A provision that mandates Aadhaar-PAN linkage for demat accounts stands on firm constitutional and legal footing, the Orissa high court has ruled, observing that while it acknowledged concerns regarding data security and privacy, they do not outweigh the compelling need for regulatory oversight in the securities market.
“By linking Aadhaar, a unique biometric-based identity, with PAN, the authorities can effectively track income, detect discrepancies, and curb tax evasion within the securities market… The linkage requirement, coupled with strict enforcement by regulatory bodies like SEBI and NSDL, ensures that Demat accounts remain a legitimate channel for investment rather than a tool for illicit financial activities,” justice Sanjeeb Panigrahi said in his 42-page verdict on a petition filed by former Biju Janata Dal MP Tathagata Satapathy.
The high court pronounced the verdict on February 14. The detailed order was, however, uploaded on Monday.
Satapathy approached the high court after his demat account in HDFC Securities was suspended in July 2023 because his Permanent Account Number (PAN) was not linked to an Aadhaar number.
Satapathy said it has been his consistent stance in Parliament that biometric data should not be collected from citizens unwilling to enroll under Aadhaar and that since he hadn’t enrolled under Aadhaar, he could not furnish an Aadhaar enrollment number to the bank to operate the demat account.
{{/usCountry}}Satapathy said it has been his consistent stance in Parliament that biometric data should not be collected from citizens unwilling to enroll under Aadhaar and that since he hadn’t enrolled under Aadhaar, he could not furnish an Aadhaar enrollment number to the bank to operate the demat account.
{{/usCountry}}Satpathy reasoned that it was not mandatory for banking services or transactions, as per the decision of the Supreme Court. When the bank failed to resolve the issue, he requested it to close his demat account and transfer all his shares and funds to his wife’s demat account.
But he was told that this could not be done either without the PAN-Aadhaar linking.
Satpathy subsequently moved the high court, saying it was illegal, arbitrary and contrary to the decision of the Supreme Court.
While the case was being heard, the National Securities Depository Limited issued a fresh circular and the freeze on his demat account was lifted in June last year. Though the cause of action did not survive anymore, the high court did not drop the proceedings on the ground that “an authoritative pronouncement may be warranted to settle legal uncertainties and provide clarity for future cases”.
In his verdict, justice Panigrahi held the PAN-Aadhar linking to be a constitutional and a reasonable restriction on ‘right to privacy’. The mandatory linking of Aadhaar with PAN and demat accounts under the Income Tax Act aligns with the constitutional principles laid down in Puttaswamy and its triple test: legality, necessity, and proportionality.
“Section 139AA of Income Tax Act satisfies this test as it is backed by a valid legislative mandate, serves a legitimate state interest, and imposes only a proportionate restriction on privacy,” he said.
Addressing the basic premise of Satpathy’s petition, the court said the provision was introduced to enhance the integrity of financial transactions and ensure compliance with tax laws.
“Mandatory linking of Aadhaar with PAN and demat accounts under Section 139AA of the Income Tax Act is in compliance with Puttaswamy principles and the triple tests laid down therein, viz., legality, necessity, and proportionality. Further, it meets the legality requirement as it is a statutory provision enacted through the Finance Act, 2017, and reinforced by CBDT, SEBI, and NSDL regulations. The necessity of this measure lies in its objective to curb tax evasion, eliminate fraudulent PANs, and enhance financial transparency, particularly given the historical misuse of Demat accounts for money laundering,” the HC said.
The bench said though Aadhaar-PAN linkage did not guarantee absolute privacy, it does not amount to an unconstitutional infringement of fundamental rights.
“While concerns regarding data security and privacy are acknowledged, they do not outweigh the compelling need for regulatory oversight in the securities market. Adequate safeguards have been implemented to mitigate risks, and the measure remains a proportionate and reasonable restriction on privacy. Therefore, the provision does not warrant interference by this Court,” the bench said.
“The measure is a reasonable restriction in furtherance of public interest, ensuring that financial transactions remain transparent and that the securities market is not misused for illicit purposes. As long as adequate security measures are in place to protect Aadhaar data, the linkage requirement remains a constitutionally valid and proportionate policy aimed at strengthening the financial ecosystem,” the court said.
“Be that as it may, the concern of the petitioner is also a genuine one. In recent years, India’s middle class has increasingly embraced the securities market, mutual funds, and various investment avenues as a means to grow their wealth,” the high court said.
“However, as more people invest their hard-earned money in these financial markets and instruments, concerns about privacy and security have also surfaced. Investors are now questioning how their financial data is handled, who has access to their transaction details, and what measures are in place to protect them from potential breaches or misuse. With increased digital transactions and mandatory KYC (Know Your Customer) norms, people rightfully demand transparency and accountability regarding their financial privacy. It is no longer acceptable for regulators, banks, or the government to turn a deaf ear to these concerns. If investment is to be encouraged, the trust of the people must be earned by ensuring stringent data protection laws, secure investment channels, and a commitment to safeguarding investor rights in a rapidly evolving financial landscape”.
To be sure, as many as three judgments, including a five-judge bench ruling of 2018 that affirmed the Union government’s Aadhaar scheme, have already upheld the validity of Section 139AA of the Income-tax Act that mandates linking of PAN with Aadhaar.
The first two-judge bench ruling was issued in June 2017, which made its approval to the legal provision conditional on the Aadhaar scheme passing the muster of the constitution bench. Subsequently, in September 2018, the five-judge bench upheld the validity of the Income Tax law amendment linking PAN with Aadhaar for filing tax returns and making Aadhaar or Aadhaar enrollment slip compulsory to apply for a PAN card. The judgment in the Puttaswamy held that the impugned provision satisfies the three-pronged test of legality, need and proportionality in restricting a person’s right to privacy.
In February 2019, the top court yet again reaffirmed its approval after the Centre assailed a Delhi high court order that allowed two persons to file their tax returns without linking their Aadhaar and PAN numbers.