In the last couple of years, there has been an immense hue and cry about curbing benami transactions and black money. The number of benami transactions in the real estate and other sectors have increased astronomically. In the absence of an effective regulation, the black or ill-gotten money is easily parked in the opaque real estate industry. Since the year 2014, this issue also assumed significant importance in view of the election manifesto of Bharatiya Janata Party and subsequent focus and determination of the present government, reflected in the substantial amendments to the applicable law and prompt actions initiated for its effective implementation.
The Benami Transactions (Prohibition) Act, 1988 has been completely revamped in the year 2016 by the Benami Transactions (Prohibition) Amendment Act, 2016 and the government is vigorously invoking the amended law in achieving its objective of combating the menace of black money and corruption. The purpose of this article is to provide a brief history of the law on benami transactions, and give an overview of the law dealing with such transactions and the journey of the vital changes in law.
1. Background & Brief History
A. Background
a) The earliest noteworthy mention of benami transactions was in the 18th century when the British had colonised the territory of India. In the case of Gopeekrist Gosain vs. Gungapersuad (1854) 6 MLA 53, it was held that such benami transactions were a part of India’s custom and therefore must be recognised unless otherwise provided by law.
Thereafter, sections 81 and 82 of the Indian Trusts Act, 1882 extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other.
b) In the last few decades, many such transactions were entered between parties to deploy ill-gotten wealth and to defraud and frustrate various law enforcement authorities under various laws. In order to remedy this situation the Parliament introduced section 281A in the Income-tax Act, 1961 [the ITA] to prohibit the institution of suits with regards to benami properties. The widespread menace of illegal benami transactions was not effectively curtailed and therefore sections 81 and 82 of the Indian Trust Act, 1882 and section 281A of the ITA were repealed by the Benami Transactions (Prohibition) Act, 1988 w.e.f. 19-5-1988. Thereafter following the recommendations of the 57th Law Commission Report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 was promulgated by the President on 19th May, 1988.
c) The said Ordinance was subjected to criticism in the media and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly, 130th Law Commission Report submitted certain recommendations as enumerated below:-
– All kinds of property must be covered by benami transactions.
– The new law must declare that entering into benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife.
– Omission of section 94 of the Transfer of Property Act, 1882.
– Acquisition of such properties under the same procedure as provided in Chapter XXA dealing with acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, of the ITA.
d) Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Bill was passed by both the Houses of Parliament and on 5th September 1988, it became the Benami Transactions (Prohibition) Act, 1988.
B. Benami Transactions (Prohibition) Act, 1988 now renamed as Prohibition of Benami Property Transactions Act, 1988
The Benami Transactions (Prohibition) Act, 1988 now renamed by the Benami Transactions (Prohibition) Amendment Act, 2016 as Prohibition of Benami Property Transactions Act, 1988 [the Benami Act] was enacted in order to prohibit all benami transactions and confiscating of property which has been held as benami. The pre-amended Act consisted of only 9 sections out of which Sections 3, 4 and 5 were significant.
– Section 3 prohibited entering into a benami transaction. The exceptions to the same were as follows:
“the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife of the unmarried daughter.”
– Section 4 provided that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same were:
“(a) where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”
– Section 5 provided that the benami properties shall be acquired by authority without any compensation or payment in return.
C. Delay in implementation of the Act
The menace of benami transactions has flourished not due to lack of appropriate legal framework but mainly due to non-implementation/lack of proper implementation of the enacted laws and lack of adequate administrative infrastructure. In other words, although 28 years ago the Benami Act was passed by the Parliament, it was not implemented despite the request by the Central Vigilance Commission [CVC] to the government to empower the CVC under the Benami Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the law. Hence, recently the present government brought in a new bill to completely revamp the Benami law in tune with the current circumstances and requirements and to deal with growing challenges.
D. Benami Transactions (Prohibition) Amendment Act, 2016
The original Benami Transactions (Prohibition) Act, 1988 i.e. the ‘Principal Act’ was woefully inadequate to address the rampant menace of benami transactions in a country with widespread poverty and illiteracy.
In the recent past, there have been various instances in which people used their unaccounted money to purchase property in name of a fictitious or non-existent person. Therefore, the need for a strong mechanism to combat such activities has become inevitable. The object and purpose of the Benami Transactions (Prohibition) Amendment Act, 2016 is not only to efficaciously prohibit benami transactions but also to prevent evasion of law by illegal practices. The most significant aspect of the Amendment Act is that all the benami properties shall be confiscated after following due procedure of law.
However, the law extended immunity under the Income Declaration Scheme, 2016 to those who made a declaration in respect of their benami properties.
E. Development of the law on prohibition of benami transactions
– On 13th May, 2015, the Benami Transactions (Prohibition) Amendment Bill, 2015 was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Benami Act i.e. amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions.
– The Amendment Bill, 2015 was then referred for examination to the Standing Committee on Finance. On 28th April, 2016, the Standing Committee’s report was submitted.
– On 22nd July, 2016, the government proposed amendments to the Amendment Bill, 2015. On 27th July, 2016 the Amendment Bill was passed by the Lok Sabha and on 2nd August, 2016 the Rajya Sabha approved the same.
– The Amendment Bill received the President’s assent on 10th August, 2016 and the Benami Transactions (Prohibition) Amendment Act, 2016 [the Amendment Act, 2016] was brought into force.
F. Reason for enlargement of the Act from 9 sections to 72 sections instead of enacting a new Benami Act
A question arises as to why the government has chosen to make such a large number of amendments i.e. from 9 sections to 72 sections, instead of enacting a new law altogether.
This was explained by the Finance Minister during the parliamentary debate, as follows:
“Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28 year immunity would not have been in larger public interest, particularly if large amounts of unaccounted and black money have been used to transact those transactions. That was the principal object.”
2. Meaning of Benami Transaction
What is Benami?
The term “Benami” has its origin in the Persian language which implies “without a name”. The term “benami” implies made, held, done, or transacted in the name of (another person). It is used in Hindu law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the principal or beneficial owner.
The benami transaction is any transaction in which property is transferred to one person for a consideration paid by another person. In this kind of transaction the person who pays for the property does not buy it under his/her own name. The person on whose name the property has been purchased is called the benamidar and the property so purchased is called the benami property. The person who finances the deal is the real owner. The property is held for the benefit, direct or indirect, of the person paying the amount.
In simple terminology, benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person; therefore, the former will be the nominal owner and the latter will the real owner of the property. The Privy Council in the case Pether Perumal vs. Muniandy (1908) ILR 35 Cal. 551 held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who has beneficial ownership of the property.
The Amendment Act, 2016 has substituted the definition of ‘benami transaction’ and the substituted definition, considerably expanding the scope of the term, reads as follows.
“(9) “benami transaction” means, –
(A) a transaction or an arrangement –
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by –
(i) a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or
(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;
(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.
Explanation – For the removal of doubts, it is hereby declared 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 (4 of 1882), if, under any law for the time being in force, –
(i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered;”
Prior to its substitution, the definition of ‘benami transaction’ read as follows:
“2(a)”benami transaction” means any transaction in which property is transferred to one person for a consideration paid or provided by another person.”
In the context of pre-amended provisions of the Act, the Supreme Court in the case of G. Mahalingappa vs. G. M. Savitha [2005] 147 Taxman 583 (SC) held that the following findings of fact were arrived at by the appellate court and the trial court, and would conclusively prove that the transaction in question was benami in nature:
(1) the appellant had paid the purchase money.
(2) the original title deed was with the appellant.
(3) the appellant had mortgaged the suit property for raising loan to improve the same.
(4) he paid taxes for the suit property.
(5) he had let out the suit property to defendant Nos. 2 and 5 and collecting rents from them.
(6) the motive for purchasing the suit property in the name of plaintiff was that the plaintiff was born on an auspicious nakshatra and the appellant believed that if the property was purchased in the name of plaintiff/respondent, the appellant would prosper.
(7) the circumstances surrounding the transaction, relationship of the parties and subsequent conduct of the appellant tend to show that the transaction was benami in nature.
Similarly, in the context of cases under the ITA, various courts and tribunals have laid down various tests for deciding the issue regarding benami nature of transactions. However, it is important to keep in mind the enlarged scope of the definition of the ‘benami transaction’ substituted by the Amendment Act, 2016.
Meaning of some other important terms
The Amendment Act, 2016 has substituted or inserted various other important definitions in the Act, some of which are given below for ready reference.
“(8) “benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property;”
“(10) “benamidar” means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name;”
“(12) “beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar;”
“(16) “fair market value”, in relation to a property, means –
(i) the price that the property would ordinarily fetch on sale in the open market on the date of the transaction; and
(ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with such manner as may be prescribed;”
“(24) “person” shall include (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) every artificial juridical person, not falling under sub-clauses (i) to (v);”
“(26) “property” means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form and also includes the proceeds from the property;”
“(29) “transfer” includes sale, purchase or any other form of transfer of right, title, possession or lien;”
3. Prohibition and consequences of Benami Transactions
A. Benami Transactions – A punishable Offence
a) Section 3(1) provides that no person shall enter into any benami transactions.
b) Section 3(3) provides that whosoever enters into any transaction on or after the date of commencement of Amendment Act, 2016 i.e. 1-11-2016, shall be punishable in accordance with the new Chapter VII i.e. new section 53 of the Act.
c) Section 53(1) provides that 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.
d) Section 53(2) provides that whoever is found guilty of the offence of benami transaction referred to in sub-section (1) mentioned above, 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 [FMV] of the property.
e) The FMV of the property shall be determined in accordance with section 2(16) read with Rule 3 of the Prohibition of Benami Property Transaction Rules, 2016 [the Rules]. Presently, Rule 3 prescribes the methodology of valuation of unquoted equity shares i.e. higher of its cost of acquisition, FMV as per Discounted Cash Flow method and value determined in prescribed manner as per prescribed formula.
B. Prohibition of the right to recover property held benami
a) Section 4(1) provides that no suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property.
b) Section 4(2) provides that no defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property.
C. Property held benami liable to confiscation.
Section 5 provides that any property, which is subject matter of benami transaction, shall be liable to be confiscated by the Central Government.
D. Prohibition on re-transfer of property by benamidar.
Section 6 provides that no person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf. Any such re-transfer shall be deemed to be null and void. However, this prohibition shall not apply to a re-transfer made in accordance with the provisions of section 190 of the Finance Act, 2016 i.e. under the Income Declaration Scheme, 2016.
4. Authorities
Chapter III and sections 7 to 23 of the Act deal with various authorities under the Act and their powers.
Section 18 of the Act provides that the following shall be the authorities for the purposes of the Act, namely:
a) The Initiating Officer;
b) The Approving Authority;
c) The Administrator; and
d) The Adjudicating Authority.
An Adjudicating Authority shall consist of a Chairperson and at least two other members.
The Central government has vide notification no. 3288(E), dated 25-10-2016, notified that the Adjudicating Authority appointed u/s. 6(1) of the Prevention of Money-laundering Act, 2002 [PMLA] and the Appellate Tribunal established u/s. 25 of PMLA shall discharge the functions of Adjudicating Authority and Appellate Tribunal under the Benami Act until the appointment of Adjudicating Authority and establishment of Appellate Tribunal under this Act.
Section 19 deals with the powers of discovery and inspection, enforcing attendance, compelling production of books of accounts and other documents, issuing commissions, receiving evidence on affidavits etc.
Section 21 provides for the power to call for information while power to impound documents is given in section 22. In addition, section 23 provides for the power of authority to conduct inquiry etc.
5. Attachment, Adjudication and Confiscation
Chapter IV and sections 24 to 29 of the Act deal with the attachment, adjudication and confiscation of the benami property.
A. Notice and attachment of property involved in benami transaction
Section 24 and Rule 5 provide for issue of notice by the Initiating officer to any person believed to a benamidar and to beneficial owner, provisional attachment of the property for a period not exceeding 90 days, passing of appropriate order for continuing provisional attachment or revocation of the provisional attachment order (after making such inquires and calling for such reports or evidence as he deems fit and taking into account all relevant materials) and in case of order for continuation of provisional attachment or order for provisional attachment, draw up a statement of the case and refer it to the Adjudicating Authority within 15 days of the attachment.
B. Manner of service of notice
Section 25 provides for manner of service of the notice on the person named therein either by post or as if it were a summons issued by a Court under the Code of Civil Procedure, 1908 and to be addressed to specified addressees in various cases.
C. Adjudication of benami property
Section 26 contains provisions relating to the process to be followed by the Adjudicating Authority in respect of adjudication of benami property. On receipt of a reference from an Initiating Officer, the adjudicating authority shall issue notice within 30 days to (a) the person specified as a benamidar therein; (b) any person referred to as the beneficial owner therein or identified as such; (c) any interested party, including a banking company; (d) any person who has made a claim in respect of the property and provide not less than 30 days to furnish the information sought.
The Adjudicating Authority shall, after (a) considering the reply, if any, to the notice issued under s/s. (1); (b) making or causing to be made such inquiries and calling for such reports or evidence as it deems fit; and (c) taking into account all relevant materials, provide an opportunity of being heard to the person specified as a benamidar therein, the Initiating Officer, and any other person who claims to be the owner of the property, and, thereafter, pass an order (before the expiry of one year from the end of the month in which the reference under sub-section (5) of section 24 was received) (i) holding the property not to be a benami property and revoking the attachment order; or (ii) holding the property to be a benami property and confirming the attachment order, in all other cases.
D. Confiscation and vesting of benami property
Section 27 provides that where an order is passed in respect of any property under sub-section (3) of section 26 holding such property to be a benami property, the Adjudicating Authority shall, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property. In case an appeal has been filed against the order of the Adjudicating Authority, the confiscation of property shall be made subject to the order passed by the Appellate Tribunal u/s. 46.
The procedure for confiscation of the property is prescribed in Rule 6, which provides that the adjudicating officer shall send a copy of the order of confiscation to the Authorised Officer. The rule contains separate procedure for confiscation in respect of immovable property and moveable property.
It is further provided that nothing in sub-section (1) shall apply to a property held or acquired by a person from the benamidar for adequate consideration, prior to the issue of notice under sub-section (1) of section 24 without his having knowledge of the benami transaction.
Where an order of confiscation has been made, all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation. Any right of any third person created in such property with a view to defeat the purposes of this Act shall be null and void.
E. Management of properties confiscated
Section 28 provides that the Administrator shall have the power to receive and manage the property, in relation to which an order of confiscation has been made. Rules 7, 8 and 9 contain relevant rules in respect of receipt of the confiscated property, management of confiscated property and disposal of the same.
The Central government has vide notification no. 3290 (E), dated 25-10-2016, directed that the Income-tax Authorities specified u/s. 116 of the Income-tax Act, 1961, as mentioned in the notification, to exercise the powers and to perform the functions of the ‘Authority’ i.e. Approving Authority, Initiating Officer and Administrator, under the Act.
F. Possession of the property.
Section 29 provides that where an order of confiscation in respect of a property has been made, the Administrator shall proceed to take the possession of the property. The Administrator shall (a) by notice in writing, order within seven days of the date of the service of notice to any person, who may be in possession of the benami property, to surrender or deliver possession thereof to the Administrator or any other person duly authorised in writing by him in this behalf; (b) in the event of non-compliance of the order referred to in clause (a), or if in his opinion, taking over of immediate possession is warranted, for the purpose of forcibly taking over possession, requisition the service of any police officer to assist him and it shall be the duty of the officer to comply with the requisition.
6. Appeals
Chapter V and sections 30 to 49 of the Act and Rule 10 together with Form 3, contain relevant provisions relating to appeal to Appellate Tribunal against the order of the Adjudicating Authority and Appeal to high Court against the order of the Appellate Tribunal.
7. Offences and Prosecution
In addition to confiscation of the benami property and penalty for benami transactions mentioned earlier in the context of section 3, section 54 provides that any person who is required to furnish information under the Benami Act knowingly gives false information to any authority or furnishes any false document in any proceeding under the Benami Act, shall be punishable with rigorous imprisonment for a term which shall not be less than 6 months but which may extend to 5 years and shall also be liable to fine which may extend to 10% of the FMV of the benami property.
No prosecution can be instituted against any person in respect of any offence u/s. 3, 53 or 54 without the prior sanction of the CBDT.
8. Other Important provisions
a) Certain transfers to be null and void
Section 57 provides that notwithstanding anything contained in the Transfer of the Property Act, 1882 or any other law for the time being in force, where, after the issue of a notice u/s. 24, any property referred to in the said notice is transferred by any mode whatsoever, the transfer shall, for the purposes of the proceedings under this Act, be ignored and if the property is subsequently confiscated by the Central Government u/s. 27, then, the transfer of the property shall be deemed to be null and void.
b) Proceedings etc. against legal representatives
Section 66 provides where a person dies during the course of any proceeding under the Benami Act, any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased.
Any proceeding which could have been taken against the deceased if he had survived may be taken against the legal representative and all the provisions of this Act, except section 3(2) relating to entering into benami transaction prior to 1-11-2016 and the provisions of Chapter VII relating to offences and prosecution, shall apply accordingly.
Where any property of a person has been held benami u/s. 26(3), then, it shall be lawful for the legal representative of the person to prefer an appeal to the Appellate Tribunal, in place of the person and the provisions of section 46 relating to appeals to Appellate Tribunal shall, so far as may be, apply, or continue to apply, to the appeal.
c) Provisions of the Act to override other laws
Section 60 clarifies that the provisions of the Benami Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force.
Section 67 provides that the provisions of the Benami Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
In this connection, the Finance Minister, during the parliamentary debate, clarified as follows:
“Is this law in conflict with the Income-tax Act in any way? The answer is ‘no’. The Income-tax deals with various provisions of taxation, the powers to levy the tax and prescribes procedures etc. This particular law deals with any benami property which is acquired by a person in somebody else’s name to be vested in the Central Government. So the two Acts are supplementary to each other as far as this Act is concerned.”
The above gives an overview of the amended Benami law. In the next part of the Article, we shall deal with certain important questions which are likely to arise in the mind of a reader.
