The Supreme Court’s Refusal to Stay the Requirement of Aadhaar for Income-Tax Returns Raises Several Troubling Questions

By Anupama Kumar | 12 June 2017

The Supreme Court’s recent judgment in the case of Binoy Viswam vs Union of India is the latest in a series of developments with respect to Aadhaar, the central government’s program to provide unique identification numbers to all residents of India. In the judgment, which was pronounced on 9 June, the court was adjudicating a challenge to Section 139AA of the Income Tax Act. The section was introduced into the Income Tax Act as a part of the Finance Act in April 2017. It included two controversial mandates: that all individuals seeking to file income-tax returns or apply for a fresh Permanent Account Number (PAN) card after 1 July 2017 must quote their Aadhaar number in the return or application; and that a failure to link a PAN card allotted before 1 July to an Aadhaar number or Aadhaar enrolment number would result in the invalidation of the PAN card. While the Supreme Court has read down the latter to mean that a PAN card will not get invalidated if a person does not obtain an Aadhaar card, it failed to address the necessity of providing an Aadhaar number for filing income-tax returns, leaving open the possibility that a failure to do so would invite penal consequences.

The Aadhaar programme has been controversial since its introduction in 2009. As Aadhaar cards were used for welfare schemes, such as the transfer of domestic gas subsidies, or benefits under the National Rural Employment Guarantee Programme, several civil society organisations, social activists and privacy-law experts raised concerns with respect to data protection and possible invasions of privacy. In August 2015, while hearing a batch of petitions challenging the validity of the Aadhaar scheme, a three-judge bench of the Supreme Court referred the cases to a higher bench on the question of whether the constitution enshrines a right to privacy that is violated by the biometric-data collection for Aadhaar enrolment. In October 2015, the Supreme Court directed that enrolment in the Aadhaar programme would be purely voluntary, and that the Aadhaar number “cannot be made mandatory till the matter is finally decided by this Court one way or the other.”

The central government, however, took every possible step to expand the Aadhaar programme. In 2016, Arun Jaitley, the finance minister, introduced the Aadhaar Bill as a money bill in the Lok Sabha, which meant that the Rajya Sabha would have no powers to reject the bill. Despite criticism over the manner of its introduction, the bill was passed, leading to the enactment of the Aadhaar Act in March 2016. In 2017, the government introduced Section 139AA into the Income Tax Act and the section was then challenged before the Supreme Court on grounds of unconstitutionality.

In Binoy Viswam, the Supreme Court only read down Section 139AA to a very limited extent. It found the first part of the section—which provides that it is mandatory for income-tax assessee to provide an Aadhaar number in her application for a PAN card and in her income-tax returns—to be constitutionally valid. The court, however, stayed the operation of the second part of the section, which states that a failure to link a PAN card with an Aadhaar card would invalidate the PAN card from the date of its issuance. The court noted that the invalidation of a PAN card would have several serious consequences, such as making the holder of an invalid card incapable of obtaining a bank loan of more than Rs 50,000 or depositing the same amount in a bank account. The court therefore read down a retrospective application of the law, according to which someone who does not possess an Aadhaar card before 1 July cannot be compelled to link it to their PAN card. It noted: “Those assessees who are not Aadhaar card holders and do not comply with the provision of Section 139(2), their PAN cards be not treated as invalid for the time being.” However, the court has upheld the prospective application, and anyone already possessing an Aadhaar card would necessarily have to comply with the second part of the section.

The stay on the second part of Section 139AA provides little relief to persons who do not possess Aadhaar cards because the Supreme Court has not expressed any views on how individuals without Aadhaar cards may file their tax returns from this year. It appears that the section has been read down only with respect to the invalidity of PAN cards, and to a limited extent at that, considering any fresh applications for a PAN card will require the applicant to quote her Aadhaar number. The rest of the Supreme Court’s order raises a number of concerns.

First, the court did not clarify the effect of the order with respect to the second part of the section and the filing of income-tax returns. It appears to agree with the central government’s framing of the act, which imposes a penalty of invalidation of PAN cards on a failure to link it to an Aadhaar number. The judgment states that “it cannot be denied that there has to be some provision stating the consequences for not complying with the requirements of Section 139AA of the Act.” However, it is ambiguous as to whether the court is referring to the requirements under the first part of the section, which makes it mandatory for a taxpayer to quote her Aadhaar number in her income-tax returns and PAN card applications, or to the second part, which requires Aadhaar card holders to link their Aadhaar number with their PAN card. It further notes that it is the prerogative of the legislature to impose penalties. Otherwise, “if those persons who violate Section 139AA of the Act without any consequence [sic], the provision shall be rendered toothless.”

The judgment does not, however, elaborate on what those consequences might be. Nor does it clarify whether the consequences would apply to those without Aadhaar cards, considering it read down the retrospective application of the section. The court proceeds to state that the “requirement of giving Aadhaar enrolment number to the designated authority or stating this number in the income tax returns is directly connected with the issue of duplicate/fake PANs.” However, it stops short of discussing whether this is necessary for those without Aadhaar cards, or the consequences of a failure to state the Aadhaar number in the income-tax returns.

The court has therefore chosen to remain silent on the most pressing question before it—whether the absence of an Aadhaar number would invalidate tax returns filed after July 2017. This in turn means that taxpayers are still unclear on the consequences of failing to obtain or to furnish an Aadhaar number. The Income Tax Act provides that both a failure to furnish tax returns, and a failure to report one’s PAN in these returns entail penalties, under sections 271F and 272B of the act. Section 271F imposes a penalty of Rs 5,000 for a failure to furnish a return on income, whereas Section 272B imposes a penalty of Rs 10,000 for a failure to quote the permanent account number in the income-tax returns. Of even greater concern is Section 276CC, which mandates that the failure to file income-tax returns by the end of the assessment year is an offence punishable with a minimum imprisonment of three months, and a maximum of seven years.

The court’s judgment, however, provides no clarity as to whether any of these provisions would apply to a person who does not quote her Aadhaar number in her income-tax returns. Meanwhile, on 10 June, the day after the court pronounced its judgment, the Central Board of Direct Taxes issued a press release on the “effect of the judgment.” The CBDT has stated that the first part of Section 139AA still stands and anyone filing their tax returns after 1 July will need to quote their Aadhaar number. It is pertinent to note that in 2001, in the case of Commissioner of Income Tax vs Anjum Ghaswala, the Supreme Court held that press releases, unlike circulars, do not bind income-tax authorities.

Secondly, the order acknowledges that a five-judge bench of the Supreme Court is yet to hear and pass orders on the question of Aadhaar and the possible violation of a right to privacy, but does not examine the impact of such a ruling on Section 139AA. The court recorded that concerns of a data leak are real, and that the parliament should look to pass a data-protection legislation. However, this is only a suggestion to the legislature, and there is no further analysis of the issue. What if, for instance, the constitution bench were to find that mandatory enrolment in Aadhaar violates a right to privacy, and citizens should have the option of remaining outside the Aadhaar programme? The decision would be meaningless for the citizens who would now be compelled to obtain Aadhaar cards in order to file their tax returns after 1 July. The data obtained from them would already exist on the government’s servers.

In upholding the validity of Section 139AA, the court relied extensively on the central government’s submissions that this was a step taken to prevent money laundering and tax evasion, and to root out black money. The court reasoned that the problem of black money had reached “alarming proportions” and that all steps had to be taken to “root out the menace.” This is of little comfort to citizens concerned about the possibility of a data leak, and the misuse of information provided. If biometric information is already provided to the government through a mandatory process, any questions of privacy become academic.

Thirdly, the court notes that the Income Tax Act and the Aadhaar Act operate in different fields. It states that the introduction of the new Section 139AA in the Income Tax Act is “to check a menace of black money as well as money laundering,” whereas the Aadhaar Act is to “avail the benefits of schemes and services.” As a result, the court held, the earlier rulings that Aadhaar would remain voluntary would not affect the competence of the legislature to introduce the new section. This appears not to consider that linking an Aadhaar number to a PAN has practically the same effect—citizens must file income-tax returns, or face penal consequences. Moreover, it appears to set a dangerous precedent, by permitting legislatures to reverse judicial decisions by passing laws in slightly different contexts. The Supreme Court’s order in August 2015 specified that Aadhaar “will not be used by the respondents for any purpose other than the PDS Scheme and in particular for the purpose of distribution of foodgrains, etc. and cooking fuel, such as kerosene. The Aadhaar card may also be used for the purpose of the LPG Distribution Scheme.” In its October 2015 order, the court added four other schemes for which the Aadhaar could be used. On a plain reading, this appears to exclude the use of Aadhaar numbers for all other purposes—including for income tax.

Finally, the reluctance of the court to look closely at questions with respect to Aadhaar is particularly troubling in light of the government’s backtracking on its promises. Since 2015, the government has reiterated that enrolment in the Aadhaar programme is voluntary. The court also took note of this, stating that: “Fact remains that as per the Government and UIDAI itself, the requirement of obtaining Aadhaar number is voluntary. … Thus, enrolment under Aadhaar is voluntary.” By introducing the new provision, the government has done indirectly what they had promised not to do directly—Aadhaar enrolment may not expressly be mandatory, but citizens must enrol if they are to file income tax returns.

In only partially staying Section 139AA, it appears that the Supreme Court has missed an opportunity to address some crucial questions as to the implications of the Aadhaar programme, and leaves open several questions. Several challenges to the programme now remain pending before the court—one, that is to listed be heard at the end of this month that challenges the notifications making the Aadhaar card mandatory for 17 different welfare schemes; another that challenges the passage of the Aadhaar Act as a money bill; and a larger constitution bench is to be constituted to hear the challenge to the programme with respect to potential violations to the right to privacy. In Binoy Viswam, the Supreme Court did not hear any arguments on the right to privacy, and passed the judgment subject to the decision made by the constitution bench. It remains to be seen what impact these judgments will have on the Aadhaar programme and the changes, if any, that it will bring to citizens’ lives.

Anupama Kumar is a lawyer based in Chennai.

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