A recent circular by the Central Board of Direct Taxes (CBDT) asked tax officials to look at the newly inserted section that deals with fake invoices and entries.
Accordingly, the Income tax department has started scrutinising financial statements of companies to examine whether there are any fraudulent transactions or false entry that could result in tax evasion.
As the tax department suspects that several companies are forging financial statements so that they can avoid tax. However, the tax department is relying on a newly inserted section in the tax regulations that refers to a “false entry (accounting entry) or omission of an entry” to pay fewer taxes.
The tax department would also start scrutinising sale and purchase invoices of companies and whether this corresponds with the financial statements and taxes paid.
However, as per the tax experts the scrutiny could also cause issues for several small companies that may depend on old ways of business or that may not be maintaining proper financial records. Also the way the new regulation is defined could cause some issues.
Tax experts point that penal provision is enacted to combat fraudulent transactions and they are in addition to any other penalty whether prescribed under income-tax or other laws like GST.