Section 271AAD: Introduction of New Penalty Provisions

• Taxation
• ||
• August 31, 2020

Nirmala Sitharaman, the honorable Finance Minister in her budget speech on 1^st February 2020, has introduced a new Section 271AAD under Income tax act, 1961, which is provided as below:- 

Statutory Provision
(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:- 

1. a false entry; or
2. 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––

1. forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or
2. 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
3. invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

Need of the law
After the introduction of Goods & Services Tax (GST), many cases of fraudulent input tax credit (ITC) claim have been trapped by the GST authorities. Invoices from which GST credits are obtained are fake and provided by suppliers registered under GST to reduce their GST liability. These invoices are found to be issued by racketeers who do not carry on any business or profession, there is not actual movement of goods and services. The GST charged on such invoices is neither paid nor is intended to be paid. This type of corrupt arrangements deserve to be dealt with severe provisions under the Act.

The income tax department is also facing huge losses as bogus billing leads to the booking of bogus expenses. However, the same is not in all the cases leading to exchequer loss to government because sometimes it is done to simply inflate turnover or for inducing the black money into the system. In these cases “The legal principle of revenue neutrality comes into play. In case there is no loss of revenue, the proceedings cannot be non-bailable and cognizable.”

Example 1: When there is a loss to the exchequer

1. One company ‘X’ sells goods to ‘Y’ for Rs. 1,00,00,000 and charges GST @18% amounting to Rs. 18,00,000 without actual supply of Goods
2. ‘Y’ avails credit of tax shown by ‘X’ in his Invoice. ‘Y’ sells the goods to ‘Z’ for Rs. 1,10,00,000 actual movement of goods and charges GST @ 18% amounting to Rs. 19,80,000. ‘Y’ has to pay only differential amount as tax i.e Rs. 1,80,000 (19,80,000 – 18,00,000) and take GST amount of Rs. 18,00,000 in cash from “X” after giving X its commission.
3. ‘Z’ avails credit of tax shown by ‘Y’ in his Invoice. ‘Z’ sells goods to ‘D’ for Rs. 1,20,00,000 by charging GST @ 18% amounting to Rs 21,60,000. Since ‘Z’ has availed credit of GST paid by ‘Y’, he has to pay only differential amount i.e Rs. 1,80,000 (21,60,000 – 19,80,000), which is small.

In the entire gamut, the loss suffered by the exchequer is the amount of GST not paid by X i.e. Rs. 18, 00,000. 

Penalty under Section 271 AAD of Income Tax Act 1961 would be as under:

Example 2: When bogus billing is done to inflate turnover
A company in Haryana is the business of the trading of luxury bags, sold those bags to a Rajasthan based company for Rs. 10 Lakh, which sold the same bags further to an Uttar Pradesh based company for Rs. 11 Lakh. Now, the third company – the Uttar Pradesh based sold the goods to the first, which is the Haryana-based firm for Rs. 12 Lakh. In the whole process, the goods were lying at a godown in Haryana without any transfer from one place to another. However, the GST credits were paid on every single transaction. The series of sales assisted the firms to extend turnover and enjoy larger valuations and credits.

Penalty under Section 271 AAD of Income Tax Act would be as under: 

Hope the above examples clarified the applicable provisions and the penalties there under.

At AJSH, we assist our clients in GST and income tax compliances, filing of income tax returns, TDS returns, tax audits, tax assessments etc. If you have any questions or would like to know more about the newly introduced Section 271AAD, kindly contact us.