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Benami Transactions: Simplified

JURISPRUDENCE OF BENAMI TRANSACTIONS LAW IN INDIA

The first law on benami transactions was enacted when the President of India passed an ordinance on 19 May 1988 titled ‘Benami Transactions (Prohibition of Right to Recover Property), 1988. This ordinance neither defined Benami transactions, nor defined property. It did not even made entering into Benami transactions an offence. The Ordinance was seen as a half-hearted measure and a ‘paper tiger by many scholars and Law Commission. The lacunae of ordinance came into debate and new law was demanded.


Keeping in view the loophole of the ordinance, Law Commission was requested to examine the subject in all its ramifications so ordinance may be replaced by an act. Law Commission in its 130th report titled ‘Benami Transactions- A Blueprint’ submitted in August 1988, examined the issue in depth and laid out three major recommendations as follows:


1. Entering into Benami transactions should be made into an offence. There should be no consideration whatsoever for the transaction and punishment should be awarded for entering in it.


2. An exception should be carved out for a property being held in name of wife or unmarried daughter, subject to a clause that the husband would not be entitled to reclaim property on the ground that the wife or daughter was Benamidar.


3. Comprehensive enforcement machinery for implementation of the act would be put in place, as it is put in place in tax laws.


In pursuance of the law commission report and with a view to replacing the ordinance on Benami transactions, Parliament of India enacted the Benami Transactions (Prohibition) Act on 5th of September, 1988. The object and purpose of the act was to prohibit Benami transactions and restrict right to recover property being held Benami. Again the act faced criticism by various scholars and judiciaries because:


A. An exhaustive and all-inclusive definition of benami transaction was not provided in the act.


B. Effective enforcement machinery as prescribed by the law commission was not set up for the acquisition of property, nor was an appellate authority to make an appeal against the action of authorities was set up.


C. The act did not contain any specific provision for vesting of confiscated property with Central Government and nor did specify the penalty for entering into Benami transactions.


Coupled with the incomplete drafting of the act, no rules for confiscation were created by the government and enforcement of act was in abeyance. Administrative Reforms Commission in its 2nd report in 2007, raised concerns that 1988 act was never implemented or notified. It recommended the government to enforce the act strictly in order to curb the issue of Benami. In view of Administrative Reforms Commission recommendations, a bill was tabled in parliament in August 2011, which was brought up to repeal the previous 1988 legislation. The bill provided an exhaustive definition for Benami transactions as well provided enforcement machinery for the same. However, the bill was never passed in parliament due to frequent disruptions in parliament. Consequently, after a long discussion, the bill 2011 was re-drafted and was introduced The Benami Transaction (Prohibition) amendment bill 2015. The Bill was introduced in Lok Sabha on 13 May 2015. After Lok Sabha passed it on July 27, 2016, Rajya Sabha gave its nod on August 2 and Bill was finally enacted on 10th August 2016. By virtue of the Benami Transactions (Prohibition) Amendment Act, 2016, w.e.f 01.11.2016, the act was renamed as ‘Prohibition of Benami Property Transactions Act, 1988” (herein after referred to as ‘The Act’) and interesting fact is that the act was deemed to have come into force on the 19th day of May, 1988 (i.e. the day on which first ordinance was passed by the President of India)


In a country like India, where issues of corruption and forgery are rampant, parallel economies seriously hamper the financial health of the country, Benami transactions are a serious issue. The benami transactions have traveled a very long journey in India from being considered as legally valid to prohibition of entering into one.


WHAT IS A BENAMI TRANSACTION?


Prior to understanding a ‘Benami Transaction’, one should understand what a ‘Property’ is, what is ‘Benami Property’, who is ‘Benamidar’ and who is ‘Benficial Owner’?


  • PROPERTY

"As per the definition contained in section 2(26) of The Act, "property" means assets of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes 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 also includes the proceeds from the property.


The definition of the property is very wide and covers all types of assets viz.

1. Immovable Property

2. Movable Property like Shares, Bonds, Cash, Jewellery, Bank Balances, Fixed Deposits, Post Office Deposits, vehicles and so on.

3. Intangible Properties like patents, copyrights, software, licenses and so on.

4. Tangible properties (covers all assets which can be seen and touched)

5. Corporeal or incorporeal properties; means the property whether in incorporated form or in any unincorporated form.

6. Proceeds from such property like rental receipts, Interest receipts, capital appreciations and so on.


In nutshell the definition of property under The Act covers all the assets which can be, or which are, held by any individual right from the cloths & accessories to the house of such individual.

  • BENAMI PROPERTY

“As per the definition contained in section 2(8) of The Act, "benami property” means any property which is the subject matter of a benami transaction and also includes the proceeds from such property.”


Any property of any individual will be held or considered as benami when such property is acquired or resulted from a benami transaction and the proceeds from such benami property, like rents, interests, capital appreciation, shall also be regarded as benami properties.


  • BENAMIDAR

“As per the definition contained in section 2(10) of The Act, "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.”


For example, Mr. A pays for the consideration of any property, but the property was transferred/ held in the name of Mr. B; then in such case Mr. B would be regarded as “Benamidar”.



  • BENEFICIAL OWNER

“As per the definition contained in section 2(12) of The Act, "beneficial owner” means a person, whether his identity is known or not, for whose benefit the benami property is held by a benamidar.”


In our example given above Mr. A would be ‘beneficial owner’ of the ‘benami property’ held in the name of ‘benamidar’, Mr. B.


BENAMI TRANSACTIONS


After understanding the above definitions, it is very simple to identify any transaction which falls within the ambit of ‘benami transaction’. The Act has defined 4 types of transactions as ‘benami transactions’, which are as below:


Transaction 1: When consideration is paid by one person (Mr. A) but property is held in name of another person (Mr. B) and such property is held for immediate or future benefit of the person who has provided the consideration (Mr. A). In this type of transaction it is pertinent to note that the condition of future or immediate benefit of the person who provided the consideration needs to be fulfilled.


Elaborating our earlier example, let us assume, that the rental income of the house, is received by Mr. A, then such transaction would fall under benami transaction, as immediate benefits are enjoyed by Mr. A. On the other hand, if no rental income is derived from such property, but the proceeds from sale in future (Including capital appreciation) will belong to Mr. A; then the transaction would again be a benami transaction, as future benefits are enjoyed by Mr. A.


The following transactions will not be regarded as benami transactions even though the consideration is paid by one person, but the property is held by another person:


o The property of HUF is held by the karta/ member of the HUF for the benefit of Karta/ Member of the HUF, but the consideration is paid from the known sources of HUF.

o The property is held by the person in fiduciary capacity for the benefit of another person (viz. property held by trustee, executor, partner, agent, director for benefit of trust/ beneficiary, firm, principal, company etc.)

o The property held in the name of the spouse/ child of an individual, but the consideration is paid by the individual.

o The property is held in joint names of individual and his brother or sister or lineal ascendant or descendant, and the consideration for such property has been provided or paid out of the known sources of the individual.


Transaction 2: When any transaction or an arrangement is carried out or made in a fictitious name in respect of a property. For example company has allotted equity shares to Mr. X, but Mr. X is not traceable and is a fictitious person.


Transaction 3: When in case of any transaction or an arrangement, the owner of the property is not aware of, or, denies knowledge of, such ownership of property; then such transaction would also be regarded as benami transaction. For example, CBI officials seized jewellery from the bank lockers of a corrupt/ accused person, which is explained by him as streedhan of spouse, but the spouse denies the knowledge of this jewellery. Such jewellery will be benami property.


Transaction 4: When the person providing the consideration for a property is not traceable or is fictitious then such transaction or arrangement is benami.




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