Benami transactions have been a long-standing concern in India, deeply rooted in historical practices and contemporary economic offences. The term "Benami" itself, derived from Urdu, translates to "without name" or "no name." In essence, Benami transactions involve property transfers where the property is held in the name of one person while the consideration is paid by another, often with the intention of concealing the actual owner. The prevalence of Benami transactions has far-reaching implications, including money laundering, tax evasion, and fraudulent asset diversion. This article delves into the historical context, legislative evolution, categories of Benami transactions, judicial perspectives and key judgments surrounding Benami transactions in India.
The concept of Benami transactions in India dates back centuries and can be traced to traditional practices within joint families and property holdings. During British rule, attempts were made to control large landholdings through the zamindari system. To circumvent land confiscation due to exceeding permissible landholding limits, landowners often resorted to Benami transactions, thereby transferring property to fictitious or unrelated individuals. This allowed them to maintain control over the property while evading legal restrictions.
Previously, benami transactions were neither expressly permitted nor expressly proscribed. The practice of acquiring and holding benami property was first acknowledged by the judiciary in 1778. The need for the legalisation of benami transactions was subsequently recognised in Gopeekrist Gosain v. Gungapersuad Gosain where the Privy Council observed that benami transactions were customary practice in India and warranted judicial recognition unless the law provided otherwise.
While Benami transactions were not expressly permitted or prohibited, their acknowledgment by the judiciary came in the late 18th century. The Indian Trusts Act, 1882 recognized certain aspects of Benami transactions by introducing concepts like trust, resulting trust, and presumption of advancement. The Code of Civil Procedure, 1908 barred suits against persons claiming title under a certified purchase by the court, even if it was on behalf of the plaintiff or someone through whom the plaintiff claimed.
The Law Commission Report of 1915 acknowledged that Benami property was a common practice in India and had inadvertently become a part of Indian law. However, it was only in 1988 that Benami transactions were explicitly prohibited through the Benami Transactions (Prohibition) Act.
The Benami Transactions (Prohibition) Act, 1988, marked a significant legislative development in combating Benami transactions. It defined Benami transactions as any property transfer in which the consideration was paid by someone other than the property's holder. This act was relatively limited in scope and lacked comprehensive rules and enforcement mechanisms. It empowered the State to acquire Benami property but did not specify the procedure for confiscation.
In 2016, the Benami Transactions (Prohibition) Amendment Act significantly expanded the scope of the original act. It expanded to 72 sections from 9 sections, defined various aspects of Benami transactions, provided exceptions, and outlined procedures for confiscation. The amendment also introduced new offences and penalties. Notably, it included both the transfer of title and possession of Benami property within its ambit.
The Amendment Act defines Benami Property [Section 4(8)] as “any property which is the subject matter of a Benami transaction and also includes the proceeds from such property”, and Benami Transactions [Section 4(9)] as:-
"(A) a transaction or an 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
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration….”
Further, the Amendment Act also defines the Benamidar as “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 law currently recognizes four categories of Benami transactions:
Quintessential Benami Transactions: In these cases, the Benamidar has not paid the consideration for the property, which has been provided by another person. The property is held for the immediate or future benefit of the person who paid the consideration.
Transactions under a Fictitious Name: Here, the Benamidar is a fictitious person/entity that does not exist.
Transactions with Denial of Ownership Knowledge: The Benamidar exists but denies knowledge or is unaware of the transaction.
Transactions with Untraceable or Fictitious Consideration Provider: These involve situations where the person who provided consideration for the transaction is not traceable or is fictitious. It is important to note that transactions within a Hindu Undivided Family (HUF) or held in a fiduciary capacity, as well as property purchases by spouses or close relatives, may not be considered Benami if the consideration comes from known sources.
The Hon’ble Supreme Court of India has established acid test factors to determine whether a transaction is Benami in nature. These factors include the source of the consideration, possession of the property, motive behind the transaction, parties' positions and relationships, custody of title deeds, and post-sale conduct. The source of the purchase consideration and the motive behind the transaction are particularly crucial in identifying Benami transactions. The burden of proof falls on the party alleging that a transaction is Benami. While these factors guide the courts, they are not exhaustive, and each case is examined based on its unique facts and circumstances. Recent judgments have reaffirmed the importance of these factors in determining the true nature of property transactions.
Several key judgments have shaped the interpretation and enforcement of Benami transaction laws in India:
K. Nagarajan v. Adjudication Authority: This case confirmed the validity of provisional attachments under the Benami Transactions (Prohibition) Amendment Act, 2016, for transactions entered into before the amendment came into effect.
Mangathai Ammal (Dead) through LRs v. Rajeswari: This case emphasized the importance of proving Benami transactions based on intention and surrounding circumstances. It also clarified the retrospective applicability of certain provisions.
Union of India v. M/s. Ganpati Dealcom Pvt. Ltd.: This landmark judgment highlighted the need for mens rea (criminal intent) in Benami transactions and struck down certain provisions as unconstitutional. It also addressed the issue of retrospectivity.
The Supreme Court's decision offers respite to litigants confronting harsher penalties introduced by the 2016 amendment. This could potentially prompt more Benamidars to admit guilt in an attempt to avoid prosecution. The Court's invalidation of Section 3(2) has implications for the implementation of the provision.
However, as per the Income Tax Act, the tax department retains the authority to reopen cases for reassessment, subject to specified conditions and time constraints. The Court's verdict might influence the construal of the Benami Transactions Act and its application to transactions predating the 2016 amendment.
Benami transactions persist as a significant issue in India, with historical underpinnings and contemporary economic ramifications. Legislative endeavours, such as the Benami Transactions (Prohibition) Act and its 2016 amendment, have endeavoured to suppress these practices. Recent Supreme Court judgments have clarified aspects of the law while addressing issues of retrospective and constitutional validity.
While challenges persist, the legal framework surrounding Benami transactions continues to evolve to combat tax evasion, money laundering, and fraudulent asset diversion effectively. As the judiciary and legal experts grapple with these issues, it is essential to strike a balance between enforcement and fairness in addressing Benami transactions in India.
About the authors: Sumit Gupta is an Associate Partner and Anupam Pandey is an Associate at Singhania & Partners.