Benami Act – No Longer A Paper Tiger ! – Part II

(continued
from page 38 of september 2018 bcaj)

5.     HOW WILL THE ACT BRING OUT ILLICIT MONEY?

Illicit money is parked to a substantial extent in benami properties.
The benefits of such properties are now effectively nullified by the Government
in the following manner.

–     Firstly, the real owner is disabled
from claiming any right on benami property.

–    Secondly, the benamidar is prevented
from re-transferring the benami property to the real owner.

–     Thirdly, by including sale proceeds
of benami property in the definition of ‘benami property’, benamidar is
prevented from enjoying the sale proceeds of such property.

–     Finally, the benami property is
confiscated and the same vests in the Central Government. Thus, the illicit
money parked in benami properties is eventually sent to Government coffers.

Thus, the Act provides teeth to the law and thereby enables
Government to deal with the holders of the illicit money parked in benami
properties. This is visible in the new preventive and punitive provisions which
did not exist in the Act prior to its amendment in November 2016. The
three preventive provisions which act as effective deterrents are reviewed, as
follows.

5.1      The
Owner deprived of the right to recover the benami property

Position of law prior to 1988 in respect of the prohibition of the right
to recover benami property was explained by the Supreme Court[1]
in the following words.

“prior to the coming into operation of the Benami
Transactions (Prohibition) Act, 1988, benami transactions were a recognised
specie of legal transactions pertaining to immovable properties. It was a legal right of the plaintiff to contend in
those days that even though the transfer of the property had been effected in
the name of defendant benamidar for the plaintiff from whom the consideration
had moved, the plaintiff was the real owner and, therefore, the defendant was
bound to restore such property to the real owner. If the benamidar took up
a defiant attitude, then the law provided a substantive right to the plaintiff
to come to the court for an appropriate declaration and relief of possession on
that ground. For the purpose of prohibiting such benami transactions, the
Benami Transactions (Prohibition of the Right to Recover Property) Ordinance,
1988, was promulgated by the President and it was followed by the Act.” (Emphasis supplied)

5.1.1     The Act reaffirms the Owner’s deprivation

The abovementioned position prevailing prior to 1988 pertaining to the
real owner’s rights in respect of Benami property, was altered by
promulgation of the Ordinance[2]  on 19 May 1988. The Ordinance eventually
resulted in the enactment of section 4 which disabled the real owner in two
ways.

Section 4(1)barred the enforcement of the real owner’s claim on the benami
property. Thus, now, the real owner cannot bring any suit, claim or action
to enforce his right as the real owner on the plea that the ostensible owner is
merely a benamidar. Section 4(1), thus, disables the real owner from
enforcing his right against the benamidar.

Likewise, section 4(2) is the other disabling provision in respect of benami
property. When the benamidar brings a suit to enforce his right in the
property, section 4(2) disables the real owner from enforcing his right of
defence to claim that he is the real owner.

5.2     Confiscation
of Benami Property

Under the old section 5, there was no provision for confiscation of
benami property and its vesting in the Central Government. This infirmity is
now sought to be remedied by providing confiscation of the benami property and
its vesting in the Government. Upon such vesting, all rights and title in the
confiscated property vest in the Central Government absolutely free from all
encumbrances and that, too, without paying any compensation.

5.2.1 Confiscation
of sale proceeds

The Act defines “benami property” to mean any
property which is the subject-matter of a benami transaction. The term
also includes the proceeds from such property. The order of confiscation is in
respect of benami property which also includes the proceeds from sale of
such property. Hence, the sale proceeds of benami property are also
liable to confiscation.

5.3     Bar
on re-transfer of benami property

The Act provides that benamidar shall not re-transfer the Benami
property to the beneficial owner or his nominee.

5.3.1 Re-transfer–
null and void

The Act provides that any re-transfer of property by benamidar to
the real owner or his nominee in violation of the abovementioned prohibition is
null and void.

5.3.2     Prohibition
on re-transfer

–  not
applicable to IDS cases

Where the beneficial owner has made a declaration of benami property under
Income Declaration Scheme (“IDS”) pursuant to which benamidar
re-transfers the benami property, such re-transfer does not attract the
prohibition and voiding of the retransfer.

6.     ADMINISTRATION OF THE ACT

The administration of the Act is done by various authorities and
officers.

6.1     Adjudicating
Authority

The Central Government is empowered to appoint Adjudicating Authorities
to exercise the jurisdiction, powers and the authority conferred by the Act.

Two notifications were issued by the Central Government on 25-10-2016
for appointment of Adjudicating Authorities.

6.1.1 Composition
of the Authority

The Adjudicating Authority comprises –

–    Chairperson

–    At least two other members

Thus, the minimum number of members of the Adjudicating Authority is
three.

6.1.2 Adjudicating
Authority to regulate its own procedure

The Act provides that the Adjudicating Authority is not
bound by the procedure specified in the Code of Civil Procedure, 1908.

The Authority has powers to regulate its own procedure, subject to the
other provisions of the Act.

The Adjudicating Authority is, however, to be guided by the principles
of natural justice.

6.1.3   Central
Government to provide staff

The Act requires the Central Government to provide each
Adjudicating Authority with officers and employees.

6.1.4 Superintendence
over the staff

The officers and employees of the Adjudicating Authority are required to
discharge their functions under the general superintendence of the Adjudicating
Authority.

The word “superintendence” signifies exercise of some authority or
control over the person or thing subjected to oversight[3].

6.2     Authorities

The Act provides the following authorities.

–     The Initiating Officer (i.e. Assistant
Commissioner of Income-tax or a Deputy Commissioner of Income-tax);

–     The Approving Authority (Additional
Commissioner of Income-tax or Joint Commissioner of Income-tax);

–    The Administrator (Income-tax Officer); and

–     The Adjudicating Authority.

The roles of the abovementioned authorities are as follows.

6.2.1 Initiating
Officer

On the basis of the information in his possession, if the Initiating
Officer has reason to believe that any person holds a property as benamidar,
he initiates the process by issuing notice to the benamidar to show
cause within the time specified in the notice why such property should not be
treated as Benami property. A copy of the notice is served on the
beneficial owner.

Thereafter, with the previous approval of the Approving Authority, the
Initiating Officer provisionally attaches the property if, in his opinion, the
person in possession of the Benami property is likely to alienate such
property during the period specified in the notice. After making such inquiries
and calling for reports or evidence and taking into account all relevant
materials, the Initiating Officer takes the following actions within 90 days
from the date of issue of notice with the prior approval of the Approving
Authority.

(a)  Where the provisional
attachment was made:

(i)   pass order continuing
the provisional attachment of the property till the date of the order made by
the Adjudicating Authority; or

(ii)   revoke the
provisional attachment of the property;

(b)  Where provisional attachment
is not made:

(i)   pass order
provisionally attaching the property till the date of order made by the
Adjudicating Authority; or

(ii)   decide not to attach
the property specified in the notice.

Where the Initiating Officer passes the order continuing the provisional
attachment or passes the order provisionally attaching the property, he is
required to draw up a Statement of the Case within 15 days from such
attachment, and refer it to the Adjudicating Authority.

6.2.2   Approving
Authority

The Approving Authority may give or deny the prior approval to the
orders of the Initiating Officer which approve-

–     the provisional attachment of the property
held by benamidar.

–     the revocation of the provisional
attachment.

–     the order continuing the provisional
attachment

–    the decision not to attach the property
specified in the notice.

6.2.3   Adjudicating
Authority

On receiving the Statement of Case from the Initiating Officer, the
Adjudicating Authority takes the following actions.

–     adjudicates whether property is Benami
property,after hearing the affected persons, and pass an order.

–     Hears the affected persons after
passing the adjudicating order, and pass the confiscation order.

6.2.4     Administrator 

His role is to take possession of the confiscated Benami property
and manage the same.

6.2.5     Assistance
of other departments

In the enforcement of the Act, the authorities are assisted by
the following officers:

–     Income-tax authorities;

–     officers of the Customs and Central Excise
Departments;

–     officers of the Narcotic Drugs and
Psychotropic Substances Act, 1985;

–     officers of the stock exchange recognised
under Securities Contracts (Regulation) Act, 1956;

–     officers of the Reserve Bank of India;

–    police officers;

–     officers of the Enforcement Directorate;

–    officers of the SEBI;

–     officers of any other body corporate
constituted or established under a Central or a State Act; and

–     such other officers of the Central
Government, State Government, local authorities or banking companies as the
Central Government may, by notification, specify, in this behalf.

6.3     Scope
of the powers of the Authorities

The powers of the abovementioned four authorities are not unfettered.

The authorities are required to exercise the powers and perform all or
any of the functions conferred on, or assigned to them under the Act or
the prescribed rules.

6.3.1   Authorities
to have powers of a Civil Court

The Authorities have the powers vested in a Civil Court under the Code
of Civil Procedure, 1908, while trying a suit in respect of the following
six matters:

–    discovery and inspection;

–     enforcing attendance of any person,
including any official of a banking company or a public financial institution
or any other intermediary or reporting entity, and examining him on oath;

–     compelling the production of books of
account and other documents;

–    issuing commissions;

–     receiving evidence on affidavits; and

–     any other prescribed matter.

7.     SCOPE OF PRACTICE FOR CHARTERED ACCOUNTANTS

Section 48 of the Act deals with “Right to representation”.
A person preferring an appeal to the Tribunal may choose to appear in person.
He is also free to take assistance of an authorised representative of his
choice to present his case before the Tribunal.

It is provided that any of the following persons may be authorised by
the appellant to appear on his behalf –

–     a relative or employee.

–     any officer of a scheduled bank with which
the appellant maintains an account or has other regular dealings.

–    any legal practitioner who is entitled to
practice in any civil court in India.

–     any person who has passed
theCBDT-recognised accountancy examination

–    any person who has acquired the
CBDT-prescribed educational qualifications.

8.     CASE STUDY: HOME LOAN – WHETHER BENAMI
TRANSACTION

In case of home loan, the following facts are observed:

–    The lender provides funds to the home-owner
and debits the account of the borrower.

–     The borrower (buyer) does not hold the
property “for the immediate or future benefit, direct or indirect,” of
the lender.

–     It is not intended that the lender will be
the real owner while the borrower will be mere name-lender.

–     Lender’s intention is only to get the
repayment of loan in scheduled instalments (including interest).

–     Lender will have charge on the property
till the loan is repaid with interest.

The moot issue is: whether the fact that the consideration for the
property is provided by the lender (who is a person other than the person in
whose name property is registered), will make the property the benami property?

The abovementioned facts show that the case of home loan will not fall
within the definition of ‘benami transaction’ under the Act.This
proposition is supported by the Supreme Court[4].

The legal position will not be any different where the loan is given for
purchase of a house under construction. For such loan, tripartite agreement is
entered into by the parties viz., lender, borrower, builder/developer/seller.

9.     PUNITIVE PROVISIONS OF THE ACT

One may now review the rigorous punitive provisions of the Act
reflected in imprisonment and fine for certain offences [sections 3, 53 and
54 of the Act].The implications of these punitive provisions are
reviewed, as follows.

9.1     Section
3

Section 3(2) provides punishment for breaching the prohibition on benami
transactions. Punishment for entering into any benami transaction is
imprisonment uptothree years or with fine or both.

9.1.1     Punishment for transaction after 1^st
November 2016

Section 3(3) provides different punishment for the benami
transaction entered into after 1^st November, 2016.

Whosoever enters into any benami transaction on or after 1^st
November 2016 is punishable u/s. 53, 54 and 55 which deal with the following
three aspects.

–    53: Penalty for benami
transaction

–    54: Penalty for false
information

–    55: Previous sanction

9.1.2     Overriding
nature of this punishment

Section 3(3) overrides section 3(2) [see the non-obstante expression in
section 3(3), viz., “notwithstanding anything contained in sub-section (2),
….]

Thus, in respect of the benami transactions entered into after 1^st
November, 2016, the punishment mentioned in section 3(2) will not apply. The
punishment for such transactions will be determined in accordance with the
provisions of sections 53, 54 and 55.

9.1.3     Enquiry
by tax department into the source of

purchase of benami property – not barred

Punishment u/s. 3 does not prevent the tax department from enquiring
into the real ownership of property for tax purposes. Section 4 of the Act
merely nullifies the possibility of setting up of a claim of Benami in
any suit, claim or action between the real owner and the benamidar. A
proceeding for the purpose of tax assessment in which the question of benami
arises, however, does not partake of such claim, action, etc.

The tax department is concerned mainly with inquiring into the source of
investment in property for the purpose of assessment of income under the Income-tax
Act, and ascertaining the person who made such investment: the assessee or
the benamidar.

Accordingly, prohibitions in sections 3 and 4 of the Benami Act
do not bar the enquiry by the tax officer into the source of investment in benami
property. The enquiry by the tax officer is to ascertain whether the investment
was made by the assesse. The benami character of the acquisition of the
property is merely secondary aspect in such inquiry. Any finding on such
secondary aspect is merely incidental[5].

9.2     Section
53

For convenience of reference, section 53 is extracted here.

53.  Penalty for benami
transaction

(1)  Where any person enters into a
benami transaction in order to defeat the
provisions of any law or to avoid payment of statutory dues or to avoid payment
to creditors, the beneficial owner, benamidar and any other person who
abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction.

(2)  Whoever is found guilty of the
offence of benami transaction referred to in sub-section (1) shall be
punishable with rigorous imprisonment for a
term which shall not be less than one year, but which may extend to seven years
and shall also be liable to fine which may
extend to twenty-five per cent of the fair market value of the property.(Emphasis
supplied)

Section 53 (1) which is deemed to have come into force on 19^th
May 1988, provides penal consequences where any person enters into a benami
transaction for any of the following three purposes.

–    to defeat the provisions of any law;

–     to avoid payment of statutory dues; 

–    to avoid payment to creditors

9.2.1   Persons guilty of the offence

According to section 53(1), three persons are guilty of the offence of
Benami transaction, viz,

–     the beneficial owner,

–     benamidar, and

–    any other person who abets or induces any
person to enter into Benami transaction.

9.2.2     Quantum
of punishment

Section 53(2) provides punishment for the offence of benami
transaction, viz, rigorous imprisonment for a term ranging from one year to
seven years.

The person guilty of the offence of benami transaction will also be
liable to fine which may extend to 25% of the fair market value of the
property. For this purpose, “fair market value” is the price that the
property would ordinarily fetch on sale in the open market on the date of the
transaction. Where the benami property is unquoted equity shares, their
market value will be determined in accordance with Rule 3(1) of the Prohibition
of Benami Transactions Rules, 2016.

9.2.3     Difference
in the quantum of punishment:

Section 53(2) vs. Section 3(2):

Punishment for entering into benami transaction is by way of imprisonment for a
term that may extend to three years. Violation of section 3(1) may be
additionally punishable with fine. However, levying fine is optional.

When we look at the punishment provided in section 53(2) for benami transaction
entered into for any one or more of the three purposes mentioned in section
53(1), the following rigours of section 53(2) become apparent when compared
with the penalty u/s. 3(2).

–    Firstly, section 53(2) provides
punishment of rigorous imprisonment for a term of one to seven years. However,
in section 3(2), it is simple imprisonment that may extend upto three years.

–     Secondly, additional punishment
under section 53(2) by way of fine up to twenty-five percent of fair market
value of the property is mandatory and not optional. On the other hand, in
section 3(2), fine is optional.

9.2.4   Overriding
nature of section 53

According to section 3(3), in respect of Benami transactions
entered into on or after 1^st November 2016, section 53 shall apply
not withstanding anything contained in section 3(2). Accordingly, Chapter VII
(Sections 53, 54 and 55) overrides only section 3(2) and not sections 3(1), 4,
5 and 6.

Thus, the rigorous imprisonment and fine specified in Chapter VII are
attracted only to the benami transactions entered into on or after 1
November, 2016 to defeat the provisions of any law or to avoid payment of
statutory dues or to avoid payment to creditors. However, the legal
consequences specified in sections 3, 4, 5 and 6 in respect of benami
transactions or benami properties will operate irrespective of the motive for
entering into the transaction.

9.2.5     Prosecution
of transferor – only in specified cases

A moot question that needs to be addressed is: can the transferor of a
benami property be prosecuted u/s. 53 of
the Act?

The transferor would be prosecuted only if he has abetted or induced any
person to enter into Benami transaction for any of the following three
purposes.

–     to defeat the provisions of any law

–    to avoid payment of statutory dues

–    to avoid payment to creditors.

This is indicated by the words in section 53(1) “beneficial owner,
benamidar and any other person who abets or induces any person to enter into
benami transaction, shall be guilty of the offence”.

In the context of the abovementioned three purposes, one may also note
the relevance of the following provisions of the Indian Penal Code, 1860.

9.2.6     Fraudulent
Transfers punishable

Now, fraudulent transfers are made specifically punishable u/s.
53 of the Act. Indeed, the Transfer of Property Act, 1882 empowers
the Court to set aside transfers in fraud of creditors and transfers in fraud
of subsequent transferees[6].

9.3     Penalty
for furnishing false information

Any person who is required to furnish information under the Act knowingly
gives any false information to any authority or furnishes any false document in
any proceeding under the Act is punishable with rigorous imprisonment
for a term ranging from six months to five years and shall further be liable to
fine that may extend to ten percent of the fair market value of the property.

“Fair market value” is the price that the property would ordinarily
fetch when sold in open market on the date of the transaction. If Benami
property is unquoted equity shares, their fair market value will be determined
in accordance with rule 3 of Prohibition of Benami Property Transactions
Rules, 2016.

9.4    Previous sanction for prosecution

Previous sanction of the Board is mandatory for instituting prosecution
against any person in respect of any offence u/s. 3, 53, or 54.

10.   CONCLUSION

In past, the debates in Parliament and the observations in the Law
Commission Reports always lamented that the then law was toothless. The
administration of the old Benami Law was found ineffective. There were no
deterrents to the persons indulging in benami transactions.

All shortcomings of the erstwhile benami legislation have been taken
care of in the Act that came into force on 1^st November 2016.
The Government is determined to remove the evil of the benami transactions by
implementing provisions of the Act with all its deterrent and penal
remedies.

It is reported that so far, investigation has led to discovery of substantial
illicit money parked in benami properties valued at several hundred crores.
Show cause notices have been issued in a number of cases. Provisional attachments
have been made of benami properties totalling Rs 1,500 crores and the matters
are being pursued vigorously.