Inoperative PAN and TDS demand: belated Aadhaar linkage does not bar relief, but fresh verification of tax compliance is required.

An inoperative PAN, treated as non-furnishing of PAN under section 139AA(2) and Rule 114AAA(3), attracts the higher deduction consequence under section 206AA, so belated Aadhaar linkage does not by itself give automatic relief. The order nevertheless held that the deductor should not be fixed with the higher demand without verifying whether the deductee disclosed the sale transaction and paid due tax. The matter was therefore remitted for de novo examination, with the Assessing Officer directed to verify the relevant facts, subsequent linkage, and tax compliance before deciding the short-deduction demand.

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Issues: Whether the demand raised for short deduction of tax at source was sustainable where the deductee's PAN was stated to be inoperative for non-linkage with Aadhaar, and whether the matter required restoration for verification of subsequent linkage and tax compliance by the deductee.

Analysis: The return in Form 26QB was processed by applying the higher deduction rate under section 206AA because, by virtue of section 139AA(2) and Rule 114AAA(3), an inoperative PAN is to be treated as non-furnishing of PAN and attracts the consequences prescribed under section 206AA. The stated linkage of PAN with Aadhaar occurred much later than the extended compliance date referred to in the CBDT circulars considered in the order, so the assessee could not claim automatic relief on the basis of belated linkage alone. At the same time, the order recognised that the deductor should not be fastened with the higher demand without verification of whether the deductee disclosed the sale transaction and paid due tax, and that the revenue system ought to flag inoperative PANs for such transactions. The matter was therefore considered fit for de novo verification.

Conclusion: The higher demand was not finally affirmed on merits and the issue was remitted to the Assessing Officer for fresh determination after verification of the relevant facts and tax compliance.

Ratio Decidendi: Where deduction at source is triggered by an inoperative PAN, the deductor may still seek relief if subsequent verification shows that the deductee has duly disclosed the income and paid tax, requiring a fresh factual determination rather than automatic confirmation of the demand.

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