SC verdict on Aadhaar: Will it hamper the fight against black money?

Published: October 3, 2018 1:28:02 PM

Upholding the constitutional validity of section 139AA of the Income-Tax Act,1961 mandating linking of PAN and Aadhaar will also strengthen Government’s fight against black money by ensuring that people do not get away from tax net by simply not quoting their PAN in reportable transactions.

Upholding the constitutional validity of section 139AA of the Income-Tax Act,1961 mandating linking of PAN and Aadhaar will also strengthen Government’s fight against black moneyMandating linking of PAN and Aadhaar will strengthen Government’s fight against black money. (Image: PTI)

By Srinivasan Anand G

In a recent Landmark Judgement in Justice K.S. Puttaswamy (Retd and another) vs Union of India (dated 26th September 2018), the Supreme Court upheld the Constitutional validity of Aadhaar as not infringing on privacy of the citizens and upheld the constitutional validity of the provisions of Section 139AA of the Income-Tax Act,1961 requiring compulsory linking of Aadhaar Number with PAN.

The Court took due judicial notice of the unique nature of Aadhaar that differentiated it from other Identity Proofs such as PAN cards, Passports, ration cards etc and took note of the fact that as issuing of Aadhaar involves collecting biometric data, same person cannot get more than one Aadhaar card as biometric details collected the second time for obtaining the second Aadhaar by the same individual would match with biometric data in Aadhaar database and he can’t be issued a second Aadhaar card.

Aadhaar’s role in inclusion and reducing corruption

With other identity proofs, it is not so and an individual can obtain duplicate PANs or passports to game the system. The Court also noted the role played by Aadhaar card in reducing leakages, pilferages and corruption in the implementation of welfare schemes meant for marginalised section of the society.

The Court observed “Insofar as the argument based on a probabilistic system of Aadhaar, leading to ‘exclusion’ is concerned, the Authority has claimed that biometric accuracy is 99.76% and the petitioners have also proceeded on that basis. In this scenario, if the Aadhaar project is shelved, 99.76% beneficiaries are going to suffer.

Would it not lead to their exclusion? It will amount to throwing the baby out of the hot water along with the water. In the name of 0.232% failure (which can, in any case, be remedied) should be revert to the pre-Aadhaar stage with a system of leakages, pilferages and corruption in the implementation of welfare schemes meant for marginalised section of the society, the full fruits thereof were not reaching to such people?”

Aadhaar-PAN linking: key points

The Court in the same judgement took notice of affidavits by Central Govt stating that analysis of Form 61/60 data using PAN-Aadhaar linkage shows that a large number of PAN holders do not quote their PAN in the prescribed transactions to prevent linking of the transactions to the PAN .

This was detected when Central Government matched the Aadhaar number and person name reported in Form 61 (which was possible only due to linking of financial transactions/accounts with Aadhaar) with the Aadhaar and name of the entity available in the ITD PAN database (possible due to linking of PAN with Aadhaar).

This analysis identified 1.65 crore non-PAN transactions reported through Form 61 (relating to FY 2016-17 and FY 2017-18) where PAN of the transacting party was present in the PAN database and was not mentioned filing a wrong form deliberately. These transactions totalled to around Rs. 33,000 crore (based on transaction amount reported).

This is the amount of undisclosed high-value transaction which would have gone undetected had it not been for Aadhaar linkage. Similar matching has also helped to populate PAN in 1.12 lakh non-PAN transactions reported under Statement of Financial Transactions (SFT). Majority of the non- PAN transactions reported are around Deposit in Cash, Investment in time deposit, Sale of immovable property, Purchase of immovable property and Opening an account (other than savings and time deposit).

Taking due judicial notice of all the above, the Court held that “ linking of PAN with Aadhaar will significantly enhance legitimate collection of country’s revenue.” and that “there is a justifiable reason with the State for collection and storage of data in the form of Aadhaar and linking it with PAN insofar as Section 139AA of the Income Tax Act is concerned.” Based on the above, the Court upheld the Constitutional validity of section 139AA of the Income-Tax Act,1961 requiring mandatory linking of Aadhaar to PAN

No mandatory linking with bank accounts – a concern

However, the Court struck down as unconstitutional the linking of Aadhaar to bank account made amendments made mandatory in 2017 by amendments to Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 .

These amendments required compulsory linking of Aadhaar Number to bank account not only for new accounts to be opened after the coming into force of the amendments but also existing accounts which were opened before the effective date of the amendments. If a client holding existing account failed to get their accounts linked to Aadhaar number, the account shall cease to be operational till the time the Aadhaar number is submitted by the client.

What petitioners challenged

These amendments were challenged by the petitioners as violative of Articles 14, 19(1)(g) and 21 of the Constitution and also of Prevention of Money Laundering Act, 2002. It was argued that those persons who do not choose to enrol for Aadhaar number would not be in a position to open the bank account or even operate the existing bank account and there is no valid explanation as to why all bank accounts had to be authenticated.

It was also argued that provisions of the Rule referred to companies, firms, trust etc. as well, though the Aadhaar Act is meant for establishing identity of individuals only. It was further submitted that in case a person fails to link Aadhaar with the bank account, such person would be rendered ineligible to operate the bank account, which would amount to forfeiting her money lying in the account which belongs to her.

This amounts to depriving the person from her property and is, therefore, violative of Article 300A of the Constitution as such a deprivation can take place only by primary legislation and not by subordinate legislation in the form of Rules. Much emphasis was also laid on the argument that the amended Rule does not pass the proportionality test. The Court upheld the contentions of the petitioners and struck down the amendments to Rule 9.

The Court held that it does not meet the test of proportionality and is also violative of right to privacy of a person which extends to banking details. The test of proportionality requires that a limitation of the fundamental rights must satisfy the following to be proportionate: (i) it is designated for a proper purpose; (ii) measures are undertaken to effectuate the limitation are rationally connected to the fulfilment of the purpose; (iii) there are no alternative less invasive measures; and (iv) there is a proper relation between the importance of achieving the aim and the importance of limiting the right.

The Court found the amendments disproportionate for the following reasons:(a) a mere ritualistic incantation of “money laundering”, “black money” does not satisfy the first test; (b) no explanations have been given as to how mandatory linking of every bank account will eradicate/reduce the problems of “money laundering” and “black money”; (c) there were alternative methods of KYC which the banks were already undertaking and the state had not discharged its burden as to why linking of Aadhaar is imperative.

The Court’s decision and reasons for finding mandatory linking of bank accounts to Aadhaar is intriguing as, in the same judgement, the Court had noticed that the whole architecture of Aadhaar is devised to give a unique identity to the citizens of this country.

The Court observed “Enrolment for Aadhaar card also requires giving of demographic information as well as biometric information which is in the form of iris and fingerprints. This process eliminates any chance of duplication. It is emphasised that an individual can manipulate the system by having more than one or even number of PAN cards, passports, ration cards etc.

When it comes to obtaining Aadhaar card, there is no possibility of obtaining duplicate card. Once the biometric information is stored and on that basis Aadhaar card is issued, it remains in the system with the Authority. Wherever there would be a second attempt for enrolling for Aadhaar and for this purpose same person gives his biometric information, it would be immediately get matched with the same biometric information already in the system and the second request would stand rejected.

It is for this reason the Aadhaar card is known as Unique Identification (UID). Such an identity is unparalleled.” It is intriguing that even after noticing these features of Aadhaar which duplication impossible, the Court found that no explanations have been given as to how mandatory linking of every bank account will eradicate/reduce the problems of “money laundering” and “black money” and the state had not discharged its burden as to why linking of Aadhaar is imperative.

Is there possibility of keeping black money in bank account?

The Court further observed “ Nobody would keep black money in the bank account. We accept the possibility of opening an account in an assumed name and keeping black money therein which can be laundered as well. However, the persons doing such an Act, if at all, would be very few.”

One wonders how the Honourable Apex Court came to the conclusion that “nobody would keep black money in the bank account”. One wonders what definition of “black money” the Court have in mind?. Whether it is that of tax-evaded money from legitimate activity or laundered proceeds of crime or both? In the very next sentence, the learned judges contradict themselves saying “We accept the possibility of opening an account in an assumed name and keeping black money therein which can be laundered as well. However, the persons doing such an Act, if at all, would be very few.”

Very few cases: enough to strike down?

One can apply the same logic to security checks at the airport. Not every air traveller is a terrorist or has any criminal intent. The persons with such intent, if at all, will be very few. Why should everyone be subjected to security checks then? Will the Court strike down security checks of each and every air traveller as unconstitutional tomorrow? Besides, on what basis did the Honourable Apex Court comes to the conclusion that only few accounts will be that of money-launderers. What if these few involve proceeds of crime laundered by terrorists who are readying for the next deadly strike? Why allow these deadly criminals to open bank accounts by duplicating other KYC documents in the first place and allow them to launder money and finance their deadly activities?

It is obvious that the Government could not produce the same amount of data before the Court for compulsory linking of bank accounts as they could for compulsory linking of PAN. However, the Government had legitimate concerns for linking to bank accounts as the Hon’ble Supreme Court has accepted these concerns by acknowledging that a few persons could open bank accounts with fake IDs or duplicated IDs to launder money. In economic and technical matters, the Government ought to be allowed considerable latitude as the Supreme Court itself has held on more than one occasion.

The silver lining

However, the damage to efforts of fighting black money menace appears to be mitigated by the fact that Rule 114B of the Income-Tax Rules,1961 make it mandatory to furnish PAN for opening any bank account other than Basic Savings Bank Deposit Account (BSBDA). In BSBDA, one can only make four 4 debits in a month, either directly from the branch, ATM or through electronic transfers and one u can’t credit more than Rs 1 lakh in a year and can’t have more than Rs.50,000 in it at any time.

Also, the total debit by cash withdrawals and transfers in a month cannot exceed Rs.10,000. And mandatory linking of PAN to Aadhaar which has been upheld by the Supreme Court would ensure that fake PANs cant be used to open accounts for laundering money. However, one cannot say with certainty that no damage has been done.

Conclusion

Overall, the Judgement has strengthened the Government’s fight against black money by upholding the constitutional validity of Aadhaar as the basis for Government transferring subsidies, benefits to accounts of downtrodden people in a manner that reduces leakages, pilferages and corruption.

Upholding the constitutional validity of section 139AA of the Income-Tax Act,1961 mandating linking of PAN and Aadhaar will also strengthen Government’s fight against black money by ensuring that people do not get away from tax net by simply not quoting their PAN in reportable transactions.

It is hoped that the Government will file a review petition regarding the striking down of mandatory linking of Aadhaar to Banks. This also holds out a lesson to Government that if it makes any move to link immovable properties to Aadhaar in future to curb black money, it must come well-prepared with data to defend the measure if challenged in Courts.

Srinivasan Anand G is Senior Consultant at Taxmann. Views expressed are the author’s own.

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