2012 (6) TMI 451 - HC - Income Tax

Applicability of Section 206AA to persons whose income is below taxable limit - non-acceptance of Form 15G by Bank on ground of non-production of PAN - Held that - Section 206AA makes it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. Imposition of such condition on small depositors would cause hindrance and discourage small investors to come forward to invest their money for secured returns and as security for their future. This runs contrary to what has been contemplated u/s 139A. Hence, Section 206AA is made inapplicable to persons and read down from the Statute for whose income is less than the taxable limit. Banking and financial institutions shall not invariably insist upon PAN from such small investors as well as from persons who intend to open an account in the bank or financial institution.

Summary

Issues:
Challenge to the constitutionality of Section 206AA of the Income Tax Act, 1961.

Analysis:
The petitioners, small investors without income exceeding the taxable limit, filed Form 15G to avoid tax deduction at source, but were required to provide their Permanent Account Number (PAN) due to an amendment in Section 206AA. They argued that this provision caused hardship and was arbitrary, violating Article 14 of the Constitution. The Parliament had previously introduced Section 139A to exempt non-assessees from tax deduction on small investments. However, Section 206AA, effective from 1.4.2010, mandated PAN for all transactions, affecting small investors. The court noted the difficulty faced by such individuals, especially the poor and illiterate, in obtaining PAN, hindering their investment activities.

The court analyzed the intention behind Section 206AA, which made PAN mandatory for all transactions, including those by small investors. This requirement contradicted Section 139A, which exempted individuals below the taxable limit from needing a PAN or filing income tax returns. The court observed that while the Legislature aimed to broaden the tax base, exempting those below the taxable limit from PAN requirement was reasonable. The court highlighted that penal provisions could address tax evasion concerns without burdening small investors with PAN requirements.

Considering the conflict between Section 206AA and Section 139A, the court held that Section 206AA should not apply to individuals with income below the taxable limit as per the Finance Act, 1991. The court clarified that Section 206AA would still be applicable to individuals with income above the taxable limit. It directed banking and financial institutions not to insist on PAN from small investors or individuals opening accounts if their income was below the taxable limit. The court allowed the petitions, providing relief to small investors and individuals with limited income from the mandatory PAN requirement under Section 206AA.