PAN-Aadhaar Linkage For Demat Accounts Constitutionally Valid: Orissa HC Dismisses Plea Of Ex-MP Against Mandatory Aadhaar Usage

The Orissa High Court has dismissed a plea made by former Member of Parliament (MP) Tathagata Satapathy challenging the requirement of mandatory linking of Aadhaar to Permanent Account Number (PAN) for the purpose of operating dematerialized accounts ('demat accounts').While holding the aforesaid requirement to be constitutional and a reasonable restriction on 'right to privacy', the Single Bench of Dr. Justice Sanjeeb Kumar Panigrahi observed –“The mandatory linking of Aadhaar with PAN and Demat accounts under Section 139AA of the Income Tax Act aligns with the constitutional principles laid down in Puttaswamy and its triple test: legality, necessity, and proportionality. Section 139AA satisfies this test as it is backed by a valid legislative mandate, serves a legitimate state interest, and imposes only a proportionate restriction on privacy.”Case BackgroundThe petitioner, a four-time MP from Dhenkanal constituency of Odisha, was having a savings account in his name at the HDFC Bank, Cuttack-Puri Road Branch, Bhubaneswar. On the advice of the bank officials, he invested an amount of ₹25 lakhs from his savings account into trading through HDFC Securities on 24.12.2019 in demat account linked to his savings account and started trading transactions under this arrangement from 06.01.2020.In July 2023, the petitioner's trading/demat account was made dormant on the ground that it was not linked to Aadhaar. After knowing about this development, the petitioner informed the bank authorities that he had not enrolled under Aadhaar and it is not mandatory for banking services or transactions, as per the decision of the Supreme Court. Thus, he requested the bank to resolve the issue accordingly.Notably, the petitioner's savings account and demat account were not linked to Aadhaar at the time of opening, as the petitioner had not enrolled under Aadhaar at all. When the bank failed to resolve the issue, he requested it to close his demat account and transfer all his shares and funds to his nominee/wife's demat account.However, the Head Office of the opposite party-bank sent an e-mail to the Branch Manager of HDFC Bank, stating that the suspension of the demat account of the petitioner could not be removed without linking the PAN with Aadhaar.Therefore, the petitioner filed this writ petition challenging the action of the bank in not allowing him to operate the demat account under his savings account on the ground that the account is not linked to Aadhaar. He impugned the same, which according to him was ex facie illegal, arbitrary and contrary to the decision of the Supreme Court. Court's ObservationsAt the very outset, the Court acknowledged the fact that during the pendency of this writ petition, the Bank unfroze the petitioner's demat account on 03.06.2024, basing upon a circular issued by the National Securities Depository Limited (NSDL) and therefore, the cause of action did not survive anymore, rendering the litigation in this case merely an academic exercise.“In light to this, any further deliberation on the issues raised would be purely academic, serving only to address questions that, with the passage of time, may not have been adequately answered. While courts generally refrain from engaging in academic exercises, in certain circumstances, an authoritative pronouncement may be warranted to settle legal uncertainties and provide clarity for future cases,” the Court said.The only question which required to be addressed by the Court was whether mandatory requirement of PAN-Aadhaar linkage for operating a demat account is in tandem with the constitutional guarantees, especially the right to privacy protected under Article 21 of the Constitution.It referred to the judgment of the Supreme Court in Binoy Viswam v. Union of India & Ors. (2017), which upheld Section 139AA of the Income Tax Act, emphasizing its critical role in curbing the duplication of PAN cards and preventing tax evasion. The Court underscored that the provision was introduced to enhance the integrity of financial transactions and ensure compliance with tax laws by mandating the linkage of Aadhaar with PAN.In Justice (Retd.) K.S. Puttaswamy v. Union of India (2018), the Apex Court acknowledged the judgement in Binoy Viswam (supra) and upheld the validity of Section 139AA of the Income Tax Act by repelling the contention premised on alleged violation of Articles 14 and 19 of the Constitution.Justice Panigrahi flagged the misuse of the securities market as a channel for money laundering and tax evasion. He highlighted how unscrupulous elements use layered transactions, shell companies and offshore accounts to obscure the origins of illicit funds. “Additionally, the anonymity afforded by multiple (read: fake) PAN cards and unverified accounts has further facilitated tax evasion. Fraudulent market participants have used benami Demat accounts to conduct high-value transactions while avoiding taxation,” he observed.By recognising the shortcomings, the...

PAN-Aadhaar Linkage For Demat Accounts Constitutionally Valid: Orissa HC Dismisses Plea Of Ex-MP Against Mandatory Aadhaar Usage

Jyoti Prakash Dutta

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