Prohibition of Benami Property Transactions Act, 1988 (As Amended) – Some Important Issues [Part – II]

In the Part I of the Article published in April 2017 issue of
BCAJ, we have given an overview of the amended Benami law. In this part, we are
dealing with certain important issues which are likely to arise in the mind of
a reader. It is important to note that there are many issues relating to Benami
Act. We have dealt with some issues which could be useful for a large number of
readers.

1.  What is Benami Property Law? What is its role
in fighting black money & corruption? How does it fit in the overall scheme
of things?

a.  Prohibition of Benami Property Transactions
Act, 1988 [the Act/Benami Act] contains the law relating to benami properties.
In addition, section 89 of the Companies Act, and rule 9 of the Companies
(Management and Administration) Rules, 2014 contain provisions relating to
declaration in respect of beneficial interest in any share.

b.  The objective of the Act is to prohibit benami
transactions so that the beneficial owner i.e. true or real owner who provided
consideration, would be compelled to keep the property in his own name only and
various legal issues and complexities arising due to apparent owner not being
the real owner, could be avoided and taken care of.

c.  The objective of the Benami Transactions
(Prohibition) Amendment Bill, 2015 and its role in fighting black money, was
explained by the Finance Minister during parliamentary debate as follows:

     “the principal object behind this Bill is
that a lot of people who have unaccounted money invest and buy immovable
property in the name of some other person or a non-existent person or a
fictitious person or a benami person. So these transactions are to be
discouraged. As far as assets held illegally abroad are concerned, from the
very beginning the effort of the Government has been, they should be squeezed,
the use of cash beyond a certain limit should be discouraged, unaccounted money
must make way and, so, the colour of transaction of money itself must change.
Therefore, this is an important step in that direction. It is predominantly
an anti-black money measure that any transaction which is benami is illegal and
the property is liable to be confiscated. It will vest in the State and the
entrant of the benami transaction is liable to be prosecuted.” 

2.  Are the provisions of Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 [Black Money Act],
Prevention of Money Laundering Act, 2002 [PMLA], Prevention of Corruption Act,
1988, Income-tax Act, 1961 and FEMA overlapping with provisions of Benami Act?

a.  The Black Money Act contains provisions to
deal with the problem of black money that is undisclosed foreign income and
assets, the procedure for dealing with such income and assets and provides for
imposition of tax on any undisclosed foreign income and asset held outside
India and for matters connected therewith or incidental thereto.

b.  PMLA essentially deals with money laundering
which involves disguising financial assets so that they can be used without
detection of the illegal activity that produced them. Thus, PMLA is restricted
only to proceeds of crime i.e. property obtained as a result of criminal
activity relating to scheduled offences.

     Please refer to our article on the subject
published in September 2016 issue of BCAJ.

c.  The Prevention of Corruption Act, 1988 is
enacted to combat corruption in government agencies and public sector
businesses in India.

d.  As regards conflicts, if any with the
provisions of the Income-tax Act, 1961, while replying to the debate on the
Amendment Bill in Lok Sabha on 27.7.2016, the Finance Minister clarified as
follows:

     “Is this law in conflict with the Income
Tax Act in any way? The answer is ‘no’. This law is not in conflict with
the Income Tax Act in any way. The Income-tax deals with various
provisions of taxation, the powers to levy the 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.”

e.  Foreign Exchange Management Act, 199 [FEMA]
contains law relating to foreign exchange with the objective of facilitating
external trade and payments and for promoting the orderly development and
maintenance of the foreign exchange market in India. 

f.   As mentioned above, since the purpose and
objective of each of the abovementioned Act is different, there is no
overlapping with the provisions of Benami Act.

g.  Benami Act vs PMLA: The Benami Act applies
equally to both a property acquired through proceeds of crime or through
legitimate means and hence its scope is wider than PMLA. Its objective is to
prohibit benami transactions so that the beneficial owner would be compelled to
keep the property in his own name only.

3.  What is benami property and a benami
transaction? Who has the onus of proof? Is it limited to only Real Estate?

a.  The term ‘benami property’ has been defined in
section 2(8) of the Benami Act to mean any property which is the subject matter
of a benami transaction and also includes the proceeds from such property.
Similarly, the term benami transaction has been elaborately defined in section
2(9) of the Benami Act.

b.  Onus or burden of proof:

     The burden of proof regarding benami is
upon the one who alleges benami. The burden to prove passing of consideration
or the motive is on the person who alleges benami. This aspect of the matter
was considered by the Supreme Court in Valliammal (D) By Lrs vs.
Subramaniam & Ors (2004) 7 SCC 233, where it was held:

     “This
Court in a number of judgments has held that it is well-established that
burden of proving that a particular sale is benami lies on the person who
alleges the transaction to be a benami. The essence of a benami transaction
is the intention of the party or parties concerned and often, such intention
is shrouded in a thick veil which cannot be easily pierced through. But
such difficulties do not relieve the person asserting the transaction to be
benami of any part of the serious onus that rests on him, nor justify the
acceptance of mere conjectures or surmises, as a substitute for proof. Referred
to Jaydayal Poddar vs. Bibi Hazra, 1974 (1) SCC 3; Krishnanand vs. State of
Madhya Pradesh, 1977 (1) SCC 816; Thakur Bhim Singh vs. Thakur Kan Singh, 1980
(3) SCC 72; His Highness Maharaja Pratap Singh vs. Her Highness Maharani
Sarojini Devi & Ors., 1994 (Supp. (1) SCC 734; and Heirs of Vrajlal J.
Ganatra vs. Heirs of Parshottam S. Shah, 1996 (4) SCC 490. It has been held that
in the judgments referred to above that the question whether a particular
sale is a benami or not, is largely one of fact, and for determining the
question no absolute formulas or acid test, uniformly applicable in all
situations can be laid. After saying so, this Court spelt out following six
circumstances which can be taken as a guide to determine the nature of the
transaction:

1. the
source from which the purchase money came;

2. the
nature and possession of the property, after the purchase;

3. motive, if any, for giving the transaction a
benami colour;

4. the
position of the parties and the relationship, if any, between the claimant and
the alleged benamidar;

5. the
custody of the title deeds after the sale; and

6. the
conduct of the parties concerned in dealing with the property after the
sale.”

     The above indicia are not exhaustive
and their efficacy varies according to the facts of each case. Nevertheless,
the source from where the purchase money came and the motive why the property
was purchased benami are by far the most important tests for
determining whether the sale standing in the name of one person, is in reality
for the benefit of another. We would examine the present transaction on the
touchstone of the above two indicia.”

c.  Is it limited to only Real Estate? 

     No. the Benami Act covers all kinds of
assets including cash, bank balances, shares etc. Section 2(26) of the Benami
Act defines “property” to mean 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. 

4.  What are the consequences if a benami
transaction / property is proved?

     If a benami transaction is proved, the
following consequences follow:

a.  Punishable Offence – imprisonment and fine

b.  Prohibition of the right to recover property
held benami

c.  Benami property liable to confiscation

d.  Prohibition on re-transfer of benami property
by benamidar to beneficial owner

     For details of the above, please refer to
para 3 of Part I of this article published in BCAJ April 2017.

5.  Can multiple actions be taken under different
laws in respect of the same benami property against different or same person?
In other words, will a person face simultaneous action under PMLA,
Anti-corruption law, FEMA, Income-tax Act etc. in respect of the same
transaction / property?

     There is no exclusion clause in any of the
abovementioned Acts. Accordingly, if an action lies under the provisions of any
particular Act in respect of same benami property, then a person may face
simultaneous action under various Acts in respect of same transaction /
property.

6.  If a benami property has already been sold,
transferred or passed on to another for lawful & adequate consideration,
what are the consequences for such a buyer / acquirer?

a.  Section 24(1) of the Act provides that
where the Initiating Officer, on the basis of material in his possession, has
reason to believe that any person is a benamidar in respect of a
property, he may, after recording reasons in writing, issue a notice to the
person to show cause within such time as may be specified in the notice why
the property should not be treated as benami property. 

b.  Section
26(3) of the Act provides that the Adjudicating Authority shall,
after (a) considering the reply, if any, to the notice issued under sub-section
(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 (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.

c.  Section 27 of the Act deals with confiscation
and vesting of the benami property. Section 27(1) of the Act 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. It is also provided that where 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. 4. It
is further provided further that the confiscation of the property shall be made
in accordance with such procedure as may be prescribed.

d.  Section 27(2) provides 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.

e.  Section 57 deal with certain transfers
to be null and void and 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.

     Therefore, the transfer of property prior
to the issue of a notice u/s. 24(1) by the Initiating Officer, by any mode
whatsoever, shall be deemed to be null and void.

f.   Accordingly, there will be no consequence for
a buyer/acquirer who has acquired the property from the benamidar
for adequate consideration, without his having knowledge of
the benami transaction, prior to the issue of notice u/s 24(1).

7.  If demonetised high value notes are deposited
in say Jan Dhan a/c of an account holder and the account holder is not aware of
or denies knowledge of the same, then what are the consequences for such an
account holder?

     As per section 2(8) of the Act, benami
property means any property which is the subject matter of a benami
transaction and also includes the proceeds from such property.

     If the monies have been deposited in a Jan
Dhan a/c without the consent of the account holder who is totally unaware or
denies knowledge, in that case though the transaction is a ‘benami transaction’
the account holder cannot be prosecuted u/s. 53, inter alia, on the ground that
he has not ‘entered into’ any such transaction.

8.  Does the law have retrospective application or
it applies prospectively?

a.  One view – Law is retrospective

     Section 1(3) enacted as part of the Original
(pre-amended) Act provides that the provisions of sections 3 (Prohibition of
benami transactions), 5 (property held benami liable to acquisition) and 8
(Power to make rules) shall come into force at once i.e. 5-9-88 being the date
on which original Act was notified and the remaining provisions of the Act
shall be deemed to have come into force on the 19^th May, 1988.

     It is to be noted that said section 1(3) of
the Benami Act has not been amended by the Benami Transactions
(Prohibition) Amendment Act, 2016, which came into effect from 1-11-2016.

     Based on the provisions of section 1(3), it
is argued that the provisions of the Benami Transactions (Prohibition)
Amendment Act, 2016 are retrospective in nature.

b.  The Other view:

     The renumbered section 3(2) of the Act
provides that whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or with fine or
both.

     Section 3(3) of the Act, inserted by the
Benami Transactions (Prohibition) Amendment Act, 2016 w.e.f. 1-11-2016 provides
that whoever enters into any benami transaction on and after the date of
commencement of the Benami Transactions (Prohibition) Amendment Act,
2016, shall, notwithstanding anything contained in sub-section (2), be
punishable in accordance with the provisions contained in Chapter VII.

     Section 2(9) defines ‘benami transaction’
and was substituted by the Benami Transactions (Prohibition) Amendment Act,
2016 w.e.f. 1-11-2016, with enlarged scope as compared to the earlier
definition of ‘benami transaction’ provided in section 2(a).

     Benami Act is a penal law. During the
parliamentary debate, it has been clarified and explained that as per Article
20 of the Constitution of India, penal laws cannot be made retrospective and in
this regard the finance minister stated as follows:

     “The 1988 Act also has a provision for
prosecution. The provision for prosecution, prohibition and acquisition
remained in that Act. So, the prosecution provision u/s. 3(3) says that whoever
enters into any benami transaction shall be punishable with imprisonment for a
term which may extend to three years or with fine or both. So, whoever
subsequent to 1988 entered into a transaction which was a benami transaction,
either of the two parties would be liable for prosecution.

     So,
if we had accepted the recommendation of the Standing Committee – repealed the
1988 Act and recreated a new law in 2016 – that would have been granting
immunity to all people who acquired properties benami between 1988 and 2016.
Obviously, the acquisition now cannot take place, but the penal provisions of
the 1988 Act also would have stood repealed. When a new Act with a similar
provision would have come, it could only apply for a penal provision to
properties which are benami and entered into after 2016.         

    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. Therefore, prima facie
the argument looks attractive that ‘there is a 9-section law and you are
inserting 71 sections into it. So, you bring a new law.’, but a new law would
have had consequences which would have been detrimental to public interest.”

     In view of the widening of the scope of the
definition of the term ‘benami transaction’ it is contended that since there
was no provision in law to cover various transactions of the nature mentioned
in the substituted definition of benami transaction in section 2(9), which came
into effect from 1-11-2016, the law cannot have retrospective application in
this regard.

c.  Judicial precedents regarding retrospective
application of section 4(1) and 4(2) dealing with prohibition of the right to
recover property held benami (which have remained the same in the amended Act
also)

i.   In Mithilesh Kumari & another vs.
Prem Behari Khare [(1989) 1 SCR 621], the Supreme Court observed that
though section 3 is prospective and though section 4(1) is also not expressly
made retrospective by the legislature, by necessary implication, it appears to
be retrospective and would apply to all pending proceedings wherein right to
property allegedly held benami is in dispute between the parties and that
section 4(1) will apply at whatever stage the litigation might be pending in
the hierarchy of the proceedings, for the reasons mentioned therein.

ii.  The Supreme Court in a later decision in the
case of R. Rajagopal Reddy vs. Padmini Chandrasekharan [(1995) 2 SCC 630],
agreed with the view that “on the express language of Section 4(1) any right
inhering in the real owner in respect of any property held benami would get
effaced once Section 4(1) operated, even if such transaction had been entered
into prior to the coming into operation of section 4(1), and hence-after
section 4(1) is applied, no suit can lie in respect to such a past benami
transaction. To that extent, the section may be retrospective. 

     However, the court did not agree with the
view that “Section 4 (1) would apply even to such pending suits which were
already filed and entertained prior to the date when the section came into
force and which has the effect of destroying the then existing right of
plaintiff in connection with the suit property cannot be sustained in the face
of the clear language of section 4(1).”

9.  Does the Benami Act apply to a ‘sham
transaction’?

     For a transaction to be ‘benami
transaction’, there has to exist an actual transaction which has taken place.
In a sham, bogus or fictitious transaction, no transaction has actually taken
place and the transaction is merely shown to have taken place on paper.

     In the context of original Act, before the
Kerala High Court in the case of Ouseph Chacko vs. Raman Nair [1990] 49
Taxman 410 (Ker.) the following questions arose for determination –

(i)  Is a sham transaction `benami’?

(ii) Does section 4 of the Benami Transactions
(Prohibition) Act, 1988 apply to sham transactions?

     The Court after exhaustively considering
various decisions of the Privy Council, the Apex Court and also the provisions
of the Indian Trusts Act, the provisions of the Benami Transactions
(Prohibition) Act, 1988, observed that in view of the decision of the Apex
Court in Shree Meenakshi Mills case and in Bhim Singh’s case the question
for consideration is whether the Act applied to both these cases, or whether it
is limited only to the benami transactions falling in the first category and
does not extend to those falling in the second category.

     The Kerala High Court, in this case held
that-

     “The Act has provided a definition for
‘benami transaction’. It means any transaction in which property is transferred
to one person for a consideration paid or provided by another. It contemplates
cases where (a) there is a transfer of property, and (b) the consideration is
paid or provided not by the transferee, but by another. Where there was no
transfer of property as in a sham document, there is no consideration for the
transaction which does not satisfy the definition of ‘benami transaction’ under
the Act. The definition of ‘benami transaction’ in the Act, thus, excludes from
its purview a sham transaction. Further, section 81 of the Indian Trusts Act,
1882, applies to a transaction under which no transfer was intended and no
consideration passed, i.e., to a sham transaction. But section 82 provides for
another class of transactions which are also statutorily treated as obligations
in the nature of a trust and they relate to transfer to one for consideration
paid by another. It is significant that section 82 has practically been bodily
lifted and incorporated in the definition of ‘benami transaction’ in the
present Act. This definition has nothing to do with the concept contained in
section 81. If the Act intended to embrace transactions covered by section 81
also, there was no reason for restricting the definition of ‘benami
transaction’ to the phraseology employed in section 82. This also gives an
indication that sham transactions, loosely called benami transactions, which
are in fact not benami transactions in the real sense of the term, are not
subject to the rigour of the Act. It is true that section 3 uses the
words ‘benami transaction’ and section 4 uses only the word ‘benami’. But that
makes no qualitative difference in the application of the Act.”

10. Whether power of attorney transactions in
immovable properties are ‘benami transaction’?

     It appears that by virtue of Explanation to
section 2(9) power of attorney transactions will not be regarded as benami
transactions provided the conditions mentioned therein are satisfied.

     In his reply to the debate on the Amendment
Bill in Rajya Sabha on 3.8.2016, the Finance Minister has clarified as under:

     “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.”

11. Is every transaction where consideration is
provided by a person other than a transferee a `benami transaction?

     In its submissions before the Parliamentary
Standing Committee on Finance, the Ministry of Finance explained the amendment
to the definition of `benami transaction’ as under–

     “The circumstances in which another
person pays or provides the consideration to the transferee for being passed on
to the transferor may be manifold. A person may provide consideration money to
the transferee out of charity or under some jural relationship such as creditor
and debtor or the like. The final relationship between such other person and
the transferee has nothing to do or may have nothing to do with the jural
relationship between the transferor and the transferee. The intention of the
other person paying or providing the consideration is in substance the main
factor to be considered and is of great importance. If that other person really
intends that he should be the real owner of the property, then only the
transferee may be characterized as a benamidar, whether the transferee is a
fictitious person or a real person having no intention to acquire any title by
means of the transfer. It was perhaps for this very reason that intention of
the persons actually paying or providing consideration to the transferee was
incorporated as an essential element in the provisions of section 82 of the
Indian Trusts Act. It would appear to be unreasonable to rest the provisions
relating to benami transactions on the payment or provision of consideration
alone by a person other than transferee. To have such a provision in a sweeping
language may make the Act unworkable in actual implementation. The actual
payment or provision of consideration has been made the dominant factor, but by
itself it may have no real substance unless the person providing the
consideration does so with the intention of actually benefiting himself. 

     In view of the above, it is proposed that
the payment alone by the other person should not be the only consideration for
deciding a benami transaction rather intention of the other person paying or
providing the consideration should be considered for deciding a benami
transaction. Therefore, to hold a transaction or an arrangement as benami, it
is proposed to provide an additional test that the benamidar should be holding
the property for the benefit of the person providing the consideration.” 

     [Para 2.10 of the 58^th Report of
the Parliamentary Standing Committee on Finance].

12. Does `foreign property’ also come within scope
of benami property?

     While
there is no requirement in either section 28 dealing with the management of the
properties confiscated or in section 2(26) defining the term ‘property’ that
the property or benami property should be located in India. However, in his
reply to the debate on the Amendment Bill in Rajya Sabha on 2.8.2016, the
Finance Minister clarified as follows:

     “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….”

13. What is meant by “known sources”? Does it mean
“Known sources of income” of the individual? If an individual takes a loan and
purchases property in spouse’s name, will it be benami transaction?

     The term ‘known sources’ is not defined in
the Act. “Known sources” of the individual should not be construed as “known
sources of income”.

     The words “of income” were originally there
in the Amendment Bill but were omitted at the time of passing of the Bill. In
his reply to the debate on the Amendment Bill, the Finance Minister clarified
in this regard in the Rajya Sabha as under:

     “ …. 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 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….” 

14. What would happen if the property is in the
name of a Director, but the money has come from the company? Would the
transaction be regarded as a benami transaction?

     In this regard, the Finance Minister
clarified as follows while replying to the debate on the Amendment Bill in
Rajya Sabha:

     “What would happen if the property is in
the name of a Director, but the money has come from the company? Already in
this Act there is an exception that if you hold it as a fiduciary of the
company as a Director, then, it is not an offence. If you hold it as a trustee
of a trust, it is not an offence. So fiduciary holding is allowed as an
exception to benami”.