2025 (3) TMI 532 - HC - Income Tax

Mandatory linkage of Aadhaar with PAN for the operation of Demat accounts - Petitioner denied to access to his Invest Right app and Demat Account linked to HDFC Bank Savings Account as alleged that the bank withheld the petitioner s funds and profits and made his accounts dormant in July 2023 citing the lack of Aadhaar linkage despite Aadhaar not being required when the accounts were opened. Petitioner submits that he is a senior citizen and a four-term Member of Parliament as deliberately not enrolled under Aadhaar as it has been his consistent stance in Parliament that biometric data should not be collected from citizens unwilling to enroll under Aadhaar. Therefore since he has not enrolled under Aadhaar furnishing an Aadhaar enrollment number to the bank to operate the Invest Right App Demat Account does not arise. HELD THAT - The concept of I or the self has been a central theme in Indian philosophy since its inception. In Indian culture the term Swa ( ) directly translates to self signifying one s individual identity essence or inner being. It embodies not just personal identity but also a profound spiritual dimension emphasizing self-reliance autonomy and the realization of one s true nature. Swadharma is not a cage that limits Swa ; it is the force that gives it meaning anchoring the self in a larger purpose. When Swa aligns with duty it does not diminish; it transcends transforming the individual into something far greater than the sum of personal wants. Mandatory linkage of Aadhaar with PAN for the operation of his DEMAT account - It is essential to acknowledge that the securities market has historically been misused as a channel for money laundering and tax evasion. Unscrupulous individuals and entities have used layered transactions shell companies and offshore accounts to obscure the origins of illicit funds. One of the most common methods has been circular trading where stocks are bought and sold repeatedly among related parties to artificially inflate prices and create a facade of legitimate gains. This practice allows black money to be converted into white through capital gains exemptions often at the expense of market integrity and government revenue. Additionally the anonymity afforded by multiple (read fake) PAN cards and unverified accounts has further facilitated tax evasion. Fraudulent market participants have used benami Demat accounts to conduct high-value transactions while avoiding taxation. The lack of robust verification mechanisms in the past enabled individuals to hold multiple PAN cards which allowed them to siphon money through the stock market without detection. As a result tax authorities often faced significant hurdles in tracing taxable income and enforcing financial transparency. Recognizing these loopholes the government introduced the mandatory linkage of PAN with Aadhaar u/s 139AA of the Income Tax Act. This measure aims to eliminate duplicate and fraudulent PANs ensuring that every financial transaction is traceable to a verifiable individual. By linking Aadhaar a unique biometric-based identity with PAN the authorities can effectively track income detect discrepancies and curb tax evasion within the securities market. This move enhances accountability strengthens anti-money laundering efforts and reinforces the credibility of India s financial system. The linkage requirement coupled with strict enforcement by regulatory bodies like SEBI and NSDL ensures that Demat accounts remain a legitimate channel for investment rather than a tool for illicit financial activities. The mandatory linking of Aadhaar with PAN and Demat accounts u/s 139AA of the Income Tax Act aligns with the constitutional principles laid down in Puttaswamy and its triple test legality necessity and proportionality. Section 139AA satisfies this test as it is backed by a valid legislative mandate serves a legitimate state interest and imposes only a proportionate restriction on privacy. As for proportionality Aadhaar is already a widely accepted authentication tool and linking it with PAN does not impose an excessive burden on individuals. While data security concerns exist the state s compelling interest in preventing financial fraud and tax evasion justifies this limited restriction on privacy especially with safeguards like encryption and data protection protocols in place. Therefore even though the Aadhaar-PAN linkage does not guarantee absolute privacy it does not amount to an unconstitutional infringement of fundamental rights. The measure is a reasonable restriction in furtherance of public interest ensuring that financial transactions remain transparent and that the securities market is not misused for illicit purposes. As long as adequate security measures are in place to protect Aadhaar data the linkage requirement remains a constitutionally valid and proportionate policy aimed at strengthening the financial ecosystem. The fear among individuals mandated to link their Aadhaar with PAN and Demat accounts is not unfounded. Any vulnerability in the Aadhaar database can lead to misuse of personal and financial information with grave consequences such as unauthorized access to bank accounts cloning of identities and financial fraud. The very system designed to prevent tax evasion and money laundering may inadvertently expose people to new risks if adequate safeguards are not in place. As financial institutions and regulatory bodies increasingly rely on Aadhaar for verification the risks associated with a compromised database could have far-reaching consequences for the economy and public trust in digital governance. Thus the need of the hour is to strengthen the security framework of Aadhaar by implementing state-of-the-art encryption multi-layered authentication protocols and stringent access controls. The government must prioritize cyber security measures conduct regular audits and ensure that data protection laws are rigorously enforced. Transparency in addressing data breaches along with proactive steps to fortify the Aadhaar infrastructure is essential to instill confidence in the system. Without these measures the very objective of Aadhaar-PAN linkage i.e. to ensure financial transparency and curb fraud may be undermined by the risk of data breaches and privacy violations. The impugned provision mandating Aadhaar-PAN linkage for Demat accounts stands on firm constitutional and legal footing. It satisfies the triple test established in Puttaswamy 2018 (9) TMI 1733 - SUPREME COURT serving a legitimate state interest in curbing tax evasion and ensuring financial transparency. While concerns regarding data security and privacy are acknowledged they do not outweigh the compelling need for regulatory oversight in the securities market. Adequate safeguards have been implemented to mitigate risks and the measure remains a proportionate and reasonable restriction on privacy. Therefore the provision does not warrant interference by this Court.

Summary

ISSUES PRESENTED and CONSIDERED

The primary legal issues considered in this judgment are:

• Whether the mandatory linkage of Aadhaar with PAN for the operation of Demat accounts violates constitutional rights, particularly in light of the Supreme Court's decision in K.S. Puttaswamy v. Union of India.
• Whether the writ petition against HDFC Bank, a private entity, is maintainable under Article 12 of the Constitution of India.
• The implications of the Aadhaar-PAN linkage requirement on privacy and informational privacy rights.
• The legality and necessity of the Aadhaar-PAN linkage under Section 139AA of the Income Tax Act.

ISSUE-WISE DETAILED ANALYSIS

1. Maintainability of the Writ Petition:

The Court considered whether a writ petition is maintainable against HDFC Bank, a private entity. The Bank argued that it does not fall under the scope of Article 12 of the Constitution, which defines "State" for the purpose of enforcing fundamental rights. As such, a writ petition against it is not maintainable. However, the Court proceeded with the case due to the socio-economic importance of the issues raised.

2. Aadhaar-PAN Linkage Requirement:

The Court examined the legal framework surrounding the mandatory Aadhaar-PAN linkage, specifically Section 139AA of the Income Tax Act. This provision was introduced to prevent tax evasion and ensure financial transparency by eliminating duplicate and fraudulent PANs. The Court referenced the Supreme Court's decision in Binoy Viswam v. Union of India, which upheld the validity of Section 139AA, emphasizing its role in curbing black money and money laundering.

The Court also considered the decision in K.S. Puttaswamy v. Union of India, which recognized the right to privacy as a fundamental right. However, the Court noted that privacy is not an absolute right and must be balanced against legitimate state interests.

3. Privacy and Informational Privacy:

The Court acknowledged the concerns regarding privacy and informational privacy in the digital age, where personal data is an extension of the self. The Aadhaar-PAN linkage requirement was scrutinized under the triple test of legality, necessity, and proportionality established in Puttaswamy. The Court found that the requirement satisfies this test, as it is backed by a valid legislative mandate, serves a legitimate state interest, and imposes a proportionate restriction on privacy.

The Court highlighted the importance of data protection and the need for robust cybersecurity measures to protect sensitive personal information, particularly given reports of Aadhaar data leaks and unauthorized access.

SIGNIFICANT HOLDINGS

The Court upheld the mandatory Aadhaar-PAN linkage for Demat accounts, finding it constitutional and legally justified. It concluded that:

• The Aadhaar-PAN linkage serves a legitimate state interest in preventing tax evasion and ensuring financial transparency.
• The requirement is a proportionate restriction on privacy, satisfying the triple test established in Puttaswamy.
• Concerns regarding data security and privacy do not outweigh the need for regulatory oversight in the securities market.
• The provision mandating Aadhaar-PAN linkage does not warrant interference by the Court.

The Court disposed of the writ petition, vacating any interim orders previously passed.