Benami Law As Amended – Whether Retroactive?

The question as to whether the Prohibition of Benami Property Transactions Act, 1988, as amended by the Benami Transactions (Prohibitions) Amendment Act, 2016, is prospective or retrospective is of vital importance to the several proceedings which are presently pending before the authorities. CA. Pankaj Agrwal has applied his mind to all the arguments and counter-arguments advanced by the contesting parties and expressed his opinion on the topic

An issue is being discussed as to applicability of the the Prohibition of Benami Property Transactions Act, 1988 as amended by the Benami Transactions (Prohibitions) Amendment Act, 2016 which got assent of the President of India on 10th August 2016 and came into force from 1st November 2016. In several webinars being conducted by various professional forums, and articles published, the discussion centres around whether the amendment Act is prospective or retrospective.  There are conflicting judgements also from various High Courts. One of such judgements is of the Kolkatta High Court in Ganpati Dealcom Pvt. Ltd. which held the law to be prospective, but has been stayed in its operation to that extent by the Hon’ble Supreme Court.  All these decisions are generally by way of writ to stall the proceedings initiated by Initiating officer, and the focus of the arguments has been whether the law is prospective or retrospective. The nature of amendments which are large in number and are changing the colour and texture of the pre-amended Act is having wider ramifications. In such discussions, and decisions, the change in definition of ‘benami transactions’ having wider repercussions is not being generally discussed.   

Hence, in this article, an attempt is being made to explain, how the amending Act, though prospective, will affect the transactions even if, they have been done prior to coming into force of this Act.

Date of commencement of Amendment Act

Sub-section (2) of section 1 of the amending Act provides as under:

“(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.”

The Central Government vide notification no. 98/2016 dated 25th October 2016 appointed 1st November 2016 as the date from which the amending Act will come into force.

It is cardinal principle that every statute prima facie is prospective unless it is expressly or by necessary implication made to have retrospective operation. Unless there are words in the statute sufficient to show the intention of the Legislature to affect the existing rights, it is “deemed to be prospective only ‘nova constitutio futuris formam imponere debet non prae-teritis’. (1)

It is not necessary that an express provision be made to make a statute retrospective and the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the new law is made to cure an acknowledged evil for the benefit of a community as a whole. (2)

Prospective Vs. Retrospective

In view of this position of law, per se, it cannot be said that the Benami Transactions (Prohibitions) Amendment Act, 2016 is retrospective in nature. The law is prospective only. A view is also being expressed that since section 1(3) of the Act, is not amended, it makes all the provisions except section 3,5 and 8 to be effective from 19th day of May 1988.  This argument was also taken before Kolkatta High Court by the Additional Soliciter General in Ganpati Dealcom Pvt. Ltd as given in its order as under:

“14. The learned Additional Solicitor General argued that the amendments were very carefully woven into the fabric of the parent Act. He referred to section 1(2) of the amending Act which stated that different dates may be appointed for coming into force of different provisions of the Act. He argued that section 1(3) of the Parent Act said that provisions of the Act except 3, 5 and 8 as per the Act would come into force on 19th May, 1988. The amending Act was grafted into it. Therefore, the amendments of 2016 had retrospective effect. He also argued that the concept of benami property and benami transaction remained the same on amendment. So was the provision regarding acquisition and compensation. The amending Act merely provided a machinery for the implementation of the Parent Act.”

 The hon’ble High Court rejected the contention of the Additional Soliciter General in the following words:

“30. I reject the contention of the Additional Solicitor General that the provision in section 1(2) of the said Act automatically made the amending Act of 2016 retrospective. The 2016 amendment is a new legislation and in order to have retrospectivity it should have been specifically provided therein that it was intended to cover contraventions at an earlier point of time. That express provision is not there. Therefore this contention of the Additional Solicitor General fails.’

However, with due respect to the proponents of this view, I will like to elaborate upon their arguments with my comments. Section 1(3) of the parent Act is as under:

       “The provisions of section 3, 5, 8 shall come into force at once, and the remaining provisions of this Act shall be deemed to have come into force on the 19th day of May 1988.”

Because of deeming provisions in commencement section, it is argued that whole Act except for section 3,5,and 8 shall be deemed to have commenced from 19th day of May 1988. It creates an anomalous situtation because there are new chapters creating authorities, providing their powers etc. and they cannot be made effective from 19th May 1988. In my understanding, the commencement section, becomes inoperative once the Act comes into operation like an officer after passing the order becomes functus officio.  Secondly, we forget why certain provisions were brought into force from a specific date. Generally, when any Act is preceded by an ordinance, the provisions which were brought through ordinance are made operative from the date of coming into force of the ordinance and the rest of the provisions are made operative from the date of coming into force of the Act.     Hence, it is incorrect proposition or argument to say that because of section 1(3) of the Act, the amendments made will have retrospective operation. Any amendment made by an amending Act will come into operation from the date as provided in the amendment Act.

Definition of Benami transaction as amended

“(9)      "benami transaction" means,—

(A) a transaction or an arrangement—

(a)        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

(b)        the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration, except when the property is held by—

(i) 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;

(ii)                 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;

(iii)                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;

(iv) 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 descendent 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; or

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(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;

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

Explanation.—For the removal of doubts, it is hereby declared that benamitransaction 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, 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.

The definition of “benami transaction” has been enlarged so as to include ‘an arrangement’ and ‘held by’. Earlier only ‘transactions’ were covered in which property was transferred to one person for a consideration paid or provided by another person. The exceptions given in sections 3 and 4 have been made part of definition alongwith some other exceptions.

How far each of the substantive changes made to the definition of ‘benami transaction’ will be prospective or affect transactions already done?

Before 1st November 2016, the definition of ‘benami transaction’ was very simple and it meant ‘when the consideration is provided by one person and the property is transferred to another person’. Impliedly, three parties were required, one, the person providing the consideration, second, the transferor and third, the transferee. The hon’ble Kerala High Court in the case of Ouseph Chacko V. Raman Nair Air (3) held that ‘when there is no transfer of property as in a sham document, when there is no consideration for the transaction, it is a sham transaction, which does not satisfy the definition of benami transaction under the Act. The definition of benami transaction in the Act thus excludes from its purview a sham transaction’. A fresh look will be required to these rulings in view of the amended definition.

Now definition of ‘benami transaction’ covers four types of transactions. For each of the transactions, it is to be tested how far it can affect the transactions done earlier (prior to 1st November 2016).

Type I 

This category is the modified definition as it existed in pre amendment Act. It has been enlarged and the exceptions given in section 3 and 4 of old section have been brought within the definition clause so they apply universally to the whole Act. The major changes are as under:

1. It includes ‘arrangement’ also. Earlier only transactions were covered. The term ‘arrangement’ is wider in scope and implications than the term ‘transaction’.
2. Applying the maxim ‘Reddendo Singula singulis’ the term ‘transaction’ will go with the act of ‘transfer’ and the term ‘arrangement’ will go with ‘held by’.
3. A provision is added to reduce its hardship which provided that the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration.
4. An explanation is also added to provide for transactions which are not registered as required by law because legally, in all such cases legal title continues with the transferor and the possession goes to the transferee based on power of attorney or some other such documents.

These following 4 actions have been contemplated in the Act:

1. Prohibition from entering into ‘benami transactions’ (Section 3)
2. Prohibition of the right to recover property held benami (Section 4)
3. Property held benami liable to confiscation (Section 5)
4. Penalty for entering into benami transaction (Section 53)

Benami property means any property which is the subject matter of a benami transaction and also includes the proceeds from such property.

Section 3 prohibits ‘entering into’ and section 53, after 1st November 2016, makes any person who ‘enters into’ a benami transaction to be an offender.

A question arises can these sections apply to benami properties which were acquired prior to 1st November 2016 as the transactions were entered into before that date or before the amendment came into force. As per legal lexicon, “TO ENTER INTO” is to engage in or bind oneself by (an engagement, contract, treaty, etc.)

Now, the definition of benami transaction includes ‘a transaction or an arrangement’ and ‘transferred to or held by’ a person. Transaction of transfer has a termination when the property gets conveyed to the transferee but an arrangement of holding the property is an act which is continuous. So in view of this extended meaning of ‘benami transaction’, the provisions of section 3 and section 53 will be attracted to all such transactions where the property is held by a person for the benefit of the person who has provided such consideration even if those transactions of transfer have taken place  earlier to 1st November 2016. For example, if by legislation, it is prohibited to hold anything say foreign made certain goods, such provision will be prospective but will apply to all such goods being held even if they might have been acquired prior to its prohibition unless exemption is given.  

The rule against retrospective construction is not applicable to a statute merely “because a part of the requisites for its action is drawn from a time antecedent to its passing”. If that were not so, every statute will be presumed to apply only to persons born and things come into existence after its operation and the rule may well result in virtual nullification of most of the statutes. (4)  

Section 4 deals with prohibition of any suit in respect of a benami property and section 5 deals with confiscation of benami property. These sections deal with ‘benami property’. Benami property means any property which has been subject matter of benami transaction and includes proceeds from such property.

To decide whether benami property has been subject matter of benami transaction or not, the definition of benami transaction has to be looked into and the amended definition which includes ‘arrangement’ and ‘held by’, being a wide definition and being a continuous act, will make them amenable to the provisions of section 4 and 5, even if the transaction has taken place prior to 1st November 2016.

The hon’ble Supreme Court had to consider the applicability of section 4 to the proceedings which were initiated before the coming into force of the benami law before the courts and were pending in the case of Mithilesh Kumari and Another Vs. Prem Behari Khare (5) . The two judge bench held the provisions of section 4 to be applicable to all the pending proceedings. Impliedly, it means that all those transactions though, having taken place earlier, will get hit by the provisions of section 4 of the Act if the property was of the nature of benami as defined. However, this decision was overruled by the three judge bench of Hon’ble Supreme Court in R. Rajagopal Reddy (dead) by L. Rs Vs. Padmini Chandrasekharan (dead) by L. Rs. (6) holding that ‘Sub-section (1) of section 4 cannot be applied to suit claim, or action to enforce any right in property held benami against person in whose name such property is held or any other person, if such proceeding is initiated by or on behalf of a person claiming to be real owner thereof prior to coming into force of sub-section (2). These decisions also support the view that the nature of property whether it is benami or not will be established as per new definition of law and the consequences of the Act will follow.  

Type II 

The second type which has been added to the definition is transactions or arrangement made in fictitious name. This is also a continuous act in which the property is being held in a fictitious name. Though, such transaction would have been carried out earlier to 1st November 2016, yet it will become ‘benami transaction’ and the property will become ‘benami property’ and all the consequences of amended law will follow.

Type III

The third type added is transaction or arrangement in respect of a property where the owner does not know about his ownership or denies his ownership. In this type also, ‘arrangement’ shows the continuity of the transaction and hence, will make such an act to be ‘benami transaction’ and the property ‘benami property’ and all the consequences of the amended law will follow.

Type IV

The fourth type added is a transaction or arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious. This is the most dangerous provision of law.

The Act does not provide any time limit as to how far back the enforcement agencies can go to trace the person who has provided the consideration. A person may have acquired some immovable property by making borrowings and the liability of such borrowing has not been repaid and the person who has lent the money is not traceable when the authorities take action. This problem can be looked at from two angles.

First the property which has been bought with borrowed money. If the person who has lent the money was identified and his confirmation etc. is available with the borrower, the property cannot be said to have been acquired with consideration whose provider is not traceable or fictitious as he was available at the time when the property was taken.

Second, can the government demand the money borrowed as it is also a property with regard to lender and the person providing consideration for such property is not traceable. Hence, this can be treated as ‘benami property’ and the action may be taken under this Act.

Explanation to definition of ‘benami property’ 

An explanation has also been added as a removal of doubt provision. It implies that if the conditions of the explanation are not fulfilled, the property will become ‘benami property’. In a nutshell, the crux of this explanation is that the legal owner is the person in whose name the legal title of the property stands and if such owner does not have any monetary interests in the property, he becomes benamidar for the real owner and such property will become ‘benami property’. The term ‘held by’ being of a continuous nature, even if such property is old one, the consequences of amended law will follow.

Exit Mechanism

When the government enacts any law prohibiting holding of something, it is also required to provide the mechanism to exit or how to deal with existing goods with their holders.

Was any such exit route provided to the holders of benami properties? The answer is yes. Income Disclosure Scheme 2016 has given an opportunity to all who have been holding benami properties to disclose and get the same transferred in their name within one year. Such re-transfer has also been exempted from the rigors of provisions of section 6 which prohibits re-transfer of property from benamidar to real owner.

Law Commisison 130th Report

Before I conclude, I will like to quote from the 130th report of the Law commission as under:

“1.6 The report was with the Government for about a decade and a half.  Ultimately it appears that the Government of India resolved to implement the recommendations of the Law Commission.  The ordinance more or less bodily adopted the draft recommendation set out under the marginal note ‘Recommendation’ with one important variation that while the Law Commission was of the opinion that it is necessary to make an exception for past transactions, as the provisions of the Ordinance stand, the President appears to have resolved to make them retroactive. The widespread belief held now is that the operation of the provisions of the Ordiance would be retroactive and even the past benami transactions would be governed by the provisoins of the ordinance if it becomes necessary for the parties to such past benami transactions to either file a suit 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 by or on behalf of the person claiming to be the real owner of such property or defend claiming right in respect of any property held benami whether against the person in whose name the property is held or against any other person.  This understanding of the ordinance has led to a debate in print media. The grievance therein stated is that ‘such legislation cannot be enacted with retrospective effect for the person purchasing benami property before May 19 (date of the ordinance) did so keeping in mind the laws relating to benami transactions prevalent at that time.  How can the state snatch away his right to enforce his ownership of that property?”

In para 2.9 of its report, the Law Commission gave its opinion as under:

“2.9 Benami property is not the creation of a statute.  It acquired legal respectability by judicial law-making.  The earliest case to which reference was made in the earlier report of the Law Commission was of the year 1915. Quoting Sir George Farwell’s observation that a benami transaction, a dealing common to Hindus and Mohammedans alike, is much in use in India.  According to him, it was quite unobjectionable and has a curious resemblanceto the doctrine of the English law and tracing the history down to the lates cases, the Law Commission concluded that benami has become part of Indian law.  The Law Commission recommended that it is time that benami ceases to be a part of Indian law because it was resorted to usually (but not always) with the object of concealing the real owner, fraud on creditors, desire to evade taxes as also to avoid certain political and social risks.  It was in 1973, that is, nearly a decade and a half back, that the Law Commission recommended to the Government of India that benami should cease to be a part of the Indian law.  This report was published and it was a notice to all benamidars as well as the so-called real owners that Government may contemplate enacting a legislation to put an end to benami as part of Indian law.  As the present trend of thinking is that the proposed legislation replacing the Ordinance should be retroactive, a grievance may be made that the Government should not have acted abruptly without giving locus poenitentiae to those who entered into benami transactions when were valid and would have no chance to set right their house.  In the opinion of the Law Commission a notice of a decade and a half is more than adequate for this purpose and therefore, it is not necessary to grant any such indulgence.

In view of the above remarks of the Law Commission, even the amendments made by 2016 amending Act will be retroactive. There was sufficient notice when the bill was presented, and the opportunity was given in Income Disclosure Scheme 2016 to make a disclosure and to get the benami property re-transferred.

Conclusion

The benami law is an unfolding law with rigourous provisions. It will be interesting to watch with legal brains on both sides arguing to see how it unfolds.  

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