The Income Tax Appellate Tribunal set aside the higher TDS demand on the ground that the deductor could not be held liable for the deductee's delayed PAN-Aadhaar linking, emphasizing reasonable cause and CBDT circulars, and remanded the matter to the Assessing Officer for fresh consideration.
Background & Facts
The Dispute
The appellant, Manoj Kumar, proprietor of M/s Manoj Metals (address: Plot No. 118, FBD, Haryana, 121001), challenged the order dated 14.08.2025 of the Commissioner of Income Tax (Appeals)-7, Mumbai, which upheld a demand for additional tax, interest, and penalties under the Income Tax Act, 1961 for Assessment Year 2024-25. The dispute centred on the applicability of the higher TDS rate of 5 % under Section 206AA because the PAN of the deductee (the seller of a property) was not linked with Aadhaar at the time of payment.
Key Facts
- 08 2023: The appellant purchased a property for Rs 30,60,000 in August 2023 and deducted TDS at 0.1 % under Section 194IA, filing the return on 28-08-2023 and processing it on 29-08-2023.
- Demand Computation: The Assessing Officer (AO) computed a total demand of Rs 48,07,910, including interest under Section 201(1A), late filing fee under Section 234E, and the higher TDS rate under Section 206AA.
- PAN-Aadhaar Issue: The deductee’s PAN remained inoperative because it was not linked with Aadhaar. The appellant repeatedly sought confirmation from the supplier, who assured that linking would be completed.
- CBDT Circulars: Circular No. 7/2022, Circular No. 3/2023, Circular No. 6/2024, and Circular No. 9/2025 extended the deadline for PAN-Aadhaar linking to 31-05-2024 and later provided relief for transactions where linking was completed within specified windows.
- Appeals Filed: Three separate appeals (ITA Nos. 1499, 1500, 1501/Del/2026) were filed, each raising identical grounds of appeal.
Procedural History
- 14-08-2025: CIT(A) order confirming the demand.
- 04-08-2026: Date of hearing before the ITAT G Bench.
- 31-08-2026: Date of pronouncement of the ITAT order (the present judgment).
- Earlier Pre-litigation: Property purchase on 08-2023; TDS deduction and filing in August 2023.
Parties' Positions
- Appellant: Asserted that the delay in PAN-Aadhaar linking was beyond its control, that it had exercised reasonable care, and that the higher TDS rate and penalties should be waived under Section 273B (reasonable cause) and the CBDT circulars.
- Respondent (ITO): Contended that the statutory provision Section 206AA is mandatory, placing the onus on the deductor to ensure the deductee’s PAN is operative; therefore, the higher rate and penalties were justified.
Relief Sought
The appellant sought:
- Set-aside of the demand of Rs 48,07,910 (including the higher TDS component, interest and late fee);
- A direction to the AO to recompute tax at the lower rate of 0.1 % under Section 194IA;
- Costs of the appeal.
The Legal Issue
What is the correct interpretation of Section 206AA and Rule 114AAA(3) when the deductee’s PAN is inoperative due to delayed PAN-Aadhaar linking, and does the deductor have a defence of reasonable cause under Section 273B to avoid the higher TDS rate and associated penalties?
Arguments Presented
For the Appellant
- The appellant relied on Section 273B (reasonable cause) and argued that the delay was technical and beyond its control, citing CBDT Circulars 7/2022, 3/2023, 6/2024 and 9/2025 which expressly extended the linking deadline.
- It highlighted that tax was deducted at the statutory rate of 0.1 % and deposited, showing no mens rea or intent to evade tax.
- The appellant cited Sanchit Gupta v. DCIT (ITA No. 8431/Del/2025) where the Coordinate Bench allowed fresh consideration in identical circumstances.
For the Respondent
- The respondent emphasized the plain language of Section 206AA, which mandates a higher rate where the deductee’s PAN is inoperative, irrespective of the deductor’s knowledge.
- It argued that the onus of verifying PAN operability rests on the deductor, and the statutory scheme aims to curb tax evasion.
- The respondent relied on earlier ITAT decisions that upheld the higher rate where the deductor failed to obtain PAN-Aadhaar linkage.
The Court's Analysis
The Tribunal examined the statutory framework:
- Section 206AA and Rule 114AAA(3) impose a higher TDS rate when a deductee’s PAN is inoperative. However, the Tribunal noted that the provision must be read in conjunction with the principle of reasonable cause under Section 273B.
- The Tribunal gave weight to the CBDT circulars, observing that they represent a legislative intent to provide relief for systemic delays in PAN-Aadhaar linking. It quoted the circulars’ language that the deadline for linking was extended to 31-05-2024 and later to 30-09-2025 for certain transactions.
- The Tribunal held that the deductor’s reliance on the supplier’s assurances was commercially reasonable and that the deductor had no statutory power to compel the deductee to link PAN.
- Citing Sanchit Gupta v. DCIT, the Tribunal affirmed that where the deductor has acted in good faith and the default is attributable solely to the deductee, the higher rate should not be mechanically applied.
- The Tribunal also stressed that the AO’s failure to consider the CBDT circulars amounted to a procedural lapse.
"The deductor cannot be penalised for a technical default that is wholly attributable to the deductee’s failure to link PAN with Aadhaar, especially when CBDT circulars have expressly extended the compliance timeline."
- Consequently, the Tribunal concluded that the demand based on the higher TDS rate was unsustainable and that the AO should recompute tax at the rate actually deducted (0.1 %).
The Verdict
The Tribunal allowed all three appeals, set aside the demand of Rs 48,07,910 (including the higher-rate TDS, interest and late fee), and remitted the matters to the Assessing Officer for fresh determination in accordance with Section 206AA, Rule 114AAA(3) and the relevant CBDT circulars. No costs were awarded.
What This Means For Similar Cases
Reasonable Cause Can Defeat Section 206AA
- Practitioners must be prepared to demonstrate that any delay in PAN-Aadhaar linking was beyond the deductor’s control and that reasonable steps were taken to obtain compliance.
- Evidence of supplier communications and timelines will be crucial.
CBDT Circulars Are Binding on Tax Administrators
- The Tribunal affirmed that circulars extending PAN-Aadhaar linking deadlines must be applied by the assessing authority.
- Deductors should cite the specific circulars (e.g., No. 6/2024, No. 9/2025) in their appeals.
Burden of Proof Remains on the Deductor
- While the onus to ensure PAN operability remains with the deductor, the Tribunal clarified that the burden can be discharged by showing commercially reasonable reliance on the deductee’s representations.
- Failure to raise the issue at the AO stage may be fatal; hence, early intervention is advisable.
Practical Takeaways
- Maintain written records of all communications with suppliers regarding PAN status.
- Monitor CBDT circulars regularly; they can materially affect TDS liability.
- When faced with a higher-rate demand, promptly invoke Section 273B and submit evidence of reasonable cause.
