Effect of non-furnishing of PAN on rate of tax - Section 206AA

Effect of non-furnishing of PAN on rate of tax - Section 206AA as inserted with effect from 1-4-2010 provides as under:

♦ Every person whose receipts are subject to deduction of tax at source (i.e., the deductee) shall furnish his PAN to the deductor. It will be compulsory from 1-4-2010.

♦ If such person does not furnish PAN to the deductor, the deductor will deduct tax at source at higher of the following rates—

(a) the rate prescribed in the Act;

(b) at the rate in force, i.e., the rate mentioned in the Finance Act; or

(c) at the rate of 20 per cent.

♦ No certificate under section 197 will be granted by the Assessing Officer unless the application contains the PAN of the applicant.

♦ It is mandatory for quoting of PAN of the deductee by both the deductor and the deductee in all correspondence, bills and vouchers exchanged between them.

♦ Where the PAN provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his PAN to the deductor and above provisions shall apply accordingly.

In Smt. A. Kowsalya Bai v. Unionof India [2012] 22 taxmann.com 157/208 Taxman 208 (Kar.) it was held that in view of the specific provision of section 139A, section 206AA is inapplicable to persons, whose income is less than the taxable limit. However, it is made clear that, section 206AA would of course be made applicable to persons whose income is above the taxable limit. Banks and Financial Institutions cannot ask for Permanent Account Number (PAN) from persons whose income is below taxable limit.

Para 4.8 of Circular No. 8/2013,dated 10-10-2013 (Annex 26.4) read as under :

"4.8.1 Section 206AA in the Act makes furnishing of PAN by the employee compulsory in case of receipt of any sum or income or amount, on which tax is deductible. If employee (deductee) fails to furnish his/her PAN to the deductor, the deductor has been made responsible to make TDS at higher of the following rates: 

(i) at the rate specified in the relevant provision of this Act; or(ii) at the rate or rates in force; or(iii) at the rate of twenty per cent

The deductor has to determine the tax amount in all the three conditions and apply the higher rate of TDS. However, where the income of the employee computed for TDS u/s 192 is below taxable limit, no tax will be deducted. But where the income of the employee computed for TDS u/s 192 is above taxable limit, the deductor will calculate the average rate of income-tax based on rates in force as provided in section 192. If the tax so calculated is below 20%, deduction of tax will be made at the rate of 20% and in case the average rate exceeds 20%, tax is to deducted at the average rate. Education cess @ 2% and Secondary and Higher Education Cess @ 1% is not to be deducted, in case the tax is deducted at 20% u/s 206AA of the Act."