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.