Meaning of ‘Benami Transaction’:
Purchase or holding of properties in the name of another is known in India, as a “Benami transaction”. The word ‘Benami’ literally means ‘without name’. The essential legal characteristic of these transactions is that there is no intention to benefit the person in whose name the transaction is made. The Benamidar (transferee) is simply an alias for that of the person beneficially interested (person paying the consideration). The Benamidar has the ostensible title to the property standing in his name; but the beneficial ownership of the property does not vest in him but in real owner.1
Before the Benami Transactions (Prohibitions) Act, 1988 (hereinafter referred as “old Benami Act”) and even before the promulgation of the Benami Transactions (Prohibition of the Right to Recover Property) Ordinance No. 2 of 88 (hereinafter referred as “Ordinance”), Courts in India have, by and large, recognised two distinct classes of transactions as Benami.
A. TRIPARTITE: A typical instance of it is when ‘A’ sells a property to ‘B’, but the sale deed mentions ‘C’ as the purchaser. Here the real purchaser is ‘B’ and ‘C’ is only the Benamidar. Such a transaction is described as the real Benami transaction. (For convenience, the first type of transaction is often referred to hereinafter as tripartite Benami transaction-as three persons are involved in it-or the first category of Benami transactions.)
B. BIPARTITE: The second class or category of Benami transaction is the sham transaction in which one person purports to transfer his property to another without intending to pass the title to the transferee. This second type of transaction was “loosely” called Benami transaction. This second class of transaction is often referred to either as bipartite Benami transaction-since only two persons are involved in it,-or the second category of Benami transaction.
The fundamental difference between the two categories of transactions is this. In the former, there is an operative transfer resulting in vesting of title in the transferee, whereas in the latter, there is no operative transfer and the transferor continues to retain title of the property notwithstanding execution of the document. The latter transaction is known as “sham transaction”.2 One common feature, however, in both these cases is that the real title is divorced from the ostensible title and they are vested in different persons. The question whether a transaction is a Benami transaction or not mainly depends upon the intention of the person who has contributed the purchase money in the former case and upon the intention of the person who has executed the conveyance in the latter case. It is only in the former case that it would be necessary when a dispute arises as to whether the person named in the deed is the real transferee or not, to enquire into the question as to who paid the consideration for the transfer. But in the latter case, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid.3
Comparison of Indian Law and English Law in regard to Benami Transactions:
Under the English law, when real or personal property is purchased in the name of another person, a resulting trust is presumed in favour of the person who is proved to have paid the purchase money in the character of the purchaser4. It is, however, open to the transferee to rebut that presumption by showing that the intention of the person who contributed the purchase money was for the benefit of the transferee and that the transferee should himself acquire the beneficial interest in the property.5 There is, however, an exception to the above rule of presumption, popularly known as the ‘doctrine of advancement’ under the English law, which requires the court to presume that the purchase is for the benefit of the person in whose favour the legal title is transferred even though the purchase money may have been contributed by another person.6
So far as the purchase in the name of a stranger is concerned, the position is same in Indian Laws and English laws. But where the purchase is in the name of a relation, the Indian law is the reverse of the English law. The English presumption of advancement has not been applied in India on the ground that it is a rule of positive English Law and not founded on natural justice. In the leading case of Gosain v. Gosain7, Lord justice Knight Bruce, delivering the opinion of Privy Council took the view that the English doctrine of advancement did not apply in India. To quote:
“If then the person in whose name the purchase was effected had been a stranger in blood, or only a distant relative, no question could have arisen; he would have been prima facie a trustee, and if he desired to contend that the prima facie character of the transaction was not its real character, the burden would have rested on him; but the individual in whose name the present purchase was effected was the son, and at that time the only son, of the person who made the purchase, and whose money it was, and it has been contended that the circumstances changes the presumption, and that what be the presumption in the case of a stranger does not exist between father and son; that the prima facie character of the transaction was not its real character, the burden would have rested on him; but the individual in whose name the present purchase was effected was the son, and at that time the only son, of the person who made the purchase, and whose money it was, and it has been contended that the circumstances changes the presumption, and that what be the presumption in the case of a stranger does not exist between father and son; that the presumption is advancement and that, therefore, the burden of proof is shifted. Now, on this, as far as their Lordships can learn, there is no authority in Indian law, no distinct case, or dictum, establishing or recognising such a principle, or such a rule.”
Statutory recognition to Benami Transaction:
The original Indian law regarding recognition of Benami Transactions was contained in the provisions of Indian Trust Act, 1882, and was based on the same principle as English Law. This Act re-inforced the Benami transaction and gave statutory recognition to such practice. Section 82 of the Trust Act, as it existed before its repeal, contained a general provision under which, where the property is transferred to one person for a consideration paid or provided by another person, and it appears that such other person did not intend to provide such consideration for the benefit of the transferee, the transferee must hold the property for the benefit of the person who paid or provided the consideration. To quote:
“82. Transfer to one for consideration paid by another. – Where property is transferred to one person for a consideration paid or provided by another person, and it appears that such other person did not intend to pay or provide such consideration for the benefit of the transferee, the transferee must hold the property for the benefit of the person paying or providing the consideration.
Nothing in this section shall be deemed to affect the Code of Civil Procedure. Section 317 of Act No. XI of 1859 (to improve the law relating to sales of land for arrears of revenue in 34 the Lower Provinces under the Bengal Presidency), section 36.”
The other provisions of the Indian Trust Act which related to the “Benami transaction” were as follows:
Section 81 of Indian Trust Act covered the case of sham transaction and provides that in such case Transferee holds the property in trust.
“Section 81. Where it does not appear that transfer intended to dispose of beneficial interest. – Where the owner of property transfers or bequeaths it and it cannot be inferred consistently with the attendant circumstances that he intended to dispose of the beneficial interest therein, the transferee or legatee must hold such property for the benefit of the owner or his legal representative.”
Section 84 of the Indian Trust Act covered those Benami transactions which are carried out for illegal purpose but such purpose is not executed, then in such case and also the cases covered by the provision, the transferee holds the property in trust. To quote:
“84. Transfer for illegal purpose. – Where the owner of property transfers it to another for an illegal purpose and such purpose is not carried into execution, or the transferor is not as guilty as the transferee, or the effect of permitting the transferee to retain the property might be to defeat the provisions of any law, the transferee must hold the property for the benefit of the transferor.” Section 94 of Indian Trust Act covered all other transactions in the nature of Benami. To quote:
“94. Constructive trusts in cases not expressly provided for. -In any case not coming within the scope of any of the preceding sections, where there is no trust, but the person having possession of property has not the whole beneficial interest therein, he must hold the property for the benefit of the persons having such interest, or the residue thereof (as the case may be), to the extent necessary to satisfy their just demands.”
Therefore, the Trust Act clearly recognised “Benami Transactions” in India. However, the statute does not recognise the English doctrine of advancement. It is also necessary to state that the legal position is somewhat obscure as to the vesting of the title. The provisions do not make it clear as to who has the legal title of the property in Benami transaction.
Statutory modifications of general principle recognising Benami Transactions:
As it is clearly established that the Benami was always a part of law in India, few attempts were initially made to modify the existing position of law. One such attempts was in the form of section 66 of Civil Procedure Code, which provides that no suit shall be maintained against any person claiming title under a purchase certified by the Court on the ground that the purchase was made on behalf of the plaintiff or on behalf of someone through whom the plaintiff claims. It may be added that Law Commission in its 54th report recommended an extension of the principle of this provision so as to prohibit also pleading of a defence based on ‘Benami’ in such cases. However, this provision is confined to sale certificates issued by courts. It does not prohibit ‘Benami’ transactions in general.
Another attempt was in the form of Section 281A of Income Tax Act, inserted in 1972. The aim of the Taxation Laws (amendment) Act, 1972 was also not to prohibit ‘Benami’, but to avoid its being made the basis of a suit unless compliance with the prescribed requirement is made. The aim was to ensure that the taxing authorities concerned with income tax and wealth tax acquire knowledge of the transaction alleged to be Benami. Section 281-A of Income Tax Act, 1961 as then introduced provided that no suit shall be instituted in any court to enforce any right in respect of any property held Benami unless the claimant has either disclosed the property in question or, the income therefrom in connection with his wealth tax or income tax assessments or given notice to Income Tax officer about the particulars of such property in the prescribed form.
Need for a specific law to regulate or prohibit the Benami transaction:
The 57th Law Commission Report
The question of prohibition of Benami transactions has been taken up by the Law Commission on a reference made on the subject by the Union Government through the Letter no. 2462/72/Adv. F, dated 20th December 1972, of the Minister of Law to the chairman, Law Commission. On such reference, the Law Commission by its 57th Report gave recommendations on ‘Benami transaction’ after analysing the situation prevailing at that point of time.
The salient recommendations were as under:
According to the Law Commission, the law should refuse to recognise the Benami character of transactions, without making them as offence.8
The law should, in effect, provide that where the property is transferred Benami, the Benamidar will become the real owner.
Also, the Law Commission recommended exception in certain cases like exceptions in the case of acquisition made by karta for himself and the members of the joint family, or by the trustees for the beneficiary of the trust and similar situations.9
Further, the Law Commission recommended that the law should be implemented prospectively and the Ordinance must not cover past transactions because those transactions would have been entered into after keeping in mind the legal position as understood at that point of time, namely, that the real owner can always enforce his rights against the Benamidar10.
Promulgation of the Ordinance No. 2 of 1988
On the basis of 57th Report of the Law Commission, the Government of India enacted the Benami Transactions (Prohibition of the Right to Recover Property) Ordinance No. 2 of 88 on May 19, 1988. The Ordinance more or less bodily adopted the draft recommendation set our under the marginal note ‘Recommendation’ with one important variation that while the Law Commission was of the opinion that it is necessary to make an exception for past transactions, as the provisions of the Ordinance stand, the President appears to have resolved to make them retroactive.
The provisions of the Ordinance received a mixed response, being half hearted measure and not effective to tackle the problem completely. Originally the Ordinance provided that no suit, claim or action to enforce any right in respect of any property held Benami shall lie and no defence based on any right in respect of any property held Benami shall be allowed in any suit, claim or action. It, however, provided two exceptions, i.e.
(1) regarding property held by a coparcener in a Hindu Undivided Family for the benefit of the Coparceners and,
(2) property held by a trustee or other person standing in fiduciary capacity for the benefit of another person.
The Ordinance did not define (1) “Benami Transactions” or (2) “Property”, nor imposed any prohibition on entering into a Benami transaction after the commencement of the Ordinance and declared it as an offence punishable with imprisonment or fine or with both. The Ordinance also did not provide any exception in respect of transactions entered into by the husband or father for the transfer of properties in the name of wife or unmarried daughter for their benefit, the principle based on the English doctrine of advancement.
Originally, the Ordinance repealed only section 82 of the Indian Trusts Act, 1882, Section 66 of the Code of Civil procedure and section 281A of the Indian Trusts of the Income-tax Act, 1961.
130th Law Commission Report
Keeping in view the above lacunae in the ordinance, the Law Commission was requested to examine the subject in all its ramifications so that the Bill to replace the Ordinance may be brought out as a comprehensive law on Benami Transactions touching all the relevant aspects. The Law Commission through its 130th Report made the detailed analysis of the situation and of the ordinance and gave recommendations, which would have had far reaching implications. However, thereafter, Benami Transactions (Prohibition) Bill, 1988 was introduced in the Rajya Sabha on 31st August, 1988 and received the assent of the President on 5th day of September, 1988, which had much to the disappointment of those advocating strong law against Benami transactions.
Benami Transactions (Prohibition) Act, 1988:
The Benami Transactions (Prohibition) Act, 1988 was no doubt more comprehensive than the ordinance; however it was far less than adequate.
The Benami Transactions (Prohibition) Act, 1988 defined “Benami Transaction” as “transaction in which property is transferred to one person for a consideration paid or provided by another person.” In the case of Bhargavy P. Sumanthykutty v. Janaki Sathyabhama and others,11 the issue before the Hon’ble Kerela High Court was whether sham transactions are included within the purview of Benami Act. The Hon’ble Court analysed the scope of definition of Benami transaction. The Court noted that even before the promulgation of the Ordinance, courts in India have, by and large, recognised two distinct classes of transaction as Benami i.e. tripartite Benami transaction and bipartite Benami transaction. However, the Court held that the aforesaid definition apparently, takes in only the first category or the tripartite Benami transactions and hence the sham transactions are not covered by the Act. This itself was a major shortcoming of the scope and coverage of the Benami Transactions (Prohibition) Act, 1988.
The Law Commission in its 130th Report noted that there is glaring lacuna appears in the limited approach as taken in the Ordinance i.e. merely refusing the assistance of court machinery to recover Benami property by the real owner. The ordinance does not even remotely affect them or their Benami transactions. The Ordinance does not remotely affect transactions between people having close intimate friends/relations. In such case, the ordinance will remain ‘a paper tiger’, ineffective in every manner. Also, the Commission noted that the Ordinance does not cover the case of re-transfer of property to the real owner. Further, the Ordinance does not prohibit against entering into Benami transaction either by imposing civil or criminal punishment.12
The Law Commission further noted that by operation of the Ordinance, one of the two parties to the illegitimate transaction obtains an undeserved advantage. Therefore, to this extent this can be termed as unjust enrichment by the Benamidar.13 Keeping in mind such circumstances, the Law Commission recommended enactment of appropriate provision in line with the provision contained in Section 269C of the Income Tax Act, 1961 which provides that if any immovable property of a fair market value exceeding one hundred thousand rupees has been transferred by a person to another person for an apparent consideration which is less than the fair market value of the property and the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument if transfer, the competent authority can start a proceeding under Section 296C read with Section 269D for the acquisition of such immovable property.14 It seems that after taking into consideration these recommendations, the Act contained provision prohibiting entering into a Benami transactions and also made it an offence punishable under law. Further, on the basis of such recommendation, the Act provided for the Acquisition of Benami property.
The Law Commission also recommended provision for enforcement machinery in the Act. The Law Commission stated that it is not possible to set up a whole enforcement machinery of inspectors and superior officers. Therefore, the Commission was of the opinion that voluntary agencies must be involved. Recognised non-governmental organisations must be empowered to lay a complaint before a tribunal pointing our violation, namely, entering into Benami transactions. It was recommended that a district judge in each district should be declared as a tribunal for the purpose of this Act Other existing machineries were also recommended to be used for this purpose. However, the Act did not provide for the enforcement machinery and the same was supposed to be provided by the rules made by the Central Government. Unfortunately, the Government of India did not made the rules in this regard and the law remained only on the paper book, except to the extent of putting restrictions of filing suit for claiming Benami property and submitting defence in this regard.
Thus, even though ostensibly the Benami Transactions (Prohibition) Act was an improved legislation as compared to the Ordinance, it was never brought into operation in absence of any Rules and administrative setup, and hence more or less remained a Paper tiger.
Reason for introducing the Amendment Bill, 2015
In such scenario, it was found that the provisions of the Benami Transactions (Prohibition) Act, 1988 were inadequate to deal with Benami transactions; therefore comprehensive amendments to the Benami Transactions (Prohibition) Act, 1988 became necessary. The Finance Minister, Mr. Arun Jaitley, while moving the amendment bill, 2015 stated that though, the amending Act was exhaustively amending the 1988 Act by changing its name, its colour and texture, providing for procedure and appellate mechanism, yet was not brought as a new fresh Act so as to bring those transactions also within the ambit of the new Act which were acquired Benami from 1988 onwards i.e. after promulgation of the Ordinance.15
The Amendment Bill, therefore, attempts to remove interlia the infirmities present in the Act of 1988 as well as to create conditions for smooth implementation of the Act. Specifically, the Bill seeks to-
Amend the definition of a Benami Transaction;
Provide for Adjudication Authorities and a Tribunal; and
Specify appropriate penalties where the ban on Benami transactions is violated.16
The Prohibition of Benami Property Transactions Act, 1988 [New Law]
The Benami Transaction Prohibition (Amendment) Act, 2016 has renamed the Act and the amending Act is now named as “the Prohibition of Benami Transactions Act, 1988” (hereinafter referred as “Amended Act”). The Amending Act of 2016 has come into force from 1st day of November 2016 as notified by notification no. 98/2016. The preamble to the Act specified it to be “An act to prohibit Benami transactions and the right to recover property held Benami for matters connected therewith or incidental thereto.”
The Amended Act is divided into 8 chapters, containing total 72 provisions covering the substantive law relating to Benami transaction as also the enforcement machinery and the Adjudicating Authorities. The definition of “Benami transaction” as provided under section 2(9) of the Amended Act is much wider and detailed. It provides for four specific cases where transaction shall be Benami.
Clause A of section 2(9) of the Act provides that in order to be a Benami transaction or arrangement, both the conditions mentioned thereunder need to be fulfilled i.e. property is transferred or held by a person and consideration for the same is paid by another person; and the property is held for immediate or future benefit, direct or indirect, of the person who has provided the consideration.
Example: Suppose a person buys a car in the name of his driver and pays consideration for the same out of his own pocket and also puts the car for his own use or for the use of his family.
Clause (B) of the definition provides second instance of ‘Benami transaction’, when a transaction or an arrangement in respect of a property carried out in a fictitious name.
Example: Person A buying a property in the name of Person B when there is no person in existence with a name B, and it is just an imaginary person.
Clause (C) of the definition provides third instance of ‘Benami transaction’ as 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.
Example: when a person A purchases property in the name of another person B, and person B is either not aware of such transaction or arrangement or denies knowledge of such ownership, then such transaction or an arrangement shall be “Benami transaction”
Clause (D) of the definition provides forth instance of ‘Benami transaction’, when a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.
Example: Person A holds title of the property, the consideration of that property is paid by Person B, who is either not traceable or is imaginary. In such case, the transaction shall be “Benami transaction”.
An explanation has also been added to this definition which takes care of those cases where Section 53A of Transfer of Property Act, 1882 applies and properties are held on the basis of ‘agreement to sale’ and ‘power of attorney’ without execution of proper conveyance deed. Three conditions have been added for taking benefit of this explanation. The conditions mentioned with the explanation are as under:
Consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property.
Stamp duty on such transaction or arrangement has been paid; and
The contract has been registered.
It is necessary that all the conditions must be fulfilled in order to fall within the ambit of explanation. However, merely if conditions of explanation are not fulfilled in any given case, it doesn’t ipso facto means that it would be a Benami transaction. For a transaction to be a Benami transaction, it must be in the nature of Benami transaction as provided in four clauses of the definition.
The Amended Act further contains provision to prohibit entering into a “Benami Transactions” and also provides punishment for transactions entered before the commencement of the Amended Act 17i.e. period after promulgation of Ordinance and before the enactment of the new Act and also provides punishment separately for those transaction entered after commencement of the Amended Act.18 A salient feature of the Amended Act is that it provides for confiscation of Benami property and prohibits the re-transfer of property by Benamidar19. Further, the Act contains detailed provisions in relation to the enforcement machinery as also in relation to Adjudication of the case under the Act.
The Prohibition of Benami Property Transactions Act, 1988 (Amended Act) has substituted the Benami Transactions (Prohibition) Act, 1988 (old Benami Act). Section 1(3) of the Amended Act provides that “the provisions of section 3, 5 and 8, shall come into force at once, and remaining provisions of this Act shall be deemed to have come into force on the 19th day of May, 1988.” Therefore, this section makes it clear that the Amended Act would be deemed to come into force on 19th May, 1988 (date of enactment of ordinance), except section 3, 5 and 8, which would be deemed to come into force on 5th September, 1988 (date of enactment of old Benami Act).
Hence, the Amended Act has been made retroactive in nature and would be deemed to prohibit the Benami transactions from the date of the old Benami Act and accordingly provides punishment for such transaction under section 3(2) of the Amended act. Also, the Government has power to acquire all those properties which come within the ambit of “Benami property” as defined under the Amended Act. This may open a debate on whether the sham transactions entered prior to the amendment, which were not covered by the old Benami Act but is now covered under the Amended Act, would also become “Benami” under the Amended Act and would be liable for acquisition.
Benami transactions were clearly recognised in India and have been practiced even before the advent of Britishers. It was intially recognised by the Indian Courts and hence was judge-made law but later on it was accorded statutory recognition with the enactment of Indian Trust Act. It was not considered objectionable by the courts of this Country.. However, eventually the outlook of our democracy changed especially because Benami transactions were often resorted to for furthering illegal or questionable objects, including the evasion of taxes or to defeat the creditors. Such practices gradually became rampant and started creating problems in the economy. Hence, a proper Legislation was required to curb the Benami activities to ultimately curtail the illegal objects of the real owners. Thus, an Ordinance was introduced in 1988 followed by the 1988 Act. However, this 1988 Act, did not have effective provisions prohibiting such transactions and had no enforcement mechanism. A need to have a better Legislation was thus felt and therefore, an attempt was made in the form of “The Benami Transactions (Prohibition) Bill, 2011”. However, the Bill lapsed with the lapsing of the Lok Sabha even though it was referred to a Standing Committee and the Report did come. Then, 2015 Amendment Bill was again introduced and the object of the bill was stated in following words by Sri. Jaitely: “Sir, the principal object behind this Bill is that a lot of people who have unaccounted money invest and buy immovable property in the name of some other person or a non-existent person of a fictitious person or a Benami person. So these transactions are to be discouraged.” So the amendment bill has changed the color and texture of the Act altogether. The Benami Transaction (Prohibition) Amendment Act, 2016 is the result of passing of 2015 Amendment Bill and has provided a exhaustive definition of “Benami Transaction” and also detailed machinery for the implementation of the provisions to control Benami transaction efficiently. Though even the rechristened Act has many open issues, which in our view could be settled only with the passage of time, however it gives the necessary teeth to the authorities to effectively deal with the Benami transactions.
1. Gurnarain v. Sheolal, 1918 (10) TMI 1 – Privy Council
2. Bhargavy P. Sumanthykutty v. Janaki Sathyabhama and others 1994 (7) TMI 6 – KERALA High Court
3. Bhim Singh v. Kan Singh, 1979 (12) TMI 158 – Supreme Court Of India; Meenakshi Mills, Madurai v. Commissioner of Income Tax, Madras, 1956 (9) TMI 1 – SUPREME Court
4. Dyer v. Dyer, (1788) 2 Cox 92
5. Rider v. Kidder, 10 Ves. 360
7. (1854) 6 M.I.A. 53.
8. Para. 6.3 Of the 57th Report, Law Commission of India.
9. Para 6.28 of the 57th Report, Law Commission of India.
10. Para 6.29 of 57th Report, Law Commission of India.
11. AIR 1995 Ker 42 = Bhargavy P. Sumanthykutty v. Janaki Sathyabhama and others 1994 (7) TMI 6 – KERALA High Court
12. Para 5.4, 130th Report on Benami Transactions-A continuum, Law Commission of India, 1988.
13. Para 5.6, 130th Report on Benami Transactions-A continuum, Law Commission of India, 1988.
14. Para 5.7, 130th Report on Benami Transactions-A continuum, Law Commission of India, 1988.
15. Para 5 of Background, 20th Report: The Benami Transactions Prohibition (Amendment) Bill, 2015, Standing Committee on Finance (2015-2016), 16th Lok Sabha, Ministry of Finance (Department of Revenue)
16. Observation/Recommendations, 20th Report: The Benami Transactions Prohibition (Amendment) Bill, 2015, Standing Committee on Finance (2015-2016), 16th Lok Sabha, Ministry of Finance (Department of Revenue)
17. Section 3(2) of the Prohibition of Benami Property Transactions Act, 1988.
18. Section 3(3) of the Prohibition of Benami Property Transactions Act, 1988.
19. Section 5 and 6 of the Prohibition of Benami Property Transactions Act, 1988.
By: Mr. Puneet Agrawal & Ms. Purvi Sinha
GST Law India is a blog on GST and allied commercial laws managed by members of the law firm ALA Legal.