APRIL 07, 2020

By Dr Rakesh Gupta, FCA, FCS, AICWA, MBA, LLM, PhD ,Ex-Member, Income Tax Appellate Tribunal & Somil Agarwal, ACA, ACS, ACMA, DISA, LLM (U.K.) ,Advocates

CHAPTER XXI of Income Tax Act, 1961 is replete with penal provisions right from section 270A to section 272BBB. Section 271AAD introduced by the Finance Act, 2020 is the latest addition to an already existing large family of penalties. This penalty provision contained in section 271AAD is quite harsh and throws several interpretational issues. It is, therefore, expedient at this stage to reproduce the said section 271AAD, relevant Note on Clauses (Note No. 98) and relevant Memorandum appended to the Finance Bill, 2020 as under:

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.'.

Notes on clauses

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 1st April, 2020.

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]

Provision in nutshell

A plain reading of the above section would show that section 271AAD provides for the levy of penalty upon a person equal to the aggregate amount of false or omitted entry if it is found by the assessing officer in the course of any proceeding under the Income Tax Act, 1961 that there is a false entry, or omission of any entry which is relevant for computation of total income of such person, to evade tax liability, in the books of account maintained by such person. Further, sub-section (2) of section 271AAD provides that any other person who causes the person referred earlier, to make such false entry or omits or causes to omit any entry which is relevant for computation of total income of such person, to evade tax liability shall also be liable to penalty similarly. Thereafter, 'Explanation' appended below to section 271AAD seeks to define the meaning of "False entry" in an inclusive manner. 'Omission of entry' has not been defined under this section but the word 'entry' appearing in both clauses (i) & (ii) of sub section (1) would be pointer to its meaning.

Effective from

First question that arises for consideration is as to whether the new section 271AAD having been made effective from 1.4.2020 is applicable for and from which assessment year viz. from A.Y. 2020-21, or is applicable in respect of the default committed on or after 1.4.2020 i.e. from A.Y. 2021-22.

It needs to be appreciated that this provision has been made effective from 1 st April, 2020 which means that any default envisaged under this section, committed on or after this date would be liable to be visited with this penalty. Section 271AAD coming into effect from 1.4.2020 should not be taken to be applicable from A.Y. 2020-21. Operation of this section is not retrospective as is feared in some section of the society merely because of this section coming into force from 1st April, 2020 by assuming as if this section would be applicable from A.Y. 2020-21. This penalty provision to come into effect from 1.4.2020 means that default committed on or after 1.4.2020 would be liable to be covered and not any such default committed prior to this date.

Notes on Clauses and Memorandum point out clearly in respect of various amendments made that a particular provision though would come into effect from 1.4.2020 or 1.4.2021 but would apply for & from A.Y. 2020-21 or A.Y. 2021-22. Some amendments like the present amendment in the form of section 271AAD has been left merely by noticing that such amendment would come into effect from 1st April, 2020. Notes on Clauses & Memorandum in respect of several other amendments, say, for clause 3, 4, 5 as instances, would clearly show the applicability of those amendments to come into effect from which assessment year. Note on clause 3, 4, 5 are as under which would show the difference from the clause 98 which deals with section 271AAD:

Clause 3- "This amendment will take effect from 1st April, 2020 and will, accordingly, apply in relation to the assessment year 2020-21 and subsequent years".

Clause 4- "These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent years."

Clause 5- "This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequent years"

Clause 98- "This amendment will take effect from 1 st April, 2020"

(emphasis supplied)

Thus, it may be noticed that wherever legislature wanted a particular date to mean Assessment year beginning from that date, it has so provided. In section 271AAD, there is no such prescription nor is this in the relevant Note on Clauses or Memorandum which means that legislature seeks to apply this penal provision under section 271AAD in respect of the defaults committed on or after this date viz. 1.4.2020 and does not intend to apply from A.Y. 2020-21.

Fear of 'Double Jeopardy'!

Next question that arises is as to what is the import of the phrase "Without prejudice to any other provisions of this Act". It may be appreciated that the penalty provision contained under section 271AAD has been made without prejudice to any other provisions of the Act. It would mean that such penalty will be in addition to any other provision of tax, penalty or prosecution under any other section of the Income Tax Act, 1961. It would further mean that the fact that there is a tax or any other penalty also leviable on account of same or similar default, would not come in the way of proceeding under section 271AAD. Similarly, if there is prosecution initiated against such person due to defaults such as fake invoice etc. or on account of fabrication of books of accounts or for any other reason, it cannot be put as defence against the imposition of penalty under this section. Nobody can be heard contending that since he has been taxed or penalized for this kind of default under some other section of the Income Tax Act, he be not proceeded against under section 271AAD.

For instance, a person may have been visited with penalty on account of misreporting under section 270A in respect of purchases entered on the strength of the fake invoices. Such person is nonetheless liable to be visited with penalty under section 271AAD. Another instance, a person may have been charged to tax at a higher prescribed rate under section 115BBE due to false entry or omission of any entry thus leading to addition under section, say, 68, 69, 69A, 69C or 69D, penalty under section 271AAD is still leviable in respect of such false entry or omission. Instances can be multiplied but it would suffice to say that by using such expression 'without prejudice…', legislature has ruled out any feeble attempt to be put by the defaulters as to the applicability of the controversial principle of double jeopardy.

In fact, strictly there may not be any case of double jeopardy though in the first blush, it may appear to be so. For instance, penalty under section 270A is for under-reporting or misreporting of income and is quantified with reference to tax payable on such under-reported or misreported income. Penalty under section 271AAD, interalia, is for false entry or omission of entry which may or may not lead to tax evasion but is meant for punishing the act of use or intention to use fake or fabricated invoices or omission of entry. Thus, it cannot be said in such a situation that there was double punishment for one and the same default, and thus there was any case of double jeopardy.

In any case, this by itself is quite debatable as to whether rule of double jeopardy if at all is applicable in tax proceeding.

Any Proceeding under this Act

Next question/issue is that the conditions of the applicability of this penalty provision should be found during 'any proceeding' under this Act which means under the Income Tax Act. The term 'any proceeding' is of wide amplitude & would cover all types of proceedings under the Income Tax Act. This term is not to be given restrictive meaning.

Such proceeding under the Income Tax Act, 1961 may be, for instance, assessment proceeding, investigation proceeding e.g. under section 131, 131(1A), 132, 133(6), 133A; TDS proceeding, penalty proceeding and appellate proceeding. But, if the authority who has found such default during any of these proceeding before him is not the assessing officer, such authority would be required to refer the matter to the concerned assessing officer who would thereafter proceed to initiate & impose penalty under section 271AAD.

Also, legislature has used the expression 'proceeding under this Act'. It would mean that the proceeding during the course of which default is found must be proceeding under the Income tax Act only and not under any other Act. Therefore, for example if proceeding is in progress before SFIO or before GST authority, and the default as prescribed under section 271AAD is found, that by itself would not empower assessing officer to initiate & impose penalty under section 271AAD since that proceeding is not under the Income tax Act. In such a situation, SFIO authority or GST authority may bring the fact of the default having been committed by a person to the knowledge of the assessing officer of that person and thereafter, if the assessing officer of such person initiates any proceeding under the Income tax Act within the four corners of law & also finds such default having been committed by such person, such assessing officer may proceed to impose penalty under section 271AAD against such person.

Opponents of this view may tend to argue that such interpretation cannot be given as penalty provision being quasi-criminal in nature should be construed strictly and any proceeding before any other authority under some other enactment should not empower assessing officer under the Act to initiate action under section 271AAD.

In our considered view, there does not seem to be any warrant to give such restrictive meaning and interpretation to this situation. In any case, sharing of information based on facts & evidence by one authority under one enactment to the income tax authority is the order of the day & cannot be shut out. Assessing officer having been supplied such information by other authority under different enactment, may initiate action of investigation under the Income Tax Act, 1961 and may come across himself such violations as are envisaged under section 271AAD. If in such a situation, assessing officer initiates penalty provision under section 271AAD, no fault can be found with that.

Any Proceeding of Assessee or any other Assessee

Proceeding of any year!

Also, it may not be necessary that commission of the default covered under section 271AAD should be found in relation to the proceeding of the assessee only (hereinafter referred as 'first mentioned person' also) or of this year only. In other words, even if the proceeding was relating to some other person/assessee and it is found during the course of that assessee's proceeding that conditions relating to the imposition of this penalty exist in case of first mentioned person, then also the assessing officer of that other person may refer the matter to the assessing officer of such first mentioned person/assessee for action to be taken under sub section (1). If, depending upon the facts of the case whereby this other person was found to have made false entry or omitted any entry as contemplated under sub section (1) of section 271AAD, assessing officer of such other person may himself proceed against such other person under sub section (1) of section 271AAD.

In fact, there can be various situations all of which though cannot be listed but some of which are listed as:

Investigation or assessment of a person, say, 'A' is in progress, assessing officer of 'A' comes to know that 'A' has made false entry in his books of accounts in respect of fake invoices issued by "B', he may proceed to impose penalty against 'A' under sub section (1), and also against 'B' under sub section (2) on the premise that 'B' has caused 'A' to make false entry in his books of accounts etc.

Other situation may be where during the course of investigation or assessment of 'A', it is found by assessing officer of 'A' that 'A' has supplied fake invoices to "B' who have entered such fake invoices in his books of account, he may impose penalty on 'A' under sub section (1) on the premise that either 'A' has made 'false entry' or omitted an entry in his books of accounts depending upon the factual situation in this regard and may refer the matter to the Assessing Officer of 'B' for the penalty to be imposed under sub section (1) of section 271AAD.

There can be another situation whereby assessing officer of 'A' finds in investigation/assessment proceeding of 'A' that 'A' has entered false entry of fake invoices procured from 'B' and 'B' is the person who has supplied such fake invoices to various other persons also. Assessing officer of 'A' would proceed to levy penalty u/s 271AAD against 'A' in respect of such false entry under sub section (1) on the premise that 'A' has made 'false entry', and also may impose penalty on 'B' in respect of such false entry caused to be made by 'B' under sub section (2) in respect of such fake invoices supplied by 'B' to 'A', and may refer the matter to the assessing officers of various other persons for initiating penal action in the hands of various other persons under sub section (1). Assessing officer of 'A' may refer the matter to the assessing officer of 'B' for taking action under section 271AAD against 'B' in respect of fake invoices issued to persons other than to 'A'.

There may be another fact situation where assessing officer of 'A' finds that 'A' has entered a fake invoice in his books of accounts which was supplied by 'B' who has also entered the same in his books of accounts. In such a situation, assessing officer of 'A' would impose penalty on 'A' under sub section (1) and may proceed to impose penalty on 'B' under sub section (2) for causing such false entry to be made etc. Alternatively, Assessing officer of 'A', instead of levying penalty on 'B', may refer the matter to the assessing officer of 'B' to enable him to proceed to impose penalty under sub section (1).

Similarly, default need not be found in the proceeding of that year in which default was committed. If it is found in the proceeding of different year that default was committed by a person in other year, there is no reason as to why provision of section 271AAD be not initiated and be taken to the logical end. This is quite reasonable also because it may not be necessary always to find the default in the same year in which the default was committed.

But, the year in which default is discovered should not be unduly & unreasonably distant from the year in which the default was committed. If it so, very initiation of penalty under section 271AAD may be contested on the ground that its initiation is beyond the reasonable period. Though there is no time limit for initiation of penalty under section 271AAD but general principle that proceeding should be initiated within the reasonable period would govern here also. What is the reasonable period in a given case would depend on the facts and circumstances of each case.

Which Assessing officer

Next issue is as to who is competent to impose penalty on 'any other person' contemplated under sub section (2). Assessing officer who is envisaged under sub section (1) is also the assessing officer under sub section (2) who would be competent to impose penalty on other person. This is clear from the expression 'the' before the words 'Assessing officer' which would mean the same assessing officer who has been referred earlier.

Of course, the assessing officer would impose penalty on such other person after affording him the opportunity of hearing & after confronting him the material in support of the allegation of default, as envisaged under section 274(1) and thereafter such assessing officer shall send a copy of such order to the assessing officer of such other person as envisaged under sub section (3) of section 274.

Books of accounts maintenance whether pre-requisite?

Next question/issue is regarding the default envisaged under section 271AAD 'found' 'in the books of accounts maintained'. False entry or omission of any entry as contemplated under this section should be found in the books of account maintained by a person. If books of account are not maintained, there is no applicability of section 271AAD (1). There may be requirement of maintaining books of accounts under the provisions of the Act and yet if that person is not maintaining books of accounts, he may be liable to penalty for non-maintenance of books of accounts but cannot be penalized under section 271AAD (1), as the finding of false entry or omission of entry should be found in the books of accounts maintained.

There may well be another situation that though books of accounts are maintained, fake invoices are also found but these are not found entered in the books of accounts. Such situation would ordinarily emerge when such invoices would be found during the course of survey or search. These invoices even if not used/entered on the date investigation, would nonetheless constitute 'false entry' as there was 'intention to use' of such invoices, in the books of accounts maintained. This is so in view of opening language of Explanation to section 271AAD.

If a person is not required to maintain books of accounts as he is opting for presumptive scheme of assessment, there may be a situation of not applying the penalty provision of section 271AAD as maintenance of books of account is the pre-requisite of attraction of section 271AAD. But, there may be a situation even in a case where presumptive taxation regime under section 44AD was opted whereby an assessee claims that his turnover is below the maximum threshold, and it is found that the bills based on which he is claiming his turnover to be less than the threshold are fake invoices. There is no reason as to why penalty under section 271AAD be not imposed on such person in such a situation. He may not be maintaining comprehensive books of accounts as envisaged under section 2(12A) but the fact of the matter is that for computing his turnover, there may be some record being maintained by him which can be taken/treated to be books of accounts for this purpose & penalty under section 271AAD may be imposed. It goes without saying that 'books of account' have been defined inclusively & not exhaustively under section 2(12A).

It may also be noted that a person who is issuing only fake invoices and is not maintaining books of accounts may still be liable to be penalised under sub section (2) of section 271AAD as he is 'any other person' causing the first mentioned person referred in sub section (1) to make false entry.

There may be a situation where despite the fake invoices found and/or omission of an entry to evade tax, in the books of accounts maintained such books of accounts are not rejected under section 145 while passing the assessment order. Though, ordinarily books of accounts deserve to be rejected in such a situation & there can be no better case than this situation where books of account should be rejected, yet mere fact that these have not be rejected would not take away the case from the levy of penalty under section 271AAD if on the facts it is found that there were fake invoices or omission of entry.

Substantive conditions

Condition of applicability of section 271AAD (1) is that there should be 'false entry', or 'omission of any entry which is relevant for computation of total income of such person to evade tax liability'. Any other person is also covered under sub section (2) if he has caused the first person to make false entry or caused him to omit entry or himself omitted the entry.

There are some interesting features here. Though 'false entry' has been given inclusive meaning under the 'Explanation' to section 271AAD but other phrase 'omission of any entry…' has not been explained. But, the word 'entry' is appearing under both clauses (i) and (ii) of sub section (1).

Further, the phrase 'to evade tax liability' seems to qualify 'an omission of any entry' clause alone and does not govern the first clause i.e. clause (i) to sub section (1) of section 271AAD viz. 'false entry'. This is so as the legislature has put semicolon immediately after 'false entry' followed by the word 'or' thus disjointing clause (i) and (ii) completely. Interpretation in such a situation seems to be that if the case is that of false entry, penalty is still imposable even if it may not be 'to evade tax liability'. This seems to be in consonance with the purport and object of insertion of section 271AAD appearing in Memorandum, which seeks to penalize the practice of issuing and entering fake invoices. This interpretation seems to be in line with the Memorandum which also speaks of claiming fraudulent input tax credit under GST regime and modus operandi adopted in such cases and illustrated therein. Thus, for instance, 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.

'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), (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. Ejusdem Generis Rule of interpretation too dictates that where a class of things is followed by general wording that is not itself expansive, the general wording is usually restricted things of the same type as the listed items. "False piece of documentary evidence' used in the clause (a) of Explanation would thus be read to have colour from the preceding part viz. 'false invoice', & from subsequent clause (b) and clause (c) of Explanation to section 271AAD which also speak about invoice without actual supply of goods or service or invoice from non-existent person.

Memorandum explaining the provision of Finance Bill also speaks about the menace of fake invoices and claim of fraudulent input tax credit under GST law. Therefore, no extended meaning can be assigned to the term 'false piece of documentary evidence' while understanding the meaning of the term 'false entry' for the purpose of section 271AAD. Thus, Menace of accommodation entry in respect of loan or capital, gift or such similar things does not appear to be caught within the meaning of 'false entry'.

Coming to clause (ii) of sub section (1) of section 271AAD, it appears from its cursory reading as if legislature has overshot the object enshrined in the Memorandum while drafting the fine print of clause (ii) of sub section (1) of section 271AAD. But careful reading of that clause too would show that legislature has spoken about omission of entry in the context of fake/false invoices only. Section 271AAD may seem to have been drafted in such a manner that transcends well beyond the object of fake invoices so vociferously canvassed in Memorandum. But it is not so.

Clause (ii) of sub section (1) of section 271AAD which speaks of 'an omission of any entry….." would also have to be appreciated having regard to the Memorandum. In the matters of fake or false invoices of goods or services issued or obtained, there are situations where such invoices procured by or received from persons are not entered in books of account but in fact are omitted to be so entered. Fake or false invoices of goods or services in the real life world are taken or given either for the purpose of making entry in the books of account & claiming input tax credit, or are omitted to be entered while at the same time, claiming or enabling input tax credit under GST law. Hence, clause (ii) of section 271AAD (1) also is also introduced to encompass the situation envisaged in the Memorandum wherein it was highlighted "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….." In practice also, these racketeers do not enter, rather omit to make entry in the books of account. This covers a situation where a person omits any entry of fake/false invoice which is relevant for the computation of income and which goes to evade tax. On the one hand, input tax credit is claimed/ enabled on the basis of such fake/false invoice but on the other hand, such invoices are altogether omitted or omitted in part even though such omitted entry had relevance for computation of total income of such person and seek to evade tax liability. Thus, according to literal & schematic interpretation of this clause (ii), if there is an omission of any entry of such invoices which has bearing on computation of total income to evade tax liability, it would lead to imposition of penalty under section 271AAD.

Sub section (2) of section 271AAD would refer to any other person who has caused the first mentioned person to enter false entry or caused to omit such entry or who himself omits to enter such fake/false invoices. Such category of persons may broadly cover racketeers, brokers engaged in this pernicious practice of issuing fake/false invoices so on and so forth. In our opinion, employees of persons and other persons covered under sub section (1) & (2) are not intended to be covered under section 271AAD if such employees are merely following instructions of their employers unless any element of deceit or culpability is attributed to them & so established.

In fact, penalty provision of section 271AAD, it is reiterated at the cost of repetition, needs to be read in line with the Memorandum explaining vocally the purport & object of the provision of section 271AAD. Though, it is said that when the language of section is clear and unambiguous, there is no need to fall back upon the object of the section. But, we cannot remain oblivious to this fact that penalty provision of section 271AAD is quite harsh and penalty provision in any case is in the nature of quasi-criminal proceeding and meaning to it dehors the object may lead to unintended consequences.

Whether levy of penalty is discretionary

A question is often asked as to whether legislature has envisaged the levy of penalty under section 271AAD as discretionary as it has used the expression 'may' in the language of that section. In fact, the word 'may' had been used in quite a few other penalty provisions also such as, for example, in section 271(1)(c).

Though the word 'may' denotes discretion but it is settled law that the discretion is a judicial discretion. It means that decision to be taken by an authority including any quasi-judicial authority is not to be an arbitrary discretion but is a discretion which needs to be exercised having regard to justice, equity and good conscience. It would, therefore, imply that if conditions for the levy of penalty under section 271AAD exist in a case, assessing officer would have no choice, but would rather owe a duty, to impose penalty under that section. Therefore, it can be said that there is no discretion vested in the assessing officer once the conditions for invoking and applying the penal provision of section 271AAD are found to exist.

Burden to prove

Section 271AAD is penal provision and hence, burden to prove the fact that the default as envisaged under sub section (1) or (2) of this section has been committed by any person, would rest on the shoulders of the Revenue. This section contemplates 'false entry' or 'omission of entry'. Both require the Revenue to establish existence of the fact situation either of false entry or of omission. It would be for the assessing officer to lead evidence in support of the allegation of the default & existence of the conditions and confront the person so as to elicit his response. It would thereafter be possible for the assessing officer to reach a conclusion either way. There is no presumption under the law as to mental culpability or as to the existence of the conditions envisaged under section 271AAD. It goes without saying that the question whether there is 'false entry' and/or 'omission of entry' 'to evade tax liability' is essentially a question of fact which needs to be established with evidences the burden to prove of which would lie on the shoulders of the assessing officer.

As explained above also, since scope of 'false entry' would be read in the context of fake invoices etc., this may lead to the addition under deeming fiction of section 68. But that in itself would not empower the assessing officer to impose penalty under section 271AAD. He would have to prove that the invoice entered in the books of accounts falls under any one of the three situations provided under clause (a), (b), (c) of the Explanation to section 271AAD. Addition may be made on the basis of deeming fictions as prescribed under the statute but when it comes to the levy of penalty, commission of default as prescribed under section 271AAD must be proved on the basis of material and burden for that would be on the shoulders of the assessing officer which cannot be discharged by merely relying upon the deeming fiction of section 68 etc. Findings in the assessment proceeding may be relevant but they are not conclusive.

Similarly, if there is any omission found, nature & evidence of omission would determine the appropriate head of income under which such omission would lead to addition. It may even lead to applying deeming fiction under section 68 to 69D. Even if any addition is made under the deeming fiction that would not automatically empower assessing officer to invoke the rigors of section 271AAD and it would still be obligatory for the assessing officer to discharge burden of proof by leading positive evidence to establish the default. It goes without saying that findings in assessment proceeding may be relevant but certainly they are not conclusive, as assessment and penalty proceeding are two separate, independent and distinct proceedings.

If 'false entry' is found entered in the books of accounts, assessing officer may discharge his burden by showing/establishing the fact of such false entries having been entered in the books of account supported by fake invoices, from the books of accounts. Thus, the 'use' of such fake invoices would be established in terms of 'Explanation' to section 271AAD.

But, there may be a situation where false or fake invoices are though found in the course of survey or search or in some other proceeding but are not found entered in the books of account on that date. In such a situation, 'intention to use' such fake/false invoices/documents would have to be found out as a fact. Attendant circumstances & other evidences found would show & establish as to whether there was any 'intention to use' such invoices for making false entries etc. These attendant circumstances and evidences may encompass availability of blank bill books, blank cheques, stamps, blank signed or unsigned letter heads etc. of fake entities, past history or the like. In such a situation, all these things would establish 'intention to use' of such fake invoices which would warrant the levy of penalty. Apparent would be taken as real unless proved otherwise by the person from whose possession & control such invoices or other documents/things are found.

Burden to prove that the 'other person' has caused to make false entry, or caused to omit entry, or omitted the entry would also be on Revenue, which can be discharged by leading direct, documentary or circumstantial evidence as discussed above.

Quantum of penalty

Section 271AAD seeks to impose penalty on the aggregate amount of false entry and/or omitted entry. The penalty is leviable on the person who has made false entry and/or omitted entry and also on every other person separately who has caused to make such false entry or omitted or caused to omit entry. The section envisages to penalise a person and every other person covered by sub section (1) & (2) separately for the same false entry and/or omitted entry. If a person entered false entry of purchase as well as sale, penalty under section 271AAD would be aggregate of such false entries involving purchases and sales. Multiplication of penalty is no good ground against the levy of penalty. Object to deal such malpractice of issuing fake/false invoices etc. and claiming fraudulently input tax credit under GST, with sternness is oozing out from the Memorandum.

'Reasonable Cause' under section 273B!

Another important point to be noted is that section 273B does not seek to cover the defaults under section 271AAD. It may be recalled that section 273B provides that no penalty under the specified sections shall be imposable if assessee proves that there was reasonable cause for the failures/ defaults envisaged under the prescribed penalty provisions. Section 273B contains the long list of penalty provisions but section 271AAD does not figure therein. In our considered opinion, there is a reason for this deliberate omission. Since the very basis of section 271AAD proceeds on the premise of fake invoices, there cannot be any cause much less any reasonable cause justifying false, fake and forged documents. The legislature has not envisaged the scope of establishing the reasonable cause on the part of the defaulter. The word 'false' in clause (a) of the Explanation or invoice referred in clause (b) and (c) of the Explanation contemplate a situation where mental culpability is embedded and that is why there was no scope of any reasonable cause to be established under section 273B.

On similar reasoning, there was no justification for making reasonable cause as a defence for situations of omission of entry as referred in clause (ii) of section 271AAD (1) or for any other person who omits or causes to omit as referred in sub section (2) of section 271AAB.

In any case, when opportunity of hearing would be provided in terms of section 274(1), it would be open to the person concerned to plead that ingredients of section 271AAD do not exist in his case.

Conclusion

By this time, it would be clear to one and all that section 271AAD is too harsh a penalty provision with strong deterrence effect. While existence of such harsh penal provision cannot be disputed given the object of this penalty provision in the wake of malpractices in the system but it is hoped that tax administration would ensure that such penalty provision is not abused or misused in the implementation.

[The views expressed are strictly personal.]