Inoperative PAN Cannot Automatically Trigger Higher TDS: ITAT Nagpur Deletes ₹3.77 Lakh Demand Under Section 206AA
ITAT Nagpur Ruling | Section 206AA | Inoperative PAN | TDS Short Deduction | Income Tax Case Law
The Income Tax Appellate Tribunal (ITAT), Nagpur Bench, has delivered an important ruling in the case of ABL Engineering Company v. Income Tax Officer, Ward-4(1), Nagpur, holding that a demand for short deduction of Tax Deducted at Source (TDS) cannot be sustained merely because the PAN of the deductee was reported as inoperative, particularly when the deductor had furnished the PAN and the Revenue had not established that the PAN was invalid.
The Tribunal deleted the demand of ₹3,77,230, along with the consequential interest, providing significant relief to the deductor.
The judgment emphasises that the provisions of Section 206AA of the Income Tax Act, 1961, cannot be mechanically invoked without satisfying the statutory conditions prescribed therein.
Case Details
Particulars| Details
Case Name| ABL Engineering Company v. ITO, Ward-4(1), Nagpur
Tribunal| ITAT Nagpur Bench (SMC)
ITA No.| 696/NAG/2026
Assessment Year| 2024-25
Date of Hearing| 7 August 2026
Date of Pronouncement| 2 September 2026
Member| Shri Manish Borad, Accountant Member
Relevant Sections| Sections 194C, 200A/206CB and 206AA
Demand Deleted| ₹3,77,230
Background of the Case: TDS Demand Due to Inoperative PAN
ABL Engineering Company, a partnership firm engaged in manufacturing, repair, job work and general fabrication of machinery, was required to deduct TDS under Section 194C of the Income Tax Act.
During the relevant period, the assessee made contractual payments of ₹19,14,000 to M/s Vijay Electronics. TDS was deducted at the applicable rate of 1% and deposited with the Government Treasury.
While filing its quarterly TDS return, the assessee duly quoted the PAN of the deductee, namely M/s Vijay Electronics, as ENDPK4855B.
However, the CPC-TDS raised a demand of ₹3,77,230 on the ground that the PAN of the deductee was inoperative. The demand was raised on the allegation of short deduction of TDS.
The assessee challenged the demand before the Commissioner of Income Tax (Appeals), NFAC, Delhi. However, the CIT(A) confirmed the action of CPC-TDS.
Aggrieved by the appellate order, the assessee approached the ITAT Nagpur Bench.
Legal Issue Before ITAT Nagpur
The primary issue before the Tribunal was:
Whether a deductor can be held liable for short deduction of TDS under Section 206AA merely because the PAN furnished by the deductee is inoperative, even though the PAN was duly quoted in the TDS return and was not established to be invalid?
The issue assumes importance because an inoperative PAN and an invalid PAN are not necessarily the same thing.
Section 206AA: When Can Higher TDS Be Applied?
Section 206AA of the Income Tax Act provides for higher TDS where the deductee fails to furnish PAN to the deductor.
Under the applicable provisions, tax is required to be deducted at the higher of:
– The rate specified in the relevant provision of the Income Tax Act;
– The rate or rates in force; or
– 20%, subject to the applicable statutory exceptions.
Further, Section 206AA(6) provides that where the PAN furnished to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished PAN.
Therefore, the statutory trigger for applying the higher rate is the non-furnishing of PAN or the furnishing of an invalid PAN, as contemplated under the provision.
The crucial question was whether an inoperative PAN, by itself, could be treated as an invalid PAN for the purpose of Section 206AA.
ITAT’s Observations: Inoperative PAN Is Not Necessarily an Invalid PAN
The Tribunal carefully examined the provisions of Section 206AA and the facts of the case.
It observed that the assessee had furnished the PAN of the deductee in the TDS return. Further, the Revenue had not controverted the fact that the PAN was valid.
The Tribunal explained that an inoperative PAN continues to be valid as an identity proof, although its use for financial and tax transactions may be temporarily suspended due to non-linking with Aadhaar or other prescribed reasons.
The Tribunal also observed that the assessee did not have access to the mechanism required to verify whether the PAN quoted in the TDS return was inoperative.
The relevant observation of the Tribunal was:
“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.”
This observation is particularly significant. The Tribunal focused on the statutory conditions prescribed under Section 206AA rather than mechanically accepting the system-generated demand.
Deductee Had Also Offered the Income to Tax
Another important aspect considered by the Tribunal was that the deductee had filed its income tax return and offered the income arising from the contractual transaction to tax.
The Tribunal noted that the deductee had paid the applicable taxes on the income received from the assessee.
Consequently, the impugned demand had resulted in double recovery or taxation of the same income.
While this aspect formed part of the factual background, the Tribunal’s principal reasoning was that the statutory conditions for invoking Section 206AA were not satisfied.
Final Decision: ₹3.77 Lakh TDS Demand Deleted
The ITAT Nagpur Bench held that Section 206AA was not applicable in the given circumstances.
The Tribunal concluded that:
– The assessee had furnished the PAN of the deductee in the TDS return.
– The PAN was not established to be invalid.
– The assessee had no mechanism available to verify the inoperative status of the PAN.
– The demand was raised solely on account of the PAN being inoperative.
– The conditions for invoking Section 206AA were absent.
Accordingly, the Tribunal reversed the order of CIT(A), deleted the demand raised for alleged short deduction of TDS and also deleted the consequential interest.
The appeal filed by ABL Engineering Company was allowed.
Practical Implications for Tax Deductors
The ruling is relevant for businesses, partnership firms, companies, professionals and other persons responsible for deducting TDS.
It highlights the importance of distinguishing between an invalid PAN and an inoperative PAN while examining TDS defaults.
However, the ruling should not be understood as a blanket exemption from higher TDS in every case involving an inoperative PAN. The applicability of Section 206AA must be examined in light of the facts, the relevant statutory provisions and the applicable law.
Tax deductors should maintain proper records of:
– PAN furnished by the deductee;
– TDS deduction and deposit;
– Quarterly TDS returns;
– Contractual payments and supporting documents; and
– Income-tax return filing and tax payment details of the deductee, wherever available.
Where a system-generated demand is raised, the deductor should examine whether the statutory conditions for the alleged default are actually satisfied.
Conclusion
The ITAT Nagpur ruling in ABL Engineering Company v. ITO reinforces an important principle of tax administration: statutory provisions must be applied in accordance with their actual language and conditions.
A deductor who has duly furnished the PAN of the deductee should not automatically be subjected to a higher TDS liability merely because the PAN is reported as inoperative, without examining whether the PAN is invalid within the meaning of Section 206AA.
The deletion of the ₹3,77,230 demand is a welcome relief for taxpayers and serves as a reminder that system-generated TDS demands must withstand scrutiny under the law.
Case Citation: ABL Engineering Company v. ITO, Ward-4(1), Nagpur, ITA No. 696/NAG/2026, ITAT Nagpur Bench (SMC), order dated 02.09.2026.
Source: ITAT Nagpur Bench Judgment.
The copy of the order is as under:
