Benami transaction are prohibited in India and the law governing such transaction is the Benami Transactions (Prohibition) Act, 2016 and Prohibition of Benami Property Transactions Rules, 2016.
Benami transactions were not illegal in India before 1988 Act and there was no punishment or bar for entering into the same.
Benami transactions have been defined under this Act as any transaction in which property is transferred to one person for a consideration paid or provided by another person.
Usually, a Benami Transaction has two primary actors:
Benamidar, in whose name the Benami Property is held.
A beneficial owner, for whose benefit the Benami Property is actually held by a Benamidar.
Though houses, cars and jewellery have traditionally been considered to be property for the purposes of Benami Law, however, under the new definition added by the 2016 amendment even securities, shares and intellectual property can be considered Benami Property and may attract the rigors of the Benami Act. This expansion of the definition by the 2016 amendment reflects the legislative intent of intensifying the crackdown on such practices.
What constitutes a Benami Transaction?
where a property is held by a person and the consideration for such property has been paid by another person.
The exceptions to this rule, enumerated to protect transactions made in good faith are as follows,
In the name of the Karta of a HUF, who has paid consideration from a known source of the HUF;
In ‘fiduciary capacity’ by a trustee, executor, partner, director, agent, etc.
In the name of the spouse or child of an individual.
In the name of the individual’s and brother/sister/lineal ascendant/lineal descendent.
In respect of a property, carried out in a fictitious name.
In respect of a property, where the owner of the property is not aware of, or, denies knowledge of, such ownership.
In respect of a property, where the person providing the consideration is not traceable or is fictitious.
Determination of whether a transaction is Benami or not.
In Jaydayal Poddar vs Bibi Hazra [(1974 1 SCC 3)], the Supreme Court observed that the determination of whether a transaction is Benami or not is predominantly a question of fact. There is no uniformly applicable rule to determine the nature of such a transaction. The Court, however, did lay down general guidelines for gathering relevant facts:
The source of money used for payment.
The possession of property after purchase.
Motive for making the transaction Benami.
The relationship or lack thereof between the parties.
The custody of title deeds.
The conduct of the parties after sale.
Further, in Mangathai Ammal vs Rajeswari [414 ITR 358 (SC)] the Apex Court observed that the consideration paid to purchase the property is the most critical test, for determining whether the sale standing in the name of one person, is in reality for the benefits of another.
What are the consequences of the ‘Benami Transaction’?
Benami Law prohibits the filing of a suit or raising a defence by the actual owner, on the ground that that the person holding the property is Benamidar.
It takes away the rights of the actual owner, vis-à-vis the ostensible owner.
If the Benamidar transfers the property to a third party, or beneficial owner, it would be considered null and void.
When a person enters a Benami Transaction, they attract penal consequences in the form of prosecution and fines. Further, the Property shall be confiscated, and all rights of such property will vest in the Central Government.
Authorities that conduct inquiry regarding Benami Transactions are:
Initiating Officer (i.e. Assistant Commissioner of Income-Tax or a Deputy Commissioner of Income-Tax)
Approving Authority (i.e. Additional Commissioner of Income-Tax or a Joint Commissioner of Income-Tax)
Administrator (Income Tax officer)
Confiscation and Vesting of Benami Property.
Confiscation is another way of penalising the beneficial owner of Benami Property along with prosecution and fines.
Once the order is passed holding property as Benami, the Approving Authority shall grant concerned persons an opportunity to plead their case before passing of any adverse order.
However, once the Confiscation Order is passed, all rights in such property shall vest with the Central Government free of all encumbrances and without compensation.
In case a third party has purchased said property with adequate consideration before a notice is issued by the Investigating Officer, the property cannot be confiscated. The authorities shall be permitted to impound any proceeds obtained from the third party.
Applicability: Prospective or Retrospective?
The controversy as to whether the amended Benami Law is applicable prospectively or retrospectively is discussed hereunder. Most High Courts while ruling on this issue have held that the provisions are applicable prospectively. However, the Chhattisgarh High Court has taken a view of retrospective operation.
The Rajasthan High Court in Niharika Jain and Ors. Vs. Union of India and Ors. [2019 (3) RLW 1947(Raj.)] held that:
“...This Court has no hesitation to hold that the Benami Amendment Act, 2016, amending the Principal Benami Act, 1988, enacted w.e.f. 1st November, 2016, i.e. the date determined by the Central Government in its wisdom for its enforcement; cannot have retrospective effect…”
“…Thus, the authority concerned would examine each case on its own merits keeping in view the fact that amended provisions introduced and the amendments enacted and made enforceable w.e.f. 1st November, 2016; would be prospective and not retrospective...”
The Calcutta High Court in Ganpati Dealcom Pvt. Ltd. Vs. Union of India and Ors [(2020) 421 ITR 483] held that:
“…The definitions of benami transaction and property are radically changed by the amending Act. So are the provisions regarding investigation of contraventions, offences etc., the consequence of it namely, confiscation, prosecution etc. The show cause notice dated 29th August, 2017 was issued under Section 24(1) of the 1988 Act as amended. It referred to the alleged benami transaction by the appellant under Section 2(8) and 2(9)(D) thereunder. Therefore to allege contravention of the 1988 Act as amended in 2016 the contravention should have been made after the date of coming into force of the amendment. In the absence of retrospective operation of the amending Act, one cannot allege that the transaction resulting in the said contravention of the 1988 Act as amended in 2016 took place in 2011. That is exactly what the impugned show-cause notice proposed to do……”
“…The 2016 amendment is a new legislation and in order to have retrospectivity it should have been specifically provided therein that it was intended to cover contraventions at an earlier point of time. That express provision is not there…”
The Bombay High Court in Joseph Isharat v. Rozy Nishikant Gaikwad [2017 SCC OnLine Bom 10006] held that:
“7. What is crucial here is, in the first place, whether the change effected by the legislature in the Benami Act is a matter of procedure or is it a matter of substantial rights between the parties. If it is merely a procedural law, then, of course, procedure applicable as on the date of hearing may be relevant. If, on the other hand, it is a matter of substantive rights, then prima facie it will only have a prospective application unless the amended law speaks in a language “which expressly or by clear intention, takes in even pending matters”. Short of such intendment, the law shall be applied prospectively and not retrospectively.
As held by the Supreme Court in R. Rajagopal Reddy v. Padmini Chandrasekharan, Section 4 of the Benami Act, or for that matter, the Benami Act as a whole, creates substantive rights in favour of benamidars and destroys substantive rights of real owners who are parties to such transaction and for whom new liabilities are created.…These observations clearly hold the field even as regards the present amendment to the Benami Act. The amendments introduced by the legislature affect substantive rights of the parties and must be applied prospectively.”
The Chhattisgarh High Court in Tulsiram & Anr. Vs. Assistant Commissioner of Income Tax (Benami Prohibition) & Ors [W.P. (C) No. 3819 of 2019 Chattisgarh High Court]
“…It can also not to be said that provisions of the Amended Act of 2016 could not have been made applicable in respect of properties which were acquired prior to 01.11.2016. The whole Act of 1988 as it stands today inclusive of the amended provisions brought into force from 01.11.2016 onwards applies irrespective of the period of purchase of the alleged Benami property. Amended Act of 2016 does not have an existence by itself. Without the provisions of the Act of 1988, the amended provisions of 2016 has no relevance and the amended Provisions are only laying down the proceedings to be adopted in a proceeding drawn under the Act of 1988 and the penalties to be imposed in each of the cases taking into consideration the period of purchase of Benami property……”
The views taken by various High Courts are clearly contradictory leaving all stake holders in a state of disarray. The question now lies in the Apex Court and all eyes will be on it as to what the decision on this issue will be, by the Hon’ble Supreme Court in Special Leave Petition No. 2784 of 2020 once and for all. Until then, the confusion will persist.
Demonetisation proven that in addition to collecting black money in the form of cash, tax evaders also heavily invest their accumulated illegal money and hide it in Benami properties, and this facilitates tax evasion. Therefore, the Act, along with its amendment, seeks to achieve a laudable motive and should be allowed its fullest play