This article is written by Riya Jain, from the Institute of Law, Nirma University. The article deals exhaustively with the regulation for the prohibition of Benami Transactions under Benami Transactions (Prohibition) Act, 1988.

Introduction

The Benami Transaction (Prohibition) Act, 1988, was enacted for the purpose of preventing and restricting Benami transactions and right to recovery of Benami property and otherwise any transaction incidental thereto. The widespread transactions dealing in Benami property in the country with the view of tax evasion on the ground that real owner is prohibited for enforcing his right, interest, claim or action in the impugned property in the court unless he produced documents mentioning income of that property for want of income tax or had given prior notice of claim to the property to concerned income tax authorities.

The Act postulates provision on restriction upon right of recovery of property held benami under the Act by way of enforcing or taking defence of such right, claim or interest against person in whose name property is held or any other person claiming it be the real owner of the property as provided under Section 4 of the Act. Therefore this section constructs a vital role in handling Benami transactions in relation with property held Benami. 

Statements of objects & reasons

The benami transactions were recognized under British Rule in 1778 by Mr. Justice Hyde’s. Later in the year 1854, a committee formed for review of the case in Gopeekrist Gosain v. Gungapersuad, the committee observed that benami transactions are the custom of the country and must be recognised till the legislature makes the law under such head. On such a suggestion, the Indian Trusts Act under section 81 and 82 gave legal approval for the practice of Benami transactions and the court is bound to enforce it. 

The Parliament introduced Section 281A of the Income Tax Act, 1961 for prohibiting Benami transactions and their implications by barring any institution of suit for Benami transactions. The framework for Benami transaction took its shape by formulation of Law Commission in its 57th report, The Law Commission has submitted its 130th Report titled “Benami Transactions – a Continuum” on following provisions:

1. All agreements in consonance with benami transactions after the commencement of new law will be an offence.
2. The benami property must be subject to acquisition by such authority in the same manner and procedure as may be prescribed under rules of legislature. Provided that no amount shall be payable for the acquisition of property. 
3. Section 81 and 94 of the Indian Trust Act,1882 shall be repealed.

President promulgates the Benami Transaction (Prohibition of the right to recover property), Ordinance on 19 May 1988. The Ordinance barred instituting any claim, action or suits as against Benami transaction for enforcing recovery of any rights in Benami property or defence on rights in Bemani property cannot be permitted except the right to institute suit regarding HUF members and fiduciary relationship. It repealed Section 82 of the Indian Trusts Act, 1882, Section 66 of the Code of Civil Procedure and Section 281A of the Income-tax Act, 1961.

Key Terms under the Act

‘Benami’ is a Persian word that means analogous or without a name. In such transactions, persons vested with no benefit other than transfer and legally recorded name in the property are called benamidar. The person paying consideration to such as the benami property fit of interest either at present or future time like tax evasion, avoiding payment to creditors, utilizing black money and therefore is called the beneficiary owner. The following transactions falls under the definition of Benami transactions:

• Property held in benami transactions is carried out under a fictitious name.
• The real owner of the property has no knowledge or denies having any knowledge of the ownership of such property.
• Where the person providing the consideration is untraceable or fictitious i.e. beneficiary owner identity is unknown.

The benami transactions are the transaction which involves the transfer of property for the consideration paid by another. The apex court observed in the case Bhim Singh v. Kan Singh, benami transactions deals with person’s who are capable of purchasing property with his consideration but in the name of another person with the intention of benefitting such another person. In such transactions, the transferee holds the possession of the property for the benefit of the person who contributed to such property and he is the real owner. For example, the director of the company knows about fluctuations in the prices of shares. However, he is not entitled to purchasing or selling the shares but if he entered into an agreement with third parties by providing consideration for the purpose of purchasing shares in his name then in such instance, these transactions would amount to Benami transactions.

The property is defined under Section 2(c) of the Act means property of any kind whether movable or immovable, tangible, or intangible, including any right or document proving title or interest in such property. 

Benami transaction differs from sham transaction

In Benami transactions, there must exist transaction or agreement for sale or purchase of property along with transfer of right, possession and title to the transferee but on other hand, in sham transaction, transaction happens to be executed on papers but actual owner vest with all rights, claim, possession and title to the property; in other words no transaction take place but shown to be done on papers. The act excluded sham transaction under Section 2(a) and court in various cases debar sham transactions from the provisions of Benami Transactions (Prohibition) Act, 1988.

In the case of Sree Meenakshi Mills Ltd. v.. CIT, the court observed that the word Benami consists of two classes of transaction which differ in their legal grounds and real character. In one sense, it states a real transaction in which a person purchasing or selling property is no same to a person paying consideration like A purchase the property in the name of B with payment of money out of his known source of income. These transactions are called Benami transactions. However, sometimes sham transactions are also termed as Benami Transactions. 

The exceptions of the benami transaction

The benami transactions exclude the following transactions under the head of benami transactions, as given under Section 4(3) and Section 3 (2) of the Act:

1. Property possessed by the member of HUF or coparcener for the benefit of coparceners in the family, consideration of which is paid from known sources of income.
2. Property is held under a fiduciary relationship in which a person holding property is a trustee or another person for the benefit of all persons for whom he is the trustee as responsible for standing in his capacity.
3.  Property is held in the name of spouse or unmarried daughter in which consideration is paid from known sources of income unless proven contrary that such property had been purchased for the benefit of the spouse of the unmarried daughter.

Penalty 

The penalty under the Act shall be punishable with imprisonment which may extend to three years or fine or both as prescribed under Section 3(3) of the Act. it also entails confiscation and acquisition of all properties in relation with benami transactions by such authority in such manner and procedure as may be prescribed. The offences punishable for prohibition of benami transactions shall be non-cognizance and bailable. 

Implication under the Income Tax Act, 1961

In the enforcement of the Income Tax Act 1961, it was found that benami transactions acted as a mechanism to defraud and evade tax by indulging in such illegal agreement and thereby digressing from real and legal transactions. To give effect to such transactions, Parliament introduced Section 281A of the Income Tax Act which states that-  ‘Effect of failure to furnish information in respect of property held benami,’ in the sense that property held benami can be challenged in any suit before any court of law to enforce any right whether against whose name property is registered or any other person claiming it to be real owner unless notice containing particulars has been given by claimant within one year from the date of acquisition to Chief Commissioner or Commissioner. Since section 281A of IT Act did not impact such an effect of prohibition, Parliament enacted Benami Transaction (Prohibition) Act, 1988. The act repealed section 281A of IT Act i.e. totally debar suit of any kind including exception under Section 7 of the Act along with other provisions.

Recently, Rashtriya Janata Dal chief Lalu Prasad and his family members were booked for benami transactions through cooperative banks investing in some benami property which led to arrest of Lalu Prasad, his son, wife and daughter under Benami Transactions Act,1988 for transactions worth 1000 crore. The IT department confiscated 12 plots, farmhouses, lands and buildings in Delhi and Patna. Such instances diminishes the economical growth and development of the country by way of converting black money in cash form into investment in benami property in order to distribute the allocation of money and thereby save consideration in any kind.  

Relevant case laws

1. Ouseph Chacko v. Raman Nair: The word ‘held’ in Section 4 refers to ‘possessed or occupied’. Section 4 has no application if there is no possession or occupation of the property for the purpose of amounting to Beami as sham transactions are not benami transactions and therefore does not fall under Section 4 of the Act.
2. Mahinder Singh v. Pardaman Singh: The burden of proof for proving that the transaction is benami lies on the person complaining about such transactions. Further, the principle for determining whether the transaction is benami or not can be ascertain by showing that money paid has been incurred by the person other than the person in whose favour such property is transferred and the intention of such person must be evaluated from the facts and circumstances of each case, relationship of the parties and ulterior motive through his/her conduct. 
3. Mithilesh Kumari v. Prem Behari Khare: The expression “any property held benami” is not limited to any particular time, date or duration i.e. the Benami Transactions (Prohibition) Act, 1988 is retrospective in operation. If the property is found to have been held benami no suit, claim or action to enforce any right in respect thereof shall lie. Sub-section (2) of Section 4 similarly nullifies the defences based on any right in respect of any property held benami.

The benamidar before the enactment of the Benami Transactions (Prohibition) Act, 1988 could not have any right, title and interest in the property, which the benamidar could convey. By the principle of fictional relation back as propounded by the Supreme Court in Mithilesh Kumari (supra), the benamidar should be deemed to have title to the property on the date he executed the deed or release.

Conclusion

Every party has the right to enter into agreement for the purpose of sale or purchase of movable or immovable, tangible or intangible property as guaranteed under Article 19(g) prescribing the right to trade and carry on any business within the limit of reasonable restriction. However, any illegal transaction unnamed or named under another person having no flow of consideration but otherwise held the property for the benefit of another person stands illegal because it falls short of the principle that property must be transferred in favour of a person at whose favour the transaction was executed. 

The Act empowers the Central Government to carry out rules for the purpose of the Act for authorising authority to acquire property held benami, manner and procedure while undergoing acquisition of the property. This Act was amended in 2016 to provide a comprehensive regulation for authority, transaction and other relevant matters in order to build a strong framework of law governing benami transactions.

The growth of benami transactions while existence and enforcement of the Act show that strict regulation and comprehensive awareness regarding the prohibition of benami transactions is the need of the hour. The imposition of harsh punishment to the offenders of benami transactions for the purpose of reducing what tenders to lower economic development of the country at the cost of people dealing in legal and valid transactions.Since the person holding benami property took the right of another person to hold that property in legal terms and conditions. 

Reference

• http://www.legalservicesindia.com/article/2579/Benami-Property:-A-concise-analysis.html#:~:text=The%20Hon’ble%20Supreme%20Court,two%20types%20of%20benami%20transactions.&text=Benami%20transactions%20were%20not%20illegal,for%20entering%20into%20benami%20transaction 
• https://taxguru.in/income-tax/benami-transaction-sham-transactions.html 
• https://itatonline.org/articles_new/interplay-between-the-income-tax-act-the-benami-transactions-act-the-money-laundering-act-and-allied-laws/#:~:text=Therefore%2C%20in%201976%2C%20the%20Parliament,the%20person%20in%20whose%20name 
• https://cleartax.in/s/benami-property-act 
• https://www.mondaq.com/india/real-estate/559548/concise-overview-of-the-prohibition-of-benami-transactions-act-1988 
• https://dea.gov.in/sites/default/files/Benami%20Transaction_Prohibition_%20Act1988.pdf 

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