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 deserved to be dealt with harsher provisions under the Income Tax Act as well as Goods & Service Tax Act.

Therefore, Finance Act, 2020 inserted a new section 271AAD in the Income-tax Act relating to penalty for false entry or omission of entry in the books of account and also brought amendment in the CGST Act, 2017 via inserting sub-section (1A) to section 122.

These changes have been made effective from April 01, 2020 for AY 2021-22 (FY 2020-21).

New Section 271AAD of the Income Tax Act, 1961

(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.		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.

Following key takeaways to remember after reading Section 271AAD:

1.		Penalty under this section shall be levied irrespective of assessee liable to pay other penalties under the Income Tax Act.
2.		It is whole discretion of officer (A.O.) to levy the penalty on assessee.
3.		This penalty can only be levied when any proceeding under the Income Tax Act is going on assessee.
4.		Penalty can be levied on any person i.e. individual, HUF, company, firm, association of person, body of individuals, local authority, artificial juridical person.
5.		Rationale to impose penalty is prevention of tax avoidance by debiting excess expense (‘false entry‘) or by omitting recording of revenue invoices in P&L account (‘omission of entry that impact computation of total income‘).
6.		“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.
7.		Whether assessee maintain books on mandatory or voluntary basis would not make any impact on imposition of penalty.

Amendment in Section 122 of CGST Act, 2017

Section 122 of the CGST Act, 2017 contains various offences under which a person shall be liable to pay penalty. Keeping in view the growing cases of fake invoices, Finance Act, 2020 inserted sub-section (1A) to Section 122.

Insertion of Subsection (1A) in Section 122

Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on.

Prescribed clauses of Section 122(1):

i.		Supply of goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply;
ii.		Issue of invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;

(vii) Avail or utilizes input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made there under;

(ix) Avail or distributes input tax credit in contravention of section 20, or the rules made there under;

Combined Analysis of Section 271AAD of Income Tax Act and Section 122(1A) of CGST ACT

Situation	Section 271AAD of the Income Tax Act, 1961	Section 122(1A) of the CGST, 2017
Supply of goods or services or both without issue of any invoice.	Penalty under clause (ii) of section 271AAD (1) Note: Only supplier shall be liable	Penalty under section 122(1A) [Transaction covered under clause (i) of Section 122(1)] Note: Only supplier shall be liable
Supply of goods or services or both with issuance of false or incorrect invoice.	Penalty under clause (i) of section 271AAD (1) [Covered under point (a) of Explanation to section 271AAD] Note: Both supplier & recipient shall be liable	Penalty under section 122(1A) [Transaction covered under clause (i) of Section 122(1)] Note: Both supplier & recipient shall be liable
Invoice issued or received without actual supply or receipt of goods or services or both.	Penalty under clause (i) of section 271AAD (1) [Covered under point (b) of Explanation to section 271AAD] Note: Both supplier & recipient shall be liable	Penalty under section 122(1A) Note: Supplier shall be liable under clause (ii) of Section 122(1) Note: Recipient shall be liable under clause (vii) of Section 122(1)
Invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.	Penalty under clause (i) of section 271AAD (1) [Covered under point (c) of Explanation to section 271AAD] Note: Person who exist shall be liable to pay	Penalty under section 122(1A) [Transaction covered under clause (ii) of Section 122(1)] Note: Person who exist shall be liable to pay

Conclusion

From the above discussion, we can conclude that accounting and book keeping needs to be done properly. There should not be any false entry or omission of any entry in the books. Proper reconciliation of books for the purpose of Income tax as well GST is required. Income tax Returns and GST Returns should be correct in order to avoid any punitive action. Any negligence or error or mistake on the part of the assessee can result into imposition of heavy penalties.