BENAMI ACT – NO LONGER A PAPER TIGER ! – PART 1

“The (1988) Ordinance will remain ‘a paper tiger’,
ineffective in every manner. It would be inane”. – 130^th Report of
Law Commission on Benami Transactions.

1. INTRODUCTION

Few months ago, Government directed the Registrars to furnish
the particulars of immovable properties registered during last ten years having
value above Rs. 1 crore. The purpose of the directive was to trace the benami
properties purchased or held in violation of The Prohibition of Benami
Property Transactions Act, 1988 (“the Act”).

Also, Business Standard reported on 12^th January
2018 that more than 900 properties worth about Rs 35 billion have been attached
under the Act. The attached properties included immovable assets, such
as, land, flats and shops worth Rs. 29 billion, while jewellery, vehicles and
bank deposits constituted the rest.

Some of the specific and important aspects of the Act are
reviewed below.

2. OBJECTIVE OF THE ACT

The following preamble of the Act as amended in 2016
reflects its objective.

“An Act to prohibit benami
transactions and the right to recover
property held benami and matters connected therewith or incidental
thereto”. (Emphasis supplied)

3. TRANSACTIONS AND ASSETS
COVERED

Section 3 of the Act puts blanket prohibition on
benami transactions. Thus, all transactions that fall within the definition of
“benami transaction” would be covered by the blanket prohibition.

3.1 ‘Benami transaction’: Type 1

New section 2(9) has substituted the definition of ‘benami
transaction’ with effect from 1^st November 2016. The difference
between the old and new definition of ‘benami transaction’ can be
ascertained by the following comparative review.

The above mentioned review indicates the following features
of the definition.

•  The new definition
  introduces the element of “intention” of the real owner about the
  person for whose benefit the property is held¹.

______________________________________________________

1   See:
Law Commission of India: 57^th Report: 7 August 1973: Paragraph
5.2(b)

•  The genesis of the
  concept of benami is three-fold:

•  the consideration for purchase of the property must flow
  from one person;

•  the property is purchased in the name of the other person;
  and

•  the consideration so flowing for the purchase was not
  intended to be gift to the person in whose name the property is purchased².

•  After the main limb of
  the new definition, four types of transactions are described as “benami
  transaction”.

Indeed, the definition of ‘benami transaction’ of Type
1 specifies four exclusions and their conditionalities. The exclusions
pertain to the properties of HUF, trustee, executor, partner, director,
depository, spouse, child, lineal ascendant and descendant and power of
attorney arrangement.

These exclusions ensure that honest and bona fide transactions
are out of the sweep of the Act.

The new definition of ‘benami transaction’ and their
exceptions with conditionalities are diagrammatically summarised below.

3.1.1  ‘Property’;
‘Benami Property’

‘Property’ is a crucial term in the definition of ‘benami
property’. There is a difference between the wordings of the definition of
“property” in the pre-Amendment Act and the new definition. For a comparative
review, both the definitions are extracted below.

2   Syed
Abdul Kader vs. Rami Reddy AIR 1979 SC 553

3.1.2     New asset
classes introduced

The new definition specifies the following nine asset classes
as “property”.

• Movable

• Immovable

• Tangible

• Intangible

• Corporeal (new class introduced)

• Incorporeal (new class introduced)

• Right/interest/legal document/instruments

– evidencing title to or interest in the property

• Property in the converted form (new class introduced)

• Proceeds from the property (new class introduced)

3.2 
      Benami transaction: Type 2

Transactions in fictitious name

The second type of benami transaction is the transaction or
arrangement made in a fictitious name.

3.3        Benami
transaction: Type 3

The owner “not aware of” “denies knowledge of”

Third type of benami transaction is “a transaction or
arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership”.

Connotation of the expressions “not aware of” and “denies
knowledge of” can be understood by the following illustration.

In the course of a search action, a lady partner gave the
statement that she was a partner in a firm.

However, she admitted that she did not know her share in the
firm and other particulars of the firm.

On these facts, the question for consideration is: whether
her being a partner will involve a benami transaction?

In this case, the lady was indeed aware of the fact that she
was a partner. She did not deny that fact. Her statement clearly indicated
that, as a partner, she was owner of her share in the firm.

Indeed, she admitted that she did not know the other
particulars relating to the firm. Having no knowledge of the firm’s
particulars, however, cannot be regarded as being “not aware of, or denies
knowledge of such ownership”. Hence, in this case, it cannot be said that
the lady’s being a partner involves a benami transaction.

3.4    Benami
Transaction: Type 4

Provider of consideration “not traceable or is fictitious”

The issue is: whether this type of transaction would cover
charitable and religious institutions where often donors wished to remain
anonymous as a precondition to giving donations to the institution?

Section 58 of the Act addresses this issue. It
empowers the Central Government to exempt any property relating to charitable
or religious trusts from the operation of the Act. Therefore, large
donations received by the charities from anonymous donors will not be regarded
as benami property if covered by Central Government’s exemption notification.

4.   TRANSACTIONS NOT COVERED

As regards the benami transaction of Type 1, the
following four transactions are excluded from this type of benami transaction.

4.1   First exclusion:

Property held by HUF Karta or member

This exclusion is applicable in the following circumstances.

•  The property is held for
  the benefit of Karta or other members of HUF; and

•  Consideration for the
  property is provided out of known sources of HUF.

4.1.1     “Known
sources”

The crucial issue is: what is the meaning of the
expression “known sources”? This expression is new and was not a part of
the pre-amended Act.

The expression “known sources” is different from “known
sources of income”. The rationale behind the expression “known sources” was
explained by the Finance Minister during the debate on the Benami Amendment
Bill in the following words.

“… … This is exactly what the Standing Committee went into.
The earlier phrase was that you have purchased this property, so you must show
money out of your known sources of income. So, the income had to be personal.
Members of the Standing Committee felt that the family can contribute to it,
you can take a loan from somebody or you can take loan from bank which is not
your income. Therefore, the word ‘income’ has
been deleted and now the word is only ‘known sources’. So, if a brother or
a sister or a son contributed to this, this itself would not make it benami,
because we know that is how the structure of the family itself is………” [Emphasis
supplied]

_________________________________________________-

3   Kalekhan
Mohammed Hanif vs. CIT (1963) 50 ITR 1(SC)

4.1.2     Under
the Income-tax Act if the assessee does not explain the nature and
source of credit in his books of account, the amount of credit will be regarded
as his taxable income. The Supreme Court³  has held that the onus to explain the nature
and source of cash credit is on the assessee. To discharge such onus, the
assessee must prove:

•  The identity of the creditor

•  The capacity of the creditor

•  Genuineness of the transaction

4.1.3     According
to section 106 of the Indian Evidence Act, 1872, if any fact is
especially within the knowledge of any person, the burden of proving that fact
is on him. Thus, where wife holds the property as benami for her
husband, conjoint reading of Income-tax Act and the Evidence Act,
raises a question: whether the burden of proving that the consideration was
paid by the husband from his known sources is discharged when the wife
furnishes the particulars of the consideration provided by her husband who
purchased the property in her name?

In other words, can the benamidar wife be asked to
prove the source from which her husband provided the consideration?

4.1.4     The
view that an assessee cannot be asked to prove the source of the source has
been recently called in question by the Calcutta High Court in the following
decisions.

•  Rajmandir Estates Pvt. Ltd. vs. CIT (Principal) [2016]
  386 ITR 162 (Cal)

•  CIT vs. Maithan International [2015] 375 ITR 123 (Cal)

4.1.5     There
is, indeed, a subtle difference in the nature of Income-tax Act and that
of the Benami Act. Income-tax Act is a Revenue law but the
Benami Act is a law dealing with economic offence. In view of the said two
decisions, it stands to reason that under the Benami Act, benamidar may
be called upon to prove the source from which the real owner provided funds for
purchase of the benami property.

4.2        Second Exclusion: Property held by
trustee, executor, partner, director, depository or participant as agent of a
depository

This exclusion applies to the property held by the above
named persons. They are merely illustrative of the class of persons covered by
this exclusion. Hence, apart from the abovementioned persons, any other person,
too, may be covered by this exclusion where the following two facts exist.

•  The property is held by the person in fiduciary
  capacity; and

•  The person holds the property for the benefit of another
  towards whom he stands in fiduciary capacity.

The Supreme Court has held⁴ that “while the
expression “fiduciary capacity” may not be capable of precise definition, it
implies a relationship that is analogous to the
relationship between a trustee and the beneficiary of the trust. The expression is in fact wider in its import for it extends to all such situations that place
the parties in positions that are founded on
confidence and trust on the one part and
good faith on other”. [Emphasis supplied]

Moreover, the Central Government is empowered to notify any
other person for inclusion in the abovementioned exclusion.

4.3        Third
exclusion: Property held in the name of wife or child

This exclusion is
applicable only if the consideration is paid or provided from the individual’s “known
sources”.

Following important
aspects of this exclusion may be noted.

•  The expression mentioned
  in the condition is “known sources” and not “known sources of income”.
  Thus, where an individual takes loan for purchasing a property in child’s name,
  it will not be Benami transaction because loan is the individual’s
  “known source” though not necessarily, the known source of his income. Thus, it
  is sufficient that the property is purchased from the individual’s “known
  sources”. The person need not further prove that the property is purchased from
  the known sources of his income.

________________________________________________

4   Marcel
Martins vs. M Printer [2012] 21 taxmann.com 7

•   The term “child” is not
  defined in the Act. Hence, in terms of section 2(31) of the Act,
  the definition of “child” given in section 2(15B) of the Income-tax Act
  may be adopted. This definition of ‘child’ includes a step-child and adopted
  child. The term “child” also includes “married daughter”. Moreover, “child”
  includes major child and also illegitimate child⁵.

4.4        Fourth Exclusion:
Property held jointly with

brother, sister, lineal ascendant or descendant

This exclusion is
applicable where the following facts exist.

•  The name of the person providing consideration appears as
  joint owner in the property document.

•  The consideration for property is provided out of
  individual’s known sources.

The following important aspects of this exclusion may be
noted.

•  The terms “brother” or
  “sister” include half-brother/sister⁶. Though colloquially, it is
  customary to address cousins as “cousin brother” or “cousin sister”, they are
  not considered “brother” or “sister”.

•  Likewise, step-brother
  and step-sister are not “brother” or “sister”.

•  The properties held in
  the sole name of the brother, sister, lineal ascendant or descendant is
  not covered in this exclusion.

•  “Lineal ascendant” and
  “lineal descendant” are not defined in the Act. Sections 24 and 25 of the Indian
  Succession Act, 1925 throw light on these two expressions.

In the light of the Indian
Succession Act, [section 24: kindred or consanguinity and section 25(1):
Lineal consanguinity], “lineal ascendant” or “lineal descendant” may be
described as the connection or relation between two persons, one of whom has
descended in a direct line from the other, as between a man and his father,
grandfather and great-grandfather, and so upwards in the direct ascending line;
or between a man and his son, grandson, great-grandson and so downwards in the
direct descending line.

4.5  Fifth
exclusion: Power of Attorney transactions

__________________________________________________

5   Sunderlal
Chaurasiya vs. Tejila AIR 2004 MP 138

6  ITO
vs. Mahabir Jute Mills Ltd (1983) 17 TTJ (All) 49

An important question for consideration is: whether “power of
attorney transactions” in immovable properties (POA transactions) are ‘benami
transactions’?

This question is addressed by the Explanation to
section 2(9)of the Act. The Explanation clarifies that ‘benami
transaction’ shall not include any transaction involving the allowing of
possession of any property to be taken or retained in part performance of a
contract referred to in section 53A of the Transfer of Property Act, 1882
if:-

•  Consideration for such property was provided by the person
  to whom possession is allowed but the person who has granted possession thereof
  continues to be owner of such property;

•  Stamp duty on such transaction or arrangement has been
  paid; and

•  The agreement has been registered.

Thus, POA transactions are not regarded as benami
transactions as per the following clarification given by the Finance
Minister⁷.

“As far as power of attorneys
are concerned, I have already said, properties which are transferred in
part performance of a contract and possession is given then that possession is
protected conventionally under section 53A of the Transfer of Property Act.
That is how all the power of attorney transactions in Delhi are protected, even
though title is not perfect and legitimate. Now,
those properties have also been kept out as per the recommendation made by the
Standing Committee”. [Emphasis supplied]

As the Explanation uses the words “for the removal
of doubts, it is hereby declared …”, it is clear that the Explanation
is retrospective in effect.

Another issue that may arise is whether the Explanation
is intended to confer legal title in the property on the power-of-attorney
holder who is in possession of property? It may be noted that the Explanation
merely removes the element of Benami from the POA transactions. It is
settled law that POA is not a title document. This aspect of the POA
transaction is not changed by the Explanation.

4.6        Further
exclusion: “Foreign property”

____________________________________________

7   See
the debate on the Amendment Bill in Rajya Sabha on 3-8-2016

A reference to the definition of ‘benami property’ in
section 2(8) and the definition of ‘property’ in section 2(26) of the Act shows that any property located abroad is not excluded from the said two
definitions.

However, the Finance
Minister has addressed this aspect in the following clarification⁸.

“What happens if the asset is outside the country? If an asset is outside the country, it would not be covered under this Act. It would be covered
under the Black Money Law, because you are owning a property or an asset
outside the country”. [Emphasis supplied]

Thus, according to the
abovementioned clarification, the foreign property would not be covered under the
Act. It would be covered under the Black Money Act.

4.7        One more exclusion: Sham transaction

A ‘sham transaction’
is different from a ‘benami transaction’.

In a benami transaction,
the transaction, in fact, takes place. A sham transaction is merely a
description given to a bogus or fictitious arrangement where transaction does
not take place at all. Sham transaction consists merely of fictitious entries
and fabricated documents, such as, bogus invoices.

The Supreme Court⁹
has explained the difference between “benami” and “sham” by observing
that the word ‘benami’ is used to denote two classes of transactions
which differ from each other in their legal character and incidents. To
demonstrate this proposition, the Supreme Court gave the following
illustration.

“A sells a property to B
but the sale deed mentions X as the purchaser. Here the sale is genuine, but
the real purchaser is B, X being B’s benamidar. This is the class of
transactions which is usually termed as benami. But the word ‘benami’
is also occasionally used to refer to a sham transaction. e.g. when A purports
to sell his property to B without intending that A’s title should pass to B. The fundamental difference between these two
classes of transactions is that in a benami transaction, there is an
operative transfer resulting in the vesting of title in the transferee. On
the other hand, in a sham transaction, there is
no real transfer since the transferor continues to retain the title even after
execution of the transfer deed. In benami transactions, when a
dispute arises as to whether the person named in the deed is the real
transferee or B, it would be necessary to address the question as to who paid
the consideration for the transfer, X or B. However, when the question is whether the transfer is genuine or sham, the
point for decision would be, not who paid the consideration but whether any consideration at all was paid”.
(Emphasis supplied)

_______________________________________________

8   Rajya
Sabha Debate on 2-8-2016 on the Amendment Bill

9   Sree
Meenakshi Mills Ltd. vs. CIT [1957] 31 ITR 28 (SC);AIR 1957 SC 49

The essential feature of
sham transaction is that the real owner of the property transfers the property
to another without the intention of transferring the legal title in the
property¹⁰.

The distinction between Benami
transaction and sham transaction is lucidly explained in the undernoted
decision¹¹ in the following words.

“The benami transaction
evidences an operative and valid transfer
resulting in the passing of title in the transferee, whereas in the sham
transaction, there is no valid transfer of interest, though ostensibly the deed
incorporating the transaction seeks to clothe the transferee with the title in
the property. Sham transaction takes place, inter
alia, when there is no consideration for the transfer. Hence, if the
transferor wants to assail the validity of the transaction, he will have to
seek cancellation of the document since as long as the document exists, the
transferee would remain clothed with the title to the property. In case of benami
transaction, however, the document has legal effect being perfectly valid;
such as a sale deed executed for consideration. However, the issue is: who is
the true owner of the property – whether the transferee named in the deed or
any other person being a benami. In such a case, the aggrieved person
would not demand cancellation of the sale deed because, if the deed is
cancelled, he would not be clothed with any right, title or interest in the
property which is the subject matter of the sale deed. This would be directly against his interest
inasmuch as he wants to derive right, title and interest in the property on the
strength of the sale deed, but wants a declaration that it is he who had
derived title and not the person named as transferee in the document. On the
other hand, in a sham transaction, the aggrieved person may require
cancellation of the deed where the transaction is of voidable nature.”
(Emphasis supplied)

The Act covers only Benami transaction and does not cover
sham transaction¹².

(To be continued in part 2
to cover how this Act will bring out illicit money, its administration,
opportunities for CAs, case study and rigour of punitive provisions.)  

___________________________________________________________________________________

10  Sree
Meenakshi Mills Ltd. vs. CIT (1957) 31 ITR 28 (SC), AIR 1957 SC 49; Thakur Bhim
Singh vs. Thakur Kan Singh: AIR 1980 SC 727; (1980) 3 SCC 72

11  Keshab
Chandra Nayak vs. Lakmidhar Nayak: AIR 1993 Ori 1 (FB)

12             Bhargary P. Sumathykutty vs.
Janaki Sathyabhama (1996) 217 ITR 129 (Ker)(FB)