Homebuyers get respite from tax notice against deducting less tax from sellers with inoperative PANs

The circular implies that the buyer should urge the seller to link their PAN with their Aadhaar to get unnecessary tax notices dismissed

On April 23, the Income Tax Department issued a circular that gave some much-needed relief to many homebuyers issued tax deduction at source (TDS) notices due to the Permanent Account Numbers (PAN) of property sellers being inoperative. The circular gave the homebuyers a breather from the liability of tax notices against TDS deductions that fell short, provided the property sellers link their PAN and Aadhaar by May 31.

As per Income Tax regulations, homebuyers must deduct TDS at the rate of 1 percent of the sale consideration if the value of the property being purchased exceeds Rs 50 lakh.

However, if the PAN of the property seller is unavailable or deemed inoperative, the TDS rate escalates to 20 percent. Effective July 1, 2023, failure to link a PAN with Aadhaar renders the PAN inoperative.

Homebuyers who were unaware or failed to verify the validity of the PAN and its linkage with Aadhaar, and deducted TDS at the standard 1 percent rate, received TDS short notices demanding an additional 19 percent payment in cases where the seller's PAN was inoperative.

In January, Moneycontrol reported that several homebuyers had been getting tax notices about a TDS shortfall.

According to information obtained through a Right to Information (RTI) request filed by one of the affected homebuyers, a staggering 16,439 short deduction demand notices were issued to buyers between July 1, 2023, and January 10, 2024, citing an inoperative seller PAN as the reason. Moneycontrol has consistently reported on this issue.

Given that TDS on property transactions applies to properties valued at over Rs 50 lakh, a short notice of 19 percent would amount to at least Rs 9.5 lakh for each home buyer. The higher the property value, the greater the TDS short notice demand. The recent circular has thus provided significant relief to these homebuyers.

What the circular says

The circular, dated April 23, noted the grievances of those who received Central Board of Direct Taxes (CBDT) notices demanding the TDS shortfall.

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“With a view to redressing the grievances faced by such deductors / collectors, the Board, in partial modification and in continuation of the Circular No. 03 of 2023, hereby specifies that for the transactions entered into up to 31.03.2024 and in cases where the PAN becomes operative (as a result of linkage with Aadhaar) on or before 31.05.2024, there shall be no liability on the deductor / collector to deduct/collect the tax…”

Respite for homebuyers

The circular implies that the buyer should urge the seller to link their PAN with their Aadhaar to get the tax notices dismissed. According to a former Vice President of the Income Tax Appellate Tribunal (ITAT), who prefers to remain anonymous, "The circular will help many homebuyers in dismissing unjust tax notices. However, the Income Tax department should have proposed an alternative solution, where the responsibility of linking PAN and Aadhaar should have rested with the seller instead of burdening the buyer with penalties."

While homebuyers are relieved, they also believe that such notices should not have been raised in the first place.

“What is the punishment for the person responsible or the team who did not update the portal simultaneously with the notification? Why should the property buyer be punished when the seller’s PAN is not linked with his Aadhar,” asks Dr Rakesh Bansal, a septuagenarian resident of Lucknow, who received a TDS short notice amounting to Rs 11.4 lakh shortly after purchasing a house.

Most homebuyers who received these notices did not receive any resolution from the Income Tax department. Some even resorted to filing writ petitions in court for assistance.

Vishal Verma, 38, an information technology sector professional from Bengaluru, who had filed a writ petition (a petition challenging a governmental action), said, “I was not at fault and just followed the process and landed into this situation because the TDS portal was not updated as per the new notification. I sent many emails to TDS CPC (Central Processing Centre) and CBDT, but did not get any response.”

Finally, Verma had to file a writ petition in the Delhi HC. Its next hearing is on May 13. “The CBDT is yet to share the affidavit on my case. However, they filed the affidavit on other buyers’ cases in our group. In those affidavits, the CBDT had justified their decision to deduct 20 percent,” said Verma.

However, with the new circular in place, it is hoped that the CBDT will file an affidavit in favour of homebuyers who have received TDS notices due to the inoperative PANs of sellers.