Understanding The Benami Law In India: Frequently Asked Questions

Understanding The Benami Law In India: Frequently Asked Questions

Last Updated: 6 March 2018

Article by Bharat Chugh and Kushank Sindhu

In the last few months we have seen a major crackdown on Benami properties and their owners by the Government. Specialised Anti-Benami units have been set up by the Income Tax department across the country and in almost every state and thousands of properties already stand attached under the Prohibition of Benami Property Transactions Act, 1988 [as amended in 2016] (hereinafter “Benami Act”). This article endeavors to give you a bird’s eye view of what exactly does this law entail, what kind of transactions are outlawed, the civil and criminal implications/sanctions imposed by the Benami Act on persons entering into such transactions, and finally, how the anti-benami law operates and the defences/exceptions/remedies available against action taken under the Benami Law.  To begin at the beginnings, let us examine what a ‘Benami Transaction’ is:

1.      What is ‘benami’ and when can a transaction be termed a ‘Benami Transaction’?

Webster’s dictionary defines the term, “Benami” to mean : made, held, done, or transacted in the name of (another person).1 Thus, a Benami Transaction, in common parlance, refers to a transaction in which a property is transferred in the name of a person, whereas the consideration for the same is paid by some other person. To illustrate, where X purchases a property, let’s call it ‘Black Acre’; however, the property is not purchased in his own name, but in the name of ‘Y’, though the consideration has flown-in from X only. This would be a classic Benami Transaction. The subject matter of such a transaction (‘Black Acre’ in this case) is called a “benami property”. Usually, any Benami Transaction would have two primary actors: a beneficial owner (Mr.X, in our example) and a Benamidar (Y). Benamidar is a real or a fictitious person in whose name the Benami Property is transferred or held. A beneficial owner, on the other hand, refers to the  person, whether his identity is known or not, for whose benefit the Benami Property is actually held by a Benamidar. Simply put, a Benamidar is a mere name lender; a mask or a facade, whereas, it is the beneficial owner who is the real McCoy.

The law governing Benami transactions in India is the Prohibition of Benami Property Transactions Act, 1988, which was comprehensively amended and streamlined in 2016 by way of extensive and rather far reaching amendments.

2. What is a ‘Benami Property’ ?

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A common illustration of a Benami transaction is one in which an individual purchases a house in the name of his daughter-in-law. Thus the property is sold to a lady, however, the consideration for the same is provided by her father-in-law. If we deconstruct this, the house is the subject matter of the benami transaction and is called ‘Benami Property’.2

It must be noted that, contrary to popular misconception, the application of benami law is not confined to immoveable properties alone.  The term ‘property’, for the purposes of Benami, is quite wide and includes within its wide ambit : assets of ‘any kind’; whether movable or immovable, tangible or intangible, corporeal or incorporeal; and not only that, it also includes any right or interest or legal documents or instruments evidencing title to, or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form is included as well. In fact, the proceeds from the property are also included within the definition of ‘property’.

Though mostly houses, cars and jewelry have traditionally been considered to be property for the purposes of Benami Law; however, under the new definition, even securities, shares and intellectual property can be considered ‘Benami Property’ and may attract the rigors of the Benami Act. This expansion of the definition by the 2016 amendment reflects the legislative intent of intensifying the crackdown on such practices.

3. What is a ‘Benami transaction’?

With a broad understanding of the concept of Benami, let us get down to some specific conditions which are required to be satisfied for a transaction to qualify as a Benami Transaction:

(A) a transaction or an arrangement where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration. (Emphasis on continued ‘beneficial ownership’ of the real owner)

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name(In other words, where benamidar is a non-existent person or entity)

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership; (A recent example of this is how Jan Dhan bank accounts were inundated with funds during demonetization and Jan Dhan account holders were made unwitting benamidars of the huge funds (Though in many cases it was also done in collusion with the account holders!).

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;

All these transactions would fall within the ambit of ‘Benami Transactions’ within the Benami Act.

4. The Acid test of what is a Benami Property ?

The Supreme Court has observed that the enquiry as to whether a particular transaction is Benami or not, is largely one of fact, and for determining this question, no absolute formulae or straitjacket can be laid down which is uniformly applicable in all situations.

However, there are some factors which weigh a great deal with the Courts in such an enquiry:

  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, if 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.3

5. Why are Benami Transactions considered unlawful/illegal?

Benami transactions have been a part of Indian society for a while. One of the earliest instances of recognition of this practice can be traced to a Calcutta case wherein – a person purchased property in the name of his wife, and the same was held to be fictitious and therefore invalid.4 However, in the next few decades, the judicial stance towards Benami became a little less certain and there was considerable ambivalence with respect to the legality of the concept. The Privy Council in fact observed that the idea was quite unobjectionable.5  In fact, in some decisions, the Courts went on to observe that certain benami transactions were  customs of the country and must be recognized as such, thereby giving it a veneer of legality, since custom was one of the important sources of law back then.

However, gradually it was realised that Benami Transactions were also being employed for various dishonorable motives, including but not limited to, money laundering and evasion of  taxes. It was also realized that these transactions could be mere facades and misused for diverting one’s assets in another’s name and thereby defeating the lawful claims of creditors and defrauding them. Slowly and gradually it dawned that, on a cost-benefit analysis, the losses and mischief arising from allowing benami transactions to continue unabated far outweighed their perceived advantages, leading to such transactions being forbidden by law.

6. What are the implications of entering into a Benami Transaction ?

  1. Attachment and Confiscation of Benami Property:

As we’ve seen above, there is a complete embargo on entering into Benami Transactions. Therefore, if X purchases a property in the name of ‘Y’, it quite clearly a Benami Transaction and X cannot file a suit seeking the recovery of the property back from Y. Any such suit would be barred by law and capable of being rejected at the very threshold. However, does this mean that Y, who was a willing partner to this illegality, continues to enjoy the property.  The Answer is No. Under the 1988 Benami Law regime there were no specific provisions for attachment and confiscation of such properties. However, the 2016 Amendments provide for an elaborate process for attachment and confiscation of such properties. Therefore, now, apart from the disability attached to recovery of such a property at the behest of someone claiming to be the real owner, Benami Property is also liable to attachment and confiscation under the Benami Act.

This is how the process plays out:

  1. Proceedings before the Initiating Officer:

An Initiating Officer under the Benami Act initiates the process. Assistant Commissioners or a Deputy Commissioners as defined in the Income-tax Act, 1961, have been empowered to act as the Initiating Officer under the Act as well.6

The process begins when some material, for instance, documents or other evidence, come into the possession of the Initiating Officer giving her a reason to believe (sufficient cause, as opposed to a mere guess or conjecture) that any person is a Benamidar in respect of a property. In such a situation, the Initiating Officer may after recording her reasons in writing, issue a notice to the person to show cause within a stipulated time as to why the property should not be treated as benami property.7 A copy of the notice must also be issued to the beneficial owner if her identity is known.8

However, issuance of prior notice is not a condition precedent to attachment always. Like other similar legislations such as Prevention of Money Laundering Act (“PMLA”) and Income Tax Act (“ITA”), Benami Act, in order to prevent wrongful alienation/dissipation of property, and since time is of the essence in some of these cases, also provides for a ‘provisional attachment’ of property suspected to be Benami, provided the initiating officer has a reason to believe that the person holding such Benami property may alienate the property, and render the proceedings infructuous. In such cases, the property can be provisionally attached for a period not more than 90 days, purely as a protective/interim measure.

Since a provisional attachment is carried out on the basis of a ‘reason to believe’ (which is a much lower threshold than positive proof), and it makes serious in-roads into a person’s right to property, as a check and balance, the approval of a higher official (“Approving Authority”) is made a condition precedent for a provisional attachment. Needless to state, the Initiating Officer as well as Approving Authority have to form an opinion that provisional attachment is absolutely imperative, on the basis of tangible and cogent material and not on the basis of conjecture.

If the Initiating Officer is of the opinion that such property ought to be provisionally attached, she may order provisional attachment of the property, initially for a period of 90 days from the day of issuance of notice. This attachment cannot be for a period of more than ninety days from the date of issuance of notice described above. Within that period, the Initiating Officer, after giving a reasonable opportunity to the Benamidar as well as the beneficial owner to put forth their side of the case, may either confirm or vacate the provisional attachment.

In case of confirmation of attachment, the matter is then referred to the Adjudicating Authority (“AA”) under the Act for its decision (on merits) and the attachment continues till a final disposal of the case.

If it is a case of mere issuance of notice (without a provisional attachment), the Initiating Officer may, after a hearing, go on to attach the property till a decision of the Adjudicating Authority. In cases where the attachment is made/continued, the Initiating Officer is required to draw up a statement of the case and refer the same to the Adjudicating Authority under the Act. This statement of case brings the matter to the seisin of the Adjudicating Authority, who conducts an enquiry in the following terms:

  1. Confirmation/Reference Proceedings before the Adjudicating Authority

Upon receipt of Reference, as outlined above, the Adjudicating Authority is required to  issue notice, within a period of thirty days from the date on which a reference has been received, to the following persons9:

  1. the person specified as a benamidar;
  2. any person referred to as the beneficial owner therein or identified as such;
  3. any interested party, including a banking company;
  4. any person who has made a claim in respect of the property:

The notice  is given to the concerned parties in order to give them an opportunity to demonstrate as to how the property in question is not a Benami Property and, therefore, not liable to confiscation.

The notice will provide a period of a minimum thirty days to the person to whom the notice is issued to furnish the information sought and make out a case of release of property.

In a situation where the property is held jointly by more than one person, the Adjudicating Authority will endeavour to serve notice to all persons holding the property.

  • Hearing by the Adjudicating Authority

Representation of Parties by Other Individuals

The Benamidar or any other person who claims to be the owner of the property may either appear in person, or take the assistance of an authorised representative of his choice to present his case. The next question that arises is

  • Who can be an authorised person?10

Authorised representative means a person authorised in writing, being—

  1. a person related to the benamidar or such other person in any manner, or a person regularly employed by the benamidar or such other person as the case may be; or
  2. any officer of a scheduled bank with which the benamidar or such other person maintains an account or has other regular dealings; or
  3. any legal practitioner who is entitled to practice in any civil court in India; or
  4. any person who has passed any accountancy examination recognised in this behalf by the Board; or
  5. any person who has acquired such educational qualifications as the Board may prescribe for this purpose.
  • Reply Filed by Parties

A reply can be filed to the notice issued by the Adjudicating Authority so as to apprise the Authority as to the correct facts and one’s answer/defence on the merits of the case.

  • Hearing

The Adjudicating Authority is required to consider the reply (if any), and conduct any such further inquiries, and/or call for such other reports or evidence as it deems fit and take into account all relevant materials, in the decision making process.

The person specified as a Benamidar, the Initiating Officer, and any other person who claims to be the owner of the property is also required to be heard by the Adjudicating Authority before taking a decision.

  • Other properties surfacing during the proceedings, suspected to be ‘Benami’.11

Where in the course of proceedings before it, the Adjudicating Authority has reason to believe that a property, other than a property referred to it by the Initiating Officer is Benami Property, it may extend the scope of the reference and provisionally attach that property as well.

  • Decision of the Adjudicating Authority12

Lastly, the Adjudicating Authority, upon due consideration, may pass any of the following two orders:

(i) holding the property not to be a Benami Property and revoking the attachment order and setting the property and property owners free; or

(ii) holding the property to be a benami property and confirming the attachment order, in all other cases.

  • Time-limit for passing the Order13

There is an outer limit of one year for the conclusion of these proceedings.

  • Situation where a part of the property is found to be Benami

This is a peculiar situation where the Adjudicating Authority is satisfied that some part of the properties in respect of which reference has been made to him is Benami Property, but it is not able to specifically identify such part; in such a case, the Adjudicating Authority will record a finding to the best of his judgment as to which part of the properties is held Benami.

In cases of an adverse decision by the Adjudicating Authority, the property is liable to be confiscated, and this is how the process of confiscation is carried out:

6.1.3. Confiscation of the Property14

Where an order is passed by the Adjudicating Authority in respect of any property holding such property to be a Benami Property, the Adjudicating Authority will, after giving an opportunity of being heard to the person concerned, make an order confiscating the property held to be a benami property.

Having said that, in case an appeal against the decision of Adjudicating Authority is filed, confiscation will be subject to the result of appeal proceedings.

  • Fraudulent Transfers during the process 15

In case, after the issuance of the initial notice by the Initiating Officer, the property in question is transferred to a third party clandestinely, in that case, the said transaction would be null and void and confiscation would take effect, notwithstanding such a transfer.

However, in case the property is held or acquired by a person from the Benamidar for:

  • adequate consideration;
  • prior to the issuance of show-cause notice by the Initiating Officer; and
  • without his having knowledge of the benami transaction; in such a case the transfer may be valid.
  • Effect of confiscation: 

Where an order of confiscation has been made, all the rights and title in such property will vest absolutely in the Central Government, free of all encumbrances and no compensation will be payable in respect of such confiscation.

7.  Role of the Administrator post confiscation.16

Once an order of confiscation is passed, the power to receive and manage the property, rests with an Administrator, notified by the Central Government for that purpose.

After the order for confiscation has been made, the Administrator will proceed to take the possession of the property. She will, by notice in writing, order within seven days of the date of the service of notice to any person, who may be in possession of the benami property, to surrender or deliver possession thereof to the Administrator or any other person duly authorised in writing by him in this behalf.  In the event of non-compliance of the order or in a situation where taking over of immediate possession is warranted, for the purpose of forcibly taking over possession, the Administrator can take police assistance and it shall be the duty of the officer to comply with the requisition.

8. What are the remedies against wrongful attachment if one is aggrieved by such an order?

8.1. Appeal before the Appellate Tribunal17

Any person, including the Initiating Officer, aggrieved by an order of the Adjudicating Authority may prefer an appeal to the Appellate Tribunal against the order passed by the Adjudicating Authority holding the property to be Benami or not, within a period of forty-five days from the date of the order. (The Appellate Tribunal may, however, entertain any appeal after the said period of forty-five days, if it is satisfied that the appellant was prevented, by sufficient cause, from filing the appeal in time.)

The Appellate Tribunal, as far as possible, may hear and finally decide the appeal within a period of one year from the last date of the month in which the appeal is filed.

Any party aggrieved by any decision or order of the Appellate Tribunal can file an appeal to the High Court18within a period of sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law arising out of such order. (The High Court may entertain any appeal after the said period of sixty days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the period specified)

8.2 Writ Proceedings in the High Court

In certain exceptional cases, a writ petition may be filed against the orders of the Initiating Officer or the Adjudicating Authority, before the High Court directly. This option can be explored in cases where the orders of the Initiating Officer/Adjudicating Authority are patently arbitrary or perverse or when there is a clear violation of principles of natural justice and/or fundamental rights. Jurisdiction of the High Court can also be sought in cases of a clear violation of the procedure established under the Act by the Initiating Officer/Adjudicating Authority, or where the Act’s validity itself is suspect, or where there is no adequate remedy provided by/is capable of being availed under the Act.

9. Is entering into a Benami Transaction a crime as well?

When a benami transaction is entered into : in order to defeat the provisions of any law, to avoid payment of statutory dues or to avoid payment to creditors, it attracts penal provisions of the Benami Act19 and prosecution can be initiated under the Act after receiving the sanction of the Central Board of Direct Taxes constituted under the Central Board of Revenue Act, 1963.20

Special Courts for trial of offences under the Act will be set up by the Central Government, as per the mandate under the Act.21

The Special Court, whenever it is setup, will take cognizance of any offence punishable under the Act, upon a complaint in writing made by—

  1. the Initiating Officer; or
  2. the Approving Authority; or
  3. the Administrator; or
  4. the Adjudicating Authority; or
  5. any officer of the Central Government or State Government authorised in writing by that Government

10. Some substantive defences to the charge of Benami.22

Though the nature of the law of Benami is pretty catch-all and extremely wide, there are certain defences/exceptions which can be pressed into action in civil and criminal proceedings under the Benami Act. If sufficiently proved, the following transactions may be protected from the rigors of the Benami Act:

10.1.  Property held by Karta/Member of a Hindu Undivided Family-

(i) A transaction wherein the property is held by a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

10.2.  Property held by a person standing in a fiduciary capacity-

(ii) A transaction wherein the property is held by a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose;

When this defence is claimed, the first step is an inquiry into whether or not the property is being held by a person in his fiduciary capacity. While the expression “fiduciary capacity” may not be capable of a precise definition, it implies a relationship that is analogous to the relationship between a trustee and the beneficiaries of the trust. The expression is in fact wider in its import for it extends to all such situations as place the parties in positions that are founded on confidence and trust on the one part and good faith on the other. In determining whether a relationship is based on trust or confidence, relevant to determining whether they stand in a fiduciary capacity, the Court shall have to take into consideration the factual context in which the question arises for it is only in the factual backdrop that the existence or otherwise of a fiduciary relationship can be deduced in a given case.23 For instance, a property was sold by a municipal corporation in favour of a person, X, who was a tenant in the property. The other siblings had not relinquished their rights in the property but had consented to the sale as the corporation required the property to be transferred in the name of one person. Further, admittedly, the sale consideration was provided by other siblings also. In this backdrop, it was held that ‘X’ was holding the property in his fiduciary capacity for his other siblings and hence, the sale of the property in favour of X was not a benami transaction. In another instance, it was observed that a property was purchased by the agent and power of attorney holder. Hence, the transaction in question was not held to be a Benami Transaction.24

10.3.  Property held in the name of spouse, children, etc.

A transaction wherein the property is held by any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;

10.4. Property held in the name of brother, sister, lineal ascendant, etc.

A transaction wherein the property is held by any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual;

10.5.  Possession allowed to be taken or retained in part performance of a contract-

A transaction which involves allowing the possession of any property to be taken or retained in part performance of a contract, if, under any law for the time being in force,— (i) consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property; (ii) stamp duty on such transaction or arrangement has been paid; and (iii) the contract has been registered.

10.6. Property purchased under a bona fide loan/financial arrangement.

Let us imagine a situation where X purchases a property called ‘White Acre’ with the help of a loan from Y, however, X, instead taking money from Y and paying it to Mr.Z , the owner of White Acre, instructs Y to pay the money directly Mr.Z, which Y does. Whether in that case, the transaction can be called Benami, or not? A literal/formalistic/positivist application of the Benami Law would seem to suggest that it may be a Benami Transaction, since consideration has admittedly flown-in from a third person (Y) and property is held in the name of another (X). However, in such a situation, the most crucial consideration would be : whether the property is held for the immediate or future benefit of ‘Y’, or is it a case of pure financial assistance, and Y has no stake in the property.   In a situation such as this, it would have to be seen as to what the real intent of the transaction was, and whether it was, or was not executed for an illegal purpose, such as defrauding the exchequer or creditors. The mischief of Benami Law would be attracted only when a property is held in the name of one, but the enjoyment of the property and real ownership is with another person who had contributed funds for purchase of the property. As opposed to this, the transferee in a property purchased through money taken as loan, would be in the safe harbour if it is shown that both real title and beneficial interests are with the transferee and the consideration had flown from a third party merely as a matter of convenience and on the basis of an underlying financial arrangement, bona fide in nature. In any other view would result in all transactions of purchase of property through assistance from financial institutions treatable as Benami Transactions.25 An interpretation that leads to such absurdity ought to be avoided.

11. Purchase of Shares-

There might be situations where the name of a person is entered in the register of members of a company as the holder of shares but the person whose name has been so entered does not hold the beneficial interest in such shares. In such a situation, the person whose name has been entered has to make a declaration within such time and in such form as may be prescribed, to the company, specifying the name and other particulars of the person who holds the beneficial interest in such shares. In the absence of such a declaration, the holder of such beneficial interest cannot enforce any rights emanating from those shares w.r.t which no declaration has been made. The registered owner is treated as the real owner for all intents and purposes. This is the disability attached to non-filing of declaration under the Companies Act by beneficial owners26 However, in some cases, the authorities have also gone on to initiate action under the Benami law w.r.t such shareholding and initiated attachment and confiscation proceedings qua such shareholding.

12.   Is the new Benami Law applicable to older transactions or only those entered-into after 25.10.2016 (i.e the date of commencement)?

  • Application w.r.t penal provisions.

The Act divides benami transactions, for purposes of punishment, into two buckets:

(i) Transactions entered into before the commencement of the 2016 Amendment i.e. 25.10.2016

(ii) those entered into after the commencement of the 2016 Amendment i.e. 25.10.2016

As per Section 3(2) of the Act, 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. However, as per Section 3(3) of the Act : whoever enters into any benami transaction on and after the date of commencement of the 2016 Amendment, shall, notwithstanding anything contained in sub-section (2), be punishable in accordance with the provisions contained in Section 53 of the Act.

With respect to transactions entered into after 25.10.2016, a combined reading of Section 3(3) and Section 53 of the Act suggests 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 beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction. Whoever is found guilty of the offence of benami transaction shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value of the property.

Therefore, transactions entered-into post 2016 are visited with much greater penal consequences, than earlier transactions.  However, the more harsher remedy cannot apply retrospectively for transactions entered into prior to the 2016 law. This aligns with the constitutional protection against ex-post facto/retrospective criminal legislations.27

Though the position in regard to retrospectivity of penal provisions is fairly clear, unfortunately, the legal position is nowhere as simple insofar as applicability of attachment and confiscation proceedings (as detailed above) qua transactions entered into prior to 2016 amendments is concerned. To recapitulate, the provisions relating to attachment and confiscation have been inserted in the Act only after the 2016 amendment. There is no juristic consensus on the question as to whether attachment/confiscation proceedings, in the context of Benami Law, are civil or criminal in nature.  There is one view which suggests that attachment and confiscation proceedings can be initiated even w.r.t transactions carried out prior to the commencement of the 2016 Act, being civil in nature and consequences, and also since these transactions were forbidden even under the 1988 law; whereas, the contra view is that these proceedings have trappings of criminal law and penal consequences and therefore, cannot have a retrospective application. Further, it has also been argued that since the 2016 amendment widens the scope of the Act by enlarging the definition of ‘property’, any transaction relating to ‘property’, not covered by the 1988 Act, but covered post the 2016 amendments, should not be brought within the purview of the Act, lest it violates the constitutional protection against retrospective penal legislations.  In the absence of clarity on these aspects, there is a need for a definitive ruling on this point and also the rather vexed and nuanced issue of difference between retroactivity and retrospectivity, which has long evaded a conclusive determination by our Courts.

13. Offences by Companies and Body Corporates

The Benami Act has a classic vicarious liability provision and provides for attribution of  liability on the alter egos/nerve centres of the Company for an offence committed by the Company.

Section 62 of the Benami Act provides that, in case it is found that a company is responsible for contravention of any of the provisions of the Act or of any rule, direction or order made – every person who, at the time the contravention was committed, was in charge of, and was responsible to, the company, for the conduct of the business of the company alongwith the Company itself; shall be deemed to be guilty of the offence.

Further, any director, partner in the firm, any member controlling the affairs of any association of persons or a body of individuals, manager, secretary or other officer of the company, on account of whose consent or neglect the contravention has taken place, would also be deemed guilty of the contravention.

Needless to state, classic defences to vicarious liability such as lack of knowledge, individual not being in charge of, or aware as to the affairs of the company, et al. may be invoked as defences to oppose fastening of vicarious liability under the Benami Law, as well.

14. Income Tax Act, 1961 and the Benami Law.

Benami law has an interesting inter-section with the Income Tax. Under the IT Act, if a person is found to be the owner of any money, bullion, jewellery or other valuable article and the same is not recorded in any books of account of the person and the source of acquisition/procurement is not explained satisfactorily, in that case, the money and value of bullion, jewellery or other valuable article is liable to be taxed as ‘income’ for such financial year at a flat rate of 77.25%, without allowing any deduction or threshold exemption. This applies only if the amount of such income is disclosed voluntarily and the applicable tax to the tune of 77.25% being paid on or before 31st of March of the relevant financial year. The penalty rate is even higher in case of non-disclosure.

However, what is pertinent to be noted is that the above would apply only in those cases where the person owns the money/asset in question, which is not the case in a Benami transaction. In a Benami transaction, the person in whose accounts such assets are held is not the real owner but only a benamidar. In such a case, the above provision may not be attracted, however, the individual assessee and the beneficial owner (or true owner!) would be liable to be proceeded-against civilly as well as criminally under the Benami Act.

15. Application to properties located outside-

Though the definition of property in the Act is extremely wide and there is nothing in the Act that excludes the applicability of Benami Act to Benami properties located outside India; however, in a reply to a debate on the Amendment Bill in the Rajya Sabha on 02.08.2016, the Finance Minister went on to say “What happens if the asset is outside the country? If an asset is outside the Country, it would not be covered under this Act. It would be covered under the Black Money Law, because you are owning a property or an asset outside the country…”.The reference appears to be to the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which aims to curb black money and undisclosed foreign assets and income by imposing tax and penalties on such income. A judicial decision on this point clearing the airs is much awaited.

16. Conclusion-

The experience of demonetisation has revealed that, in addition to hoarding black money in the form of cash, tax evaders also heavily invest their accumulated illegal money and park it in Benami properties, whether in the form of land, property or gold. This facilitates circumvention/evasion of taxes, allows defeating the legitimate claims of creditors and facilitates money laundering. Therefore, the Act, along with its amendment, seeks to achieve a laudable motive and should be allowed its fullest play. Having said that, there is a lot of uncertainty that remains with respect to crucial issues like: application of the Act to properties located outside India, retrospective application to transactions entered-into prior to 2016, and the inter-play with Income Disclosure/Income Tax/Black Money and Company laws, amongst others. We hope that at least some of these issues would find their way into courts and get resolved judicially, or the legislators may take note, and introduce the necessary amendments clearing the airs.

Footnotes
1 This article has been authored by Bharat Chugh, Managing Associate/Counsel & Kushank Sindhu, Associate at Luthra and Luthra Law Offices, New Delhi. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the Firm.
https://www.merriam-webster.com/dictionary/benami
3 This observation is subject to the special circumstances existing and laws applying thereunder.
4 Jaydayal Poddar (Deceased) through L.Rs. and Anr. vs. Mst. Bibi Hazra and Ors. (1974)1SCC3. Also see : In Bhim Singh v. Kan Singh, AIR 1980 SC 727, the principles governing the determination as to: whether a transfer is a benami transaction or not, was summed by the Supreme Court in the following words:
  1. The burden of showing that a transfer is a benami transaction lies on the person who asserts that it is such a transaction;
  2. 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;
  3. the true character of the transaction is governed by the intention of the person who has contributed the purchase money; and
  4. the question as to what his 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.
5 Sheikh Bahadur Ali v. Sheikh Dhomu, 1 Calcutta Sud. R. Diw. Rep. 250, 251, cited in Tyabji, Muslim Law (1968), page 396, foot note 1- page 3, Law Commission of India, Fifty-seventh Report, Benami Transactions, August, 1973, Available at: http://lawcommissionofindia.nic.in/51-100/Report57.pdf
6 Bilas Kunwar v. Desraj Ranjit Singh and Ors. (13.07.1915 – PRIVY COUNCIL) : MANU/PR/0010/1915
7 Section 2(19) of the Act
8 Section 24(1) of the Act
9 Section 24(2) of the Act
10 Section 26 of the Act.
11 Section 26(8) of the Act read with the Explanation thereto.
12 Section 26(5) of the Act.
13 Section 26(3) of the Act.
14 Section 26(7) of the Act.
15 Section 27 of the Act.
16 Section 27 of the Act.
17 Section 28 of the Act.
18 Section 27 of the Act.
19 Section 28 of the Act.
20 Section 46 of the Act.
21 Section 49 of the Act.
22 Section 53 of the Act
23 Section 55 of the Act.
24 Section 50 of the Act
25 Section 2(9) of the Act
26 Sri Marcel Martins vs. M. Printer and Ors. (27.04.2012 – SC) : MANU/SC/0333/2012
27 P.V. Sankara Kurup vs. Leelavathy Nambiar (16.08.1994 – SC) : MANU/SC/0533/1994 (1994)6SCC68
28 Hemangini Finance and Leasing Private Ltd. and Others v. Tamilnad Mercantile Bank Ltd. and Others (1996) 86 Comp Cas 875 (CLB). Also see : Pawan Kumar Gupta Vs. Rochiram Nagdeo [(1999) 4 SCC 243], wherein the Supreme Court interpreted the phrase ‘consideration paid or provided by another person” used u/s 2(a) of the Benami Act and held as follows: “29. Section 2(a) of the Benami Act defines benami transaction as “any transaction in which property is transferred to one person for a consideration paid or provided by another person.” The word “provided” in the said clause cannot be construed in relation tothe source or sources from which the real transferee made up funds for buying the sale consideration. The words “paid or provided” are disjunctively employed in the clause and each has to be tagged with the word “consideration”. The correct interpretation would be to read it as “consideration paid or consideration provided”.
29 If consideration was paid to the transferor then the word provided has no application as for the said sale. Only if the consideration was not paid in regard to a sale transaction the question of providing the consideration would arise. In some cases of sale transaction ready payment of consideration might not have been effected and then provision would be made for such consideration. The word “provided” in Section 2(a) of Benami Act cannot be understood in a different sense. Any other interpretation is likely to harm the interest of persons involved in genuine transactions, e.g., a purchaser of land might have availed himself of loan facilities from banks to make up purchase money. Could it be said that since the money was provided by the bank it was a benami transaction?.
30. We are, therefore, not inclined to accept the narrow construction of the word “provided” in Section 2(a) of the Benami Act. So even if appellant had availed himself of the help rendered by his father Pyarelal for making up the sale consideration that would not make the sale deed a benami transaction so as to push it into the forbidden area envisaged in Section 3(1) of the Benami Act.”
31 Sections 89 and 90 of the Companies Act, 2013
32 Article 20(1) of the Constitution of India.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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