Benami Transactions

Benami transactions

People generally ask whether he or she can purchase a property in the name of a person who may be a relative, friend or an employee etc. Acquisition of a property in the name of a person other then the one paying the consideration thereof may result into a Benami Transaction.

What is a Benami  transaction?

The two classes of transactions covered - The word ‘benami’ is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, when A sells properties to B but the sale deed mentions X as the purchaser. Here the sale itself is genuine but the real purchaser is B, X being the benamidar. This is the class of transaction which is usually termed as benami. But the word ‘benami’ is also occasionally used, perhaps not quote accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B.

The fundamental difference between these two classes of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. It is only in the former class of cases that it would be necessary when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquiry into the question as to who paid the consideration for the transfer - X or B. But in the latter class of assess when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration, but whether any consideration was paid - Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 (SC).

Benami Transactions (Prohibition) Act, 1988

Sections 81, 82 & 94 of the Indian Trusts Act, 1882 (now repealed) and the provisions of Section 281A of the Income Tax Act, 1961 (now repealed) dealt with “benami transactions” without prohibiting them, but they only tried to identify the real owner and the benami owner in these transactions. These provisions came up for review before the Law Commission which felt that these provisions must be repealed and they should be replaced by an independent legislation. The Law Commission, after making a detailed study and examining the views and opinions of the public, came to the conclusion that such transactions are carried out by people having funds and wealth from sources not disclosed to the revenue authorities and with tainted funds to acquire properties in the names of benamis (to avoid deletion and punitive actions). It is in this background that the Benami Transactions (Prohibition) Act, 1988 was enacted to come into effect from May 19, 1988 in all States, except Jammu and Kashmir.

The main highlight of the aforesaid enactment are as under:

A “Benami Transaction” has been defined under Section 2(a) of the Act to mean a transaction in which a person (transferor) transfers property to another person (transferee) for a consideration paid or provided by a third person.

The transferee in the above case is only a “benami” (name lender) for the third person, who is the real owner. The consideration is really paid or provided for by the third party i.e., the real owner only.

No person shall enter into any benami transaction. There is a total prohibition and ban on it. However, it is made clear that the prohibition does not apply to a person who buys property in the name of his wife and unmarried daughter. The law will presume that the purchasing the property was made only for the benefit of the wife or unmarried daughter, unless the contrary is proved.

The act of carrying out such a benami transaction has been made into a cognisable offence punishable up to three years imprisonment or with fine or with both. All parties to the transaction are held to be offenders.

The real owner of the property legally loses all his right and interest in the property against the benami owner and cannot legally file a suit, make a claim or take action against the benami owner to take over the property. There is a total prohibition against the real owner asserting his ownership rights against the benami owner.

The property owned and held in the name of the benami owner is liable to be acquired by the government through a competent authority (appointed under the Act for this purpose) without paying any compensation whatsoever.

However, the onus of proving whether a transaction is benami is only on the person who alleges that it is such. The person should prove that the consideration was not paid or provided for by the transferee and in fact the consideration was actually paid or provided for by a third party who is alleged to be the real owner.

This being a legal requirement, the Act has not become very effective in curbing or prohibiting benami transactions or punishing the persons involved. This is a serious restriction in the application of the Act.

The Act also does not apply to a fraudulent transfer covered by Section 53 of the Transfer of Property Act, 1882. In Section 53 of the Act, it has been held that when a person transfers property to another person fraudulently with a view to defeat or delay the creditors and their rights and claims, such a transfer can be nullified at the option of the creditors. In such a case, the transfer itself becomes invalid and the creditors have a right to go against the property of the transferor nullifying the fraudulent transfer. The Benami Transaction (Prohibition) Act, 1988 does not apply in such cases.

The exceptions

There are certain exceptions to the above said position.

• The property may be purchased by a person in the name of his wife or unmarried daughter.
• Such a person may be able to prove that he is a real and beneficial owner of the property. The securities held by a depositary as a registered owner under the provisions of The Depositaries Act, 1996 or participants or the agents of a depositary may also be proved by the real owner.
• Further, the property which is held by a coparcener in a Hindu Undivided Family and the property held for the benefit of the other coparceners of the family will not amount to a Benami transaction. Similarly, the property held by a trustee or other person who, in a fiduciary capacity has the benefit of another person for whom he has a trustee will also normally not amount to a Benami transaction. Fiduciary capacity means being in a position of a trustee and being in a position where the person can be stated to have duties of good faith, trust, confidence and transparency and one who must exercise a high standard of care in managing another person’s money or property.

Pronouncements and Principles governing benami transactions

In Bhim Singh v. Kan Singh AIR 1980 SC 727, the principles governing the determination of the question whether a transfer is a benami transaction or not, were summed up by the Supreme Court thus :

            -           The burden of showing that a transfer is a benami transaction lies on the person who asserts that it is such a transaction.

-           If it is proved that the purchase money came from a person other than the person in whose favour the property is transferred, the purchase is prima facie assumed to be for the benefit of the person who supplied the purchase money, unless there is evidence to the contrary.

            -           The true character of the transaction is governed by the intention of the person who contributed the purchase money.

-           The question as to what the intention was has to be decided on the basis of the surrounding circumstances, the relationship of the parties, the motives governing their action in bringing about the transaction and their subsequent conduct, etc.

Settled propositions

- The following propositions seem to be well established :

Ø      The burden of proof regarding benami is upon the one who alleges benami.

Ø      To prove benami, the most important point is to examine the source of consideration and along with that there are certain other criteria which should be taken into account. Such criteria have been laid down in Jayadayal Poddar v. Bibi Hazra AIR 1974 SC 171.

Ø      A finding regarding benami is a finding of fact.

Ø      A finding of fact cannot be questioned in the reference procedings unless it is without any evidence in support of it or is perverse in the sense that ‘no person acting judicially and properly instructed as to the relevant law’ would reasonably come to such a finding.

Ø      The mere rejection of an explanation would not entitle the department to claim that the consideration for the purchase of the property in the name of a non-assessee was provided by the assessee.

Ø      Apart from the relationship between the parties, there must be some material or evidence to support the case of the benami nature of a transaction.

Ø      Where a finding is based on material, partly relevant and partly irrelevant, then such a finding is vitiated in law.

Ø      One of the important criterion for deciding the controversy about benami is the motive for the benami purchase - Prakash Narain v. CIT/CWT [1982] 134 ITR 364 (All.).

Risk involved in Benami Transactions

All persons intending to purchase properties in the names of others have to consider the implications of the legal provisions, the fact that the persons concerned may unwillingly or unknowingly commit an offence and the fact that both real and beneficial holder and the name lender may ultimately lose the property.

The circumstances may also engender manipulations by other persons who are in the know of things and who may be in a position to cause mischief or nuisance or even more serious situation in the lights of having knowledge of the transaction.