What happens if your PAN Card is misused and the entry shows up in your Form 26AS, prompting an income tax notice and tax demand way above your salary?In one such case a man received a tax notice along with a penalty claim for purported cash sales worth Rs 24.62 crore. Incidentally, the man earned a salary that was not even taxable. Here’s how the case unfolded:
What the case is about
In 2024, a cook employed at a 5-star hotel in Delhi received an income tax notice demanding nearly Rs 4 crore in tax, along with a penalty for under-reporting income.The notice alleged that the man had made cash sales worth Rs 24.62 crore through a company dealing in packing materials.He immediately checked his Form 26AS to understand why such a large transaction was linked to his tax records.Also Read | Husband and wife sell property; Income Tax dept alleges Rs 3.30 crore sale against Rs 1.60 crore in deed, cites WhatsApp chats, Excel sheets to claim Rs 1.70 crore cash receipts, but ITAT gives reliefThe document showed an entry against his Permanent Account Number (PAN) for cash sales of Rs 24.62 crore. The form also indicated that tax had been deducted at source (TDS) at 1% on the reported amount.He suspected that his PAN details had been misused, so the man approached the Greater Kailash Police Station in New Delhi and the Delhi Police Cyber Cell in Saket to lodge formal complaints.The Income Tax Department’s Assessing Officer (AO) did not accept his explanation. The man was told that the tax law required him either to pay the outstanding demand or challenge the order before the appropriate authority.Challenging the demand, however, was not easy. With the tax liability standing at nearly Rs 4 crore, the man would have had to deposit around Rs 78 lakh in advance. He therefore approached the Delhi High Court.The man told the court that he had no taxable income and had never carried out the transaction referred to in the tax notice. He maintained that his PAN details had been used by someone else without his knowledge.His advocate argued that the man was a victim of identity theft and that an unidentified person had misused his PAN credentials. He pointed out that the man had no connection with the packing materials company mentioned in the notice, as his occupation was that of a cook.The advocate further submitted that the man had been working as a contractual employee. During his employment, he had worked for several contractors and provided them with copies of his PAN card for verification. According to the advocate, one of these copies could have been misused, resulting in the disputed transaction being linked to the man’s tax records.Also Read | US-based homebuyer paid Rs 15 lakh for Rs 10.41 lakh flat, but builder demanded Rs 20 lakh more and allegedly threatened him; commission orders refund with 12% interest and Rs 10 lakh compensationThe lawyer also contended that the mere appearance of the Permanent Account Number in Tax Collected at Source records, Form 26AS or the annual tax summary was not sufficient grounds to impose a tax demand. Without additional evidence connecting the man to the transaction, the reported amount could not automatically be treated as his business turnover or receipts.On October 6, 2026, the Delhi High Court ruled in the man’s favour, providing him relief by cancelling the entire tax demand notice.
Why did the man win the case?
Pranshu G, Partner at Ashok Pranshu & Co, told ET that the Delhi High Court found that the assessment against the man relied entirely on Form 26AS and information available on the tax portal. There was no independent evidence establishing that he had carried out the transactions in question.The man’s employment background, bank statements and financial circumstances supported his contention that his PAN had been misused.Despite this, the assessing officer disregarded his explanation and the police complaints he had filed. The officer also failed to provide the underlying evidence or conduct an inquiry with the company allegedly involved in the transactions, according to the ET report quoting the judgement.Also Read | She bought shares for Rs 13.5 lakh and sold them for Rs 77.47 lakh after 18 months; taxman denied capital gains exemption, but ITAT gives relief and deletes Rs 79 lakh in additionsDuring the hearing, the Delhi High Court questioned the Income Tax Department about the evidence it had gathered beyond the man’s Form 26AS. The court also sought to know whether the department had carried out an independent investigation or recorded the statement of the owner of the packaging company to establish that the alleged transactions had actually taken place with the man.The Delhi High Court also pointed out that the AO could have issued a notice under Section 133(6) of the Income-tax Act to the packaging company, seeking further information or recording its statement to establish whether the transactions had taken place.Another error identified in the assessment was the double counting of the gross and net amounts relating to the same transaction by the tax officer.In the response reproduced in the assessment order, the man had explained that he withdrew money from his provident fund (PF) account between 2013 and 2018 to meet his financial requirements. He had also obtained an Economically Weaker Section (EWS) certificate and applied for a waiver of school fees for his children.The court said these circumstances called for an empathetic approach, careful scrutiny and a detailed examination of the facts rather than a mechanical assessment of the available information.The Delhi High Court said: “Because, these facts clearly suggested that petitioner’s defence that someone had misused his PAN number, had some substance.”Emphasising the need for tax authorities to balance enforcement with a realistic assessment of the facts, the Delhi High Court said: “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.”Also Read | He bought a home, gave it for redevelopment years later and sold new flat for Rs 1.95 crore within 8 days; taxman denied LTCG exemption and added Rs 80.14 lakh, but ITAT grants reliefPranshu said these lapses amounted to a violation of the principles of natural justice and constitutional safeguards against arbitrary action.Pranshu said: “Given the man’s limited means, the appellate remedy was considered ineffective. Fresh proceedings remain permissible only upon other cogent evidence linking him to the transactions, within statutory limitation.”The court ultimately granted the man complete relief and quashed the tax demand notice. However, it clarified that the Income Tax Department could reopen the case in the future if it discovered incriminating evidence linking him to the alleged transactions.