Section 271AAD – Penalty for Fake Entries and Fake Invoices

While introducing the new penalty provisions, relating to fake entries and fake invoices under Income Tax, the Finance Minister, Smt. Nirmala Sitharaman, in her budget speech, had stated as under:

‘In order to discourage the taxpayers to manipulate their books of accounts by recording false entries (including fake invoices) to claim a wrong input tax credit, it is proposed to impose a penalty for such malpractices.'

The new provisions of Section 271AAD of the Income Tax Act impose a penalty for fake invoicing; fake entries and omission of entries (entry which is relevant for computation of income) in the books of accounts. Further, the penalty under Section 271AAD is also imposed on the other person who induces the defaulter to commit such an offensive act. The present article explains the provisions of newly inserted Section 271AAD; and also the meaning of the term false entry and the amount of penalty payable under Section 271AAD.

Understanding the Provisions of Section 271AAD

The newly inserted Section 271AAD of the Income Tax Act states that the provisions of the section are applicable in the following circumstances:

Provisions are applicable in case it is found that there is a false entry in the books of accounts maintained by any person; or
Provisions are applicable in case it is found that there is an omission of any of the entry (which is relevant for computation of total income of such person) to evade income tax liability in the books of accounts maintained by any person.
Provisions are also applicable in case any other person who induces the person to make a false entry or omit any entry which is relevant for computation of income in the books of accounts.

Other important points covered under provisions of Section 271AAD:

The provisions of Section 271AAD are without prejudice to any other provisions of the Income Tax Act.
The penalty under Section 271AAD can be imposed only on the direction of the Assessing Officer.
The provisions are applicable only in case of a finding fake invoice; fake entry or omission of entry during any proceedings under the Income Tax Act.
The penalty provisions are applicable with effect from 1st April 2020.

Meaning of the term ‘false entry’

In order to understand the provisions of Section 271AAD, it is necessary to understand the term false entry. The explanation to Section 271AAD states that false entry includes use or intention to use the following:

Forged or falsified documents (like a false invoice or a false piece of documentary evidence) or
Invoice issued in respect of the supply of goods or services without actual supply of goods or services; or
Invoice in respect of the supply of goods or services to or from a person who does not exist.

Amount of Penalty Payable under Section 271AAD

The defaulter is liable to pay the penalty of an amount equal to the total of such false and omitted entries.

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Frequently Asked Questions

Common questions about Section 271AAD.

Section 271AAD aims to discourage taxpayers from manipulating their books of accounts by recording false entries (including fake invoices) to claim incorrect input tax credits or evade income tax liability. It introduces a penalty for such malpractices.

Section 271AAD imposes a penalty on any person found to have made false entries or omitted relevant entries in their books of accounts to evade income tax liability. It also applies to any other person who induces the defaulter to commit such an offensive act.

The explanation to Section 271AAD defines 'false entry' as including the use or intention to use forged or falsified documents, invoices issued without actual supply of goods or services, or invoices for transactions with non-existent entities.

The penalty amount under Section 271AAD is equal to the total of such false and omitted entries found in the books of accounts.

The provisions of Section 271AAD are applicable with effect from April 1, 2020.

No, the penalty under Section 271AAD can be imposed only on the direction of the Assessing Officer.

Yes, the provisions of Section 271AAD are without prejudice to any other provisions of the Income Tax Act.

The provisions of Section 271AAD can be invoked if false entries or omissions of relevant entries are found during any proceedings under the Income Tax Act.

Section 271AAD applies to false entries or omissions of entries that are relevant for the computation of the person's total income and consequent income tax liability.

No, the penalty under Section 271AAD cannot be imposed retrospectively as the provisions are applicable with effect from April 1, 2020.