ITAT Nagpur Holds Inoperative PAN Is Not Invalid for Section 206AA: TDS Demand of ₹3,77,230 Deleted

1. Background of the Dispute

The Nagpur Bench of the Income Tax Appellate Tribunal, in the case of ABL Engineering Company Vs ITO (ITAT Nagpur Bench), examined whether a deductor can be saddled with higher TDS liability under Section 206AA where the deductee’s PAN, though valid and correctly quoted, was treated as “inoperative” for non-linking with Aadhaar.

The appeal arose from an order dated 30.04.2026 passed by the CIT(A)/NFAC, Delhi, which had upheld an intimation issued by CPC-TDS under Section 200A/206CB raising a demand of ₹3,77,230 on account of alleged short deduction of tax at source.

The Tribunal was required to decide:

  • Whether Section 206AA could be invoked solely because the PAN of the deductee was “inoperative”; and
  • Whether the assessee-deductor, having obtained and quoted a valid PAN and deducted tax at 1% under Section 194C, could be treated as in default for not applying the higher rate prescribed in Section 206AA.

2. Condonation of Four-Day Delay

2.1 Delay in Filing the Appeal

The appeal before the Tribunal was filed with a delay of 4 days. The assessee moved a condonation petition supported by an affidavit explaining the circumstances of the delay.

2.2 Tribunal’s Approach to Condonation

After:

  • perusing the condonation application and affidavit, and
  • hearing both sides,

the Tribunal concluded that the delay was not deliberate or motivated.

Relying on the principles laid down by the Hon’ble Supreme Court in:

  • Collector Land Acquisition, Anantnag vs. Mst. Katiji & Ors. [1987 (2) SCC 107], and
  • Inder Singh vs. State of Madhya Pradesh, judgment dated 21.03.2025 [(2025) INSC 382)],

the Tribunal condoned the delay in the interest of justice and admitted the appeal for adjudication on merits.

3. Facts: TDS on Contract Payments and CPC-TDS Intimation

3.1 Nature of Business and TDS Obligation

ABL Engineering Company is a partnership firm engaged in:

  • manufacturing,
  • repair,
  • job work, and
  • general fabrication of machinery.

The firm was liable to deduct tax at source under Section 194C on payments made to contractors.

3.2 Payment to M/s Vijay Electronics and TDS Deduction

During Quarter 2 of Assessment Year 2023-24, the assessee:

  • made contractual payments aggregating to ₹19,14,000 to M/s Vijay Electronics, and
  • deducted TDS at 1% under Section 194C,
  • deposited the deducted tax into the Government account.

In the quarterly TDS return, the assessee reported the PAN of M/s Vijay Electronics as ENDPK4855B.

3.3 CPC-TDS Adjustment and Demand

CPC-TDS processed the TDS statement and issued an intimation under Section 200A/206CB, raising a demand of ₹3,77,230.

The basis of the demand:

  • The PAN ENDPK4855B of the deductee was flagged as “inoperative”;
  • CPC-TDS treated the case as attracting higher TDS under Section 206AA;
  • The alleged short deduction, along with interest, was computed in the intimation.

The CIT(A)/NFAC sustained this adjustment, leading to the present appeal before the Tribunal.

4.1 Text and Scheme of Section 206AA

The Tribunal reproduced and examined the scheme of Section 206AA of the Income Tax Act 1961, which, inter alia, provides: