1. Basic Concepts
A. CORPORATE VEIL
Although a corporation is a legal fiction forming a separate legal entity, in reality, it is an association of persons who are the real beneficiaries. Therefore, the veil of a corporation can be used by their underlying beneficiaries to commit frauds or such other illegal acts keeping their self-interest in mind against company interest. In certain circumstances of this nature, where it would be illogical to impose liability upon the company, an artificial entity, the corporate veil is lifted to identify the persons committing such acts who use the corporate entity as a mask. There are two aspects i.e. Judicial and Statutory which can help to lift the corporate veil
B. BENAMI TRANSACTION
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.
Two condition must be fulfilled to show a transaction as Benami Transaction as mentioned below:
1. Provider of consideration is third person who has immediate or future interest in that property i.e. other than the transferee viz. beneficial owner, and
2. Name on records as owner is of some other person i.e. other than beneficial owner benamidar
For example, one person receives as offer “Here is my Rupees one crore in old Rs. 500/Rs. 1000 notes. Keep it deposited in your bank account for 3 months. Enjoy the interest on it. Return me my Rupees one crore in new notes after 3 months”. This is a benami transaction if person accept such offer.
2. Main Concept
Interplay of Corporate Veil with Benami Law
There may be situation where a director or any other person of company may make any Benami/Fraudulent transaction by using the name of company.
We know, company has a separate legal entity. Any activity good or bad done by a company should be treated as an activity of that particular company. Hence Liabilities lie on the shoulder of such company. And the person who had made benami/fraudulent transaction is enable to hide himself behind the shield of the concept of “company is a Separate Legal Entity”.
Here the concept of “lifting of corporate veil” comes to identify the real offender who misuse this corporate entity.
Below cases can give an explicit elaboration of corporate veil with Benami Law:
Case 1
There is company, say M/s H Ltd. having four immovable properties where source of investment prima facie is fictitious/shell concern. During the search and seizure operation conducted under section 132 of the Income tax Act 1961, certain material and incrementing documents were seized which reflects that share capital of M/s H Ltd. was raised from different shell company through bogus and fabricated financial transactions. As original shareholders of the company were in the nature of shell companies controlled and managed by infamous entry operator. Subsequently M/s H Ltd. has invested the money raised through the bogus shell company in immovable property.
In above case, it is evident from the fact and circumstances that the consideration related to the transaction is provided by another person’s i.e. shell companies and it is held for future benefit of another person’s i.e. shell companies whose identity is not known. It is therefore concluded that the said condition satisfies the definition of Benami transaction u/s 2(9) of The Prohibition of Benami Property Transaction Act. Therefore, in the given case, M/s H Ltd. shall be considered as benamidar and as shareholder of the company are fictitious entity, beneficial owner is yet to be identified.
Also, authority shall lift the fictional identity of shell companies to pierce the inner working of the shell company and shareholders behind the entity to find the real owner/beneficial owner of the immovable property.
Case 2
ABC Pvt. Ltd. was incorporated by two shareholders. The share transfer certificates were signed by the first shareholders in the name of Mr. A & Mrs. A. The first director was replaced by three directors — Mr. X, Mrs. Y, and Mr. Z on the same day of share transfer. Mr. A gave an unsecured loan to the company. The company purchased the land by using the proceeds from unsecured loan. Since, it was a piece of agricultural land during the time of representation, Mr. Z himself an agriculturist. Accordingly, the additional collector allowed the purchase of the land on condition that it would be used for farming within three years.
Later on, Mr. N was appointed director of the company in place of Mr. Z. The only source of income of the company was by way of the loan advanced by Mr. A to his company. Mr. A had applied for purchasing agricultural land for farming, but instead constructed a farmhouse there for personal use. Even lives in that farm house without paying any rent to the company.
In above Case, it is evident from the facts and circumstances that the consideration for the land purchased is provided by Mr. A for his immediate or future benefit. However, land is registered on the name of company. It is therefore concluded that the said condition satisfies the definition of Benami transaction u/s 2(9) of The Prohibition of Benami Property Transaction Act. Therefore, in the given case, M/s ABC Ltd. shall be considered as benamidar and Mr. A as beneficial owner.
Also, authority shall lift the fictional identity of the company to pierce the inner working of the company and shareholders behind the entity to consider the Mr. A as real owner/beneficial owner of the land.
Note
It may be observed that simultaneous proceedings in Income Tax Act and The Prohibition of Benami Property transaction Act are possible. Therefore, Income tax may be charge under section 68 of Income tax Act, 1961 and simultaneous proceeding may be initiated under section 60 of The Prohibition of Benami Property transaction Act.
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