in books of account having a bearing on total income; and
6. failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

On perusal of clauses (d) & (e) of section 270A (9) of the Act, it is clear that such clauses also provide for similar penalty as envisaged under clauses (i) & (ii) of section 271AAD(1) viz., false entry in the books of accounts or omission of any entry relevant for computation of total income of such person, to evade tax liability. It can be further highlighted that, if the addition or disallowance has been made u/s 68, 69, 69A, 69B, 69C, 69D of the Act, then penalty can also be imposed u/s 271AAC.

Penalty under provision of the GST Act

Finance Act, 2020 has inserted subsection (1A) after subsection (1) in section 122 of CGST Act, the penalty for the transactions would extend to beneficiaries in such transactions and to the person at whose instance such transactions are conducted.

Penalty under different sections and Act will put the assessee in double whammy. The question arises that whether it is possible to penalize a person for the same act more than one time under the same act or different statues.

The 'Double Jeopardy principle' exists in India even prior to the enforcement of the Constitution of India. It is enacted under various laws as given in the below table:

"Double jeopardy" means that person must not be punished twice for the offence. "audi altermn partum" rule i.e. a person cannot be punished twice for the same offence.
It can be said that on the basis of above acts a person cannot be penalized more than once for the same offence under the same Act or under different Act.

6. Arbitrary and discretionary power of Assessing Officers ('AOs') to impose the penalty.

The Section 271AAD reads as under:

"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."

Both the provisions, Section 271(1)(c) and Section 271AAD is stating that "the Assessing Officer may direct" and " the Assessee shall pay", in light of the above decisions, one may also contend that irrespective of whether it was willful or not on the part of the Assessee, the Assessing Officer must levy a penalty if he finds a false entry or omission of any entry in the books of accounts. In other words, the discretion of the Assessing Officer ends at the point where he finds a false entry or omission of any entry.

Conclusion

At the time when revenue collection is depressed the suppliers are using fake invoices to avail ITC credit has been increasing and has become a concern for the government. It not only helps reducing burden of GST on taxable output supplies by availing undue ITC and converting excess ITC into cash but also helps in inflating turnover using these invoices, booking fake purchases to reduce income-tax, diversion of funds and money laundering. Considering this, introduction of such harsh provision is a welcome step to curb the menace which has been caused by issuing of fake invoices.

Disclaimer:“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”