ABL Engineering Company Vs ITO (ITAT Nagpur Bench)
Inoperative Is Not Invalid: ITAT Deletes ₹3.77-Lakh TDS Demand u/s 206AA Where Valid PAN Was Furnished but Not Linked with Aadhaar
Four-Day Delay Condoned
The assessee challenged the order dated 30.04.2026 passed by the CIT(A)/NFAC, confirming a demand of ₹3,77,230 raised by CPC-TDS u/ss 200A/206CB.
The appeal before the Tribunal was delayed by four days. The assessee filed a condonation application supported by an affidavit.
After examining the explanation & hearing both parties, the Tribunal found that the delay was neither intentional nor deliberate. Following Collector, Land Acquisition v. Mst. Katiji & Inder Singh v. State of Madhya Pradesh, the four-day delay was condoned in the interest of justice.
TDS Deducted at 1% on Contract Payment
The assessee was a partnership firm engaged in manufacturing, repair, job work & general fabrication of machinery.
During the relevant period, it made contractual payments aggregating to ₹19,14,000 to M/s Vijay Electronics. Tax was deducted at 1% u/s 194C & deposited in the Government treasury.
In its quarterly TDS statement, the assessee quoted the deductee’s PAN as ENDPK4855B.
CPC-TDS processed the statement & raised a demand of ₹3,77,230 for alleged short deduction of tax. The sole basis of the adjustment was that the deductee’s PAN was shown as inoperative.
The CIT(A) confirmed the adjustment, resulting in the assessee’s appeal before the Tribunal.
Statutory Framework of Section 206AA
The Tribunal examined Section 206AA, which requires a person receiving income on which tax is deductible to furnish PAN to the deductor.
Where PAN is not furnished, tax must be deducted at the higher of the rate prescribed under the relevant provision, the rate in force or 20%, subject to the specific exceptions contained in the section.
Section 206AA(6) further provides that where the PAN furnished is invalid or does not belong to the deductee, it shall be deemed that PAN has not been furnished. The higher deduction requirement then becomes applicable.
Thus, the statutory trigger is either non-furnishing of PAN or furnishing of a PAN that is invalid or does not belong to the deductee.
Valid PAN Was Admittedly Furnished
In the present case, the assessee had obtained PAN from M/s Vijay Electronics & correctly mentioned it in the TDS return.
The Revenue did not dispute that the PAN was valid or that it belonged to the deductee. Therefore, neither of the statutory situations contemplated u/s 206AA existed.
The assessee had not failed to obtain or quote PAN. Nor had it furnished an invalid or unrelated PAN. It had deducted tax at the normal rate of 1% applicable u/s 194C on the strength of a valid PAN supplied by the deductee.
Inoperative PAN Retains Its Identity
The Tribunal drew an important distinction between an invalid PAN & an inoperative PAN.
A PAN may become inoperative because it is not linked with Aadhaar or for other reasons prescribed under the applicable rules. However, it continues to remain a valid identification number assigned to the taxpayer. Inoperativeness temporarily restricts its use for specified tax or financial purposes, but it does not necessarily make the PAN invalid or establish that it belongs to someone else.
Section 206AA(6) expressly speaks of a PAN that is invalid or does not belong to the deductee. It does not automatically equate every inoperative PAN with non-furnishing of PAN.
The impugned intimation itself did not allege that the assessee had furnished an invalid PAN, quoted another person’s PAN or failed to furnish PAN altogether.
Deductor Had No Verification Mechanism
The Tribunal also accepted that the inoperative status of PAN could be identified only through an online or software-based verification facility.
Such a verification mechanism was not available to the assessee at the relevant time. Therefore, after receiving & quoting a facially valid PAN belonging to the deductee, the assessee could not reasonably have ascertained that it had been temporarily rendered inoperative.
A deductor cannot be subjected to a higher TDS liability for failing to perform a verification that it had no mechanism to undertake.
Income Already Offered by Deductee
It was further submitted that M/s Vijay Electronics had filed its return of income, disclosed the contractual receipts & paid the applicable tax.
Consequently, sustaining the short-deduction demand against the assessee would result in double recovery of tax on the same income—once from the deductee through its return & again from the deductor by applying the higher rate.
Although the Tribunal’s principal conclusion rested upon the inapplicability of Section 206AA, this fact further supported the inequity of the demand.
Demand & Interest Deleted
The ITAT held that Section 206AA could not be invoked because the assessee had neither failed to furnish PAN nor furnished an invalid PAN.
The mere fact that the correctly quoted PAN was inoperative did not justify treating the assessee as having committed short deduction at source.
The CIT(A)’s findings were reversed. The demand raised by CPC-TDS for short deduction, along with the consequential interest, was deleted. The assessee’s appeal was accordingly allowed.
Author’s Comments
The decision makes a commercially important distinction between the deductee’s default in linking PAN with Aadhaar & the deductor’s obligation to obtain and quote PAN.
Where the deductor has obtained a valid PAN belonging to the payee, deducted tax at the applicable rate & lacked a facility to verify its operative status, Section 206AA cannot automatically be invoked against it.
The ruling is fact-sensitive & should not be read as neutralising every consequence of an inoperative PAN. Its protection rests on the valid PAN, absence of a verification mechanism & tax already discharged by the deductee.
In short, a PAN may temporarily stop operating, but that does not automatically make the deductor’s compliance invalid.
Cases Discussed
- Collector, Land Acquisition, Anantnag vs. Mst. Katiji & Ors. [1987 (2) SCC 107]
- Inder Singh vs. State of Madhya Pradesh, judgment dated 21.03.2025 [(2025) INSC 382)]
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, NAGPUR
This appeal by the assessee is directed against the order of Ld.Commissioner of Income Tax (Appeals)/NFAC, Delhi (for short, “Ld.CIT(A)”) dated 30.04.2026 passed u/sec. 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of intimation dated 05.11.2023 passed u/sec. 200A/206CB of the Act for the Assessment Year (A.Y.) 2024-25.
2. Registry has informed that there is a delay of 04 days in filing the present appeal. Application for condonation of delay along with an affidavit is placed on record. Perusal of the same and after hearing both the sides, I find that the delay is neither intentional nor deliberate and therefore, in the interest of justice and taking guidance from the judgments of Hon’ble Apex Court in the case of Collector Land Acquisition, Anantnag vs. Mst. Katiji & Ors [1987 (2) SCC 107] and also in the case of Inder Singh vs. State of Madhya Pradesh dated 21.03.2025 [(2025) INSC 382)], I hereby condone the delay and admit the appeal for adjudication.
3. The sole grievance of the assessee is that the Ld. CIT(A) erred in confirming the action of CPC-TDS in raising a demand of Rs. 3,77,230/- u/sec. 200A/206CB of the Act. The demand raised vide intimation issued u/sec. 200A/206CB of the Act is solely on account of the PAN quoted in the return being inoperative.
4. I have heard the rival submissions and perused the material placed before me. I observe that assessee is a partnership firm, engaged in the business of manufacturing, repair, job work and general fabrication of machineries. The assessee is required to deduct tax at source u/sec. 194C of the Act. During the period under consideration, Quarter-2 for A.Y. 2023-24, assessee made payment of Rs.19,14,000/- to M/s.Vijay Electronics towards contractual work and deducted tax at source @ 01% and deposited the same in the Government Treasury. In quarterly TDS return, the assessee has mentioned PAN of the deductee, namely M/s. Vijay Electronics, as ENDPK4855B. The CPC-TDS has raised the impugned demand for the alleged short deduction of tax on the ground that PAN of the deductee namely M/s. Vijay Electronics is inoperative. The provisions relating to requirement of furnishing PAN for deduction of tax at source are provided u/sec. 206AA of the Act. For better understanding, the said provisions are reproduced as under:-
“206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent:
Provided that where the tax is required to be deducted under section 194-O, the provisions of clause (iii) shall apply as if for the words “twenty per cent”, the words “five per cent” had been substituted:
Provided further that where the tax is required to be deducted under section 194Q, the provisions of clause (iii) shall apply as if for the words “twenty per cent”, the words “five per cent” had been substituted.
(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.
(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).
(4) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.
(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.
(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.
(7) The provisions of this section shall not apply to a non-resident, not being a company, or to a foreign company, in respect of—
(i) payment of interest on long-term bonds as referred to in section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.”
5. On perusal of the above section, I find that sub-section (1) of section 206AA of the Act provides that if the assessee does not furnish the PAN to the person responsible for deduction at source, then the tax shall be deducted (i) at the rate specified in the relevant provision of this Act (ii) at the rate or rates in force and (iii) at the rate of twenty per cent. Now the other relevant provisions of sub-section (6) to section 206AA of the Act which provides that if the PAN provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his PAN to the deductor and the provisions of sub-section (1) shall apply. In the instant case, the assessee has mentioned the PAN in the TDS return. The revenue has also not controverted the fact that the PAN is valid.
So, both the conditions that the deductor received PAN from deductee and such PAN is valid, based on which the assessee has deducted tax at source @ 01%. Now in the instant case, assessee has been levied with demand for short deduction of TDS solely on the ground that the PAN quoted in the TDS return is inoperative. In operative means, the PAN is still valid as an identity proof, but the Income Tax Department has temporarily suspended its use for financial and tax transactions because it is not linked with the Aadhar and in some cases, it is treated as inoperative for various other reasons mentioned under the prescribed rules.
6. However, whether the PAN is inoperative can be ascertained only through the facility of software/online verification mechanism, but the same was not available with the assessee. However, the impugned demand has been raised u/sec. 206AA of the Act which could have been invoked in the case of non-furnishing of PAN or furnishing of invalid PAN and both the situations are absent in the present case. Therefore, where the assessee has no mechanism to verify as to whether the quoted PAN in the return of income is inoperative and, thus the assessee should not have been subjected for levy of alleged demand. Even in the intimation raising the alleged demand, nowhere it is stated that the assessee has furnished invalid PAN or not furnished PAN. It has also been stated that the deductee has also filed the income tax return and offered the income arising from the alleged transaction of payment of contract receipts and paid due taxes thereon and, therefore, the impugned addition has resulted into double recovery/taxation on the same income.
7. Under the given facts and circumstances of the present case, the provisions of section 206AA of the Act are not applicable and, therefore, could not have been invoked against the assessee. The assessee had neither furnished an invalid PAN nor failed to furnish the PAN. Accordingly, the action of the CPC-TDS in raising the impugned demand under the said provision is not justified, and the Ld. CIT(A) erred in confirming the same. Finding of Ld.CIT(A) is hereby reversed and the demand raised on account of short deduction of TDS and consequent levy of interest is hereby deleted. Grounds of appeal raised by the assessee are allowed.
8. In the result, appeal of the assessee is allowed.
Order pronounced on 02nd September, 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963
