Aadhaar linkage to PAN constitutionally valid but linkage with Bank account unconstitutional

Aadhaar linkage to PAN constitutionally valid but linkage with Bank account unconstitutional. Aadhaar Act held constitutionally valid by 4 Judges against Justice Dhananjaya Y Chandrachud who held that passing Aadhaar Act as Money Bill was unconstitutional

ABCAUS Case Law Citation:
ABCAUS 2534 (2018) 09 SC

In land maek judgment running into 1448 Page the Constitution Bench of Hon’ble Supreme Court comprising of Hon’ble Chief Justice Shri Deepak Mishra, Hon’ble Shri A.M. Khanwilkar, Hon’ble Shri A. K. Sikri,  Hon’ble Shri Ashok Bhushan and Hon’ble Dr Dhananjaya Y Chandrachud.

While four judges including the CJI upheld the constitutional validity of Aadhaar Act, Dr Dhananjaya Y Chandrachud held that the Aadhaar Act had not followed the constitutional procedure mandated for the passage of a law by disguising the statute as a ‘Money Bill’. His Lordship accordingly struck down the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 (the Aadhaar Act)

The constitutional validity of the Aadhaar was challenged inter alia by the following questions:

(a) Whether Section 139AA of the Income Tax Act, 1961 insofar as it violates Article 21 by mandating linking Aadhaar to PAN and requiring Aadhaar linkage for filing returns.

(b) Whether Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 and the notifications issued thereunder which mandates linking of Aadhaar with bank accounts is unconstitutional

The Hon’ble judges in favour of the constitutional validity of Aadhaar, upheld the linking Aadhaar to PAN and Bank account while dissenting Justice Dr Dhananjaya Y Chandrachud held otherwise.

The operative part of the judgment of both the side is as under:

Hon’ble CJI and other Hon’ble Jusrtice

Dr Dhananjaya Y Chandrachud, J

Aaadhaar linkage to PAN

Validity of this provision was upheld in the case of Binoy Viswam by repelling the contentions based on Articles 14 and 19 of the Constitution. The question of privacy which, at that time, was traced to Article 21, was left open.

The matter is reexamined on the touchstone of principles laid down in K.S. Puttaswamy.  The matter has also been examined keeping in view that manifest arbitrariness is also a ground of challenge to the legislative enactment. Even after judging the matter in the context of permissible limits for invasion of privacy, namely:

(i) the existence of a law;

(ii) a ‘legitimate State interest’; and

(iii) such law should pass the ‘test of proportionality’, we come to the conclusion that all these tests are satisfied. In fact, there is specific discussion on these aspects in Binoy Viswam’s case as well.

Section 139­AA does not breach fundamental Right of Privacy as per Privacy Judgment in Puttaswamy case.

 Aaadhaar linkage to PAN

The explanation to Section 139AA adopts the definition of the expressions ‘Aadhaar number’, ‘enrolment’ and ‘resident’ from the parent Aadhaar legislation. The seeding of Aadhaar with Pan cards must depend for its validity on the constitutional validity of the Aadhaar legislation. Hence, besides affirming that the object of the measure in Section 139AA constitutes a legitimate state aim, the decision of this Court in regard to the validity of Aadhaar will impact upon the seeding of PAN with Aadhaar, which Section 139AA seeks to achieve.

Since the Aadhaar Act itself is now held to be unconstitutional for having been enacted as a Money Bill and on the touchstone of proportionality, the seeding of Aadhaar to PAN under Article 139AA does not stand independently.


Aadhaar Linkage to Bank Account:

(a) We hold that the provision in the present form does not meet the test of proportionality and, therefore, violates the right to privacy of a person which extends to banking details.

(b) This linking is made compulsory not only for opening a new bank account but even for existing bank accounts with a stipulation that if the same is not done then the account would be not be entitled to operate the bank account till the time seeding of the bank account with Aadhaar is done. This amounts to depriving a person of his property. We find that this move of mandatory linking of Aadhaar with bank account does not satisfy the test of proportionality.

To recapitulate, the test of proportionality requires that a limitation of the fundamental rights must satisfy the following to be proportionate: 

(i) it is designated for a proper purpose;

(ii) measures are undertaken to effectuate the limitation are rationally connected to the fulfilment of the purpose;

(iii) there are no alternative less invasive measures; and

(iv) there is a proper relation between the importance of achieving the aim and the importance of limiting the right.

c) The Rules are held to be disproportionate for the following reasons:

a) a mere ritualistic incantation of “money laundering”, “black money” does not satisfy the first test;

(b) no explanations have been given as to how mandatory
linking of every bank account will eradicate/reduce the problems of “money laundering” and “black money”;

(c) there are alternative methods of KYC which the banks are already undertaking, the state has not discharged its burden as to why linking of Aadhaar is imperative. We may point out that RBI’s own Master Direction (KYC Direction, 2016) No. DBR.AML.BC. No. 81/14.01.001/2015-16 allows using alternatives to Aadhaar to open bank accounts.

We, thus, hold the amendment to Rule 9, by the Seventh
Amendment Rules, 2017, in the present form, to be unconstitutional.

Aadhaar Linkage to Bank Account:

The 2017 amendments to the PMLA Rules fail to satisfy the test of proportionality. The imposition of a uniform requirement of linking Aadhaar numbers with all account based relationships proceeds on the presumption that all existing account holders as well as every individual who seeks to open an account in future is a potential money-launderer. No distinction has been made in the degree of imposition based on the client, the nature of the business relationship, the nature and value of the transactions or the actual possibility of terrorism and money- laundering. The rules also fail to make a distinction between opening an account and operating an account.

Moreover, the consequences of the failure to submit an Aadhaar number are draconian. In their present form, the rules are clearly disproportionate and excessive. We clarify that this holding would not preclude the Union Government in the exercise of its rule making power and the Reserve Bank of India as the regulator to re-design the requirements in a manner that would ensure due fulfillment of the object of preventing money-laundering, subject to compliance with the principles of proportionality as outlined in this judgment.

Rule 9 as amended by PMLA (Second Amendment) Rules, 2017 is not unconstitutional and does not violate Articles 14, 19(1)(g), 21 & 300A of the Constitution and Sections 3, 7 & 51 of the Aadhaar Act.  Further Rule 9 as amended is not ultra vires to PMLA Act, 2002.

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