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July 14, 2020

False Entry or Omission of Entry in Books of Accounts? Know Penalty in IT Act from 1 April 2020

by Mahesh Mara in Compliance Law, Income Tax

False Entry or Omission of Entry in Books of Accounts? Know Penalty in IT Act from 1 April 2020

Finance act 2020 has introduced a new penal provision for fake invoice issued by the business entities. The provision levies penalty for false entry or Fake invoices or omission to record entries in the books of accounts. The main intention of introduction of this section is to remove the fraudulent practice of inflating expense or availing input tax credit wrongly under GST.

All about Section 271ADA applicable from 1 April 2020
All about Section 271ADA applicable from 1 April 2020

When is penalty applicable?

Penalty under section 271AAD is attracted if during assessment proceeding it is found that the person maintaining the books of account has:

  1. Made a false entry; or
  2. Omitted any entry which is relevant for the computation of total Income of such person in order to evade tax.

Then the assessing officer shall direct such person to pay the penalty under this provision.

Note: False entry Includes:

(a) forged or falsified document such as a false document; or

(b) Invoice for supply or receipt of goods or services without actual supply or receipt of the same; or

(c) Invoice for supply or receipt of goods or services or both to or from a person who does not exist.

Quantum of Penalty under section 271AAD:

Where the assessing officer during assessment proceedings finds out that the assessee has committed offence under section 271AAD then the officer shall direct the assessee to pay penalty of a sum equal to the aggregate amount of such false or omitted entry.

When Section 271AAD is Applicable from ?

The new section 271AAD is applicable in respect of the default committed on or after 1.4.2020 i.e. from A.Y. 2021-22. So the Section is Not applicable from FY 2019-20 and only applicable from FY 2020-21

Bare act portion of the Section:

‘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 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; 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.’.

What Notes on Clauses says

Clause 98 of the Bill seeks to insert a new section 271AAD in the Income-tax Act relating to penalty for false or omission of entry in books of account. It is proposed to insert a new section 271AAD, under which penalty shall be levied on a person who is required to maintain books of account, if it is found that the books contain a false entry or that any entry has been omitted which is relevant for the computation of his total income. Such person shall be liable to pay by way of penalty a sum equal to the aggregate amount of such false and omitted entries. Penalty shall also be levied on any other person who causes the person required to maintain books of account to make or causes to make any false entry or omit or cause to omit any entry in books of account. The false entries shall include use or intention to use forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence; or 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 invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist. This amendment will take effect from lst April, 2020

What Memorandum to Finance Bill 2020 – 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. Therefore, it is proposed to introduce a new provision in the Act to provide for a levy of penalty on a person, if it is found during any proceeding under the Act that in the books of accounts maintained by him there is a (i) false entry or (ii) any  entry relevant for computation of total income of such person has been omitted to evade tax liability. The penalty payable by such person shall be equal to the aggregate amount of false entries or omitted entry. It is also proposed to provide that any other person, who causes in any manner a person to make or cause to make a false entry or omits or causes to omit any entry, shall also pay by way of penalty a sum which is equal to the aggregate amounts of such false entries or omitted entry. The false entries is proposed to include 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 do not exist. This amendment will take effect from 1st April, 2020. [Clause 98]

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