High Court: PAN not mandatory for those with income below taxable limit

Here is some heartening news for those who are small investors/depositors and whose income is below the taxable limit. The Karnataka high court has said that Permanent Account Number (PAN ) for a financial
transaction is not applicable to those whose income is below taxable limit. The Karnataka High Court has ruled that persons whose income falls below the taxable limit are not required to obtain Permanent Account Number (PAN).  The high court on Friday said that the banking institutions and the financial institutions should not insist upon small time investors whose income is below the taxable limit, on producing their Permanent Account Number (PAN).

A Kowsalya Bai and two others had challenged the introduction of the Section 206 AA of the Income Tax Act 1961 which was introduced from April 1, 2010. Allowing petitions filed by A Kowsalya Bai and others, Justice Huluvadi G Ramesh on Friday observed that provisions of section 206 AA of Income Tax Act, 1961, which make PAN compulsory for any financial transaction, is inapplicable to these category of people as it runs contrary to section 139 A of the Act. Section 139A permits these people to file a declaration in Form 15G to seek exemption from TDS. Justice Huluvadi G. Ramesh delivered the verdict, allowing the petition filed by 58-year-old Kowsalya Bai A. of Bangalore and others challenging the demand for PAN made by financial institutions — Shriram City Union Finance Ltd. and Shriram Transport Finance Co. Ltd. — for accepting their request to open fixed deposit account for sums in the range of Rs. 5,000.

The High Court has also directed that banks and other financial institutions should not insist on PAN from such persons for opening of account or for making investment by way of fixed deposits.  The petitioners had claimed that they had no other source of income other than their investment and had filed the necessary declaration under Section 197A of the Income Tax Act for not having taxable income and seeking exemption from deduction of tax at source on the interest. Despite this, the financial institutions refused to accept their deposits stating furnishing of PAN was mandatory since April 2010 under Section 206AA of the I-T Act, as amended through the Finance Act, 2009.  

Mr. Justice Ramesh held that the very intent of the Section 206AA was to make it conditional for every person who wished to have a transaction in a bank or financial institutions, including small investors/depositors, to have a PAN. This runs contrary to what has been contemplated under Section 139A of the Act, which was introduced in 1991, granting exemption from possessing PAN to those whose total income falls under the taxable limit.

The section has an overriding provision to furnish the PAN and as a consequence of which the persons who do not have assessable income are now compelled to obtain PAN, or otherwise taxes would be deducted.  Though the intention of the legislature is to bring the maximum persons under the net of income tax, it should not force people whose income is below the taxable limit to produce PAN, the high court said. The judge observed that making PAN mandatory would discourage small investors from investing their money for secured returns.