Circular issued by the Income Tax Department to ease the burden on Tax deductors/ collectors facing demand notices due to PAN inoperability and providing a grace period to rectify PAN-Aadhaar linkage.

Brief Background

• The Income Tax Department issued Circular No. 3 of 2023, on 28.03.2023, explaining the consequences of a PAN becoming inoperative due to failure to link it with Aadhaar, as per rule 114AAA of the Income-tax Rules, 1962.
• A person who has failed to link Aadhaar with PAN shall be subject to Tax Deducted at Source (TDS)/ Tax Collected at Source (TCS) at a higher rate in accordance with the provisions of section 206AA/ 206CC.
• The tax department has issued Circular No. 6/2024 to address the grievances faced by taxpayers who have received notices for ‘short deduction/ collection of TDS/ TCS while carrying out transactions with persons having inoperative PANs.

Key excerpts from Circular

• Circular specifies that for transactions entered into up to 31st March 2024 and in cases where the PAN becomes operative by linking with Aadhaar before 31st May 2024, there will be no liability on the deductor/ collector to deduct/ collect tax under sections 206AA/206CC.
• Instead, the deduction/collection mandated in respective provisions of Chapter XVII-B or Chapter XVII-BB of the Income-tax Act shall apply.

Our preliminary thoughts

• This is a welcome clarificatory move for the majority of taxpayers who have been issued TDS demands on account of this reason.
• It is recommended to follow up with deductees/ collectees to ensure that PAN is linked with Aadhaar on or before 31st May 2024. Status of PAN can be verified on the e-Filing portal.
• It is pertinent to note that the Circular is silent as to how the already raised demands which have been settled by the deductors will be catered, and how the relief will be extended to such cases.