Benami Law in India: An Analysis

Advocate Divesh Chawla has conducted a comprehensive analysis of the Benami Law. He has explained the impact of the statutory provisions, the process involved, and the consequences in civil and criminal law. He has also explained the conflict between the Benami Law, the Income-tax Act and the Money Laundering Act. He has also provided valuable advice on the precautions to be taken by the concerned persons and third parties to avoid falling foul of the law

The Government commitment to eradicate the black economy is evident with demonetization of high-value currency notes and numerous statutes (1) . To future its purpose, they carried out significant amendments in the Benami Transactions (Prohibition) Act, 1988 (‘BTPA’). Leading up to the BTPA, there was no embargo on Benami Transaction and was recognized as legally valid by Indian Courts (2) . The deceitful use of Benami Transaction to defeat the provisions of law, sow the seeds for BPTA, that prohibits Benami Transaction, while compelling the actual owner to keep the property in his name.

BTPA had inherent flaws to control the menace of Benami Transaction, i.e., failure to provide machinery provisions for vesting of a confiscated property with the Central Government, no appellate mechanism against an action taken by the authorities, and adequate provisions enabling rule-making power. To overcome the weaknesses, the Legislature, by Finance Act, 2016, amended the Act as Prohibition of Benami Property Transaction Act, 1988 (‘PBPT’ or ‘Benami Law’). The amendments seek to cover all aspects of transaction where the source of funding for the acquisition of Benami Property has no link with the ownership.

The article intends to give a complete view of the Benami Law, consequences in civil and criminal laws and the decisions of the Benami Appellant Tribunal and Courts.

What is ‘Benami’ and the person(s) involved in ‘Benami Transaction’? 

‘Benami’ means without a name. (3) It denotes a transaction effected by a person (‘Beneficial Owner‘) without using his name but in the name of another (‘Benamidar‘).  To illustrate, where ‘X’ buys a property, say ‘house’, and pays the consideration to ‘Y’ though the registration of the property is in the name of ‘Z’, who does not benefit from the property. In the example, ‘Z’ is the Benamidar, ‘X’ is the Beneficial owner, while the property ‘house’ is the ‘Benami Property ‘, the entire arrangement is referred as ‘Benami Transaction ‘. The genesis of the concept is that payment must flow from one person, and transfer in the name of another person, which does not intend to be a gift or benefit, to the transferee (4) . 

‘Benamidar‘ (5) means a person who is real or fictitious or a name lender, that holds title to the property, with the object of concealing the actual owner. The ‘Beneficial Owner‘ (6) refers to a person, whether the identity of such a person is known or not, for whose benefit the Benamidar holds the Benami Property. Benamidar has no beneficial interest in the property that stands in his name; he is nothing but an alias of the Beneficial Owner. 

What is ‘Benami Property’?

Contrary to common misconception, that the application of Benami Law is limited to immovable property or tangible assets; however, it is incorrect, as its implications are extensive. The definition of ‘Benami Property‘ (7) refers to any property that is part of the Benami Transaction, and includes "proceeds from the property". The term ‘Property‘ (8) [1], defined is broad, and covers within its ambit: assets of ‘any kind’; whether movable or immovable, tangible or intangible, corporeal or incorporeal; 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 and includes the proceeds from the property.

The definition includes securities, shares and intangible assets to be considered ‘Benami Property’. The expression "proceeds from the property" includes cash or bank balance received on sale of a property. When a part of the property is treated as Benami, the provisions will apply only to that part of the property, and they will not taint the entire property as Benami. To illustrate, ‘X’ is the owner of 10 floors building, 5 floors are in the name of ‘X’, and  5 floors are in the name of the Benamidar, the ones in ‘X’ name, would not be tainted with Benami; however, the Benami Law will apply to the ones held in the name of the Benamidar.

Whether property situated outside India, is within the ambit of Benami Law?

The definition of ‘Property’ or ‘Benami Property’ is extensive, and there is nothing in the provisions to restrict the applicability to property situated in India. There would be complications and hindrances to implicate Benami Law, to property located outside India, especially to attach and confiscate the property.  The authorities may consider applying Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which aims to apply to ‘undisclosed asset located outside India‘ (9) . Further, the Legislature introduced the Fugitive Economic Offenders Act, 2018, that includes ‘Benami Transactions’ as an offence. On compliance with the conditions, it allows the confiscation of ‘Benami Property’ in India or abroad owned by ‘Fugitive Economic Offenders’. 

What is ‘Benami Transaction’?

With the general understanding of ‘Benami’, it would be relevant to look at what qualifies as a ‘Benami Transaction‘ (10) . PBPT altered the definition to include new categories, and to exclude transactions from its ambit.  Before dealing with these categories, we should consider the two preliminary questions, that will help in analyzing ‘Benami Transaction’:- first, who provided or paid the consideration for the property; and second, who is the beneficiary of such property. The Benami Transaction or 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 the property is held for the immediate or future benefit, direct or indirect, toward the person that has provided the consideration.

Under this category, four conditions are to be satisfied:- first, the transaction has taken place, resulting in the property being transferred or held by the Benamidar; second, the Beneficial Owner has paid the consideration; third, Benamidar has no beneficial interest in the property; and fourth, neither parties are fictitious or untraceable.        

When dealing with a person in a close relationship or fiduciary capacity, the category was due to raise issues in a bonafide transaction. To avoid harassment, saving clauses were added to exclude transactions, even though the consideration is provided or paid by a person other than the transferee/on record owner. When the property is held:-   

(i)         in the name of the Karta or member of Hindu Undivided Family (HUF), for the benefits of the other members of the family, and the consideration has been provided or paid from a known source of the HUF;

(ii)        in ‘fiduciary capacity’ (trustee, executor, partner, director, agent, etc.) for the benefits of another person (trust, firm, company, etc.);

(iii)       in the name of the spouse or child of an individual, and the consideration has been provided or paid from a known source of the individual (11) ;

(iv)       in the name of the individual’s and brother/sister/lineal ascendant/lineal descendent, and the consideration has been provided or paid from a known source of the individual.

The exclusion cover transactions and arrangements with family members, unless dealing with a person in the ‘fiduciary capacity’. The expression ‘fiduciary capacity’ is not capable of precise definition, raising certain complications. It implies a relationship between a trustee and the beneficiaries of the trust. The expression is, in fact, wider in its import, for it extends to all situations founded on confidence and trust on one part, and good faith on the other. In determining whether a relationship is based on confidence or trust, the Court will take into consideration the factual context in which the question arises, for only in the factual backdrop that the existence of a relationship can be determined (12) .

(B)       in respect of a property, carried out or made in a fictitious name; 

The expression ‘fictitious name’ means the name of a person mentioned in the document is fabricated or non-existent. 

(C)       in respect of a property, where the owner of the property is not aware of, or, denies knowledge of, such ownership;

Under this category, the transferee/on record owner/person is not aware of the transaction, i.e., during demonetization, various news articles showing bank account of another was used to deposit cash without the knowledge. The expression "not aware of or denies knowledge of ownership", would not include a person who lacks knowledge of the details. To illustrate, during a raid at ‘X’ premises, his wife ‘Z’ admits she is a partner in a firm with her husband, but not aware of her share or details of the firm. For several years, the income from the registered firm has been assessed in her hands. Merely because she lacks the details, during the search, they could not treat her as Benamidar (13) .  

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

The payer of the consideration is fictitious or not traceable. The Central Government, through a notification, can exempt any property of charitable or religious trust from the operation of Benami Law (14) . When the donor to charities or places of worship wishes to stay anonymous, the provisions of Benami Law will not apply if the exemption notification covers the trust.

Whether transaction executed by a power of attorney is within the ambit of ‘Benami Transaction’?

The Legislature, keeping commercial practicality in mind, excluded transaction under power of attorney. By virtue of the explanation, transaction allowing possession of any property to be taken, or retained in part performance of a contract as referred in section 53A of the Transfer of Property Act, 1882, would not be considered ‘Benami’. The exclusion is subject to three conditions; first, the consideration of the property has been paid by the person to whom the possession of the property has been allowed, but the person who has granted possession continues to hold ownership of such property; second, stamp duty on such a transaction has been paid; and third, the contract has been registered. The intent is to cover development agreement, where the owner provides the actual possession of the property to another, however, retains the rights of ownership.  The explanation does not grant a legal title to the power of attorney holders; it eliminates the taint of ‘Benami’.

The test to determine ‘Benami Transaction’

The Supreme Court in Jaydayal Poddar v/s Bibi Hazra (1974 1 SCC 3) (15) , has observed that the enquiry whether a transaction is Benami, is mainly a question of fact. There is no absolute formula or test, uniformly applicable in all situations; yet in weighting probabilities and for gathering the relevant indicia, the courts are usually guided by the following circumstance:-

1. 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.

The Supreme Court, in the case of Mangathai Ammal (16) , has noted that the consideration paid to purchase the property is the most critical test, for determining whether the sale standing in the name of one person, is in reality for the benefits of another.

Whether the purchase of a property, with the help of financial assistance or loan, is within the ambit of Benami Law?

A literal interpretation of Benami Law would suggest that purchase of a property with financial assistance, are part of the ‘Benami Transaction’, as the consideration has flowed from a third party, and the property held in the name of another. One may need to check the actual intent of the transaction, i.e. whether entered to defeat the provisions of law or evade payments to creditors or statutory dues. When a property is purchased with financial assistance, the lender is only interested in the repayment of his loan along with interest, and he has no beneficial interest in the property. At the same time, the buyer that borrow the loan is not holding the property, for immediate or future benefit, for the lender, so the transaction is not ‘Benami’. To illustrate, ‘X’ purchases a property from ‘Y’, after taking a loan from ‘Z’, however, ‘Z’ pays the consideration directly to ‘Y’, the transaction is not ‘Benami’.  Any other interpretation, is likely to harm a person involved in genuine transactions with the help of financial assistance.

What are the consequences of the ‘Benami Transaction’?

Benami Law prohibits the filing of a suit, or raising of defence, by the actual owner, on the ground that the person holding the property is a Benamidar.  Benami Law takes away the rights of the actual owner, vis-à-vis ostensible owner, however, does not take the rights of the third party.  If the Benamidar, transfer the Benami Property to a third party, or beneficial owner including a person acting on his behalf, it would be considered null and void. When a person(s) enters a Benami Transaction, they attract themselves with a penal consequence, in the form of prosecution and fines.  Further, the Benami Property will be confiscated, and all rights in the property will vest with the Central Government. 

PBPT Act and Income Tax Act, 1961 (I.T. Act)

The Benami Law seeks a mechanism to attach and confiscate Benami Property; while the I.T. Act contains no provisions to deal with Benami Property. Section 115BBE r.w.s 68 to 69D of the I.T. Act, deals with the cash credit, undisclosed income, or expenditure. The provisions apply when the person is found to be the owner of money, jewellery, or other valuable article, and the same is not recorded in the books of accounts of the person. The enquires under the I.T. Act primarily focus on the source of investment, while the Benami character is only incidental and subsidiary (17) . When the source of investment or cash credit is unexplained, and the tax department can trace the source to some other person, only then the proceedings under Benami Law can be initiated. 

Whether Sham Transaction is within the ambit of Benami Law?

There is a fundamental difference in Benami and Sham Transaction, in the former there is an operative transfer, resulting in the vesting of title in the transferee, in the latter, there is no transfer and merely shown to take place on paper.  In the case of Meenakshi Mills Ltd (18) , the Hon’ble Supreme Court notes that the word ‘Benami’ denote two classes of transactions, which differ from each other in their legal character and content. In ‘Benami Transaction’ there has to exist an actual transaction or arrangement which has taken place, in the Sham Transaction, the transferor, continues to retain the title despite the execution of the transfer deed.  Further, it noted that Benami is occasionally used, perhaps not quite accurately, to refer to a Sham Transaction.
BTPA only considered those ‘Benami transactions’, wherein Beneficial Owner paid the consideration while Benamidar held the property. However, PBPT now defines, ‘Benamidar’ to include a fictitious person or name lender, and ‘Benami Transaction’ includes transaction carried out in a fictitious name. The purpose would appear to enlarge the scope of provisions, by adding a fictitious person or name lender within the definition, covering certain kinds of ‘Sham Transaction’. To illustrate, where ‘X’ purchases a property, say ‘house’ and pays the consideration to ‘Y’. However, the property is registered in the fabricated name of ‘Z’ (or maybe a name lender), the transaction could be considered as Benami Transaction. 

The amended law would not imply that every case of Sham Transaction that should ordinarily be considered under the I.T. Act shall be regarded as ‘Benami’. However, the distinction is imperative for a transaction entered before 1-11-2016.

PBPT and Prevention of Money Laundering Act, 2002 (Money Laundering Act)

There is a fundament difference between PBPT and Money Laundering Act; the former was enacted, to fight against legalizing the income/profits from an illegal source, the latter prohibits, Benami Transaction while compelling the actual owner to keep the property in his name. Money Laundering Act applies only to proceed of crime, i.e. purchase of property by criminal activities. Benami Law does not restrict itself to proceeds of crime; it applies irrespective to the origin of funds. When the property purchased from the proceeds of crime, and later disguised by holding it in the name of the Benamidar, then Benami Law could apply and supplement the Money Laundering Act. There would be circumstances where the law would conflict with another.

Process before the Initiating Officer

Step – 1: – Initiating Officer (‘IO’) (19) , commence the adjudication process into motion, by issuing a notice. The Central Board of Direct Tax (CBDT) has issued Notification S.O. 1621(E) dated 18.05.2017, to notify the jurisdictional officers under PBTA (20) . Only after recording reasons in writing, the office can issue a notice to the Benamidar and Beneficial Owner (if they know the identity), to show cause why the property should not be treated as Benami Property. The reasons recorded has to be ‘based on some material’ in his possession, which gives him a reason to believe (not mere guess or conjecture or reasons to suspect), that a person is a Benamidar.

The concerned person(s) should check the notice is issued and served in accordance with the law.  The provisions do not prescribe for a copy of reasons recorded or material in possession, to be disclosed to the person(s). It is advisable to obtain the reasons recorded and material in possession from the I.O. so that the person(s) can prepare their defence.  The notice issued without application of mind or appreciation of the material would be invalid or void. Further, the concerned person(s) should comply with the summons or notice, by filing the details, as failure would attract penal consequences.  The showcase notice issued by the I.O. does not constitute an order to be challenged before the Appellant Tribunal (21) .

Step – 2: – In certain case, the concerned person(s) may try to wrongful alienate the property to render the entire proceedings infructuous. If the I.O. considers it appropriate, as a protective measure, he has the powers to attach the property. ‘Attachment’ (22) as a process does not result in a change of ownership; however, it restricts the transfer, conversion, disposing or movement of the property. The provisional attachment harms the right of the property holder and is based on speculation of the I.O. To keep a tab on misuse, the attachment is subject to the approval of the ‘Approving Authority’ (23) , by order in writing. 

Step – 3: – After giving the concerned person(s), a reasonable opportunity to put forth their side of the case:-

a)     pass an order holding the property to be ‘Benami’ and continue the provisional attachment or attached the property, with the previous approval of the ‘Adjudicating Authority’  (A.A.). The attachment will continue till the A.A passes the order; or

b)    pass an order revoking the provisional attachment or drop the proceedings, with the previous approval of the ‘Approving Authority’. 

The aggrieved person has statutory rights to appeal against the provisional attachment. 

Step – 4: – Within 15 days of passing of the order, the I.O. shall draft a ‘statement of the case’ and refer the matter to the A.A. 
Process before the Adjudication Authority 

On submitting the ‘statement of the case’, the jurisdiction of the I.O. ceases, and the A.A. commences the process by issuing a notice.  He will conduct an enquiry by calling for evidence as considered necessary on the following persons:-

1. the person specified as a Benamidar;
2. a person referred to as the Beneficial Owner or identified;
3. interested party, including a banking company; and
4. any person who has raised a claimed regarding the property.

If multiple persons own the property, the A.A. shall use all endeavours to serve the notice on every person owning the property; however, the failure to serve all, shall not render the proceedings invalid. The A.A. may strike out the name of any person incorrectly joined, or include a person whose presence is necessary to adjudicate and settle the issues.

In the opinion of the A.A. an additional property, not referred by the I.O., ought to be held Benami, he shall extend the reference and attach such additional property.  Where only part of the property can be considered as Benami, however, he is unable to identify such part accurately, he should use his best judgement to identify the Benami part and record his reasons in writing.
A.A. after considering the reply, evidence, and providing an opportunity of being heard, to the IO, Benamidar and any other person claiming to be the owner of the property, pass an order:- 

(a) holding the property to be a Benami Property and confirming the attachment order.
(b) holding the property not to be a Benami Property and revoking the attachment order.

Rights of the Aggrieved Persons

1. File a rectification application, before the A.A., to correct any mistake apparent on the face of the record.
2. Appeal to the Appellate Tribunal, against an order of the A.A., holding property to be Benami. 
3. Appeal to the High Court, against any order of Appellant Tribunal, where a substantial question of law is involved.

Alternative Remedy: – Failure to follow the process, or infringement of natural justice

The principles of natural justice and due process of law has been embedded in Benami Law by laying down the requirement of mandatory issues of notice to the concerned person(s), grant of opportunity to be heard, necessity of taking the evidence produced by the concerned person(s), recording of reasons, passing of orders in writing. Further, the approval of the A.A. and approving authority may provide a safeguard for bonafide transactions and provisional attachment of property. 
The High Courts have the power to prohibit the executive authority from acting without jurisdiction, that would subject the concerned person(s) to lengthy proceedings, and harassment. To prevent unnecessary harassment, recourse to jurisdiction under Article 226 and/or 227 of the Constitution of India is not prohibited (25) .

In an exceptional case, failure to follow the procedure laid down by the Benami Law, or infringement of natural justice or approval without application of mind, the aggrieved person(s) has the option to approach the High Court through Writ Petition.

Confiscation and Vesting of Benami Property.

Confiscation results in a change of ownership, as the Benami Property will vest with the Central Government. Along with the prosecution and fines, confiscation is an additional way to penalize the Beneficial Owner. 

Once an adjudication order is passed holding property as Benami, the A.A. shall grant the concerned person(s) a reasonable opportunity to put forth their side of the case and pass a confiscation order. An appeal lies to the Appellant Tribunal against an adjudication order and no appeal against the confiscation order. Once the confiscation order is passed, all rights in such property vest with the Central Government free of all encumbrances and no compensation is payable. It is advisable to file an appeal within the statutory period, as failure will render the aggrieved party with no remedy.

During the confiscation proceedings, it is advisable to the concerned person(s), to provide the details of the appeal pending before the Appellant Tribunal, as the confiscation order is subject to the outcome in appeal.  Further, the take up an argument, that confiscation is restricted only to those transactions that are entered to defeat the provisions of any law or to avoid payment of statutory dues or creditor.

If the third party has paid adequate consideration, purchased the property before notice issued by the I.O., and without having knowledge of the Benami Transaction, the property cannot be confiscation.  The authorities will impound the proceeds obtained from the third party. However, the rights created to defeat the purpose of Benami Law shall be excluded by holding the transaction as void. Once a third party is aware of the Benami nature of the transaction, it is prudent to take all precaution steps. The law does not prescribe for a notice to a third party, that has acquired the rights in the property, it is advisable, to request the authorities to issue notice and to provide an opportunity to be heard. The authorities should inform such party and provide an opportunity to be heard before passing an attachment order (26) . 

On the passing of the confiscation order, the A.A. shall send a copy of the order to the ‘Administrator’ (27) , who should take possession of the Benami Property, manage and dispose of them in accordance with the prescribed manner.

Burden of Proof and Evidence 

The Supreme Court in Jaydayal Poddar (supra), has observed that the burden of proving a Benami Transaction, always rests on the person alleging the transaction (28) . The Benami Law stipulates that the authorities have to discharge the burden by adducing evidence to prove guilt. The allegations based on presumption without proof does not take the shape of evidence. (29)

When the authorities discharge the burden, the onus of proving rest on the concerned person(s).

Primary evidence filed will play a crucial role in determining whether the transaction is Benami, i.e. bank statements, source of income, etc. The person(s) shall provide proof of consideration from a known source, and the property does not benefit any third party but himself. It is advisable to provide all vital evidence, that shall discharge the burden and hold the transaction to be genuine.

The piece of evidence should be such that it could evaluate itself or along with other materials (30) . 

Whether the amended Benami Law will apply retrospectively?

There is much uncertainty surrounding the applicability of the 2016 amendment to be retrospective or prospective. The Benami Law brought changes in the definition of ‘Benamidar’, ‘Benami Transaction’, ‘Beneficial Owner’, ‘Benami Property and ‘Property’, that enlarge the application and affect the substantial rights of the person. The machinery provisions for vesting of a confiscated property with the Central Government and appellate mechanism against an action taken by the authorities were procedural. Before we consider the amendment to Benami Law, we need to consider general principles that apply to all laws: –

1. The legislation is presumed and intended to be prospective unless a contrary intention is reflected.
2. Substantial provisions are not retrospective but prospective, while procedural provisions will apply retrospective unless the intent shows otherwise.
3. It the amendments are merely explanatory or declaratory that intended to supply a glaring omission, the provisions will apply retrospective. 

The applicability of the 2016 amendment to be retrospective or prospective has subject to judicial view.

The Hon’ble Bombay High Court, in the case of Joseph Isharat (31) , had to consider, whether the amendment made to nullifies the defence available to the real owner in recovering the property, ought to be applied prospectively or retrospectively. The Court concluded that the changes introduced by the Legislature affect substantial rights of the parties and applies prospectively.

The Chhattisgarh High Court, in the case of Tulsiram (32) , was to determine, whether the amended can apply to initiate proceedings against the Petitioner in respect of the properties which were purchased before 01.11.2016. The Court on considering the amended provisions held that initiation proceedings are only a procedural law. The provisions dealing with confiscation of properties will apply to transactions carried out prior to 1-11-2016. 

A contrary view, in the case of Niharika Jain (33) , where the Rajasthan High Court, was to determine whether the amendment provisions of Benami Law will apply on transaction undertaken and discovered before the amended provisions came into force. The Court held that the amendment provisions were neither curative or declaratory amendments. By way of amendment penal consequences have been introduced, providing for the confiscation of the Benami Property and enhanced punishment. The power to confiscate and consequent forfeiture of rights in property are penal in nature; therefore, such statutes are to be read prospectively.

Considering, the Courts lack consistency, the issue will find its way into the Supreme Court and legally resolved, or the Legislature may take note, and introduce the necessary amendments.

Conclusion

As Benami law infringes a right of the property holder, the procedure laid down must be strictly followed.  In case of ambiguity, they may hold the provisions in favour of the concerned person(s). Every transaction, entered in the name of another, cannot be visited with the taint of ‘Benami’. It is relevant to check whether the transaction falls within the saving clause, explanation or was entered to defeat the provision of law, creditors, or statutory dues. The concerned person(s) should provide evidence that satisfies the authorities beyond any doubt, as the determination of a Benami Transaction would depend upon the evidence. There are certain issues which are open for debate: retrospective applications entered into prior to 2016, application of the Benami Law to property located outside India, the overlapping of provisions with Money – Laundering, Income Tax Act and the inclusions of the sham transaction in Benami Law.

I hope the above article provides an insight on Benami Law, in case of any clarification or questions,  please don’t hesitate to contact me on diveshchawla72@gmail.com

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