All about Benami Transactions

INTRODUCTION

The amendments of Benami Transactions (Prohibition) Act should further enhance India’s attractiveness as an investment destination by encouraging greater transparency in ownership of property. Along with other regulatory changes such as implementation of Goods and Services Act (GST), Real Estate (Regulation & Development) Act (RERA) and Land Digitization, this amendment is a step in the right direction. In the short term, it will lead to a reduction in transaction volumes. However, in the long term, it will help aligning transactions with ethical standards and will increase international institutional investors and financial institutions participation in this sector. Benami transactions (prohibition) Act, 1988 (hereinafter referred to as “the Act” or “the 1988 Act”) was a small act with 9 sections when originally enacted. Benami Transactions (prohibition) amendment act, 2016 (hereinafter referred to as “the 2016 amendment act”) has amended the act to enlarge it from 9 sections to 72 sections, 2016 amendment act has renamed the 1988 act as “prohibition of Benami property Transactions Act,1988.” 2016 act shall come into force with effect from 01/11/2016. (NOTIFICATION NO. SO 3289[E], DATED 25-10-2016)

DEFINITION

Benami transaction is a transaction or arrangement whereby the identity of real owner (beneficial owner) of property is concealed by showing someone else (benamidar) as owner on record. The beneficial owner provides or pays consideration for purchase of property. Benami transaction is a consensual act and not something imposed upon a person such as unauthorised access to his account or fraud.

Benamidar and beneficial owner can be any person (viz. individual, HUF, firm, company, trust, etc.)

OBJECTS OF BENAMI ACT

To prohibit a Benami Transaction so that the beneficial owner (true owner/real owner/person who provided consideration) would be compelled to keep the property in his own name only and the legal complexities owing to the apparent ownership not being the real ownership, could be avoided.

CATEGORIES OF BENAMI TRANSACTIONS

CATEGORY I: TRANSACTION OR ARRANGEMENT WHERE CONSIDERATION PROVIDED BY PERSON OTHER THAN THE TRANSFEREE OR THE PERSON IN WHOSE NAME PROPERTY IS HELD.

EXCEPTIONS-TRANSACTIONS WHEN IT IS NOT BENAMI

• HUF Property held in the name of Karta/Members of HUF, property is held for the benefit of Karta or a member of a HUF and consideration is paid out of known sources of HUF.
• Property held in Fiduciary capacity means informal relations which exist whenever one party trusts and relies upon another held by a person like trustee, executor, partner, agent, director of a company etc. for the benefit of another person like trust, firm, principal, company etc.
• Property is held by individual in name of spouse or child and not specifically for the benefit of them and consideration is paid out of known sources of individual.
• Property is held by individual in joint names of himself or his brother/sister/lineal ascendant or descendent and consideration is paid out of known sources of individual and not specifically meant out of income of known sources. The terms Brother and sister will not include cousins.

CATEGORY II: WHERE TRANSACTIONS IS CARRIED OR MADE IN A FICTITIOUS NAME

As per Section 2(9)(D) provides that a transaction or an arrangement in respect of a property is a Benami transaction if the person providing the consideration is not traceable or is fictitious.

CATEGORY III: BENAMIDAR NOT AWARE OF OR DENIES KNOWLEDGE OF TRANSACTION

CATEGORY IV: BENEFICIAL OWNER WHO PAID CONSIDERATION IS FICTITIOUS OR IS UNTRACEABLE

POINTS TO PONDER

In this article, I have narrated certain points mentioned below having importance in understanding this act in a better way. Each point has its own importance and no one is interconnected to one another.

1. Benami property means any property which is the subject-matter of a Benami transaction and also includes proceeds from such property-section 2(8).

2. 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.

3. Beneficial owner means a person, whether his identity is known or not, for whose benefit the Benami property is held by a Benamidar. 

4. Person being a Benamidar shall not retransfer the Benami property held by him to the beneficial owner or any other person acting on his behalf.

5. Section 58 of the act provides that Central Government may by notification exempt any property relating to charitable or religious trusts from operation of the act.

6. Benami act covers all kinds of Immovable assets and movable assets including cash, bank balance, shares etc.

7. Though Benami transactions could be used to disguise the real ownership of a property to prevent detection of the illegal activity that produced it, but it can be entered into for other purposes like defrauding creditors, avoiding payment of taxes or social reasons.

8. The true test to determine whether the transaction is Benami or not is to look into the Intention of the parties, viz, whether it was intended to operate as such or whether it was meant to be colourable. In every Benami transaction the intention of the parties is the essence.

9. In ITO v. M.R. Dhanalakshmi Ammal (1978) 112 ITR 413 (Mad.) court suggested criteria for discharging burden of proof for the parties who sets up the case of Benami nature of transaction. They are as under.

1. The source of purchase consideration relating to the transaction,
2. Possession of property,
3. Position of the parties and their relationship to one another,
4. Circumstances, pecuniary or otherwise, of the alleged transfer,
5. The motive for the transaction,
6. The custody and production of the title deeds, and
7. The previous and subsequent conduct of the parties.

10. Where there was no proof to establish necessary ingredients of Benami like contribution of capital, enjoyment of profits and control of business, assessing officer could not be said be justified in including income of sister concern PFI in hands of assessee company on ground that PFI was benamidar of assessee. – Parakh Foods Ltd. Dy. CIT (1998) 64 ITD 396 (Pune-Trib.)

11. Prohibition contained in Benami Transaction Act against plea by any person claiming to be real owner does not extend to declaring a transaction as Benami transaction in tax proceedings.

P.K. Narayanan v. ITO (1994) 49 ITD 229 (Coch-Trib.)

In Benami transaction there is an operative transfer resulting in the vesting of title in the transferee and in sham or Bogus or Fictitious transaction no transaction has actually taken place and the transaction is merely shown to have taken place on paper.

• Meenakshi Mills Ltd. V. CIT (1957) 31 ITR 28 (SC)
• Krishna Kumar v. Harman Dass (1991) 56 Taxman 233 (Delhi)

Power of attorney transactions are not regarded as Benami transactions provided consideration has been paid to the original owner, person who grants possession holds ownership, stamp duty on transaction has been paid and the contract has been registered. Power of attorney transactions cannot be treated as completed transfers or conveyances. Bonafide genuine transactions such as power of attorney to family members or development agreements between land owners and developer cannot be brought in the radar of suspicion.

Where assessee’s wife had been assessed for several years in respect of share income from a firm which had been granted registration, merely because during search of assessee’s residence his wife stated that she did not know name of firm and the share of profit therein though she admitted she was a partner, she could not be treated as assessee’s Benami so as to include share income in assessee’s hands.

Gaurishankar Omkarmal v. ITO (990) 37 TTJ (Ahd-Trib.) 353. 

1. Depositing monies belonging to another would attract the Benami act and returning the money in new notes would violate section 6 which forbids benamidar from re-transferring property to real owner or anyone acting on his behalf.

2. If transaction involves foreign property, it would be covered under black money act and not under Benami act.

3. Section 2(9) (A) suggests that it must be established that the property is held or possessed by the Benamidar and that consideration was paid by another person. If the Benamidar is only a name lender than it is a “sham Transaction”.

4. Benami transaction is a punishable offence. Whoever enters shall be punishable with rigorous imprisonment for a term not less than one year but which may extend to 7 years and shall also be liable with fine which may extend to 25% of the fair market value of the property or with both. Any property held Benami liable to be confiscated by Central Government. 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. With or without motive Benami transactions once entered will attract all punishments. No suit, claim, action or defence based on any right in respect of any property held Benami, shall be allowed by or on behalf of a person claiming to be the real owner of such property.

5. Section 54 of the act provides that any person who is required to furnish information under this act knowingly gives any false information to any authority or furnishes any false document in any proceedings under this act shall be punishable with rigorous imprisonment for a term not 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 fair market value of the property. Offences under the act are Non-cognizable but not bailable.

6. Under Section 4(1) the real owner cannot bring any suit, claim or action to enforce his right as the real owner on the plea that the ostensible owner is Benamidar.

7. Every proceedings under the act shall be deemed to be a judicial proceeding. Any books of accounts or other documents produced before the authority and impounded by him may retain for a period not exceeding 3 months from the date of order of attachment made by adjudicating authority.

8. Where the initiating officer is of the opinion that the person in possession of the property held Benami may alienate the property during the period specified in the notice, he may, with the previous approval of the Approving Authority, by order in writing, attach provisionally the property in the manner as may be prescribed, for a period not exceeding 90 days from the date of issue of notice.

9. Notice may be served 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.

10. The Administrator shall by notice in writing order within 7 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 and in the event of noncompliance of the order and 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.

11. Any person including the initiating officer, aggrieved by an order of the Adjudicating Authority may refer an appeal within 45 days in such form and along with such fees, as may be prescribed, to the Appellate Tribunal against the order passed by the Adjudicating Authority. Every appeal shall be accompanied by a fee of Ten Thousand rupees.

POWERS OF APPELLATE TRIBUNAL

• To determine a case finally, where the evidence on record is sufficient
• To take additional evidence or to require any evidence or to require any evidence to be taken by the Adjudicating Authority, where the Adjudicating Authority has refused to admit evidence, which ought to have been admitted,
• to require any document to be produced or any witness to be examined for the purposes of proceeding before it,
• to frame issues which appear to the Appellate Tribunal essential for adjudication of the case and refer them to the Adjudicating Authority for determination,
• To pass final order and affirm, vary or reverse an order of adjudication passed by the Adjudicating Authority and pass such other order or orders as may be necessary to meet the ends of justice.
• Any party aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High court within a period of 60 days from the date of communication of the decision or order.    
• No prosecution, suit or other proceeding shall lie against the Government or any officer of the Government or the Appellate Tribunal or the Adjudicating Authority established under this act, for anything done or intended to be done in good faith under this act.
• Where a person dies during the course of any proceeding under this 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.
• Declaration under Pradhan Mantri Garib Kalyan Yojna, 2016 will not enjoy immunity from Benami Act.
• Money deposited in Jan Dhan account if investigations reveal that money deposited belong to someone else then the provisions of Benami act would be invoked to confiscate the money.
• Section 281 A of the Income Tax Act, 1961 has been repealed because of the amended Benami act except Jammu & Kashmir where this act does not apply.

CONCLUSION

The amendment in the act is a means to reduce generation and utilization of unaccounted (black) money. This was a pivotal election promise made by the current government. Through this amendment, the government seeks to clearly define ‚ Benami ‘transactions, establish adjudicating authorities and an Appellate Tribunal to deal with Benami transactions, and specifies the penalty for entering into Benami transactions. Moreover, this will also increase the tax revenue for the Government by curbing unaccounted money into the system. Along with other regulatory changes such as implementation of Goods and Services Act (GST), Real Estate (Regulation & Development) Act (RERA) and Land Digitization, this amendment is a step in the right direction in improving transparency in real estate transactions. In the short term, it will lead to a reduction in transaction volumes. However, in the long term, it will make India a more attractive investment destination, aligning transactions with ethical standards and will increase international institutional investors and financial institutions participation in this sector.