Orissa High Court Upholds Mandatory PAN-Aadhaar Linking For Demat Accounts; Shares Concerns About Data Breaches & Privacy Violations

The Orissa High Court has dismissed a writ petition filed by former Member of Parliament (MP) Tathagata Satapathy challenging the mandatory linking of Aadhaar with Permanent Account Number (PAN) for the operation of dematerialized (demat) accounts. The Court upheld the constitutional validity of the requirement, deeming it a reasonable restriction on the right to privacy under Article 21 of the Constitution.

The Single Bench of Justice Sanjeeb Kumar Panigrahi ruled that Section 139AA of the Income Tax Act, which mandates PAN-Aadhaar linkage, aligns with constitutional principles and satisfies the triple test of legality, necessity, and proportionality as laid down in Justice K.S. Puttaswamy v. Union of India.

“The mandatory linking of Aadhaar with PAN and demat accounts under Section 139AA of the Income Tax Act aligns with the constitutional principles laid down in Puttaswamy and its triple test: legality, necessity, and proportionality. Section 139AA 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,” the Court observed.

Senior Advocate Yasobanta Das appeared for the Petitioner, while Senior Advocate Gautam Mukherjee appeared for the Respondent.

Case Background

Satapathy, a four-time MP from Odisha’s Dhenkanal constituency, maintained a savings account at HDFC Bank, Cuttack-Puri Road Branch, Bhubaneswar. On the advice of bank officials, he invested ₹25 lakhs from his savings account into trading through HDFC Securities in December 2019, linking the demat account to his savings account. He began trading transactions in January 2020.

In July 2023, the petitioner's demat account was made dormant due to its lack of Aadhaar linkage. Upon learning of this, Satapathy informed bank authorities that he had never enrolled under Aadhaar and that its linkage was not mandatory for banking services or transactions, as per Supreme Court rulings. He requested the bank to resolve the issue but received no relief. Consequently, he sought to close his demat account and transfer shares and funds to his nominee/wife’s demat account. However, the bank’s head office responded that the suspension could not be lifted without linking PAN with Aadhaar.

Challenging the bank’s action, Satapathy filed a writ petition, arguing that the requirement was arbitrary, illegal, and contrary to Supreme Court decisions.

Court’s Observations

During the pendency of the petition, the Bank unfroze Satapathy’s demat account on June 3, 2024, based on a circular issued by the National Securities Depository Limited (NSDL). This rendered the cause of action moot, turning the litigation into an academic exercise. However, the Court proceeded with an authoritative pronouncement to provide legal clarity for similar cases in the future.

The key issue addressed by the Court was whether the mandatory PAN-Aadhaar linkage for operating demat accounts aligns with constitutional guarantees, particularly the right to privacy under Article 21.

Legal Precedents and Reasoning

The Court referred to Binoy Viswam v. Union of India (2017), in which the Supreme Court upheld Section 139AA, citing its importance in curbing PAN duplication and tax evasion. The provision was introduced to enhance financial transaction integrity and ensure tax compliance by mandating Aadhaar-PAN linkage.

Further, in Justice (Retd.) K.S. Puttaswamy v. Union of India (2018), the Apex Court reaffirmed the validity of Section 139AA, rejecting claims that it violated Articles 14 and 19 of the Constitution.

The Single Judge flagged the misuse of the securities market for money laundering and tax evasion, highlighting how fraudulent actors use layered transactions, shell companies, and offshore accounts to obscure illicit funds. “The anonymity afforded by multiple (read: fake) PAN cards and unverified accounts has further facilitated tax evasion. Fraudulent market participants have used benami demat accounts to conduct high-value transactions while avoiding taxation,” the Bench observed.

Recognizing these challenges, the Court emphasized that the government introduced PAN-Aadhaar linking as a statutory requirement under Section 139AA to track income, detect discrepancies, and prevent financial crimes. “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,” the Court stated.

Proportionality and Privacy Concerns

The Court held that the mandatory PAN-Aadhaar linking satisfies the Puttaswamy principles and the triple test of legality, necessity, and proportionality.

1. Legality: The measure is backed by the Finance Act, 2017, and reinforced by CBDT, SEBI, and NSDL regulations.

2. Necessity: The requirement aims to curb tax evasion, eliminate fraudulent PANs, and enhance financial transparency, particularly given historical misuse of demat accounts.

3. Proportionality: While Aadhaar-PAN linkage does not ensure absolute privacy, it does not amount to an unconstitutional infringement of fundamental rights.

“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 observed.

Conclusion

Finding no constitutional infirmity in the PAN-Aadhaar linkage mandate for demat accounts, the Court upheld the requirement and dismissed Satapathy’s petition. Accordingly, the Court disposed of the writ petition.

Cause Title: Tathagata Satapathy v. HDFC Bank Ltd., Mumbai & Ors. [W.P.(C) No. 875 of 2024]

Appearance:-

Petitioner: Senior Advocate Yasobanta Dash, Advocate N.C. Mohanty

Respondent: Senior Advocate Gautam Mukherjee, Advocates D.N. Mishra, Rajeet Roy, S. Sourav, Tapesh Roy, S. Roy

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