Section 271AAD- Penalty for False Entries & Invoices

CBDT orders IT officers may charge a fraudulent entry penalty in the account book

The background to the introduction of the penalty provision has been set out clearly in the Memorandum having to explain the provisions of the Finance Bill 2020 which are constructed as follows:

CBDT notified us of the penalty for false entry, etc. in account books defined under section 271AAD the Income Tax Act, 1961, which is effective from 9 April 2020.

In accordance with the provisions of 271AAD, where it is stated during a proceeding that there is a false entry or omission of any entry performing for the avoidance of tax liability in the account books maintained by any individual, the assessing officer shall, by way of penalty, pay the amount equivalent to the aggregate of such false or missing entry.

• Object

In the past years, since the introduction of Goods & Services Tax (GST), many instances of false claims of Input Tax Credit (ITC) have been caught by the GST authorities, the Explanatory Memorandum to the Finance Bill, 2020 reported.
Fake invoices were shown by GST licensed suppliers to fraudulently claim ITC and reduce their GST liability in such cases. These invoices are provided by connectors who do not carry out any business or occupation. They just issue invoices without delivering products or services.

The GST on such invoices shown to have been charged is neither paid nor expected to be paid. Under the Act, such fraudulent arrangements deserve to be addressed with harsher provisions.

In order to prevent taxpayers from manipulating their books and claiming the incorrect input credit under GST, the penalty clause was added.

• The penalty under what circumstances

A new provision has been implemented to provide for a penalty levy on an individual if it is identified during any proceeding under the Act that there is (i) a false entry in the account books held by that person or (ii) any entry relating to the calculation of that person’s total income has been omitted in order to escape tax liability.

The new section 271AAD was added to penalise the individual keeping account books if an entry related to the measurement of total income was false entered or omitted.

• Under section 271AAD Quantum of Penalty

The penalty owed by the person concerned shall be equal to the cumulative sum of the false entries or omitted entries. It has also been provided that any other individual who in any manner induces or causes a person to make a false entry, or omits or causes any entry to be omitted, shall also pay a sum equal to the aggregate amount of any false entry or omitted entry by way of a penalty.

• What are “false entries” for penalty consider under section 271AAD?

 

In the following paragraph 271AAD, what is incorrect is the video clarification. Include usage or plan to use false entries –

(a) fake or falsified documents such as a misleading invoice or a false documentary proof in general;

(b) invoice regarding supply or receiving, without or without actual provision or receipt of such goods or services or both, provided by the individual or by any other person;

(c) an invoice for the provision or receipt, to or from a non-existent individual, of goods or services.

Falsified or forged documents, fraudulent invoices, receipt of goods and services without real provision of, or receipt of, such goods or invoices using fake IDs would also be included in false entries. So we can extract the purpose or intention of false entries:

(i) false or forged material; (such as false or fake invoices)

(ii) invoiced on the provision and receipt of or without real provision or receipt of goods or services both

(iii) invoice for the delivery or receipt to or from a person who does not exist of goods or services;

However, it must influence the measurement of income to attract penalty provisions under Section 271AAD if entry into account books is omitted.

• Anybody else who causes any false entry shall also be punished.

A penalty shall also be imposed on anyone else, in accordance with Section 271AAD(2), who causes the person forced to make or cause any false entry in, or omitting or omitting entries in, the account books to maintain the books or to cause any entry. Applicants, accountants or bookkeepers, consultants or advisors may be included for the purposes of this Section.

Key points regarding section 271AAD

a) Penalty can be issued if, in any proceeding under this Act, a false entry or any omission of entry to avoid tax liability is found in books of accounts held by a person.

(b) Penalty of how much: the sum of a sum equal to the amount of false entries or omitted entries a person must maintain a book of accounts. In that case, a penalty under Article 271AA

(d) may not be imposed for a person who is not required to keep books of accounts. A further question arises, whether a person who has not kept the account’s books but has not maintained books account may levy this penalty.

c) The power to impose the penalty is with Assessing Officer

e) “any person” shall be imposed by this Penalty.

Govt of India has made E-Invoicing mandatory for companies having annual turnover over 20-Crores from 1st April 2022.

The current E-invoice format is complex with over 87 fields at the moment. Thus, generating a large number of E-Invoices to be generated, it will be challenging.

Conclusion

From the above discussion, we can make out that accounting and bookkeeping need to be done by keeping the 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 the 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.

In relation to the repercussions under the GST legislation, the new penalties provision will have far-reaching consequences under the Income Tax Act. Information under the Income Tax Acts and the GST Acts is obligated to be exchanged, so the regulations of the GST Act are also relevant.

U/s 122 of the GST Act provides that, in addition to the tax avoided, a person is also subject to a penalty equivalent to the total of tax avoided. The provision for punishment of offences has been made pursuant to section 132 of the CGST Act.

Respective modifications were also made under the CGST ACT by way of the Finance Bill 2020. Section 122 of the CGST Sanctions Act has been modified to penalise the person who maintains the benefit of the transaction and in whose case the transaction is carried out.

U/s 132 of the CGST Act on penalties for offences has been amended to ensure that anyone who commits or causes the offence to commit & retain the benefits resulting from the offences, is also subject to similar penalties. GST Registration under the GST laws may also be cancelled in the situations.

In simple terms, the law is further modified to give effect to the strict penalty and penalty provisions of the Income Tax Act and the GST Act for a person who commits an error or an offence, and for a person who causes, in any way, a person who has made or cause such false entries or causes him or her to fail to enter.

Govt of India has made E-Invoicing mandatory for companies having annual turnover over 20-Crores from 1st April 2022.

The current E-invoice format is complex with over 87 fields at the moment. Thus, generating a large number of E-Invoices to be generated, it will be challenging.

Disciplinary proceedings against 8 arrested CAs for fake GST invoice fraud: ICAI

The CA Institute has begun disciplinary proceedings against 8 chartered accountants who’ve been arrested on nationwide claims against fake GST invoice fraud in the last 2 and a half months since November 2020.

Mr Atul Kumar Gupta, President of the ICAI, Confirming this step,  informed Business Line that the letter from the Revenue Department provided the basis for the commencement of disciplinary proceedings against these 8 CAs.

The 8 Chartered Accountant was arrested last Saturday, along with his four business accomplices in Jaipur, for running 25 fake companies for illegal use and for passing on the Input Tax Credit (ITC) via false invoices without actual supplies of goods/services.

On the progress that has been made in ICAI disciplinary proceedings, Atul Gupta said, “In the last two financial years (2019-20 and 2020-21) we have disposed of more than 650 cases by means of a disciplinary mechanism whose primary objective, in accordance with the proposed amendments, is to conclude cases within 1 year of the current period of 2 years.”

In these 650 cases, around 400 were held guilty and punishments ranged from ‘reprimand’ to ‘removal of names.’ Hundreds of them have been exempted from the membership registry, Atul Gupta said.

Moving ahead, ICAI’s purpose will be to finish the case within one year, Atul Gupta said.

Guidelines for processes to be guided during the search operation.

Specific instances have been notified by the Board and the Central Vigilance Commission where the correct procedures have evidently not been accompanied during the search procedure and/or the Panchnamas/statements have not been documented in accordance with the existing guidelines.

Such inconsistencies weaken the judicial review of the case at a later point. Appropriately, the guidelines contained in the Central Excise Intelligence and Investigation Manual (2004), which are valid even under the Gst system, are reiterated for compliance by DGGI/filed structures.