Benami Transactions-Genesis and Analysis

The number of benami transactions in the real estate sector has increased astronomically. In the absence of an effective regulation, the black or ill-gotten money is easily parked in the opaque real estate industry. In the recent last couple of years, there has been immense hue and cry about curbing benami transactions and black money. In the year 2014, this issue also assumed significant importance in the election manifesto of the political party now in power at the Centre, i.e., the Bharatiya Janata Party[1].

The purpose of this article is to provide the history of law on benami transactions, the enactment of the statute to deal with such transactions, the journey of the imperative amendments to the said statute and the vital changes in law which have ushered due to the contemporary developments in the society. The following quote provides a noteworthy starting premise of this article-

“Taxes are what we pay for civilized society. I like to pay taxes, with them I buy civilization.”    – Justice Holmes[2]

Meaning of Benami Transactions

The term “Benami” has its origin from the Persian language which implies “without a name”. According to Merriam Webster Dictionary the term “benami” implies “made, held, done, or transacted in the name of (another person) —used in Hindu law to designate a transaction, contract, or property that is made or held under a name that is fictitious or is that of a third party who holds as ostensible owner for the principal or beneficial owner[3]”.

In simple terminology, benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person therefore the former will be the nominal owner and the latter will the real owner of the property. The Privy Council in the case Pether Perumal v Muniandy[4] held that the person who lends his name for the purchase of property and has ostensible title, i.e., the benamidar is nothing but an alias for the real owner who is has beneficial ownership of the property.

Brief History[5]

The earliest noteworthy mention of benami transactions was in the 18^th century when the British had colonised the territory of India. In the case of Gopeekrist Gosain v Gungapersuad[6] it was held that such benami transactions were a part of India’s custom and therefore must be recognized unless otherwise provided by law. Thereafter, Section 81 and 82 of the Indian Trusts Act, 1882 (hereinafter refereed as the “Act, 1882”) extended legislative recognition to benami transactions due to which the Indian Courts were bound to enforce them. The rationale provided for justifying these transactions was Section 5 of the Transfer of Property Act, 1882 according to which there is no prohibition on transfer of property in the name of one person for the benefit of the other[7].

Eventually such transactions were entered between parties to defraud public revenues. In order to remedy this situation the Parliament introduced Section 281A in the Income Tax Act, 1961 (hereinafter referred as the “Act, 1961”)to prohibit the institution of suits with regards to benami properties[8]. The widespread menace of illegal benami transactions was not effectively curtailed and therefore Sections 81 and 82 of the Act, 1882 and Section 281A of the Act, 1961 were repealed. Thereafter following the recommendations of the 57^th Law Commission report the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988(hereinafter referred as the “Ordinance”) was promulgated by the President on 19^th May, 1988.

The said Ordinance was subjected to criticism from press and public on the grounds that it was not an effective mechanism to curb benami transactions. Accordingly 130^th Law Commission Report submitted certain recommendations as enumerated below:-

• All kinds of property must be covered by benami transactions
• The new law must declare that entering into benami transactions is an offence except when a father or husband transfers property in the name of his daughter or wife. \
• Omission of Section 94 of the Act, 1882
• Acquisition of properties in the same procedure as provided in Chapter XXA of the Act, 1961

Thus, after incorporating the relevant recommendations of the Law Commission the Benami Transactions (Prohibition) Act Bill was passed by both the Houses of Parliament and on 5^th September 1988 it became the Benami Transaction (Prohibition) Act, 1988

Benami Transaction (Prohibition) Act, 1988

The Benami Transaction (Prohibition) Act, 1988 (hereinafter referred as the “Act”) was enacted in order to prohibit all benami transactions and recovery of property which has been held as benami. The Act consisted of only nine sections out of which Sections 3, 4 and 5 are significant.

♣ Section 3 prohibits entering into a benami transaction. The exceptions to the same are as follows-

“the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife of the unmarried daughter.”

♣ Section 4 provides that no suit or claim shall be maintained to enforce rights with respect to benami properties. The exceptions to the same are:-

“(a) where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

♣ Section 5 provides that the benami properties shall be acquired by authority without any compensation or payment in return.

Delay in implementation of the Act

The flourishing of black money is not due to lack of black letter of law but due non-implementation of an enacted statute by the administration. In other words, although twenty three years ago the Act was passed by the Parliament, however, it was not implemented despite the request by the Central Vigilance Commission to the Government to empower the former under the Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the same[9]. Hence, recently the legislators drafted a new bill in tune with the current circumstances and requirements.

Benami Transactions (Prohibition) Amendment Bill, 2016

In the recent past, there have been various instances in which people use their unaccounted money to purchase property in name of a fictitious or non-existent person therefore the need for a strong mechanism to combat such activities has become inevitable. The object and purpose of the Benami Transactions (Prohibition) Amendment Bill, 2016 (hereinafter referred as the “Amendment Bill”) is not only to efficaciously prohibit benami transactions but also to prevent evasion of law by illegal practices[10]. The most significant aspect of the Amendment Bill is that all the benami properties shall be confiscated after following due procedure of law[11]. However, the law extends immunity under the Income Declaration Scheme to those who make a declaration in respect of their benami properties[12].

Journey of the law on prohibition of benami transactions[13]

• On 13^th May, 2015 the Benami Transactions (Prohibition) Amendment Bill, 2015 (hereinafter referred as the “Amendment Bill, 2015”) was introduced in Lok Sabha in order to amend and incorporate certain very important provisions of the Act, e., amendment to the definition of benami transactions, establishment of Adjudicating Authority and Appellate Tribunal, penalties on benami transactions.
• The Amendment Bill, 2015 was then referred for examination to the Standing Committee on Finance.
• On 28^th April, 2016 the Standing Committee report was submitted.
• On 22^nd July, 2016 the Government proposed amendments to the Amendment Bill, 2015.
• On 27^th July, 2016 the Amendment Bill was passed by the Lok Sabha
• 2^nd August, 2016 the Rajya Sabha approved the same.
• The Amendment Bill is one step away from becoming the law of the land, e., the bill now requires the Presidential assent to complete its journey successfully
• The Amendment Bill received the presidential assent on 10^th August, 2016 and the Benami Transactions (Prohibition) Amendment Act, 2016 (hereinafter referred as the “Amendment Act, 2016”) was brought into force.

The significant developments of law on prohibition of benami transactions is traced in the following table[14]

	Amendment Bill, 2015	Recommendations of the Standing Committee	Government proposals for amendment	Amendment Act, 2016
1.	Clause 4 Expands the definition of “benami transactions” and adds the following arrangements/ transactions to the definition:- i) property is held for another for immediate/ future benefit, direct or indirect except- Karta or HUF, person in fiduciary capacity, holding in name of spouse, property in the name of the person’s brother or sister or lineal ascendant or descendant ii) transaction is made under a fictitious name iii) the owner is in denial of the ownership of property iv) transaction in which the person who has provided consideration for the purchase of property is not traceable.	To provide exemption to the following i)  bona fide transactions in which consideration has been paid ii) Transaction which involves transfer of immovable property via a) registered agreement of sale b) registered General Power of Attorney  or c) registered development agreement on stamp duty payment	Accepted the Standing Committee Recommendations. Proposed exemption to the contract involving transfer of property which is partly executed under the Transfer of Property Act, 1882 provided that stamp duty is paid and contract is registered.	Explanation to S. 2(9)
				Benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882. This requires that the requisite stamp duty is paid and the contract is registered
2.	The aforesaid mentioned provides exemption to individual purchasing property in name of family member provided he is using “known source of income” for this purpose	Recommended to substitute “known sources of income” with “known sources”	Recommendation accepted	S.2(9)(A)(i)- exemption to Karta provided the consideration for the purchase of property is paid out of known source. S. 2(9)(A)(iii)- Exemption for purchase of property in the name of spouse provided the consideration paid out of known source S. 2(9)(A)(iv) Exemption for purchase of property in the name of brothers or sisters or lineal ascendants  provided the consideration is paid out of known source
3.	Clause 8 There shall be no re-transfer of the benami property from the one who is holding the property (benamidar) to the one who has paid the consideration (beneficial owner) and any such re-transfer shall be void	No recommendation	The corresponding provisions of the bill will not apply to those who disclose their benami properties under the Income Disclosure Scheme of the Finance Act, 2016	Section 6(3)- The provisions of sub-sections (1) and (2) shall not apply to a transfer made in accordance with the provisions of section 190 of the Finance Act, 2016.
4.	Clause 27(3) All the rights and titles shall vest, free of all encumbrances, in the Central Government after the confiscation of the benami property. No compensation shall be paid for such confiscation.	Since land is subject of the State List of the Schedule VII of the Constitution of India therefore all the rights of the confiscated property to be vested with the State Government	No amendment	S. 27(3) Where an order of confiscation has been made under sub-section (1), all the rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and no compensation shall be payable in respect of such confiscation
5.	Clause 24(1) On grounds of suspicion, the Initiating Officer, after recording reasons, may initiate investigation after issuance of notice to show cause as to why the property in question should be considered as benami	A specified time frame must be enunciated for the completion of investigation against benami transaction	No amendment	Section 24(1) Where the Initiating Officer, on the basis of material in his possession, has reason to believe that any person is a benamidar in respect of a property, he may, after recording reasons in writing, issue a notice to the person to show cause within such time as may be specified in the notice why the property should not be treated as benami property
6.	Clause 24(2) When the notice as mentioned in Clause 24(1) specifies the property held by the benamidar then the copy of notice shall also be provided to the beneficial owner	No recommendation	Notice to be issued to the beneficial owner provided his identity is known	Section 24(2) Where a notice under sub-section (1) specifies any property as being held by a benamidar referred to in that sub-section, a copy of the notice shall also be issued to the beneficial owner if his identity is known
7.	Clause 26(1) Within the period of 30 days, the Adjudicating Authority may require the benamidar or the beneficial owner of the benami property to submit all the necessary documents	The time period to furnish the documents must be extended to three months	No amendment	Section 26(1) 26. (1) On receipt of a reference under sub-section (5) of section 24, the Adjudicating Authority shall issue notice, to furnish such documents, particulars or evidence as is considered necessary on a date to be specified therein
8.	Clause 46(1) The Appellate Tribunal shall be the appellate body  against the order of the Adjudicating Authority	The time period of two years must be provided for disposal of appeals	No amendment	Section 46(1) Any person, including the Initiating Officer, aggrieved by an order of the Adjudicating Authority may prefer an appeal in such form and along with such fees, as may be prescribed, to the Appellate Tribunal against the order passed by the Adjudicating Authority under sub-section (3) of section 26, within a period of forty five days from the date of the order.
9.	Clause  32(1) A sitting or former High Court Judge shall be qualified for the purpose of being a Chairperson of the Appellate Tribunal	The Chairperson must have an experience of minimum five years as a High Court Judge	Recommendation accepted	Section 32 (1)   A person shall not be qualified for appointment as Chairperson of the Appellate Tribunal unless he is a sitting or retired Judge of a High Court, who has completed not less than five years’ of service.

Relevant Miscellaneous Provisions

Apart from the aforesaid, there are certain significant provisions of the Amendment Act, 2016 whichare as follows:

i. Religious and Charitable Trusts– Section 58 (1) exempt property in relation to charitable and religious trusts from the application of the Act.

ii. Special Courts– According to Section 50 (1) the Central Government in consultation with the High Court Chief Justice notify for designation of courts as Special Courts in order to try offences which are in violation of the Act.

iii. Penalties– Section 53(2) provides that the offence of benami transaction shall be penalised with fine (which may extend up to twenty five percent of the fair market value of the property) as well as rigorous imprisonment of at least one year and which may extend to seven years.Section 54 provides that anyone who furnishes false information in any proceedings under the Act shall be punished with fine which may be ten percent of the fair market value as well as imprisonment of at least six months which may be extended to five years.

The Interpretation of the Judiciary on Benami Transactions

There are couple factors that need to be taken into account in order to determine as to whether a particular sale of property is benami or not. In the case of Om Prakash Sharma v Rajendra Prasad Shewda & Ors[15] the Supreme Court made reference to a landmark precedent known as Jaydayal Poddar (Deceased) through L. Rs. & Anr v Mst. Bibi Hazra & Ors[16] and laid down certain important factors produced below:-

“(1) the source from which the purchase money came;

(2) the nature and possession of the property, after the purchase;

(3) motive, if any, for giving the transaction a benami colour;

(4) the position of the parties and the relationship, it any, between the claimant and the alleged benamidar;

(5) the custody of the title-deeds after the sale and

6) the conduct of the parties concerned in dealing with the property after the sale.”

The Apex Court also cautioned that no straight jacket formula can be laid down in this context and the aforesaid mentioned factors are not exhaustive therefore the facts and circumstances of each case become excessively relevant.

Adverse Impact

This article is of the opinion that the legislation has taken the first step towards eradicating the wide spread corruption in the real estate sector by enacting the Act. However, there was no visible impact because no action was taking against the people who resorted to such illegal activities. It cannot be under-emphasized that the adverse impact of benami transactions on the economy of our nation is immense. There is an immediate requirement to do work at the grass root level to eliminate the existence of such transactions in its entirety.

A Ray of Hope

On careful examination, the Amendment Act, 2016 appears to be promising enough to address the legal infirmities that existed in the Act. The proper implementation by the executive would cause immense deterrent impact in the society. As for instance, on one hand the provision of confiscation of benami properties sufficiently creates threat in the minds of people; and on the other hand the provision of exemption to those who declare their benami properties appears to be a lucrative incentive. Thus, if the new amended law is not handicapped by non-implementation then it can send shivers down the spine of those who have entered into such illegal transactions and also prevent the people from illegally evading taxes

Recommendations

The prevention and prohibition of benami transactions is imperative for the healthy economic growth of the country. It is imperative that no one should do an act indirectly which he cannot do directly; in other words, no one should be allowed to take the advantages of the loopholes in the legal system to destabilise the administration of the Government authorities. Therefore for significant impact of benami laws it is vital the following observations of the Standing Committee[17] are taken into consideration:-

i) It is conceded that there are provisions in the Income Tax Act, 1961 to deal with tax evasion and undisclosed wealth but requisite amendments to the same to curb stashing ofunaccounted investment under benami names would result in achieving the object of the Act

ii) The requirement of digitalisation of land records and accordingly it would require amendments in the Transfer of Property Act, 1882 and the Registration Act, 1908 to provide for registration of immovable properties, linking of Aadhar Card and PAN numbers of parties who purchase the property, providing relevant registration data to the tax authorities

iii) The application of the Act must be extended to all properties located abroad

Thus, this article concludes by highlighting that the successful prevention and curbing of the benami transactions is possible only when the political will of the executive to productively implement the new amended law is materialised. Also, if the mentioned recommendations are reflected in the rules then it shall pave the way for fulfilment of the object and purpose on the law on prohibition of benami transactions.

[1] http://www.bjp.org/images/pdf_2014/full_manifesto_english_07.04.2014.pdf

[2] 130^th Law Commission Report, available at- https://indiankanoon.org/doc/26445461/

[3]http://www.merriam-webster.com/dictionary/benami

[4] (1908) I.L.R. 35 Cal. 551

[5]http://policy.mofcom.gov.cn/english/flaw!fetch.action?id=573d04ab-7dbc-460c-9af6-5ae1d28ecc29

[6](1854) 6 MLA 53

[7]“In the following sections “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons; and “to transfer property” is to perform such act. In this section “living person includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.”

[8]“No suit to enforce any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be instituted in any court by or on behalf of a person (hereafter in this section referred to as the claimant) claiming to be the real owner of such property unless notice in the prescribed form and containing the prescribed particulars in respect of the property has been given by the claimant within a period of one year from the date of acquisition of the property to the Chief Commissioner or Commissioner.”

[9]Pardeep Sahni, Governance For Development: Issues And Strategies

[10] Cabinet approves amendment in the Benami Transactions (Prohibition) amendment Bill, 2015, 20^th July, 2016, available at- http://www.pmindia.gov.in/en/news_updates/cabinet-approves-amendment-in-the-benami-transactions-prohibition-amendment-bill-2015/

[11] Cabinet approves amendment in the Benami Transactions (Prohibition) amendment Bill, 2015, 20^th July, 2016, available at- http://www.pmindia.gov.in/en/news_updates/cabinet-approves-amendment-in-the-benami-transactions-prohibition-amendment-bill-2015/

[12] Cabinet approves amendment in the Benami Transactions (Prohibition) amendment Bill, 2015, 20^th July, 2016, available at- http://www.pmindia.gov.in/en/news_updates/cabinet-approves-amendment-in-the-benami-transactions-prohibition-amendment-bill-2015/

[13] Amendments to the Benami Transactions Prohibition (Amendment) Bill, 2015, available at- http://www.prsindia.org/uploads/media/Benami/Benami%20Transaction%20Amendments%20comparison.pdf

[14] Amendments to the Benami Transactions Prohibition (Amendment) Bill, 2015, available at- http://www.prsindia.org/uploads/media/Benami/Benami%20Transaction%20Amendments%20comparison.pdf

[15][15] Civil Appeal No. 8609-8610 OF 2009 decided on 9^th October, 2015  http://judis.nic.in/supremecourt/imgs1.aspx?filename=43027

[16] AIR 1974 SC 171

[17] Standing Committee Report Summary The Benami Transactions Prohibition (Amendment) Bill, 2015, available at- http://www.prsindia.org/uploads/media/Benami/SCR%20Summary-%20Benami%20Transactions%20Bill.pdf