Everything You Need to Know about Benami Transactions

Introduction:

Even before the arrival of the British, Indians engaged in Benami transactions. It was a legal idea at the time. It was not thought to be risk-free. However, over time, these were frequently used to promote illicit or questionable activities, such as tax evasion. Benami transactions were also used to defraud creditors on occasion. The practice grew in popularity over time. As a result, proper legislation was required to limit Benami operations and, as a result, the illicit objects of the true owners. As a result, in 1988, an Ordinance was passed, followed by the 1988 Act. However, the Benami Act, which was enacted in 1988, lacks effective provisions and implementation. Benami transactions were not unlawful in India prior to the 1988 Act; there was no prohibition or penalty under any law for engaging in a Benami transaction, and the properties that were the subject of the Benami transaction were not subject to government seizure.

What is a Benami Transaction?

The Persian word “Benami” means “property without a name,” and its literal meaning is “property without a name.” Any transaction in which property is transferred to one person for compensation paid or furnished by another person, according to section 2(a) of the Benami (Prohibition) Act, 1988.

In layman’s terms, a Benami property is one that is purchased in the name of another person by one person (who invested the money) (the person who has not invested in the property). The person who bought the property is not obligated to convey any interest in the property to the person in whose name the property was purchased.

Benami transactions are cases of financial deals that involve a third party whose name is not disclosed in order for the benefits of said deals not to transfer monetarily to him/her. The term can come about from a number of situations. In many countries, there is a legal distinction made between the name of beneficial owners and their addresses, which is why it’s common for some companies to use a nominee as their representative. In other countries, third parties’ names are simply never filed as owners of the company. In these cases “Benami” can apply to any transaction(s) involving those third parties.

According to the 2016 Benami Transaction (Prohibition) Amendment Act, A transaction is considered a Benami Transaction if it meets both of the following criteria:

1. Any person holds or transfers property to another person for a price paid by another person.
2. The property is kept for the advantage or future benefit of the person who has provided such consideration, either directly or indirectly;^[1]

Types of Benami Transaction recognized in India

The transaction is known as Benami when a person purchases a property with his own money but in the name of another person with no intention of benefiting that other person. In that instance, the transferee is the real owner and holds the property for the benefit of the person who donated the purchase money.

The second scenario, referred to as a Benami transaction, occurs when a property owner executes a conveyance in favor of someone without intending to transfer title to the property. In this instance, the real owner is still the transferor.

The difference between the two types of Benami transactions discussed above is that in the former, there is an operative transfer from the transferor to the transferee even though the transferee holds the property for the benefit of the person who contributed the purchase money, whereas in the latter, there is no operative transfer at all and the title remains with the transferor despite the conveyance being executed. The genuine title is separated from the ostensible title in both of these circumstances, and they are vested in distinct persons.

Transactions not Considered as Benami

A transaction covered by section 53A^[2] of the Transfer of Property Act is not regarded as a Benami transaction if the person who owns the property has supplied an examination for it. Even though the individual who granted possession of the property retains the right to it, stamp duty on the transaction or arrangement has been paid, and the contract has been registered. Executor, Trustee, Partner, Director, Karta, Spouse or Child, Brother or Sisters, or legal ascendant or descendant – a person acts in a depository capacity; consideration is paid out of known sources.

Why and How a Benami Transaction takes place?

There are two parties involved in a Benami transaction. On the one hand, the Benami transaction’s consideration is paid by the beneficial owner of the property. The benamidar, on the other hand, is the owner of the property under whose name the property was purchased.

Many people make a lot of money through sources they don’t know about, which is referred to as “black money.” There are numerous methods for concealing such funds. One method is to invest in real estate and engage in Benami transactions. By purchasing a property through a Benami transaction, a person avoids paying income tax since he does not use his name anywhere and the transaction is not recorded in his account. Because the actual beneficiary’s name is missing, he or she cannot be identified. He will be able to put that money to good use in this manner. Second, there is a limit to how much land an individual can hold in order to ensure that land is distributed equally. As a result, they buy land in the name of others.

Why is it Illegal in India?

Benami transactions have long been a part of India’s culture for many years. In a number of judgments, the Courts went on to say that some Benami transactions were national customs that needed to be recognized as such, thereby granting them legal status, because the custom was one of the most important sources of law at the time.

However, it was eventually discovered that Benami Transactions were being used for a variety of nefarious purposes, such as money laundering and tax evasion. It was also noted that these transactions may be used to divert one’s assets into the name of another, thereby defeating and deceiving creditors’ legitimate claims.

Benami Transaction (Prohibition) Amendment Act, 2016

The Benami Transactions (Prohibition) Amendment Act, 2016, which was passed by parliament in August 2016 and went into force in November 2016, was aimed to combat black money. The Prohibition of Benami Property Transactions (PBPT) Act, 1988, revised the Benami Transactions Act, 1988, and renamed it the Prohibition of Benami Property Transactions (PBPT) Act, 1988. In terms of legal and administrative procedure, the amending legislation reinforces the parent Act. The act’s goal is to bring unexplained funds into the financial system.

Impact of Benami Amendment Act

The real estate sector is the most affected by the Benami Act’s applicability. This Act ensures that real estate transactions are carried out in the name of the genuine owners, i.e. the person paying the consideration for the property. This most likely resulted in lower real estate values.

It alleviated a fundamental problem in the real estate industry, namely the absence of property title clarity. This lack of transparency deters investors such as private equity and non-bank financial institutions (NBFIs) from engaging in the real estate market.

If a person deposits old currency in the account of another person with the knowledge that the account holder will return the money in the new currency as part of the ongoing demonetization process, this might be considered a Benami transaction. The Tax Department has the authority to issue notices under the Benami Property Act in this case.

Benami transactions can also occur when a company raises funds but is unable to produce its shareholders to the appropriate authorities. If a person takes a loan and is unable to establish the lender’s genuinity or produce the lender, the Benami Act may apply as well. The new rule is also likely to have a significant impact in rural India, where even real landowners may find it difficult to demonstrate their titles due to the enormous volume of cash transactions and poor status of land records. The amended Prohibition of Benami Transactions is a significant step forward by the government in combating the flow of black money.^[3]

Punishment under the Act

The statute^[4] punishes those who are found guilty by imposing a sentence of up to three years in prison, a fine, or both.

In addition:

1. No one should participate in Benami Transactions.

2. Subsection (1)^[5] does not apply to property purchased in the name of a person’s wife or unmarried daughter, and it is considered, unless shown otherwise, that the property was purchased for the benefit of the wife or unmarried daughter.

3. An offense under this section shall be non-cognizable and non-bailable for anyone who enters it into the Code of Criminal Procedure^[6].

Conclusion

Benami Transactions pose a threat to regular functioning, particularly in the property sector, because people use this way of purchasing properties as a set formula to alter their black money in order to avoid paying large taxes that would otherwise be imposed on the taxpayer. Such transactions must be fully abolished by the government’s severe and deliberate efforts. In reality, the government has been successful in enacting policies that it believes would eliminate the issue of Benami transactions to a larger extent. Not only the government but also the general public, should come out and help identify those involved in Benami transactions so that the government can take the appropriate steps in the future and so frame the future course of action.

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References:

^[1] Thakur Bhim Singh v. Thakur Kan Singh [1980] 3 SCC 72.

^[2] The Transfer of Property Act, 1882, §53A, No. 4, Acts of Parliament, 1882 (India). 

^[3] The Benami (Prohibition)Transaction Amendment Act, 2016, No. 43, Acts of Parliament, 2016 (India). 

^[4] Supra note 3, § 3. 

^[5] Supra note 3, § 3(1).

^[6] The Code of Criminal Procedure, 1973, No. 2, Acts of Parliament, 1973 (India).