PAN Misuse | Delhi High Court Quashes ₹3.91 Crore Income Tax Demand Against Security Guard

The Delhi High Court has quashed an income tax assessment order raising a demand of approximately ₹3.91 crore against a contractual security guard, observing that the assessment was based solely on portal data without any independent inquiry to establish his connection with the alleged transactions.

The Division Bench of Justices Dinesh Mehta and Aditi Choudhary held that the assessment violated the principles of natural justice, as the Assessing Officer failed to provide the material relied upon to Petitioner despite his request and did not properly consider his response alleging misuse of his Permanent Account Number (PAN).

Petitioner, who had worked as a contractual security guard and cook, claimed that he had no taxable income or business dealings with Montage Enterprises Pvt. Ltd., a company engaged in the packaging material business. He alleged that someone had misused his PAN details to conduct transactions in his name.

The Income Tax Department had issued a notice alleging that Petitioner had made cash payments of approximately ₹24.86 crore to Montage Enterprises and had recorded cash sales of approximately ₹24.62 crore under his PAN.

Based on these figures, the Assessing Officer treated nearly ₹49.49 crore as Petitioner's turnover and calculated 8% of that amount as his income for the assessment year 2017–18. This resulted in a tax demand of approximately ₹3.91 crore, besides the initiation of penalty proceedings.

Petitioner submitted that he had filed complaints with the police and the cyber cell after receiving the notice. He also provided his bank statements and sought details of the transactions but claimed that the department failed to supply the relevant material.

The Court noted that the assessment order did not refer to any independent evidence linking Petitioner to the alleged transactions. The department was also unable to satisfactorily explain whether any independent inquiry had been conducted or whether the statement of Montage Enterprises had been recorded.

Observing that Petitioner's claim of PAN misuse was plausible, the Court said the AO ought to have conducted further inquiry, including by seeking details from the company under Section 133(6) of the Income Tax Act, 1961.

The Court further found that the Assessing Officer had added the cash payment and the net sale amount reflected in Form 26AS to arrive at the total turnover, effectively counting the transaction twice.

“This approach of the AO reveals that he has not even cared to understand the nature of transaction,” the Court observed.

It added, “A Tax Enforcement Officer should strive to achieve high revenue target but he should keep his feet firmly grounded on the floor of reality. His eyes should be sharp to pierce through the fraud but they should not slip away from the facts.”

The Court also rejected the department's objection that Petitioner should pursue the statutory appellate remedy. It noted that requiring a person of limited means to arrange a deposit of nearly ₹78 lakh to obtain interim protection against the demand would render the remedy illusory and inefficacious.

“A demand of about Rs. 3.91 crore, slapped against a person with no means, that too on the strength of portal data alone, without an answer to his request for particulars, exposes him to recovery proceedings, accrual of interest and penalty proceedings that he cannot meet or contest on the terms the statute lays down. Such a liability is not a neutral fiscal event for him, it results into a continuing cause of anxiety, constant fear of coercive recovery and complete loss of mental peace. That is an additional reason, along with the breach of Article 14 and the inefficacy of the appellate remedy, why we do not relegate him to the statutory forum.”

The Court held that the right to life under Article 21 includes the right to live with dignity and that avoidable mental anguish caused by the State to a person with no means can impinge upon this right.

Stating that the demand of ₹3.91 crore was “nothing short of threat to his mental and emotional health,” the Court quashed the assessment order.

For Petitioner: Advocate A.K. Babbar

For Respondents: Advocate Gaurav Gupta, SSC with Shivendra Singh,Yojit Pareek, JSCs with Vedansh Anand, SPC with Shivam Kumar, GP