Authored By: Kanika Arora
Table of Contents
A benami transaction: what is it?
Benami is defined as any transaction in which property is transferred to one person in exchange for compensation paid or furnished by another person under Section 2(A) of the Benami Transaction (Prohibition) Act, 1988 Act.
As a result, many situations that could fall under the concept of a benami transaction are missed by the definition.
Benami property is defined by the 2016 Act Amendment as an arrangement or transaction in which property is transferred to or held by one person and the consideration for it has been provided or paid by another person; the property is held for the immediate or future benefit of the person who paid the consideration, or for indirect or direct benefit.
The intent of the enactment of the Benami Transaction (Prohibition) Act, of 1988 was to prohibit and limit Benami transactions, as well as the right to reclaim Benami property and any related transactions. The country’s extensive Benami property transactions are viewed as tax evasion because the real owner cannot enforce his right, interest, claim, or action in the impugned property in court unless he produces documents proving the property’s income due to unpaid income taxes or gives prior notice of claim to the relevant income tax authorities.
Under Section 4[2] of the Act, the Act postulates provisions on restrictions on the right of recovery of the property held benami using enforcing or taking defense of such a right, claim, or interest against the person in whose name the property is held or any other person claiming to be the real owner of the property. As a result, this section plays a crucial part in managing Benami transactions involving Benami-held property.
Important Terminologies in the Act
Benami is a Persian word meaning “analogous” or “nameless.”Benamidars are those who, in such transactions, have no further rights to the property except the transfer of their legally registered name. The individual who considers benami property fit of interest, whether now or in the future, such as tax avoidance, evading payment to creditors, or using black money, is referred to as the beneficiary owner. Benami transactions include the following types of transactions:
- Under a false name, property held in benami transactions is transacted.
- The property’s true owner either does not know who owns it or does not acknowledge knowing.
- when the beneficiary owner’s identity is unknown or the individual giving the consideration cannot be located.
Benami transactions are those in which property is transferred in exchange for money given by one party to another. In the Bhim Singh v. Kan Singh case, the Supreme Court noted that benami transactions involve individuals who can pay for property in the name of another person to help that other person. In these kinds of transactions, the real owner of the property is the person who donated to it, and the transferee retains possession of it for their benefit. For instance, the company’s director is aware of changes in share prices. He is not permitted to buy or sell the shares, though, if he made a deal with someone else in exchange for money to buy shares in his name. In that case, the transactions would be considered Benami transactions.
Property of any sort, whether movable or immovable, tangible or intangible, including any right or document demonstrating title or interest in such property, is defined as property under Section 2(c) of the Act.
Sham transactions are not the same as benami transactions.
Benami transactions require an agreement or transaction for the sale or purchase of property in addition to the transfer of rights, possession, and title to the transferee. In contrast, sham transactions are those in which the property is not purchased or sold but rather the transaction is completed on paper and the real owner retains all rights, claims, possession, and title. Under Section 2(a) of the legislation, sham transactions were excluded, and in some cases, the court disallowed sham transactions from the Benami Transactions (Prohibition) legislation, in 1988.
The court noted in the Sree Meenakshi Mills Ltd. v. CIT case that the term “Benami” refers to two different types of transactions with different actual and legal characteristics. It describes a genuine transaction in which the person buying or selling the property is not the same as the person giving consideration, such as when A buys the property under B’s name by paying money from his recognized source of income. We refer to these exchanges as Benami exchanges. On the other hand, benami transactions can also refer to fraudulent transactions on occasion.
The transactions that are not considered benami
According to Sections 4(3) and 3(2) of the Act, the following transactions are not included in the category of Benami transactions:
- Property owned by the HUF member or coparcener serving the interests of other coparceners in the family, for which payment is made out of known sources of income.
- In a fiduciary relationship, property is held by one person as a trustee or by another for the benefit of all those for whom he is the trustee and accountable for acting in that capacity.
- If it can be demonstrated that the property had been acquired without consideration, it is kept in the name of the spouse or unmarried daughter and is paid for from known sources of income.
Penalties
According to Section 3(3) of the Act, the penalty under the Act carries a maximum sentence of three years in prison, a fine, or both. It also involves any properties related to benami transactions being seized and acquired by the relevant authority, following any approved protocol. Benami transaction prohibition offenses are non-cognizance and bailable offenses.
The Income Tax Act of 1961’s implications.
By engaging in such an illegal agreement and straying from actual and lawful transactions, benami transactions were discovered to function as a technique for tax evasion and fraud in the execution of the Income Tax Act of 1961. To give legal effect to these kinds of transactions, Parliament created Section 281A of the Income Tax Act. This section states the “Effect of failure to furnish information in respect of property held benami,” meaning that property held benami may be challenged in any court of lawsuit to enforce any right, regardless of whose name the property is registered against or who else may be claiming ownership, unless notice containing specifics has been given by claimant within a year after the purchase date to the Commissioner or Chief Commissioner.
The Benami Transaction (restriction) Act, of 1988 was passed by Parliament because section 281A of the IT Act did not affect this kind of restriction. Along with other provisions, the act removed section 281A of the IT Act, which completely barred suits of any kind, with the exemption specified under Section 7 of the Act.
Lalu Prasad, the leader of the Rashtriya Janata Dal, and his family members were recently accused of engaging in benami transactions through cooperative banks investing in certain benami property. This led to the arrest of Lalu Prasad, his wife, daughter, and son for transactions totaling Rs. 1000 crore under the Benami Transactions Act, of 1988. Twelve plots, farmhouses, farms, and structures in Delhi and Patna were seized by the IT department. By distributing the distribution of funds and avoiding consideration of any type, such incidents undermine the nation’s economic growth and development by turning cash black money into investments in benami property.
Recent Case Laws
- Ouseph Chacko vs. Raman Nair:[6]In Section 4, “held” means “possessed or occupied.” Since sham transactions are not benami transactions and do not come under Section 4 of the Act, Section 4 does not apply if there is no possession or occupation of the property to amount to Beami.
- Mithilesh Kumari vs Prem Behari Khare: As a result of the Benami Transactions (Prohibition) Act of 1988’s retroactive application, the phrase “any property held benami” is not restricted to any certain period. Any lawsuit, claim, or effort to assert any rights to the property will be barred if it is shown that it was held benami. The defenses based on any right about any property held benami are likewise nullified by subsection (2) of Section 4.
Conclusion
The Benami Transactions (Prohibition) Act of 1988 serves as a vital tool in combating illegal property transactions by prohibiting the practice of holding property in someone else’s name. Despite its importance, challenges remain in its enforcement due to resource constraints and procedural complexities. Continued efforts to raise awareness, strengthen enforcement mechanisms, and address legislative gaps are necessary for its effective implementation and to uphold the integrity of the financial system.
- https://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://www.drishtiias.com/daily-updates/daily-news-analysis/benami-transactions-act
- https://cleartax.in/s/benami-property-act
- https://en.wikipedia.org/wiki/Benami_Transactions_(Prohibition)_Act,_1988
- https://www.mondaq.com/india/real-estate/559548/concise-overview-of-the-prohibition-of-benami-transactions-act-1988
[1]https://dea.gov.in/sites/default/files/Benami%20Transaction_Prohibition_%20Act1988.pdf
[2]https://indiankanoon.org/doc/17891642/
[3]1980 AIR 727, 1980 SCR (2) 628
[4]https://indiankanoon.org/doc/41470524/
[6]AIR 1989 Ker. 317[1989] ITR511
