Understanding Benami Transaction Act.

There has been a series of administrative changes and new laws introduced in the last few years with an aim to crack down the parallel black economy that exists in our country. One of these measures was the unprecedented demonetisation drive that was announced on November 8, 2016. However, prior to that, the government introduced another law by way of comprehensive amendments to the already existing law (The Prohibition of Benami Property Transaction Act, 1988 as amended in 2016 referred hereinafter as “Benami Law”) in order to crack down the Benami Properties. This 28 years old law was given a fresh bout of oxygen with insertion of 63 new sections and notified rules thereto. The law governing the benami transactions in India is now extensively streamlined with threefold objective – broadening the definition of Benami transactions, establishing processes and line of authority and regulating the prosecution and penalty provisions in case of default. This is the first article in a series of three articles intended to give you a holistic view of this law and its interpretation. This article aims to provide you with the panoramic view of how this law operates, transactions covered under its purview and the criminal and civil implication thereon.

As per the provisions of the Benami Law, it is prohibited for any person to enter into a “Benami Transaction”. Now, before we go on to understand the intricacies of the law, it is imperative to understand as to what exactly entails Benami property and Benami Transaction.

Benami Property

The benami law is not confined to immovable property only. The definition has been amended to include almost all kinds of assets, whether movable or immovable, corporeal or incorporeal, tangible or intangible. Further, it also includes any right, interest or legal document evidencing title to some property. The definition is so wide that in case the property is capable of being in converted into some other form, it includes such converted form as well.

Benami Transaction:

In simple words, any transaction wherein the property is transferred in the name of a person but the consideration for such property is paid by another person is known as Benami transaction.

Let’s understand the types of benami transactions  that come within the ambit of Benami Law through the above example (refer illustration 1.1 above),

• Mr A purchases the property, but the consideration for such property is paid by Mr B and the benefits (immediate or future) arising from such property are also vested in Mr B. Herein, it is worth noting that Mr A is mere façade or a name lender whereas the actual transaction in substance is carried out by Mr B without his name being involved. This is a classic example of Benami transaction and here   Mr A would be known as Benamidar and Mr B would be the beneficial owner or real owner of the property.
• The property is purchased by Mr B in a fictitious name (i.e. Mr A cannot be traced or is a non-existent entity/person)
• Mr A is not aware of holding any such property or denies the knowledge of such transaction
• Mr B is not traceable or it is impossible to trace the source of funds used by Mr A to purchase the property

Now, what would be the consequences of entering into a benami transaction. Taking forward the above example, as we know there is a complete restraint on entering into a benami transaction, therefore Mr B cannot file a suit against Mr A to recover back the property in question. Any such suit will be barred and shunned at the beginning itself.

Mr B cannot re- transfer the property back to Mr A. Any such transfer shall be considered null and void and cannot be affected. Further, there is an elaborate process for confiscation and attachment of such properties under the benami law. The property shall be confiscated by the government and the defaulter parties shall be liable to pay fine upto 25% of the FMV of the property in question. Along with that, prosecution proceedings shall be initiated. The Act provides for rigorous imprisonment ranging from 1 to 7 years.

 Further, in case the property in question is sold by the benamidar (Mr B here) to a third party in a valid transfer, say Mr C. Then proceeds earned from such property shall be liable to be attached.  

Process of Benami Proceedings

• Initiating officer (ACIT/DCIT empowered to act as such) shall issue a show cause notice to the benamidar, when on basis of substantial proof he has a reasonable cause to believe that the property held by him is benami property. A copy of notice shall be issued to the beneficial owner as well.
• Further, the property can be provisionally attached by the officer as a protective or interim measure with prior approval of the approving authority, if the initiating officer has sufficient reason to believe that the benamidar may dispose off or alienate the property which may render the proceedings infructuous.
• The provisional attachment can be ordered by the officer for a maximum period of 90 days and within such period, he shall provide a reasonable opportunity of being heard to the beneficial owner and the benamidar. On the basis of such facts and explanations he may confirm or vacate the attachment of the property.
• In case the attachment is confirmed, the case is then referred to the Adjudicating Authority (AA) for its perusal on merits of the case and the property is attached till the final disposal. The AA would then carry outs its enquiry.
• AA shall issue a notice within 30 days to the benamidar, beneficial owner and any other interested party (for instance, banker, any other person claiming right in property). These parties will be given reasonable opportunity of being heard and produce proofs substantiating their stand and apprise the AA.
• During the proceedings, in case the AA finds any other property suspected to be Benami he may extend the scope of investigation and also provisionally attach such property.
• Lastly, upon due consideration the AA may either confirm the property to be Benami or revoke the attachment and set the property an its owners free. The AA has to complete the proceedings within a time limit of one year.
• In case the property is confirmed to be Benami property, the same shall be confiscated and prosecution proceedings can be launched against the owners.
• Appeal can be filed against the order of the AA with the Appellate Authority and in such situation the confiscation of property shall be subject to results of the appeal proceedings.
• In case the property is transferred or sold by the benamidar post issue of the initial notice by the initiating officer, such transfer shall be null and void and the property shall be subject to confiscation irrespective of the fact the same is transferred to a third party.
• Where an order of confiscation is passed by the AA, all the rights in the property shall be vested with the central government and no compensation shall be paid in lieu of such confiscation.
• Once the order of confiscation is passed, within 7 days of such order, the Administrator shall issue a notice to surrender the possession of such property. The administrator can even take assistance from police to obtain the possession in the event of non-compliance to the notice of vacancy/surrender.

Transactions not considered as Benami transactions –

Though the benami law has a wide scope and it covers all kinds of sketchy transactions, however there are certain exceptions laid down by the Law. The exceptions, enumerated below, are generally those transactions which are considered normal in day to day business processes, like –

• A transaction wherein the property is owned by the Karta or any other member of the Hindu undivided family (HuF) and the benefit of such property is derived by other members of the family. Such property shall not be rendered as benami property provided the property is funded by known sources of the HuF.
• A property held by an individual in name of his/her spouse or children, provided the property is funded out of known sources by such individual.
• A property held by any person in the name is his brother/sister, Lineal ascendants or descendants provided such property is in joint name of the person funding the property and mentioned relative. Secondly, the property should have been funded out of known sources of such individual.
• A transaction wherein the property is held by a person in fiduciary capacity for the benefit of some other person. For eg – trustee, executor, depository, partner, director etc. Herein, the essence is the relationships based on the confidence and trust of each other. For instance, a property purchased by an agent or Power of attorney holder.
• Property purchased under loan or financial assistance arrangement. For example, Mr X purchases the property from Mr Y and to pay the consideration, Mr X takes a loan from Mr Z. Now instead of taking the amount from Mr Z and paying it to Mr Y, Mr X requests Mr Z to directly pay the amount to Mr Y. So, the consideration of the property is flowing from Mr Z to Mr Y, however the ownership flows from Mr Y to Mr X. Herein, on the face of it, the transaction appears to be a Benami transaction as the consideration has flown from a different person. Hence, it is imperative here to note that the intent of the transaction was to take financial assistance from Mr Z and the flow of amounts directly to Mr Y was for mere convenience and underlying financial arrangement and not executed illegal purpose or defrauding the exchequer. Hence the transaction will not be classified as Benami transaction.
• There are situations, wherein the registered owners of the shares of a company (whose names are mentioned in the register of members) do not hold the beneficial interest in such shares. Such an arrangement will not be considered as the Benami transaction in case the registered owner makes a declaration in this regard to the company specifying the credentials of the person who holds the beneficial interest is such shares in prescribed Form and within prescribed time limit.

There is another important change introduced in this law in respect of part performance of the contract. As per the provisions of Income Tax Act, in case the possession in property is transferred to the buyer against payment or promise to pay by the buyer, it is considered to be a transfer of property. However, it has been clarified in the Benami Law, that a transfer shall be considered a complete only when the contract to sell is registered with the authorities and appropriate stamp duty is paid thereon along with transfer of possession and payment thereon.  Otherwise, the transaction will be treated as a Benami Transaction.

Though the definition of “property” is quite wide, however the applicability of the Benami law is limited to the assets situated in India and nothing is mentioned in the Act for the foreign assets. However, any assets held directly or indirectly outside India shall be covered under that Black Money (undisclosed foreign income and assets) and Imposition of taxes Act, 2015. The Benami Law has an interesting intersection with other laws in force like Income Tax Act, Company Law, Anti Money Laundering Law, Black money Law etc.

The amendment of this law is quite narrative and is a laudable step in the process to curb black money, illegal hoarding of income in properties and circumvention of taxes. However, there are still some open ends that needs clarifications or judicial decisions for better understanding like pre- amendment transactions (prior to 1 November 2016), interplay with Income Tax Act and Black money Law etc.