#Budget2018 should clarify #BenamiLaw

The Benami Transactions (Prohibition) Act ,1988  was amended and enlarged from a 9 sections Act to a 72 sections Act by the Benami Transactions (Prohibition)Amendment Act,2016 and renamed as "The Prohibition of Benami Property Transactions Act,1988"  . The amendments came into force with effect from 01.11.2016.

'The word benami is a Persian compound word, made up of “be” which means without and “nam” which means name. It means literally without name . It denotes a transaction effected by a person(‘beneficial owner’) without using his own name, but in the name of another(‘benamidar’). The objective of the Prohibition of Benami Property Transactions Act,1988  as amended and enlarged by the Amendment Act of 2016 is to prohibit a benami transaction so that the beneficial owner 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. The prohibition would apply irrespective of the nature or source of the funds invested in the property. Thus, the Benami law applies equally to both a property acquired through proceeds of crime and a property acquired through legitimate means and hence its scope is wider than Prevention of Money Laundering Act,2002. PMLA deals with money laundering which involves disguising financial assets so that they can be used without detection of the illegal activity that produced them. Thus, PMLA is restricted only to proceeds of crime, i.e. property obtained as a result of criminal activity relating to scheduled offences while Benami Act has much wider scope as noted above.

The Act defines ‘benami transaction’. The Amendment Act of 2016 has enlarged the definition of 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

There are four 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 ;
• Category II:Transaction or arrangement in respect of property carried out in a fictitious name;
• Category III:Transaction or arrangement in respect of property where owner denies knowledge of ownership or not aware of ownership; and
• Category IV:Property transaction or arrangement where person providing consideration is not traceable or is fictitious 

Benamidar is on record owner in whose name property is held. Beneficial owner is the real owner who provides or pays consideration for the property. Any   property which is the subject matter of any of these four types of transactions is ‘benami property’. If any transaction does not fall within the scope of any of these 4 categories, it is not a benami transaction and property involved will not be benami property.Benamidar may be any person-individual or HUF or firm or company or AOP or BOI or artificial juridical person. Beneficial owner  may also be any person-individual or HUF or firm or company or AOP or BOI or artificial juridical person.

The following five types of transactions  are exceptions which would not be  regarded as CATEGORY I benami  even though consideration is paid or provided by someone other than the benamidar(on record holder) and property held in benamidar’s name would not be regarded benami property: 

• (i)Karta or member of HUF holding HUF property if  consideration for property provided or paid out of known sources of HUF 
• (ii)Property held by a person standing in fiduciary capacity 
• (iii)Property held in the name of spouse or any child of an individual and consideration for property paid or provided out of   known sources of individual 
• (iv) Property held jointly in the names of an  individual and his brother/sister/lineal ascendant/lineal descendant where  consideration for property paid or provided out of   known sources of individual
• (v)Genuine stamp duty paid  power of attorney transactions referred to in section 53A of Transfer of Property Act where contract (agreement to sell) is registered and transferee has taken possession and paid consideration to transferor but property remains in transferor’s name

For a transaction to be ‘benami transaction’, there has to exist an actual transaction or arrangement which has taken place. In a sham transaction or bogus transaction or fictitious transaction, no transaction has actually taken place and the transaction is merely shown to have taken place on paper. This is where a benami transaction differs from a sham/bogus/fictitious transaction. In Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28, the Supreme Court explained that 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 his benamidar. This is the class of transactions which is usually termed as benami. But the word ‘benami’ is also occasionally used, perhaps not quite 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 (benami transactions) there is an operative transfer resulting in the vesting of title in the transferee, in the latter (sham transactions) there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. In benami transactions, it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But 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. A question arises whether the distinction between benami and sham transaction which was applied to the Court to the pre-amended provisions of the Benami Act would apply under the amended provisions also ? Two views are possible here. The better view is that ,in view of the new definition of ‘benamidar’ in clause (10) of section 2 inserted by the Amendment Act of 2016, which specifically covers a mere name-lender the distinction is irrelevant . It would appear that the sham transactions would also be covered within the purview of ‘benami transaction’. This view also accords with the avowed objectives of the Benami Act. One would like to see an amendment to the Benami Act in the Union Budget of 2018 via the Finance Bill,2018 to clarify whether the Benami Act after the amendment in 2016 would apply to sham transactions also.

The following are the legal consequences of benami transactions entered into on or after 01.11.2016 (ie the date of commencement of amended provisions):

Benami transaction is a punishable offence

1. Whoever enters into any benami transaction on or after the date of commencement of the Benami Transactions (Prohibition) Amendment Act, 2016 (i.e. on or after 1-11-2016), shall be punishable in accordance with (new) Chapter VII of the Act - i.e. in accordance with new section 53 of the Act. [Section 3(3)] Section 53(1) provides that where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the following shall be guilty of the offence of benami transaction:

ubeneficial owner,

ubenamidar and

uany other person who abets or induces any person to enter into benami transaction

Where any person is found guilty of the offence of benami transaction as above, he 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 to fine which may extend to 25% of the fair market value of the property. - [Section 53(2)].

Prohibition of the right to recover property held benami.

2. No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property.

[Section 4(1)]

3. No defence based on 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 allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property. [Section 4(2)]

Property held benami liable to confiscation

4. Any property, which is the subject matter of benami transaction, shall be liable to be confiscated by the Central Government. [Section 5]

Prohibition on re-transfer of property by benamidar

5. 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 [Section 6(1)]. Any such re-transfer shall be null and void. [Section 6(2)]. However, this prohibition shall not apply where re-transfer is made in accordance with Income Declaration Scheme, 2016, i.e. in accordance with section 190 of the Finance Act, 2016 [Section 6(3)].

It may be noted that rigorous imprisonment and fine as per Chapter VII (Section 53) is attracted in respect of benami transactions entered into on or after the date of  commencement of the 2016 Amendment Act only if these are entered into in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors. It would appear that all other legal consequences in sections 3, 4, 5 and 6 shall follow in respect of benami transactions or benami properties irrespective of the motive with which the transaction is entered into.

The punishment of rigorous imprisonment of one to seven years and fine upto 25% of fair market value will apply to benami transactions entered into on or after 01.11.2016. For benami transactions entered into prior to 01.11.2016, the punishment shall be as per section 3(2) of the Act ie Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both.  The consequences at nos.2 to 5 above shall apply whether transaction was entered into before 01.11.2016

Section 5 of the Act provides for confiscation of benami property. “Confiscation” in its ordinary sense, means property taken by the Crown by way of penalty. - Stroud’s Judicial Dictionary “Confiscation must be an act done in some way on the part of the government of the country where it takes place, and in some way beneficial to that government; though the proceeds may not, strictly speaking, be brought into its treasury” (per Ellenborough C.J., Levin v. Allnutt, 15 East, 269). See Termes de la Ley, Confiscate; Cowel. Confiscation results in change of ownership and property vesting in the Government. Confiscation of property is by way of penalty. There has to be a due process for determining whether confiscation is justified and whether the property is benami property after duly hearing out the persons who will be affected by the confiscation order. Adjudication is the due process which precedes confiscation order and may or may not result into a confiscation order. When due process is going on , property in question needs to be attached so that culprits can’t sell away the property when due process is on. Attachment does not result in change of ownership 

Briefly, the process for confiscation under the Act is as under: 

(i) Issue of show cause notice by Initiating Officer where he has reason to believe that any person is a benamidar in respect of a property, he may, after recording reasons in writing.

(ii)Provisional attachment of property if necessary.

(iii)Revoke provisional attachment if satisfied the property is not benami. 

(iv)Continuing provisional attachment or ordering provisional attachment where not satisfied that property is not benami and refer a statement of case to Adjudicating Authority.

(v)Adjudicating Authority to hear affected persons and pass order holding that property is benami or not. (vi)Where adjudication order holds property as benami, hear affected persons and pass confiscation order. (vii)Administrator to take possession of benami property and manage it.

A question rises whether benami property is liable to be confiscated when no prosecutable offence under section 53 is made out? Two views are possible here. From a plain reading of section 5 it appears that confiscation will happen regardless of the motive. One would like to see an amendment to the Benami Act in the Union Budget of 2018 via the Finance Bill,2018 to clarify this issue also.

During demonetisation, one saw the rich deposit banned notes  in the accounts of poor on the understanding that it will be repaid in new notes later. These deposits will clearly be benami property.The Prime Minister in one of his speeches told the poor  not to return the money to the rich beneficial owner. What the PM said is perfectly in accordance with section 6 which prohibits benamidar from re-transferring benami property back to beneficial owner. However question arises. If the poor account holder refuses to co-operate and re-transfer, will he get amnesty from  prosecution under section 53? Will the whole or any part of the amount confiscated will be returned to the poor accountholder/benamidar as reward? The Central Govt may make Rules or Scheme in terns of section 28(3) as to how benami property is to be disposed of. Will the Union Budget unveil any plan as to how the poor benamidar accountholder be rewarded if he refuses to re-transfer it to the rich beneficial owner and intimates the authority?