Critical Analysis of Benami Act - Income Tax Bar Association Analysi… · · 2017-02-08The principles governing the determination of the question ... getting privious approval

Critical Analysis of

Benami Transactions (Prohibition) Act, 1988

& The Amendment Act, 2016.

27th January, 2017

Income Tax Bar Association, Ahmedabad

Tushar P. Hemani Advocate, High Court

• This (demonetisation) is not an end. I have more projects in mind to make India corruption-free. …. We will take action against ‘benami’ property. This is major step to eradicate corruption and black money … If any money that was looted in India and has left Indian shores, it is our duty to find out about it.

- PM Shri Narendra Modi

Tushar P. Hemani, Advocate 2

Meaning • ‘Benami' means without name. • Benami is a Persian word made up of

two words viz. 'be' which means without and 'nami' menas name.

• The benamidar has no beneficial interest in the property or business that stands in its name.

• Benamidar has fiduciary relation with real owner.


Definition under the 1988 Act

Section 2: Definitions In this Act, unless the context otherwise requires,:-

(a) benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person;

Note: It covers the transfers after 1988. Existing benami properties are not covered.


Other Provisions under the old Act

• There were only 9 sections under the old Act. • Section 2 is definition section having just 3

definitions. (benami transaction, prescribed & property).

• Section 3 simply prohibits benami transactions (exceptions: property in the name of wife and unmarried daughter shall be presumed to be for their benefits). Section further provides that whoever enters into any benami transaction shall be punishable with imprisonment upto 3 years or with fine or with both.


• Section 4 bars right of recovery of property held benami by the real owner. (Exceptions: HUF and Fiduciary holdings).

• Section 5 provides for confiscation of benami property. However, this provision was never implemented as neither the Authority for implementing this provision was ever appointed nor the procedure for acquisition ever prescribed. Tushar P. Hemani, Advocate 6

Benami vs Sham • Benami - transaction real but names

not real • Sham –transaction itself is bogus or

ficticious and only on paper. • Sree Meenakshi Mills Ltd vs CIT (31 ITR

28)(SC) explains these 2 classes of transactions. Both kinds of transactions are loosely termed as Benami.


Tests of Benami

The principles governing the determination of the question whether a transfer is a benami transaction or not have been summed up by Hon’ble Supreme Court in the case of Bhim Singh v. Kan Singh AIR 1980 SC 727

(i) the burden of showing that a transfer is a benami

transaction lies on the person who asserts that it is such a transaction;

(ii) it is proved that the purchase money came from a person other than the person in whose favor the property is transferred, the purchase is prima facie assumed to be for the benefit of the person who supplied the purchase money, unless there is evidence to the contrary;

Tushar Hemani, Advocate 8

(iii) the true character of the transaction is governed

by the intention of the person who has contributed the purchase money; and

(iv) the question as to what his intention was has to be decided on the basis of the surrounding circumstances, the relationship of the parties, the motives governing their action in bringing about the transaction and their subsequent conduct, etc.


The need for amendment

• Provisions of the Existing Act are inadequate to deal with benami transactions as the Act does not—

– Contain exhaustive definition of Benami

transactions; – contain any specific provision for vesting

of confiscated property with Central Government;


– have any provision for an appellate mechanism against an action taken by the authorities under the Act, while barring the jurisdiction of a civil court;

– specify the penalty for entering into benami transactions;

– confer the powers of the civil court upon the authorities for its implementation; and

– provide for adequate enabling rule making powers.


Time Line of Amendment • Prohibition of Benami Property Transaction Act,

1988 is now substantially amended by Benami Transactions (Prohibition) Amendment Act, 2016.

• The Benami Transactions (Prohibition) Amendment Bill, 2016 was introduced in Lok Sabha on 13th May, 2015.

• Reference was made to Parliamentary Committee for its recommendations on 15th May, 2015.

• Report of the Committee was received on 28th April, 2016.


• Bill was passed in Lok Sabha on 27th July, 2016 and in Rajya Sabha on 2nd August, 2016.

• Benami Transactions (Prohibition) Amendment Act, 2016 received the assent of the President of India on 10th August, 2016;

• The Amendment Act has been published in the Gazette of India on 11th August, 2016.

• The Amended Act comes into force from 1st November, 2016.


Amendment by 2016 Act Section 2(9): "benami transaction" means,— (A) a transaction or an arrangement— • where a property is transferred / held by

X and consideration has been provided / paid by Y (same as 1988 Act);

• the property is held for immediate / future / direct / indirect benefit of Y;


Definition contd… except when the property is held by— (i) a Karta or any member for HUF / family

members and the consideration flows from known sources of HUF;

(ii) a person in a fiduciary capacity for the benefit of another person and includes a trustee, executor, partner, director of a company, a depository / participant as & as may be notified by Govt.;


Definition contd…

(iii) any individual in the name of his spouse (as against wife) or in the name of any child (as against unmarried daughter) and the consideration flows from known sources of such individual;

(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where such relatives appear as joint-owners in any document, and the consideration flows from known sources of such individual.


Definition contd…

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;

(D)a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;


Definition contd…

Explanation: Benami transaction shall not include any transaction where possession is handed over in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882, if, consideration provided by the person in possession and property continues to be in the name of the person granting possession, stamp duty on such transaction paid and contract is registered.


Overview of the Amendment • As against only 9 sections in the existing Act, the

amendment brought in 72 sections in 8 chapters: Chapter-I - Definitions. Chapter-II - Prohibition of Benami Transactions. Chapter-III - Authorities Chapter-IV- Attachment, adjudication and

confiscation Chapter-V- Appellate Tribunal Chapter-VI - Special courts Chapter-VII - Offences and Prosecution Chapter-VIII - Miscellaneous


Original Proceedings

• 1st Step: If an Initiating Officer (IO), on the basis of material in his possession, has a reason to believe that a particular person is a benamidar with respect to a property, he may issue a SCN to the said person in that regard for treating such property as benami property.

• Copy of SCN to beneficial owner also. • Powers to Provisionally attach the benemi

property for 90 days. Order in writing and after getting privious approval from Approving Authority.


• IO to pass order with a period of 90 days from issue of SCN.

• IO may continue the provisional attachment or revoke the attachment, if property is already attached. He may provisionally attach the property or decide not to attach the property at all.

• All actions of IO – only after prior approval of Approving Authority.


Adjudication • 2nd Step: IO to draw a statement of the case

and refer it to the Adjudicating Authority (AA) once he passes an order having the effect of provisional attachment of the benami property.

• 3rd Step: AA to issue notice of hearing to all concerned within 30 days from the date of reference giving 30 days time to the affected parties to respond.

• AA to pass order in one year from the date of receipt of reference by IO.

• AA has powers of Enhancement also.


• 4th Step: AA to pass order holding the property to be benami property so as to be confiscated by Central Government.

• Rights of bonafide purchaser for adequate consideration prior to notice u/s 24(1) without having knowledge of property being benami property are protected.

• No compensation to any tenant etc. • Rights to defeat the provisions of law shall be

null and viod.


Appellate Proceedings • Government to establish Appellate Tribunal

to hear appeals against orders of AA. • Tribunal to exercise powers of Civil Court. • Not bound by technicalities of CPC, 1908. • Parties (both assessee and IO) to prefer

appeal before the Tribunal within 45 days from the date of order of AA.

• Tribunal does not have power of enhancement.


• Tribunal to pass order within 1 year from the end of the month in which appeal is filed.

• Parties (both assessee and IO) to prefer appeal before the High Court within 60 days from the date of order of Tribunal.

• Special Court shall be established for trial of offences punishable under this Act. Cr.PC to apply to special court.


Offences & Prosecution • S.53(1) Where any person enters into a

benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of benami transaction.


• S.53(2) Whoever is found guilty of the offence of benami transaction referred to in sub-section (1) shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty-five per cent of the fair market value of the property.


• S.54 Any person who is required to furnish information under this Act knowingly gives false information to any authority or furnishes any false document in any proceeding under this Act, shall be punishable with rigorous imprisonment for a term which shall not be less than six months but which may extend to five years and shall also be liable to fine which may extend to ten per cent of the fair market value of the property .


• S.55 No prosecution shall be instituted against any person in respect of any offence under sections 3, 53 or section 54 without the previous sanction of the Board.

• Board means CBDT.


Miscellaneous Provisions

• S.61 Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence under this Act shall be non-cognizable.

• S.67 The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

• S.71 AA and Tribunal of PMLA, 2002 to discharge functions under this Act until such authorities are appointed / established.


Effects of Amendment Property purchased after 1988 is covered. Wider definition of ‘Benami Transaction” in

amended Act so as to cover more transactions.

Powers to punish both the beneficial owner and the Benamidar.

Powers to confiscate the property Imprisonment up to 1 to 7 years for entering

into such transaction and 6 months to 5 years for giving false information.


Issues

• Mr. Black buys a property for a consideration of Rs.5 crore and gets the same registered in his own name. Total consideration of Rs.5 crore is discharged as follows:

– Rs.1 crore out of his income declared in ITRs; – Rs.4 crore paid “in black” out of his income which is

not declared in ITRs.

• Question: Whether such property will be treated as “benami” since entire consideration in respect of such property is not paid out of income declared in ITRs ? Tushar Hemani, Advocate 32

• Such property will not be treated as “benami” property on account of following reasons: – Property is “Registered” in Mr. A’s name; – “Consideration” for such property has also been paid

by Mr. A i.e. the person who is owner of such property as per the conveyance deed;

• The fact that a part of total consideration has been paid in black is immaterial while deciding whether such property is benami or not.

• The question of discharging the consideration out of known sources would arise where property is registered in the name of any other family member.


• Whether properties of charitable or religious trusts are exempted from purview of this Act? (S.58)

• Whether under valued property can be treated as part benami?

• During search, if wife of the assessee who is a partner in the Firm admits her being a partner. However, she didn’t know her share and other details. Can she be considered as benamidaar of assessee in view of S.2(9)(C) of the Act? [37 TTJ 353 (Ahd)].


• In absence of final sale deed, whether power of attorney transactions can be treated as benami trasactions? [S.2(9)(D)]

• Can provisions of amended Act apply retrospectively?

• Is it necessary that ‘benami property’ needs to be an immovable property?

• How name-lending is different from Benami transaction?


“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” - Winston S. Churchill

Thank You


Documents

Critical Analysis of Benami Act - Income Tax Bar Association Analysi… · · 2017-02-08The principles governing the determination of the question ... getting privious approval