Layered Loans Used to Acquire Promoters’ Shares Constitute Benami Transaction: SAFEMA

Initiating Officer Vs DCS Infotech Pvt. Ltd. (Appellate Tribunal under SAFEMA, New Delhi)

Interest-Free Loans Are Not Per Se Benami, but Layering of Funds Through a Controlled Company to Acquire Promoters’ Shares Constitutes Benami Transaction: SAFEMA Tribunal

Summary: The Appellate Tribunal under SAFEMA has held that interest-free loans by themselves do not constitute a benami transaction. However, where the alleged borrowing company is controlled by the persons providing the funds, its directors and shareholders are merely name-lenders, and the funds are layered through group concerns to acquire shares for the benefit of those controlling persons, the arrangement would fall within the definition of a benami transaction under Sections 2(9)(A) and 2(9)(C) of the Prohibition of Benami Property Transactions Act, 1988.

The Tribunal set aside the order of the Adjudicating Authority and confirmed the provisional attachment of the shares and other assets. It also granted liberty to the Department to refer the matter to SEBI for investigation into the possible aspect of insider trading.

Facts of the case

The Income-tax Investigation Wing conducted a survey in the case of Deepak Nitrite Ltd. and its associated concerns. During the survey, the books of account and other important documents belonging to M/s DCS Infotech Pvt. Ltd. were found at the business premises of the Deepak Group.