A Study Of The Benami Transactions (Prohibition) Amendment Act 2016

The Benami Transactions (Prohibition) Amendment Act 2016 imposes draconian consequences on persons seeking to evade the law by holding property by illegitimate means. However, the hammer of the law, if literally interpreted, also adversely affects innocent persons who enter into genuine transactions. Advocate Deepa Khare has analyzed the statutory provisions in detail and explained how they should be interpreted so that the objective of the legislature is met while avoiding hardship to genuine transactions

1. Introduction:

1.1 Benami Transactions Prohibition (Amendment) Act 2016 has finally taken its shape and is no more a ‘Paper Tiger’. The subject has been a matter of much debate and deliberation before its insertion. Much has been said for and against the enactment which indicates the intricacy and vexed character. Inspite of diverse views, the enactment comes with a strong conviction about the evil of “Benami”, legislature has outspoken about time and again. The zeal expressed by the legislature to go out of the way to eradicate the evil, raises concerns for those who have been victimized in these transactions and likely be face the serious consequences as well as for those who acted out of long perpetuated habit or psychology. It is essential that the legislation is taken in its correct perspective and achieves the very objective for which it is conceived. The peculiarity in operation of the Act is seen with an interplay between larger public interest (eradication of illegal means and resources) v. equity and justice (exclusion of genuine transactions).

1.2 This makes the role of us professionals very onerous and warrants our core expertise and skill for its application. An endeavour is made to look at the Enactment with broader perspective and cull out the important principles likely to be emerged from the process.

2. Benami- Meaning:

2.1 Benami means without name. It means transfer of a property in the name of a person without any intention to transferring the beneficial interest to him. Such person is popularly called benamidar or a name lender while he has only ostensible title to the property without beneficial interest therein. The beneficial ownership vests with the real owner.

3. Doctrine of Benami:

3.1 The term ‘Benami’ existed as a concept which was common and customary prevalent from ancient time as a permitted form. The Courts observed that the system of acquiring and holding property in the name of other than real owner called Benami System, is quite common system. It is quite unobjectionable. The Courts observed that there is nothing inherently wrong in Benami. It accords ‘within its legitimate scope’ ideas and habits of people.

3.2 The law was enunciated by Courts approving Benami by observing that so long as the provisions of any statute are not defeated, the Courts are bound to give effect to it. The Benamidar has no beneficial interest, he represents the real owner and holds the property or business in trust for him. The principle was that if the property is purchased in the name of a person but the consideration was paid by another, the presumption would prevail that the transaction was for the benefit of the person who paid the consideration.

In general, Benamidar would fully represent as owner in dealings with third person. The third person would not be able to challenge his title so long as the real owner does not come into the picture. Ordinarily the real owner will not have any occasion to make assertions about his title. But if situations arise, the Courts would have to regard to the reality and disregard the ostensible title of Benamidar allowing real owner to assert his ownership. This was called Doctrine Of Benami enunciated by the judge made law.

3.3 The most important provision giving statutory footing to benami is in the Trust Act which creates resulting trusts. Section 82 of the Trust Act provided that if a property is purchased in name of one person and the consideration is paid by some other person, there is resulting trust in favour of the person who paid the consideration.

4. Burden Of Proof:

4.1 The burden of proving all the facts necessary to lead to the inference that the transfer was benami is on the persons who are asserting it to be. Section 82 of Trust Act made the principle as to burden of proof very clear.

5. Tests of deciding the benami transaction:

In deciding the question as to whether a transaction can be construed to be benami several factors like, motive, source of consideration, possession, enjoyments, title of documents etc have to be considered severally and cumulatively.

6. Threats of Benami:

6.1 Further the benami transactions were often resorted to for dishonest purpose. The broad spectrum of these illegal or dishonest objects, is given as under-

i. In Hindu Undivided Family, where a provision for secret profit was to be made.

ii. Fraud on creditors

iii. Evade Taxes

iv. Desire to avoid certain political and social risk.

7. Mitigating and /or Modifying Provisions:

7.1 Provisions under different laws therefore were enacted modifying the above Doctrine of Benami. The purpose of such provisions was to address such dishonest or illegal purpose while entering into benami transactions. These provisions were found in Code of Civil Procedure and Income Tax Act. Sec 66 Civil Procedure code contained a provision that no suit shall be maintained against any person claiming title under a purchase certified by the Court in such manner as may be prescribed on the ground that the purchase was made on behalf of the plaintiff or on behalf of someone through whom the plaintiff claims. This provision deprived a person to file any suit to claim any right in the property held as benami or for raising any defence on the ground of Benami. The legal remedies were withdrawn for such transactions. Section 64, 281 and 281A dealt with similar provisions. Section 281A itself did not prohibit Benami Transaction but it required that the prescribed authorities are to be informed if Benami is to be made basis of any suit. This ensured acquiring knowledge by the income tax authorities about the alleged Benami transaction.

7.2 At the same time, special provisions existed which took care of fraudulent transfers viz provision under section 41 and 53 of Transfer of property act which enabled to set aside and hold the transactions as void, transfers for unlawful object. Sections 422- 424 of Indian Penal Code contain provisions for punishment of fraudulent deeds and disposition of property and were wide enough to include benami transactions.

7.3 Section 84 of the Trusts Act provided that if the transfer was made for carrying out an unlawful object and the unlawful object is not carried out, then (subject to some qualifications) the transfer can be disregarded.

7.4 The above provisions were wide enough to cover the Benami Transactions and eliminate every possible threat from the underlying unlawful object. The above provisions were operative so as to guard against the Benami Transactions entered into with some illegal objects and at the same time approved other Benami transactions for legal objects.

8. Reference to the Law Commission and its 57th Report:

8.1 Need was felt by the legislature to tackle the menace of Benami Transactions in spite of these existing provisions under different Acts. While considering the Taxation Laws (Amendment) Bill, 1969, the Select Committee adverted to various aspects of benami law. The need was precisely to have a legislation dealing with specifically Benami transactions as also to pronounce absolute prohibition. The Government then made reference to Law Commission to consider proposal of absolute prohibition of benami transactions. The 57th Report of Law Commission dated 7th August 1973 referred to the gamut of Benami in detail as also the existing provisions then.

8.2 The Commission before giving specific opinion on the question referred, made general observations as to the need for a specific law for Benami transactions and observed that the threats in the context of Hindu Undivided Family as also tax evasion may not survive then, on account of adequate respective laws in both areas. However, reduction of litigation may be looked as one of the purpose for which any specific law can be thought of. The Courts are burdened with wasteful litigation concerning this aspect. If this is cured by a direct legislation on the benami transactions, the Courts would have more time for fruitful work.

8.3 In order to provide opinion on the questions referred to it, the Law Commission considered three alternatives-

1. Entering into Benami Transaction could be made an offence.

2. A provision may be enacted that no suit be filed to enforce right against benamidar or against third person by or on behalf of the person claiming to be real owner on the ground of benami

3. The present presumption of resulting of trust in favour of person who paid consideration may be displaced.

8.4 While considering the above three alternatives, views from various sections were called for and considered. It is noteworthy that majority of the views on first alternative were not in favour of the option. The reasons given were as under-

i. Not all transactions of benami are entered into for illegal purpose. Some of them are for honest purpose.

ii. It is a deep-rooted habit which may be restricted and not prohibited.

iii. Prohibition may be difficult since the benami transactions may not come to light ordinarily.

iv. The existing laws are adequate to take care of evasion of taxes and defeating claims of creditors.

8.5 Having said that, the view suggested that the benami transactions may be allowed to prevail and not be barred in toto. If the operating objective is tainted with fraud then only the legislation should ban them. The law therefore should go only that far where it would be effective. The views were positive on second as well as third.

8.6 The Committee after referring to the whole discussion, came to the conclusion that first option of creating a prohibition with criminal consequence is most drastic and will not be more effective than others. The prohibition with criminal sanction is not desirable unless the condition of mens rea is made a part of the provision enacting it. The second option was considered to be most effective which created a bar for judicial recognition to Benami transaction. The suggestion was made in line with provisions of Sec 66 of Civil Procedure Code with further widening of the scope of the provision. The third option was considered to be least effective by the Commission.

8.7 The Commissions therefore proposed the second alternative providing of prohibition on the right of the real owner to recover Benami property from benamidar. The Law Commission also dealt with the Constitutional validity while proposing a provision in the second alternative. The provision may hit Fundamental Right under Article 19(1)(f) dealing with Right to acquire, hold and dispose of the property. Referring to Article 19(5) that saves a law to impose reasonable restriction on the right in the public interest.

Viewing the reduction of litigation as one of the object of achieving Public interest may be a valid legislation. Important to note that any law dealing with putting restrictions on the property was liable for challenge under Article under 19(1)(f). The test of reasonable restriction was conceived to be only for reduction of wasteful litigation and not others.

The opinion of the Law Commission thus indicates that the concern from benami transactions was only towards the ensuing litigation while it was felt that all the other provisions were adequate to take care of the evils of Benami like taxation.

9. Benami Transaction (Prohibition of Right to Recover Property) Ordinance 1988:

9.1 This resulted into Benami Transaction (Prohibition of Right to Recover Property) Ordinance, 1988 on 19th May 1988 which saw the light of the day almost after a decade. Section 4 of the Ordinance provided for a bar for giving any judicial recognition to the Benami Transaction as well as raising any defence on the ground of Benami. At the same time, Sec 66 of Civil Procedure Code, Sec 281A of the Income Tax Act and Section 82 of the Trust Act were deleted. The Ordinance was promulgated under Article 123(1)(a) of the Constitution as per which the ordinance to perpetuate its existence further and to be on the statute book had to be passed within six weeks once the parliament is reassembled without which the Ordinance would cease to exist. Accordingly, in July 1988, a reference was made to Law Commissions again to comment on the Benami transactions so as to pass the appropriate legislation. The Law Commission had to submit the Report with much constraints of time. The Law Commission submitted its 130th Report with a declaration that for the paucity of time normal procedure of throwing a national debate and obtaining views from different spheres could not be done. However, it could obtain views of some selected personalities of outstanding stature in the field of law.

10. 130th Report of Law Commission:

10.1 A careful reference to the Report shows that in the beginning part of the Report, it has made clarification about the approach of the Law Commissions while dealing with Benami. This clarification as to approach appears to have been given under the apprehension that the subject of Benami is dealing with right of an individual in respect of the Property which was a fundamental right covered as Right of Property under Article 19(1)(f). The discussion found in this context therein considers the Constitutional history and the 44th amendment therein where the Right to Property under Article 19(1)(f) as a fundamental right was removed and it was inserted in Article 300A which was understood to be legal right subject to the authority of any law.

The whole philosophy of the change in Constitution about de-recognising the Right to Property as a fundamental right, has been referred. The justification then offered and considered while doing so was on the ground that India is a socialist state. A socialist state would presage a socialist order in which there would be equitable distribution of national cake. Concentration of property in few hands would be negation of socialist state and state policy should be in the direction not to permit such concentration of property in few hands.

10.2. The Law commission thereafter comments that Benami transactions in all sorts of properties like immovable, movable ie shares, stocks, fixed deposits, intangibles etc have contributed to defeating the tax laws, violation of social morality, concentration of wealth in few hands. A legislation must have extensive application so as to not leave a single loop hole as escape route for benami transaction. The umbrella of protection therefore must be completely, fully and effectively lifted up.

10.3. While dealing with the coverage of the subject, the Commission makes it clear that the scope of the report is in continuation of earlier report. The report proceeds to deal with the scope of subject being covering to all types of properties immovable, movable etc. It also deals with the question as to whether, the new legislation should be made prospectively or retrospectively.

Considering the question of legislative competence as per the Constitution in view of the various judicial pronouncement, it came to the conclusion that the new legislation should be made retroactive if not retrospective which would cover the transactions undertaken in the past. It noted that since the First Law Commissions Report was given in 1973 about the conceived bar or prohibition for Benami transactions, it was sufficient notice so as prevent from entering into such transactions.

10.4. The Report then considered a very vital question as to what is generally the motivation for entering into a Benami transactions. It noted the argument that the transactions can be for legitimate as well as illegitimate purpose. The Commission formed an opinion that in most of the cases the motivation is illegitimate. The honest purposes are very very rare and therefore in principle, the new legislation should be made applicable to all the Benami transactions irrespective of the intention. The law therefore may be based on the presumption that all the benami transations are entered for illegal purposes.

10.5. The Commission then considered the earlier recommendation of the first Report about the legal bar to be made for the real owner to file suits against the benamidar or even raise defense about such transactions. According to the Report, such law would be very ineffective as the Benami Transactions are entered into between close persons who would normally not go the Courts to assert their rights. The law therefore would be just a paper tiger.

The legal bar further did not discourage the persons from entering into such transactions. If the legal remedy was taken away, the Benamidar would become the legal owner. This would amount to unjust enrichment of Ostensible owner. Further the benami transactions also could be circumvented by retransfer of the property to the real owner.

At this point, the Commissions made a concrete observation that in case of retransfer at low consideration or without consideration, the provisions of Gift Tax would come into play and further the law should intervene and the Government should take away the property without consideration.

10.6. The Commissions therefore gave an opinion that a prohibition must be created specifically and it should be made an offence. Similarly, the provisions of Trust Act of creating a resulting trust should undergo change and must be given go by. The provisions of Trust Act were at a time which was vintage and when the property was sacrosanct. IT was therefore given outmost protection to the property. But the protection must be withdrawn. Viewing every transaction as tainted with illegitimacy, the criminal consequences may be followed up.

10.7. Lastly, it commented that having brought a legislation creating a prohibition with criminal consequences, there should be effective enforcement machinery to administer the law.

11. Critical Comparison of 57th and 130th Report:

11.1 A critical study of both the reports is essential. The following issues emerge-

1. The first Report is given after enough deliberation and detailed discussion about the law that prevailed earlier, the reasons for which new legislation is required, the different alternatives and the selection of the alternative with reasons. The Second Reports as itself admits, does not get occasion for enough deliberation and seem to have given in haste for paucity of time.

2. The Second Report seem to have given contradictory opinion from first one. First Report reserves the option of creating a prohibition and offence so as to make liable for criminal consequences. The Second Reports makes the pre-supposition that a prohibition and offence is to be created so as to make liable for criminal consequences.

3. The Second Report has added one evil called ‘concentration of wealth in few hands’ as a justification for the new legislation. Upto the time, the concerns were relating to the specific illegal objects like tax evasion, defrauding creditors, cover social and political risks etc. However, it is not detailed out either by any statistics or actual modus operandi which would result in concentration of wealth in few hands. Even in principle, the practice of Benami is well pervasive and as observed by Earlier Courts that Indian Psychology of buying property in the name of other is deep rooted and runs through all the spheres of society irrespective of the financial or economic status of person. It has not been shown that the practice of Benami is followed by few resulting into concentration of wealth to a considerable extent. The justification for creating an absolute bar as ‘concentration of wealth’ appears to be too generalized without any concrete basis.

4. The vital aspect of disregarding the distinction between benami for legal purposes and illegal purposes is not understood considering the known psychology of the Indian People. The proportion of illegal transactions may be to a significant extent, but that may not entail a theory or supposition that all the benami transactions are illegal.

5. The question about the existing adequate provision under different acts including Indian Penal Code is not dealt with. It is not shown as to how the existing provisions are not adequate to deal with illegal transactions. The concept of ‘menrea’’ being an essential ingredient of Criminal law is ignored. On the contrary, it gives a go by to the concept of mensrea for punishing a person by charging for criminal offence. This is against the rule of justice and equity.

6. First Reports proceeds on the factual footing that the wasteful litigation has ensued due to benami transactions which needs to be reduced. Second Report proceedings on the reasoning that the benami transactions are normally between two close relatives who may not go to Courts for asserting their rights without giving any factual basis.

7. Lastly, the First Report proceeds on the theory that the specific evils or illegal objects can be taken care of under respective laws and creating an offence would be harsh. Second Report proceeds on the theory that benami must be made an offence to be prohibited in public interest.

12. Critical Issues:

12.1 The above discussion is made to high light anxiety about the Benami Transactions and the eagerness with which the law has been forced to take its birth. The subject however looks vulnerable and debatable since there have been differential views on the subject. Some of the fundamental questions arising from the whole discussion are-

i. If there are provisions under the different laws to take care of the illegality, why insist on another new legislation for the same purpose.

ii. If there are attempts to evade tax, the Income Tax Act alone can have remedial provisions. If at all, income tax is considered to be inadequate for, whether one can have a different or new legislation to address tax evasion. There appears to be some misconception in the process.

iii. If then existing provisions under different laws are considered, they were actually addressing the menace of the illegality objectively. The conception of Benami Act however is made more wide and runs out of the illegality touching all transaction including legal ones. One may not forget that the new is creating a punishable offence.

13. Benami Transaction (Prohibition Act) Act 1988:

13.1 After the above Report of Law Commission, Benami Transaction (Prohibition Act) Act 1988 was enacted. The term Benami transaction was defined to mean any transaction in which property is transferred to one person for a consideration paid or provided by another person; and Property to include property of any kind, whether movable or immovable, tangible or intangible, and includes any right or interest in such property.

It provided for Prohibition of benami transactions that states that “no person shall enter into any benami transaction.” Exceptions were made for 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.

It also made punishable with imprisonment for a term which may extend to three years or with fine or with both.

It provided that “Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence under this section shall be non-cognizable and bailable.”

Section 4 of the Act provided that 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.

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. The provisions of Sec 81,82,84 of Trust Act, Sec 66 of Civil Procedure Code and 281A of the Income Tax Act were repealed.

13.2 From the above, it appears that the recommendations of both the reports were adopted. It was made an offence with criminal prosecution for the persons without any reference to any condition of mensrea. The law further provided for acquisition of the property. At the same time, the provision of creating a bar on judicial recognition was also included which was basis of first report and was negated in second. The provision states that no suit can be filed to enforce right in a property held in benami can be enforced nor a defence can be raised. The two alternatives i.e “providing a prohibition” and the other of “provision of bar for judicial recognition” have been included in the Act.

If some act is considered an offence, there is no question of putting up a claim on the basis of that act or raising a defence as well. If that happens, it may be considered as admission of benami which may be liable for punishment. The law appears to be irrational on this count.

13.3 The enforcement machinery however was left to the delegated legislation by appropriate rules to be framed under the law. The said machinery ultimately never came into existance and on that count the law actually became a paper tiger as anticipated by the 130th Report of Law Commission. The Act lacked many aspects for it to become an effective and actionable code.

14. Amendment Bill 2011:

14.1 A new Bill the Benami Transactions (Prohibition) Bill, 2011 which was to replace the Benami Transactions (Probition) Act 1988 was introduced in the Lok Sabha in July 2011. The Bill was referred to the Standing Committee on Finance by Lok Sabha for its examination. The report was submitted by the Standing Committee in June, 2012. The Committee had made various recommendations and suggested changes to the proposed Bill which was introduced in the Lok Sabha. The Benami Transactions (Prohibition) Bill, 2011 however lapsed in view of dissolution of the Fifteenth Lok Sabha.

15. Amendmend Bill 2015:

15.1 Effectively after almost 26 years, Benami Transactions (Prohibition) Amendment Bill 2015 was introduced to amend the 1988 Act and remove the infirmities of earlier Act.

The reasons for introducing an Amendment Bill to the 1988 Act instead of preparing a new bill are that by way of a clause in the new law for repeals and savings, Benami transactions on which no action was taken under the 1988 Act, would be recognized as a Benami transaction under the new Act, and consequential action could have been followed. The provision would be unconstitutional in view of Article 20 of the Constitution, and therefore, could not be included in the repeals and savings. Therefore no action would be possible on any such transaction which occurred between 1988 and the date of repeal of the 1988 Act.

As a consequence, the Benami transactions during the period of twenty six years, would be in fact granted immunity since no action could be initiated in the absence of a specific provision in the Repeals and Savings clause. It was therefore suggested by the Ministry of Law, that it would be advisable to comprehensively amend the existing Benami Transactions (Prohibition) Act, 1988, so that the offences committed during the last twenty six years are also covered. This would enable action against Benami transactions undertaken after the commencement of the 1988 Act. Therefore the present Act is an Amendment Act and not a new Act.

15.2 The Bill was introduced in Lok Sabha on May 13, 2015. It sought to amend the Benami Transactions Act, 1988, which prohibits benami transactions and provides for confiscating benami properties. The Bill sought to: (i) amend the definition of benami transactions, (ii) establish adjudicating authorities and an Appellate Tribunal to deal with benami transactions, and (iii) specify the penalty for entering into benami transactions.

16. Report of Standing Committee:

16.1 When placed the Amendment Bill 2015 before Standing Committee, the Standing Committee on Finance (Chair: Mr Veerappa Moily) submitted its Report on the Benami Transactions Prohibition (Amendment) Bill, 2015 on April 28, 2016. The Standing Committee made important observations and suggestions as under-

1. The new proposed law is draconian and therefore exploring an alternative approach is felt important. It would create immense unrest in rural India where revenue records are in disarray.

2. The existing legislative framework could be strengthened suitably in order to achieve the objectives sought to be achieved by means of a new legislation. Some suitable amendments would be required with a view to addressing the situation of benami transactions being entered into to escape laws such as ceiling laws and transactions entered into to defeat creditors.

The present amendment Bill, if legislated, shall result not only in multiplicity of proceedings but also a clash of Government orders of attachment and confiscation of the same property.

However, the need for separate legislation is not at all warranted. On the contrary, it is bound to lead to multiplicity of proceedings as well as clash of orders of attachment and confiscation in respect of the same property. This is because if the property which shall be a subject matter of the PMLA shall be, in all probabilities a benami property and shall also be subject matter of The Benami Transactions (Prohibition) Amendment Bill, 2015 after the Bill comes into being.

3. Enlargement of scope of the PMLA can itself meet the requirement of dealing with benami properties. It may be noted that entire procedural mechanism in both the scheme of things is parallel and shall require a duplicity of hierarchical mechanism which is uncalled for.

4. Considerable powers under the Income-tax Act (‘IT Act’) have been conferred on the administration to deal with benami transactions. If the authorities under the tax laws are satisfied that a device has been entered into to defeat the tax laws, it can proceed to recover tax demands ignoring the façade of apparent or real ownership, as the case may be.

17. Salient Features of the Benami Transactions (Prohibition) Amendment Act:

A. Definition of Benami transaction and benami property:

(a) A Benami transaction is defined as- a. A transaction or an arrangement where a property is transferred to or 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 providing the consideration;

b. a transaction or an arrangement in respect of a property carried out or made in a fictitious name;

c. a transaction or an arrangement where the owner of the property is not aware of or denies knowledge of such ownership; d. a transaction or an arrangement where the person providing the consideration is not traceable or fictitious.

(b) Benami property is defined as any property which is the subject matter of a benami transaction.

(c) The following are exclusions from the definition of Benami transaction:-

a. Properties acquired out of the known sources of the Hindu undivided family which are
held by a coparcener in a Hindu undivided family;

b. Properties held by a person in fiduciary capacity;

c. Properties acquired out of the known sources by an individual in the name of spouse or in the name of any child of such individual;

d. Properties acquired in the joint names of an individual and his brother or sister or lineal ascendant or descendant and acquired from the known sources of the individual.

B. Consequences of entering into a prohibited benami transaction:

(a) 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, in such cases the beneficial owner, benamidar and any other person who abets or induces any person to enter into such 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 a fine which may extend to twenty five percent of the fair market value of the property . (b) A benami property shall also be liable for confiscation by the Adjudicating Authority.

C. Procedure for determination and related penal consequences in the case of a prohibited benami transactions:-

(a) Proceedings for enquiring into an alleged benami transaction are to be initiated by the Initiating Officer;

(b) The Initiating Officer will refer the case to the Adjudicating Authority set up under the proposed Bill;

(c) The Adjudicating Authority, after providing an opportunity of being heard to the alleged benamidar, the beneficial owner, any interested party including a banking company and any other person who makes a claim in respect of the property, will pass an order within one year, holding the property to be a Benami property or otherwise;

(d) An appeal against the order of Adjudicating Authority will lie with the Appellate Tribunal set up under the proposed Bill;

(e) An appeal against the orders of the Appellate Tribunal shall lie with the jurisdictional High Court;

(f) After the order of adjudicating authority becomes final, it shall confiscate the properties held Benami;

(g) Confiscated properties are to be managed and disposed of by officers of the rank of Income-tax Officer who will be designated by the Central Government as Administrators.

D. Other Provisions:

(a) The powers of civil court will be available to authorities under the Act.

(b) Miscellaneous provisions for service of notice, protection of action taken in good faith, etc.

(c) The Central Government to be empowered to make rules for the implementation of the legislation.

The above discussion may appear academic in view of the Law on Benami now being on Statute book. However, the discussion brings us to the debate that has undergone and the different views emerged in the process. That would surely help us to understand the law that now exists and enable us to effectively deal with the implementation of the provisions in substance and spirit.

18. Constitutional Validity:

18.1 As discussed above, the Law Commission Reports have extensively dealt with the Constitutional Validity of then proposed Benami Act. It provides a crucial hint to look into the Constitutional validity of the subject statute. The validity may be seen from two perspectives. One the basic charge of Benami being relating to restriction or prohibition in respect to the property and second, the consequence of confiscation of that property.

18.2 Right of Property even though not a fundamental right, is a constitutional right and is subjected to authority of law as per Article 300A under the Constitution. The authority of law implies that the law must be a valid law is force as per the Constitution. In the context of removal of ‘Right of Property as a fundamental right, Courts have held that ‘’Right of Property” as per Article 30 was distinguishable and mutually exclusive from “Right of Freedom” relating to Property under Article 19(1)(f).

However Right of Freedom (Article 19) was interwoven with freedom of speech, expression, trade, business etc together which are subject to Article 19(5) providing test of reasonableness of restriction in the public interest. The law depriving of property has to meet the test of reasonable restriction thereon in public interest.

18.3 The restriction for such transaction is explained as to avoid certain underlying illegal motives mainly tax evasion and others like fraud of creditors etc. The restriction is also tested on the touchstones of ensuring equitable distribution of property as against the concentration of wealth in the hands of few. If one takes a view that the law provides for absolute prohibition, then in cases where there is no illegality and are genuine, the restriction seem to be unreasonable and arbitrary. As discussed in above paras, the test of reasonableness being justified for avoiding concentration of wealth, is not founded on any concrete ground.

This is supplemented with further rationale that the existing legal framework is sufficient and can be broadened or tightened up so as to tackle the menace of benami where bonafide cases may be allowed to prevail. The consequence of Benami is a creation of an offence liable for prosecution and confiscation. If severe consequences are framed, the test for such fixation must also provide a strong footing. Going by the definition Section of Benami, if it takes within its sweep benami transactions without the test of illegality, the charge is fixed liable for action of prosecution and confiscation.

That’s where the un-reasonability creeps in and is tested weighing the objectives to be achieved as above on one side and other repercussions alongwith the alternative options available on the other side.

18.4 In the context of confiscation, the consequence is a punishment in addition to prosecution. The provision for acquisition and payment of compensation in the earlier Act of 1988 has been replaced by confiscation leaning towards harsher consequence. It is very vital to identify the specific act which is fixed under the Act. The act relates to transferring or holding a property in the name of other person.

What is considered as an offence is the Act or intention of transferring the property. The property itself is not the subject matter of any charge. There lies a significant distinction between the two. The Benami Act does not make any charge against the property as such nor draws any relation between the “transfer of property” with the “property” as from legal source or illegal source.

What is sought to be curbed is the specific act with underlying illegal purpose of tax evasion or other civil frauds. There appears no rationale in the further punishment of confiscation. The object of punishment to act as a deterrent may be achieved with prosecution. The punishment of confiscation therefore appears to be unreasonable. The confiscation does not address the underlying illegality in all eventualities. E.g if Benami transaction is done to defraud creditors, the confiscation would further put the creditors in worse condition.

If a person is trying to prejudice an interest in the property of a family member while creating Benami, the interest of such person is perpetually prejudiced after confiscation. Even a situation of tax evasion can be tested. If a person with the intention to avoid tax, transfers the property in the name of other, the underlying tax evaded is the mischief. The confiscation of the entire property becomes disproportionate as compared to the extent or degree of mischief.

18.5 The punishment of confiscation of properties are provided in respect of the properties which are harmful per se. e.g Contraband goods or any other property whose existence can be dangerous to public. The property in Benami per se cannot be called dangerous which ought to be removed from its existence.

18.6 The deprivation of property for the public purpose must lay down the effective appropriation of the property. If concentration of wealth is the anxiety as commented in the Law Commission Report, the effect of the legislation must be to deprive property from those few hands and ensure equitable distribution amongst the deprived ones. There appears no such mechanism in the Act to provide for such distribution.

18.7 If the provisions of Benami Act 2016 are considered to be targeting black money, the provisions like 68,69 etc as also recent General Anti Avoidance Rule is fully equipped to address the evil. The Income Tax Act has provisions has effective powers like search, seizure, survey, reassessment to find such mischiefs and set right the evasion.

In certain situations, the consequences under both the Act ie Benami and Income Tax may operate and the person shall be punished for the same offence twice under two statutes. The question of ‘Double Geopardy’ also may arise and has to be tested within the meaning of Article 20 of the Constitution. Clause 60 of the Act reads as under: "The provisions of this Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of any other law for the time being in force". Clause 67 of the Act reads as under: "The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force".

It is clearly evident from the above that the provisions under Clause 60 and Clause 67 are self-conflicting. Even though amendments by way of deletion of provisions in Trust Act and Civil have been made, the provisions of Indian Penal Code, Prosecution provisions under Income Tax Act are still operative. It is therefore possible that the consequences under different acts would follow at the same time.

19. Critical Analysis:

19.1 Besides the discussions of the Constitutional validity which would take its own turns, the Law needs to be looked upon for our close study. Let us turn to the Law that has now appears on statute books and critically analyse the important principles.

20. Absolute Prohibition v. Tainted Transactions:

20.1 The question about the scope of Benami whether to be extended to all the transactions irrespective of the purpose underlying, legal or illegal, has been dwelled upon extensively in the entire journey of the new Law till it came into force. The Law Commission Reports have given divergent views. Gathering the legislative intent, the view that the prohibition would apply to each and every transactions of benami is a likely view. However, one must go by the Rules of interpretation and look at the provisions to find the answer to the above question. A reference to the rules of interpretation for Penal/criminal Statutes is essential.

21. Strict Construction of Penal Statues:

(A) General Principles

The settled rule of construction of Penal sections is that “ if there is a reasonable interpretation which will avoid the penalty in any particulars case we must adopt that construction. If there are two reasonable constructions we must give the more lenient one.

The following are some of the propositions important in relation to strict construction of penal Statutes :-

i) If the prohibitory words in their known signification cover only some class of persons or some well-defined activity, their import cannot be extended to cover other persons or other activity on considerations of policy or object of the statute.

ii) If the prohibitory words are reasonably capable of having a wider as also a narrower meaning and if there is no indication in the statute or in its policy or object that the words were used in the wider sense, they would be given the narrower meaning. Where, on the other hand, after full consideration it is found that the prohibitory words are equally open to two constructions, one of which covers the subject and the other does not, the benefit or construction will be given to the subject.

iii) If the prohibitory words in their own significance bear a wider meaning which also fits in with the object or policy of the statute, the words will receive that wider meaning and their import will not be restricted even if in some other context they can bear a narrower meaning.

iv) If the literal reading of the prohibitory words produces an unintelligible or non-sensual or socially harmful result, but the statute read as a whole gives out is meaning clearly, effect will be given to that meaning by curing a mere defect in phraseology and even by rejecting words as surplusage.

22. Mens Rea in Statutory offences:

(A) General Principals

The Principle related to mens rea is expressed in the maxim ‘ Actus non facit reum nisi mens sit rea’ which means that the existence of a guilty intent is an essential ingredient of a crime at common law.

Mens rea is the state of mind stigmatized as wrongful by the criminal law which when compounded with the relevant prohibited conduct constitutes a particulars crime. Crimes involving mens rea are of two types:

a) Crimes of basic intent, and

b) Crimes of specific intent.

In Crimes of basic intent, the mens rea does not go behind the actus reus. While in crimes of specific intent, mens rea goes beyond the contemplation of the prohibited act and foresight of its consequences and has a purposive element.

The offences created by statutes either involve the existence of mens rea as an essential element of the offence or the statute dispenses with the mens rea and creates strict liability for the offences. Therefore, when the offence is committed the question arises as to the type of offence, which can be answered on the true construction of the statute.

The rule given by justice WRIGHT is important: “there is a presumption that mens rea, an evil intention, or knowledge of the wrongfulness of the act, is an essential ingredient of every offence, but that presumption is liable to be displaced either by the words of the statute creating the offence of by the subject-matter with which it deals and both must be considered.

In sherrasvde Rutzen Justice WRIGHT found that there are three classes of cases where the Legislature normally enacts absolute prohibition:

a) First is a class of acts which are not criminal in any real sense but are acts which are prohibited in public interest under a penalty, and instances of this class are found in the Revenue Statutes, Adulteration Acts, Game Acts, etc.

b) Second class comprehends some and perhaps all public nuisances ;

c) Third class of cases are those where, although the proceedings may be criminal in from, they are really only a summary mode of enforcing a civil right.

Those offences in respect of which mens rea is not required to be established are usually of a minor character and sentences passed for them are not of a severe type.

The Principle that mens rea is presumed to be necessary, gives rise to another Principle that the courts should be slow to impute to Parliament so harsh an intention as to impose criminal liability on a citizen acting lawfully because another citizen, over whom he has no control, acts unlawfully.

It has been held that when the state of an accused person’s mind and his knowledge are ingredients of an offences, he has to be judged on the facts as he believed them to be. For example, in R.v. Taffa when the accused smuggled a controlled drug mistakenly believing that he was importing currency and also mistakenly believing that the import of currency was prohibited and he was committing an offence, he could not be punished for the criminal offences of being ‘ knowingly concerned’ in the importation of a controlled drug.

In applying the rule of construction, it should be enquired that whether putting the defendant under strict liability will assist in the enforcement of the statute or not. Where it can be shown that the imposition of strict liability would result in prosecution and conviction of class of persons whose conduct could not in any way effect the observance of law, even where the statute is dealing with a grave social evil, strict liability is not likely to be intended.

If the statute deals with a grave social evil and a construction consistent with the existence of mens rea as a necessary ingredient of the offence would largely frustrate the effective enforcement and the purpose of the statute, it may be inferred that the legislature intended to provide for strict liability. Some of the decisions would throw some light on the applicability of mesrea for criminal offences.

ii) Lim Chin Aik v. Reginam – 19631 A11ER223(pc) L

Here the appellant was charged for having ‘contravened’ section 6(2) of the Immigration Ordinance, 1959, ( Singapore ) by ‘remaining in Singapore’ when he had been ‘Prohibited’ by an order made by the ministry containing such Prohibition. The privy Council allowed the appeal and laid down that before the appellant could be said to have contravened an order of Prohibition, it should be shown that he was aware of it and that the presumption of existence of mens rea was not displaced in that case merely on the Ground that the ordinance dealt with a social evil of immigration or that the relevant sections did not contain the word ‘knowingly’ or the phrase ‘without reasonable cause’ Which occurred in other sections of the same ordinance.

iii) Kalpnath Rai v. State – AIR 1998 SC 201

In the case, the supreme Court considered section 3(4)of the Terrorists and Disruptive Activities ( Prevention ) Act, 1987. This section provided that ‘Whoever harbours any terrorist’ shall be punishable with imprisonment which shall not be less then five years but which may extend to imprisonment for life. It was held by the Court that the section provided for harsh punishment and could not be held to have excluded mens rea and a person giving shelter to a terrorist without knowing that he was a terrorist could not be punished under the section.

Nathulal v. State of M.P. – AIR 1966 SC 43

Here the dealer in foodgrains was prosecuted under section 7 of the Essential Commodities Act for contravening the M.P. Grain Dealers Licensing Order, 1958, for carrying on business in food grains whithout a license. It was found that the accused had applied for a licence and he was under the impression that the licence was issued to him and that order of rejection of his application was not communicated to him and that he went on sending the returns on the footing that he was a licensee to the authority concerned. The Supreme Court acquitted the accused and held that the Act which imposed heavy penalties could not be construed to dispense with mens rea as the object of the Act could not be defeated on such a construction.

23. Mensrea Under Benami Act:

23.1 Extending the above principles to the Benami Act, one has to refer to the scheme of the Act governing the definition Section which defines a Benami Transaction, the charging Section, and the Section providing for punishment.

23.2 Definition – Section 2(9): Benami Transaction:

A close look at the Definition Section is necessary. The first clause has twin conditions so as to apply to any transaction 1)where property is held or transferred in the name of one person and consideration is paid by other and 2) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration. This has been provided exceptions for HUF, Fiduciary relationship, spouse, children, Brother, Sister etc. The second of the twin condition is crucial which high lights the intention of not transferring the beneficial interest in the property to the person. However, it does not expressly make any distinction for having such intention being for legality or illegality.

Apparently, the clause describes the benami transaction simplicitor. One is still short to look at the further intention of illegality. This is important since the subject revolves around a concept which has been a part of the deep- rooted psychology or even habit as observed by Courts. The intention of keeping away the beneficial interest may be without any illegal purpose and a sheer habit. The exercise becomes further cumbersome when one looks at the specific exceptions provided in this clause specifying obvious unintended cases where no malafide can be attributed. However, one cannot forget that the list of exception is limited and the other obvious possible situations are not taken into account.

E.g Nephew, In laws, Uncles or such other relations which are to be considered since we emerge from concepts of joint family and are resistant to change our conventions or traditions. Moreso, the provision pertains to criminal act and intention is relevant as per the principles discussed above.

23.3 The further clauses (B) to (D) relating to a transaction or an arrangement in respect of-

a property carried out or made in a fictitious name; or

a property where the owner of the property is not aware of, or, denies knowledge of, such ownership; or

where the person providing the consideration is not traceable or is fictitious;

however give a clear indication of some malafide intention expressly present therein. The clauses deal with situations when transactions are entered into with specific motive leaning towards illegality. The transactions more than expressly suggests of involving tax evasion or other civil offences.

23.4 The definition clause begins referring to ‘a transaction or arrangement’ and if the two terms are read as taking colour from each other, the term arrangement indicates some scheme, understanding or concerted action. It means to plan, position, present etc high lighting existence of concious mental state.

23.5 Rule Of Interpretation: In ascertaining the meaning of the word or a clause or sentence in the statute in its interpretation, everything which is legally relevant should be admissible. It is no doubt true that the doctrine of noscitur a sociis, meaning thereby, that it is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them i.e. when two or more words which are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general is restricted to a sense analogous to a less general.

According to Mexwell, this rule means that when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, i.e. the more general is restricted to a sense analogous to a less general.

This rule has been interpreted as that the ‘Associated’ words take their meaning from one another under the doctrine of noscitur a sociis the philosophy of which is that the meaning of the doubtful word may be ascertained by reference to the meaning of words associated with it

23.6 The definition of Benamidar under section 2(10) provides that "benamidar" means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name. The definition also indicates that the person is fictitious or a positive action by the transferor for holding such property in other name or positive action of the person as a name lender. The clause read together would certainly make out the category of ill intended cases where illegal purpose is hidden.

23.7 Moving further, the Act provides punishment for offences against persons entering into Benami transaction. Section 53 reads as under-

53. (1) 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.

(2) Whoever is found guilty of the offence of benami transaction referred to in sub-section (1) 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.

Referring to above provision, it is very clear that offence is created in case where the benami transaction is entered into 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. Unless the specific illegal purposes are established, the offence is not fixed.

Reading the definition Section with the above Section together, we can say that the prohibition is not absolute. It is therefore important to note that the underlying intentions are conditions inbuilt into the process of establishing Benami transaction as one of a prohibited class. This essential requirement therefore would be read in the entire process from definition section and will permeate in the procedural part as well.

24. Procedural aspect:

24.1 The procedural aspect starts with the provisions of Section 24 which provides as under-

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.

The above Section makes the initiation of action on objective criteria of “on the basis of material in his possession, has reason to believe that any person is a benamidar in respect of a property”. The provisions appear to be similar to Section 147 of the Income Tax Act where the requirement is understood to be jurisdictional condition to be objectively fulfilled. In the context of Section 147, the principles of law have been settled by Courts.

Accordingly to the settled principles, the words ‘reason to believe’ would not include any subjective satisfaction but an objective satisfaction of a prudent person. It is further required to be recorded in writing. The above condition as to ‘reasons to believe’ require proper understanding of the term in order to appreciate the scope of reassessment. In Bawa Abhai Singh’s Case 253 ITR 83, the Hon Delhi High Court held “The crucial expression is “reason to believe”. The expression predicates holding of such a belief. In other words, it contemplates existence of reasons for which the belief is founded and not merely a belief in the existence of reasons on inducing the belief. Such a belief may not be based merely on reasons but it must be founded on information.

As was observed in Ganga Saran and Sons P Ltd. V ITO 130 ITR 1 SC, the expression ‘reason to believe’ is stronger than the expression ‘is satisfied’. The belief entertained by the AO should not be irrational and arbitrary. To put it differently, it must be reasonable and must be based on reasons which are material. In S. Narayanappa V CIT 63 ITR 219, it was noted by the apex court that the expression ‘reason to believe’ in section 147 does not mean purely a subjective satisfaction on the part of the AO, the belief must be held in good faith, it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational nexus or irrelevant for purpose of the section. To that limited extent, the action of the AO in initiating proceedings u/s 147 can be challenged in a court of law.

24.2 In the context of benami transaction, the essential conditions of establishing the benami transaction including the underlying illegal purpose must emanate from the material in the possession of the Initiating Officer, the reasons to believe formed by him on the basis of such material and the recording of such transaction. It may be a prima facie belief and not a concluded one, but the material in possession and the belief must have live link with prima conclusion that transaction is benami within the meaning of the Act and will be tested with reference to the definition section as also the intention. Unless, such notice is valid, the initiating officer may not get valid jurisdiction to initiate the proceedings.

25. Burden of Proof:

25.1 The burden of proving all the facts necessary to lead to the inference that the transfer was benami is on the persons who is asserting it to be. The principle does not undergo any change and the initiating officer will have to make out a case to prove the transaction as falling within the scope of the Section.

26.Confiscation:

The finality of the proceedings by the adjudicating authority subject to further order of appellate authority under the Act about the establishing the Benami Charge would further face the confiscation of the property. The above rationale therefore would also hold good while confiscating the property. The test of the illegal purpose would be operative in the confiscation proceedings as well.

27.Integrated Code:

The above discussion leads us to an integrated code prescribed in the Act. The Code can be perceived to include the definition section of Benami transaction u/s 2(9), Benamidar u/s 2(10), Section 3 creating prohibition and making the act punishable, Acquiring valid jurisdiction u/s 24 after recording reasons on the basis of material in possession and confiscation under Section 27, prosecution provisions u/s 53; where the essential element of illegality would flow from every step.

28. Conclusions:

The present effort runs through the every possible turn till the Law comes finally on the statute book. At every turn, it faces same set of questions as to the legal v illegal purpose, absolute prohibition v tainted prohibition, New Benami Act v Existing legal framework etc. There is every possibility that the same set of questions might continue further during the execution or implementation of the Act.

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