From Toothless Tiger To A Tiger With Teeth: The Evolution And Impact Of The Amended Benami Transactions Act

Background

What's there in a 'name'? It is preposterous to dismiss the significance of a name by asking, 'What's there in a name?'.' The term 'Benami', derived from Persian origins, translates to 'without a name' or 'no name.'¹. Likewise, Benami transactions are deeply rooted in historical aspects as well as economic crimes. A Benami transaction involves purchasing property in someone else's name. For example, 'A' buys a property in the name of 'B' from 'C'. It is evident that 'A' does this with malicious intent, such as tax evasion, money laundering, fraudulent asset diversion, or circumventing legal restrictions.

The practice of 'Benamitransaction' was first acknowledged in 1778, in the case ofGopeekrist Gosain v. Gungapersuad Gosain², where the privy council observed that there was a prevalence of Benami transactions in Indian society as a customary practice and there was a dire need for judicial recognition unless there is legislation enacted. Until the 18th Century, the law prohibiting 'Benami transaction' was unclear and unregulated. However, the Indian Trust Act, 1882 ('Trust Act') regulated certain aspects of Benami transactions by incorporating certain concepts like trust, resulting trust, and presumption of advancement. The Civil Procedure Code, 1908 ('CPC') 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.

In 1915, the Law Commission report acknowledged 'Benami transactions' as customary practice in India. However, legislation prohibiting them was enacted in 1988 under the name of the Benami Transaction (Prohibitions),1988 ('Old Act').

Toothless Tiger: The Journey of the Old Act

The Old Act was fairly small legislation, with only nine sections. It defined a 'Benami transaction' as any transaction in which property is transferred to one person for a consideration paid or provided by another person³.

S. 3 of the Old Act explicitly prohibited Benami transactions and provided for punishment for entering into Benami transactions. S. 3(1) of the Old Act stated that no person shall enter into any Benami transaction. However, a person purchasing property in the name of his wife or unmarried daughter for the benefit of others could not be termed as engaging in a Benami transaction unless the contrary was proved. Any contravention of S.3 could result in a punishment of up to three years imprisonment, a fine, or both. Offences under the Old Act were non-cognizable and bailable.

The Old Act prohibited the right to recover property held as a Benami. However, s. 4(3) of the Old Act stated exceptions where the person in whose name the property was held was a coparcener in a Hindu Undivided Family ('HUF') and the property was held for the benefit of the coparcener in the family, or where the person was a trustee or stood in a fiduciary capacity. The property was held for the benefit of another person.

S. 5 of the Old Act provided for the acquisition of Benami property by such authority as per the prescribed procedure. However, the authority never notified the acquisition procedure.

Due to its lack of procedural aspects and limited scope, the Old Act was later amended in 2016. The Benami Transactions (Prohibition) Act, 2016 ('Amended Act'), effective from 01.11.2016, introduced a broader scope and procedural framework to ensure proper implementation, including the Prohibition of Benami Property Transactions Rules, 2016 ('Rules').

Tiger with Teeth: The Journey of the Amended Act

Recognising the deficiencies of the Old Act, the government enacted the Amended Act, a stricter piece of legislation. The Amended Act expanded to 72 sections, including a broader definition of 'Benami transaction' and more stringent punishments.

Before delving into the Amended Act, it is imperative to understand its retrospective applicability. There were several criticisms, particularly regarding whether the Amended Act passed the Constitutionality test. The Amended Act, being criminal in nature, applied retrospectively, which violated a. 20(1) of the Constitution of India ('Constitution'). A. 20(1) explicitly states that no person shall be convicted of any offence except for the violation of the law in force at the time, nor be subjected to a greater penalty than what was applicable at the time of the offence. This provision prohibits the imposition of punishment retrospectively.

The objective of the Amended Act was to punish individuals for Benami transactions that occurred before 2016, leading to numerous litigations challenging its validity. In the case of Tulsiram v. CIT⁴, the Chhattisgarh High Court held that the Old and Amended Acts should be read together as an amending legislation. The Court also noted that retroactively reading both acts affects the Amended Act. Moreover, the Court observed that the retrospective application of the Amended Act would be hampered by a. 20(1) of the Constitution since it creates a new offence with a harsher punishment, effectively creating a 'new crime' by broadening the definition of 'Benami transaction.'

Analysing the Definition of 'Benami transaction' under the Amended Act and Old Act

Under the Old Act, a 'Benami transaction' was defined as any property transferred where the consideration was paid by someone other than the property holder. In contrast, the Amended Act significantly broadens this definition under s. 2(9). It defines a 'Benami transaction' as a transaction or arrangement 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. The property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration.

However, the Amended Act provides certain exemptions from being classified as Benami transactions:

1. Hindu Undivided Family (HUF): When a property is held by the Karta or a member of a HUF and is held for their benefit or the benefit of other family members, consideration for such property must be provided or paid from known sources.
2. Fiduciary Capacity: When the property is held in a fiduciary capacity for the benefit of another person. This includes trustees, executors, partners, directors of a company, depositories, or participants acting as agents under the Depositories Act, 1996, and any other persons notified by the central government ('CG').
3. Spouse or Children: When the property is in the name of an individual's spouse or any child of such individual, and the consideration for such property is provided or paid from known sources of the individual.
4. Siblings or Lineal Relatives: When property is in the name of an individual's brother, sister, or lineal ascendant or descendant and the names of the brother, sister, or lineal relative appear as joint owners in any document, consideration for such property must be provided or paid from the individual's known sources.
5. Possession in Part-Performance: Benami transactions do not include any transaction involving the allowing of possession of any property to be taken or retained in part-performance of a contract referred to in s. 53A of the Transfer of Property Act, 1882 (ToPA). This is applicable if the consideration for such property has been provided by the person to whom possession has been allowed. However, the person granted possession must continue to hold ownership of the property, the stamp duty on such a transaction or arrangement must be paid, and the contract must be registered.

These detailed exemptions aim to ensure that legitimate transactions are not unfairly classified as Benami. At the same time, the expanded definition under the Amended Act seeks to capture a broader range of deceptive transactions.

Broadening the Meaning of 'Benami Transaction': Creation of New Offence and Violation of A. 20(1) of the Constitution

The Amended Act broadens the definition of 'Benami transaction,' potentially creating a new offence. In the case of Tulsiram v. CIT (supra), the Chhattisgarh High Court observed that this expanded definition results in the creation of a new offence. Additionally, the Amended Act proposes 'confiscation of Benami property' rather than 'acquisition of Benami property,' resulting in harsher punishment and potentially violating a. 20(1) of the Constitution.

This issue reached before the Hon'ble SC in the case of Union of India v. Ganpati Dealcom (P) Ltd.⁵, where the State argued that the Amended Act is 'declaratory legislation' and does not establish any new offence, thus not violating a. 20(1) of the Constitution. The Hon'ble Supreme Court ('Supreme Court') formulated three primary questions:

1. Whether there is legislative intent to give retrospective effect to the Amended Act.
2. Whether the Amended Act imposes harsher punishment than the Old Act, thus contravening a. 20(1) of the Constitution.
3. Whether the Amended Act is constitutionally valid.

The Supreme Court observed that the Old Act only punished the transfer of 'title' to the property, whereas the Amended Act included both the transfer of 'title' and 'possession' of Benami property. This expansion created a 'new offence' of holding Benami property, violating a. 20(1) of the Constitution.

The Old Act suggested that s. 2(a) should be interpreted broadly to punish the benamidar owner, beneficial owner, and any other person acting with sufficient intent to circumvent the law. The definition of a Benami transaction under the Amended Act is broader, acknowledging that not all Benami transactions are illegal and providing exceptions based on socioeconomic and political conditions that inspire the custom of purchasing property in another's name. These exemptions were absent in the Old Act.

The Amended Act introduced definitions for benamidar, beneficial owner, and Benami properties:

• Benamidar: The person or fictitious person in whose name the property is transferred or one who lends their name.
• Beneficial Owner: The person for whose benefit the Benamidar holds the Benami property.
• Benami Property: Any property that is the subject matter of a Benami transaction, including proceeds from such property. This includes both tangible and intangible property.

S. 3 of the Amended Act prohibits any person from entering into a Benami transaction and provides punishment with imprisonment for up to three years, a fine, or both. S. 3(3) of the Amended Act states that any person entering into a Benami transaction after the Amended Act shall be punished in accordance with Chapter VII.

However, the Supreme Court held s. 3(2) of the Amended Act unconstitutional, reasoning that the unamended Act criminalised the act of payment of consideration by one person for acquiring property for another without including 'mens rea' (criminal intent). This exclusion made the provision stringent and disproportionate with respect to tripartite Benami transactions, making it violative of due process under the Constitution.

S.4 of the Amended Act prohibits the 'real owner' of the property from enforcing or maintaining any right against the Benamidar or any other person if the transaction is Benami. Thus, in a Benami transaction, the owner's right is curtailed when retrieving his property. In the case of Samittri Devi v. Sampuran Singh⁶ and Vijay Kumar v. Dharam Pal⁷, it was held that s.4 is prospective in operation and does not attract pending suits already filed and entertained before the Act's enforcement.

Attachment, Confiscation and Adjudication of Benami Property

Confiscation of Benami Property

S. 5 of the Amended Act provides for the confiscation of Benami property by the CG. However, this section cannot be applied retrospectively because proceedings under the Old Act were in rem (against the property) and provided for harsher punishments, which would violate a. 20(1) of the Constitution. Thus, retrospective application would be punitive and harsher.

The Old Act had poor enforcement, which was another reason for introducing the Amended Act. The Amended Act establishes several authorities to conduct enquiries and investigations regarding Benami transactions:

1. Initiating Officer ('IO')
2. Approving Authority
3. Administrator
4. Adjudication Authority ('AA')

These authorities are empowered with the powers vested as Civil Courts under the CPC.

Procedures Before Confiscation

The IO, either an Assistant Commissioner or Deputy Commissioner of Income Tax, initiates the process before confiscating the Benami property.⁸

S. 24 of the Amended Act states that if the IO, based on material in possession, has reason to believe that any person is a Benamidar (holding property in another's name) and knows the identity of the beneficial owner, they can issue a show cause notice ('SCN') to the person, asking why the property should not be treated as Benami property.

If the IO believes that the Benami property may be alienated, they can provisionally attach the property for up to 90 days with the previous approval of the Approving Authority.

Investigation and Final Orders

The IO must conduct inquiries, gather reports or evidence, and consider all relevant materials within 90 days. They must then pass an order to continue the provisional attachment of the property, with prior approval from the Approving Authority, until the AA issues an order under s. 26(3) of the Amended Act. Alternatively, the IO may revoke the provisional attachment in accordance with the procedure provided in the second schedule of the Income-tax Act, 1961 (IT Act), again with the prior approval of the Approving Authority.

If a provisional attachment has not been made under s. 26(3) of the Amended Act, the IO can still order provisional attachments with prior approval from the approving authority until the AA's order under s. 26(3) is issued.

Referral to the AA

After passing an order to continue the provisional attachment, the IO must draw up a statement of the case and refer it to the AA after fifteen days from the date of attachment. The limitation period excludes any duration during which the proceedings are stayed by a Court order or injunction.

These procedural details ensure that the process of identifying and confiscating Benami properties is thorough, transparent, and legally sound, aligning with the broader objectives of the Amended Act.

Adjudication of Benami Property

Upon receiving information from the IO under s. 24(5) of the Amended Act, the AA must issue a notice to the specified benamidar, the referred or identified beneficial owner, any interested party (including banking companies), and anyone who has claimed the property. The AA must issue this notice within thirty days from the date of receiving the reference, according to the proviso of s. 26(1) of the Amended Act. The notice must allow at least thirty days for the recipients to furnish the requested information.

If multiple persons jointly hold the property, the AA should strive to serve notice to all holders. However, the notice will not be deemed invalid solely because one or more holders did not receive it.

Adhering to the principle of natural justice, which includes the right to be heard, the AA must consider the replies to the notice, make inquiries, call for reports or evidence, and review all relevant materials. The Authority will then pass an order either revoking the attachment order if the property is not found to be Benami or confirming the attachment order if the property is determined to be Benami.

Suppose the AA is satisfied that a portion of the properties referred to is Benami but cannot specifically identify that portion. In that case, it can make a judgement-based finding and declare such properties Benami.

S. 26(5) of the Amended Act states that if the AA has reason to believe another property, not initially referred by the IO, is Benami, it can attach that property, treating it as if it was referred under s. 24(5) of the Amended Act from the date of receipt of the initial reference.

At any stage of the proceedings, the AA can, either on its own or upon application by any party, remove the name of any improperly joined party or add the name of any necessary party to adjudicate and settle all questions involved in the reference.

The order under s. 24(3) of the Amended Act must be passed within one year from the end of the month in which the reference under s. 24(5) was made. The period of limitation will exclude any duration during which the proceedings are stayed by a Court order or injunction. The benamidar or any other person claiming to be the property owner can either appear in person or be assisted by an authorised representative of their choice.

Standard of proof in Adjudication Proceedings

The standard of proof in adjudication proceedings concerning whether a property is a Benami property involves determining whether the property in question meets the criteria of a Benami transaction. Generally, the burden of proof lies with the person asserting that the property is Benami. The Supreme Court reinforced this principle in the decision of State of Karnataka v. J. Jayalalitha⁹, wherein it observed that there is no straight jacket formula or acid test for such determinations. It was held that Courts must usually be guided by circumstances such as sources of purchase of money, nature of possession after purchase, motive, relationship between persons concerned, custody and title after sale and conduct of parties. Thus, the discharging of the burden of proof depends on a case-to-case basis, depending on the facts of each case.

Furthermore, the burden of proof must be discharged by providing legal evidence of a definite character, which would either directly prove the fact of the Benami nature of the property or establish circumstances that reasonably and unerringly raise an inference of that fact.

Administration of Benami Property

The Old Act did not contain provisions relating to the administration of Benami property. However, the Amended Act introduced specific provisions for administering Benami property once provisionally attached.

Under the Amended Act, when an order is passed with respect to any property under s. 26(3), holding it to be Benami property, the AA must, after giving the concerned person an opportunity to be heard, order the confiscation of the Benami property as per the laid-down procedure. If the AA orders the confiscation, it may be challenged before the Appellate Tribunal under s. 46 of the Amended Act.

Once an order of confirmation is made under s. 26(1) of the Amended Act, all rights and titles of such property vest absolutely in the CG, free of all encumbrances, and no compensation is payable in respect of such confiscation.

The Administrator, who is also an income tax officer as per s. 28 of the Amended Act, has the power to take possession of, receive, and manage the Benami property. This ensures proper administration and management of the property once it is confiscated, addressing the gaps left by the Old Act.

Appeals under the Amended Act

By virtue of notification, the CG establishes an Appellate Tribunal to hear appeals against the orders of any authority under the Amended Act.

Composition of the Appellate Tribunal: The Appellate Tribunal consists of:

• A Chairperson
• Two members: a Judicial Member and an Administrative Member

Powers and Procedures: S. 40 of the Amended Act outlines the powers and procedures of the Appellate Tribunal. Notably:

• The Appellate Tribunal is not bound by the procedure laid down under the CPC but adheres to the principles of natural justice.
• The Tribunal has the power to regulate its own procedure.
• When trying a suit, the Tribunal has the same powers as a Civil Court under the CPC to discharge its functions under the Amended Act.
• The proceedings before the Appellate Tribunal are deemed to be judicial proceedings under ss. 193 and 228 of the Indian Penal Code, 1860 (45 of 1860).

Appeal Process:

• S. 46: Any person aggrieved by the order of the IO or the AA may prefer an appeal to the Appellate Tribunal within forty-five days.
• S. 49: Any party aggrieved by the order of the Appellate Tribunal may appeal to the High Court.

Special Court: The Amended Act provides for the constitution of a Special Court to expedite case hearings. The Special Court is mandated to conclude the hearings within six months from the date the complaint is lodged.

This framework ensures a structured and timely appeals process, provides multiple levels of review, and adheres to principles of natural justice.

Offences and Prosecutions under the Amended Act

The Amended Act imposes harsher punishments compared to the Old Act. Here is a detailed breakdown of the changes:

Punishments Under the Old Act:

• Scope: Limited to persons entering into a Benami transaction.
• Punishment: Imprisonment up to three years, or a fine, or both.

Punishments Under the Amended Act:

Scope: Broadened to include:

• Persons entering into Benami transactions to defeat the provisions of any law.
• Persons entering into Benami transactions to avoid payment of statutory dues or payment to creditors.
• Beneficial owners and benamidars.
• Any person who abets or induces another to enter into a Benami transaction.

Punishment:

• S. 53(1): Imprisonment for not less than one year, extendable up to seven years, and a fine up to 25% of the fair market value (FMV) of the property.

Additional Punishments Under the Amended Act:

• Providing False Information: Punishment for those who provide false information.
• Penalty for Non-compliance: Penalties for failure to comply with notices or furnish information.

Prosecution Procedures:

• S. 55: No prosecution can be initiated against any person for offences under ss. 3, 53, or 54 of the Amended Act without the previous sanction of the competent authority.

The Amended Act thus introduces a more comprehensive and stringent framework for dealing with Benami transactions. It aims to deter such practices by imposing more severe penalties and expanding the scope of punishable actions.

Our Analysis

From a toothless tiger to a tiger with teeth, Benami legislation has undergone a significant transformation to address and tackle Benami transactions effectively. The Amended Act emerged amidst several economic reforms, such as demonetisation and efforts to combat the proliferation of black money in India. This legislation has received both praise and criticism from various quarters of society. The government's intention behind introducing the Amended Act was to curb the practice of investing black money in properties and enforce stricter regulations against Benami transactions.

Examination of the Amended Act:

1. Strengthened Legislative Framework: The Amended Act was introduced to rectify the deficiencies of the Old Act. It is more punitive and deterrent, expanding the definition of Benami transactions and imposing harsher punishments. This expansion includes introducing new categories of offenders, such as those who abet or induce others to enter into Benami transactions.

2. Comprehensive Procedure for Attachment and Confiscation: The Amended Act outlines a detailed procedure for the attachment and confiscation of Benami property. This includes the roles and powers of the Initiating Officer, Approving Authority, Administrator, and AA. By doing so, the Act ensures a systematic approach to dealing with Benami properties.

3. Preventive Measures: The Amended Act incorporates preventive practices at various stages of prosecution to deter Benami transactions. This includes harsher punishments for providing false information and non-compliance with notices.

4. Constitutional Challenge: Despite the objective to pass constitutional scrutiny, the Supreme Court in Union of India v. Ganpati Dealcom (P) Ltd.¹⁰ held that the Amended Act could not be applied retrospectively. The Court reasoned that the new Act broadened the scope of the law and placed a negative burden on individuals to prove that their property was not Benami. This judgment highlights the challenge of balancing punitive measures with constitutional rights.

5. Societal Impact: The Amended Act has been seen as necessary to check the misuse of Benami transactions to launder black money. By expanding the definition and increasing penalties, the government aims to dissuade individuals from engaging in such transactions.

6. Future Jurisprudence: As the Amended Act is relatively new, its impact on jurisprudence and its practical implications will evolve through judicial pronouncements. The interpretation and enforcement of this legislation will be crucial in determining its effectiveness in curbing Benami transactions.

The transformation of Benami legislation into a stringent law reflects the government's commitment to tackling black money and Benami transactions. While the Amended Act is a significant step forward, its true test will lie in its implementation and the judiciary's interpretation. The future will reveal how this newborn Act shapes the legal landscape concerning Benami transactions and its effectiveness in achieving its intended goals.

Footnotes

1. Benami Transactions in India: A Historical and Legal Perspective by Anupam Pandey, https://singhania.in/blog/benami-transactions-in-india-a-historical-and-legal-perspective.

2. (1854) 6 MLA 53.

3. Section 2(a) of Benami Transaction (Prohibitions),1988.

4. 2019 SCC OnLine Chh 140.

5. (2023) 3 SCC 315.

6. (2011) 3 SCC 556.

7. (2009) 3 SCC 319.

8. S. (19) of the Amended Act.

9. (2017) 6 SCC 263.

10. supra.

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