Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

Benami transactions – Prohibition – Act not applicable to companies – Action under Act should be taken within reasonable period

In this writ petition, the petitioners assail the provisional attachment orders dated 12th January, 2018 passed by the Initiating Officer u/s 24(4) of the Prohibition of Benami Property Transactions Act, 1988 and the confirmation orders dated 30th January, 2019 passed by the adjudicating authority u/s 26(3) of the Prohibition of Benami Property Transactions Act, 1988 (hereinafter referred to as ‘the Benami Act, 1988’).

The Rajasthan High Court held as under:

‘i) The Prohibition of Benami Property Transactions Act, 1988 would not extend to properties purchased by a company.

ii)  The very purpose of coming into force of the Prohibition of Benami Property Transactions Act, 1988 was to implement the recommendations of the 57th Report of the Law Commission on benami transactions and was to curtail benami purchases, i.e., purchase in the name of another person who does not pay the consideration but merely lends his name while the real title vests in another person who actually purchased the property. Upon reading the provisions of the Act and the definitions, it is apparent that a benami transaction would require one transaction made by one person in the name of another person where the funds are owned and paid by the first person to the seller while the seller gets the registered sale deed executed in favour of the second person, i.e., from the account of A, the amount is paid to C who sells the property to B and a registered sale deed is executed in favour of B. While in the case of an individual this position may continue, a transaction for purchase of property by a company in favour of any person or in its own name would not come within the purview of a benami transaction because the funds of the company are its own assets.

If the promoters of the company, namely, the shareholders, their relatives or individuals invest in the company by way of giving land or by way of gift or in any other manner, then such amounts or monies received would be part of the net worth of the company and the company would be entitled to invest in any sector for which it has been formed. The persons who have put monies in the company may be considered as shareholders but such shareholders do not have the right to own properties of the company nor can it be said that the shareholders have by virtue of their share in the company invested their amount as benamidars. The transactions of the company are independent transactions which are only for the purpose of benefit of the company. It is a different aspect altogether that on account of benefit accruing to the company the shareholders would also receive benefit and they may be beneficiaries to a certain extent. This would, however, not make the shareholders beneficial owners in terms of the definition as provided u/s 2(12) of the 1988 Act. A “company” as defined under the Companies Act, 1956 and incorporated thereunder, therefore, cannot be treated as a benamidar as defined under the 1988 Act. The company cannot be said to be a benamidar and its shareholders cannot be said to be beneficial owners within the meaning of the 1988 Act.

iii) Transactions done legally under the Companies Act of transferring shares of one shareholder to another, the benefit, if any, of which may accrue on account of legally allowed transactions, cannot be a ground to draw a presumption of benami transaction under the 1988 Act. Strict proof is required to be produced and there is no room for surmises or conjectures nor presumption to be made as the 1988 Act has penal consequences.

iv) The prayer of the respondents for lifting the veil to examine the original sale deed dated 24th August, 2006 in relation to the 1988 Act was correct. However, the original transaction of 2006 was between the company and the sellers and the sale deed was executed in favour of the company. Therefore, a subsequent registered sale deed executed by the Development Authority did not warrant interference and it was not a case of proceeds from the property acquired through benami transaction. Once land had been surrendered and order had been passed by the Development Authority u/s 90B of the Rajasthan Land Revenue Act, 1956 and the land had been converted from agricultural to commercial use and registered lease deed had been executed by the Development Authority in favour of the company, the transaction was not a benami transaction.

v) Ordinarily, any proceeding relating to benami transactions ought to be taken up immediately or at least within a reasonable period of limitation of three years as generally provided under the Limitation Act, 1963. Moreover the proceedings initiated after ten years of the purchase were highly belated.

vi) The action of the respondents in attaching the commercial complex which had been leased out to the company by the Development Authority was illegal and unjustified and without jurisdiction.’