27 September 2018 EY Tax Alert Supreme Court reaffirms constitutional validity of Aadhaar PAN linking requirement Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor. Executive summary This Tax Alert summarizes the impact of a recent ruling of the Constitution Bench [1] of the Supreme Court (SC), dated 26 September 2018, in the case of Justice K. S. Puttaswamy v. Union of India [2] and Others (Puttaswamy ruling), which upheld the constitutional validity of the Aadhaar Act [3] and, consequently, also reaffirmed the constitutional validity of the Aadhaar-PAN [4] linking provision under the Indian Tax Laws (ITL). [1] Five-Judge Bench [2] Writ Petition (Civil) No. 494 of 2012 and others [3] The Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 [4] Permanent Account Number (unique tax identification number for taxpayers)
Page 2 Earlier, in June 2017, a Division Bench [5] of the SC, in the case of Binoy Viswam v. Union of India [6] (Binoy Viswam ruling), had upheld the constitutional validity of the Aadhaar PAN linking provision, subject to the outcome of the challenge to the constitutional validity of the Aadhaar Act, which was, at that time, pending before the Constitution Bench. However, as an interim relief, till the validity of the Aadhaar Act was decided by the Constitution Bench, the SC, in the Binoy Viswam ruling, directed that PAN shall not be treated as invalid for a limited class of taxpayers who did not possess Aadhaar [7] and who were not required to file return of income (ROI), in case they failed to comply with the Aadhaar-PAN linking provision. In the intervening period, some High Courts [8] directed the Tax Authority to accept ROIs of taxpayers who had approached the High Court, without quoting Aadhaar. The Constitution Bench, in the Puttaswamy ruling, has upheld the constitutional validity of the Aadhaar Act and, consequently, also confirmed the constitutional validity of the Aadhaar PAN linking provision under the ITL. Consequently, the interim relief granted earlier in the Binoy Visvam s ruling stands vacated. Background Section 139AA of the Income tax Act, 1961 (Aadhaar PAN linking provision), inserted by the Finance Act, 2017 with effect from 1 April 2017, mandates the following compliances by a taxpayer: o Aadhaar quoting compliance: Quoting of Aadhaar [9] while securing new PAN and in ROIs furnished on or after 1 July 2017. o Aadhaar linking compliance: Linking of Aadhaar with PAN on or before specified date [10] in cases where valid PAN was held by any taxpayer as on 1 July 2017, failing which PAN of such taxpayers would be treated as invalid. The Aadhaar-PAN linking provision also confers the power on the Central Board of Direct Taxes (CBDT) [11] to notify the class of taxpayers to whom Aadhaar quoting and linking compliances shall not apply. In exercise of such power, by a Notification [12] dated 11 May 2017, the CBDT excluded the following categories of taxpayers who do not possess Aadhaar: [5] Two-Judge Bench [6] Writ Petition (Civil) No. 247 of 2017 (along with two other writ petitions), order dated 9 June 2017 [7] A 12-digit unique identity number issued by the Unique Identification Authority of India [8] Illustratively, Kerala High Court in Writ Petition No. 26033 of 2017 (order dated 4 August 2017), Madras High Court in Writ Petition No. 27826/ 29820 of 2017 (interim order dated 31 October 2017) o An individual who resides in the states of Assam, Meghalaya and, Jammu and Kashmir; or o An individual who: Is a non-resident as per the ITL; or Is of the age of 80 years or more at any time during the tax year; or Is not a citizen of India. The object of the Aadhaar-PAN linking provision is to tackle tax evasion by unscrupulous persons by obtaining PAN in the names of fictitious taxpayers, which makes it difficult for the Tax Authority to trace financial transactions where PAN is quoted, to the real owners. Since Aadhaar is a unique identity with biometric parameters, linking Aadhaar with PAN makes it possible for the Tax Authority to identify fictitious PAN and invalidate/eliminate them. Constitutional validity of the Aadhaar-PAN linking provision upheld by the SC in the Binoy Viswam ruling: In June 2017, the Division Bench of the SC, in the Binoy Viswam ruling, upheld the constitutional validity of the Aadhaar-PAN linking provision. However, the SC made its ruling subject to the outcome of the challenge to the constitutional validity of the Aadhaar Act which was, at that time, pending before the Constitution Bench of the SC in a set of various writ petitions. As an interim relief, till the validity of the Aadhaar Act was decided by the Constitution Bench, the SC, in the Binoy Viswam ruling, directed that PAN shall not be treated as invalid for a limited class of taxpayers who did not possess Aadhaar and who were not required to file ROI, in case they failed to comply with the Aadhaar linking compliance. [9] If Aadhaar is not available, taxpayer has to quote temporary enrolment ID issued in acknowledgement of Aadhaar application [10] This date is yet to be notified by the Central Government [11] Apex administrative body of direct taxes in India [12] Notification No. 37/2017
Page 3 ØMeanwhile, the CBDT, vide Circular dated 31 July 2017, permitted filing of ROIs by quoting Aadhaar, but without linking Aadhaar to PAN. But, the relief was conditional upon the taxpayer complying with the Aadhaar linking compliance by 31 August 2017, without which ROIs [13] filed would not be processed by the Tax Authority. During the pendency of the present SC ruling, the said date was extended from time to time, vide various orders [14], the last being to 31 March 2019. It appears that this due date was for a limited class of taxpayers who filed ROIs for tax year 2016-17 by quoting Aadhaar, but without linking Aadhaar with PAN. The due date for all taxpayers to link Aadhaar with PAN, failing which PAN shall be treated as invalid under the Aadhaar linking provision, is yet to be formally notified by the Central Government. In the intervening period, some High Courts (supra) directed the Tax Authority to accept ROIs of taxpayers who had approached the High Court without quoting Aadhaar. Impact of upholding the constitutional validity of the Aadhaar Act on the Aadhaar PAN linking provision To recollect, the SC, in the Binoy Viswam ruling, upheld the constitutional validity of the Aadhaar PAN linking provision, subject to the outcome of the challenge to the validity of the Aadhaar Act. Since the Constitution Bench, in the Puttuswamy ruling, has upheld the validity of the Aadhaar Act, the constitutional validity of the Aadhaar PAN linking provision also stands confirmed. Furthermore, the interim relief granted from the Aadhaar linking compliance by the SC in the Binoy Viswam ruling, also stands vacated. Snapshot of litigation on validity of the Aadhaar Act before the SC The matters which were pending before the Constitution Bench of the SC when the Binoy Viswam ruling was pronounced were in relation to two major issues: (1.) Whether the right to privacy is a fundamental right granted under the Constitution of India (Constitution). (2.) The challenge to the constitutional validity of the Aadhaar Act on multiple grounds, including on whether it violates the fundamental right to privacy. The first issue was decided by a nine-judge Bench of the SC, vide a ruling dated 24 August 2017, which held that the right to privacy is a fundamental right guaranteed under Article 21 of the Constitution. The Puttuswamy ruling has dealt with the second issue and has upheld the validity of the Aadhaar Act by a majority ruling (4:1) that it does not violate the fundamental right to privacy. [13] Apparently, CBDT Circular dated 31 July 2017 applies to tax year 2016- [14] Various CBDT orders dated 31 July 2017, 31 August 2017, 8 December 2017, 23 March 2018 and 30 June 2018
Page 4 Comments The present SC ruling puts to rest long-drawn litigation on the challenge to the constitutional validity of the Aadhaar Act. Consequently, the validity of the Aadhaar PAN linking provision, as upheld by the SC in the Binoy Viswam ruling, stands confirmed and interim relief from the Aadhaar linking compliance for taxpayers who were not required to file ROI, stands vacated. The position on compliance of the Aadhaar-PAN linking provision, post the Puttaswamy ruling, is summarized at Annexure below. It may be noted that the Aadhaar linking compliance requires the Central Government to notify the date in the Official Gazette before which the taxpayer shall intimate his or her Aadhaar to the Tax Authority for linking with PAN in the form and manner to be prescribed. Presently, the e-filing portal of the Tax Authority provides a simple mechanism for linking Aadhaar with PAN, though a formal notification of the form, manner and last date for linking is yet to be issued. Hence, until a formal notification is issued, the provisions for invalidation of PAN not linked with Aadhaar, will have no operation. As per the CBDT order dated 30 June 2018, read with the Circular dated 31 July 2017, taxpayers who filed ROIs for tax year 2016-17 by quoting Aadhaar but without linking Aadhaar with PAN, will need to comply with the linking requirement by 31 March 2019 to ensure that their ROIs are processed by the Tax Authority. Taxpayers who are exempted from the Aadhaar-PAN linking provision and who do not possess Aadhaar are not impacted by the present SC ruling. Such taxpayers include individuals who are: (a.) Residing in the states of Assam, Meghalaya and, Jammu and Kashmir. (b.) Non-residents. (c.) Senior citizens aged 80 years or above (d.) Foreign citizens.
Page 5 Summary of tax compliance requirement post the Puttaswamy ruling dated 26 September 2018 Scenario Whether taxpayer has PAN as on 1 July 2017? Whether taxpayer possesses Aadhaar on or after 1 July 2017? Whether mandatory to quote Aadhaar in PAN application and/or ROI? Whether mandatory to link Aadhaar with PAN? 15 I No, but applied for PAN II No, but applied for PAN No. The taxpayer is required to obtain Aadhaar III No, but taxpayer IV wishes to enrol for Aadhaar No/does not wish. The taxpayer V to obtain Aadhaar is required to for the time being obtain Aadhaar [15] The due date by which the taxpayer is required to comply with this requirement is yet to be notified by the Central Government
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