This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here she has discussed Benami transaction.

What is a benami transaction?

The Benami Transaction (Prohibition) Act, 1988 Act defined benami under Section 2(A)  means any transaction in which property is transferred to one person for a consideration paid or provided by another person.

The definition, therefore, misses a great deal of instances that could come under the benami transaction.

The 2016 Amendment to the Act defines Benami property as an arrangement or a transaction where the property is transferred to or held by one person and the consideration for it has been paid or provided by some other person, and the property is held for either indirect or direct benefit or immediate or future benefit of the person who paid the consideration.  

In addition, several transactions which could be genuinely undertaken but would still fall within the ambit of the above definition have specifically been listed and excluded from the purview of the definition of ‘benami’ (see below).

In contrast, the 1988 Act did not provide detailed exclusions. It defined a benami transaction as any transaction in which property is transferred to one person for a consideration paid or provided by another person.

As you can see, the level of explanation and detail introduced by the 2016 Amendment is very high, coupled with an elaborate adjudicative machinery and enforcement provisions.

Note that the person who is mentioned as the owner on paper is called the benamidar or ostentatious owner. This is a term which is frequently used in case laws and legal conversations associated with benami property.

What is the incentive to enter into benami transactions and what is the regulatory reason for prohibiting the same?

The following commercial incentives and regulatory concerns explain why benami transactions are prohibited.

• Commercially, benami assets were acquired to separate the assets from one’s personal assets, so that they could not be attached during insolvency and liquidation. As the purpose is inherently fraudulent, it made sense to prohibit such transactions for a regulator.
• Wherever a cash economy is prevalent (particularly in the pre-demonetization era), businessmen have the opportunity to utilize cash generated from the business by immediately investing into assets in somebody else’s name, without disclosing the income or paying tax on it. This was a tax concern behind prohibiting benami transactions. Until 1988, income tax law allowed benami transactions provided the assets acquired were declared in income tax returns, but later in 1988 it was prohibited by the introduction of the Benami Transactions (Prohibition) Act, 1988.
• Benami transactions can also give rise to round-tripping – for example, I could send money to a friend offshore, who could invest the same in India. In this way, a transaction which has funds generated in India could be masqueraded as a foreign investment.
• Apart from having unaccounted money flowing in the economy, some of the other reasons behind prohibiting benami transactions are to prohibit money-laundering, hawala transactions or any financing of terrorism or proceeds of crime.   

Types of assets that can be attached or forfeited if purchased benami

Typical assets which have been attached by the income tax department are land, flats, shops, vehicles, Fixed Deposits, bank account and jewelry (see an Economic Times article here mentioning details of notices issued and attachments of property.

In January 2018, Shahrukh Khan’s farmhouse in Alibaug was provisionally attached by the Income Tax Department (the designated inquiring authority can attach it if there is a concern about the alienation of the property – see Section 24(3)) on grounds of its being a benami property (see here).

What are the consequences of entering into a benami transaction?

If a person is found guilty of being involved in a benami transaction, he can face the following consequences:

• As per Section 53 of the Act, he or she may be sentenced to rigorous imprisonment ranging between one year to seven years.
• A fine of up to 25% of the fair market value of the property involved in the benami transaction may be imposed.
• The property involved can be confiscated.

Furnishing of false documents is also punishable with rigorous imprisonment ranging between 6 months to 5 years along with a fine of up to 10 percent of the fair market value of the property.

Those who are involved in furthering any aspect of the benami transaction (called abetment or inducement) or can also be subjected to the same punishment.

Which transactions are excluded from the purview of benami transactions?

Following transactions are not within the purview of benami transactions as per the 2016 Amendment:

1. Property held for the benefit of karta of a (HUF) Hindu Undivided Family or other members, where and the consideration is paid by known sources of such family
2. If property is held by people in fiduciary capacity for the benefit of another – this is largely the case in context of the following relationships, which will not be caught within the benami prohibition:
3. 1. Property held by trustees
   2. Property held by executors
   3. Property held by a partner of a firm or a director of a company
   4. Securities held by a depository participant as an agent of a depository under the Depositories Act, 1996.
4. Property purchased in the name of spouse or child, where consideration is paid by known sources.
5. Property purchased in the name of an individual’s brother or sister or lineal ascendant or descendant, where the names of them appear as joint owners in concerned documents and consideration paid by known sources of the individual.
6. Property purchased bona fide under a financial or loan arrangement.
7. Any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 if:
8. 1. consideration for such property has been provided by the person to whom possession of the property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;
   2. stamp duty on such transaction or arrangement has been paid; and
   3. the contract has been registered.

Note that the real intent of the parties is of prime importance to determine whether or not the transaction is a benami. If put to the application of strict definition many of the genuine deals may easily fit, however, the intent of the parties is a consideration against the strict application of the law.

How is action with respect to Benami transactions initiated?

Initiation by the designated Assistant/ Deputy Income Tax Commissioner

An Assistant or Deputy Income Tax Commissioner can be designated by the government initiate the proceedings, who has the power to conduct inquiry or investigation after the prior approval of an approving authority (typically an Additional or Joint Commissioner of Income Tax). Permission of the approving authority is also required for attachment of any property (in case there is a concern about the alienation of property) or for impounding documents.

The initiating officer can issue a notice to the holder of the benami property to issue a show cause as to why the property should not be considered as benami property. He can conduct inquiry or investigation of any person, place, property, assets, documents, books of account or other documents.

Adjudication by Adjudicating Authority

The Adjudicating Authority (the power is vested in Sessions Courts) may pass an order within a period of 1 year on whether the property is benami or not.  

The authorities are not bound by the Civil Procedure Code but must follow the principles of natural justice. Thus, every person who is alleged to have entered into a benami transaction will have an opportunity to present his or her case.

The Act empowers authorities with the following powers:

• Discovery and Inspection
• Enforcing the attendance of any person and examining him on oath
• Compelling the production of books and documents
• Issuing commissions
• Receiving evidence on affidavits
• Impound documents  

The Administrative Authority under the Act manages the process of confiscation of the property after an order is passed by the adjudicating authority. The authority gives a 7-day notice for the surrender of property. Failing voluntary surrender, the administrative authority can requisition police assistance for confiscation.

Collaboration by multiple authorities for the purpose of inquiry and investigation

Another interesting aspect is that Section 20 of the Act specifies the authorities which may assist in the inquiry process, and these span a huge gamut of regulators, namely:

1. Income Tax Authorities
2. Custom and Central Excise Department
3. Narcotic Drugs and Psychotropic Substance
4. SEBI officers
5. RBI officers
6. Police
7. Enforcement Officers of Foreign Exchange Management Act
8. Officers of the Stock Exchange

Criminal proceedings

The Adjudicating Authority only has the power to determine whether a transaction is benami and initiate attachment/ confiscation of property. However, criminal proceedings are to be initiated by one of the authorities mentioned above or an officer of the Central Government or State Government who is authorised by written order. Cognizance may be taken by a Sessions Court which has been especially designated in this regard. Note that criminal proceedings arise independent of civil proceedings and determination by the Adjudicating Authority for confiscation and attachment will not be a final determination for the purpose of criminal punishment – an independent determination by the criminal court in accordance with Criminal Procedure Code and the Indian Evidence Act will be made.     

Reward schemes for citizens for disclosure of benami transactions to tax authorities

The Income Tax Department launched new “Benami Transactions Informants Reward Scheme, 2018” (see the press release here) to encourage informants to disclose Benami transactions that they know about, and thus reduce black money or tax evasion.

Under the Benami Transactions Informants Reward Scheme, 2018, a person (including a foreigner) can get a reward up to INR 1 crore for giving specific information in the prescribed manner to the Joint or Additional Commissioners of Benami Prohibition Units (BPUs) in Investigation Directorates of Income Tax Department. The identity of the persons giving information will not be disclosed and strict confidentiality shall be maintained.

The full text of the scheme is available here.

Note that any proceeding, based on the information will be initiated by the Initiating Authority (mentioned above).

How to challenge the attachment of property

An attachment of property is undertaken at the stage of the inquiry. Along with attachment of property, documents and books of account can also be impounded.

An order of attachment prohibits transfer, conversion, disposition or movement of property.

Attachment is provisional at the stage of inquiry and can be undertaken by:

• Initiating Authority, with the approval of Approving Authority
• Adjudicating Authority directly

(See Sections 24 and 26)

The provisional order of attachment will expire after 90 days unless it is continued further.

Further, the adjudicating authority is required to provide an opportunity of being heard to the benamidar and any other person who claims to be the owner and can pass an order confirming or revoking the order of attachment, depending on whether it has found the property to be benami or not.

The simplest way to have an attachment of property vacated is to provide sufficient evidence to provide that the transaction is not benami.

How to challenge confiscation of property

The term attachment has been used in a ‘provisional’ context only, when the property is to be forfeited upon a determination by the adjudicative authority, the technical term used is ‘confiscation’. After confiscation, disposal of the property undertaken by the Income Tax department.

Appeals from a decision of the adjudicating authority (of confiscation) can be made to the Appellate Tribunal. The order of the Appellate Tribunal can be appealed at the High Court under Section 49 of the Act.

Were such investigative powers and consequences specified under the earlier version of the Act?

The 1988 Act did not specify a detailed definition or exclusions for benami transactions. A detailed investigative or adjudicative machinery was not prescribed either. Apart from forfeiture of property, there was simple imprisonment for 3 years or fine or both. Thus, there was an option for a criminal court to sentence an offender with imprisonment or fine.

In comparison, the 2016 Amendment prescribes mandatory rigorous imprisonment for entering into benami transactions and a mandatory penalty which is fairly hefty, at 25% of the market value of the property.

A detailed investigative process and adjudicative machinery are set up, and the government authorities who may assist in the process are also clarified. The law now has teeth.   

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