Benami Transactions – Definition | Meaning | Legal Implications

Benami transaction is a transaction or arrangement in respect of property whereby the identity of real owner (beneficial owner) of property is concealed by showing someone else (benamidar) as owner on record. The beneficial owner provides or pays consideration for purchase of property but title deed or ownership documents are in the name of person other than the beneficial owner.

Benami transactions can be entered into by ‘any person’ (viz., individual, HUF, firm, company, trust, etc.). The benamidar can be any person. So also, the beneficial owner can be any person.

The term ‘benami transaction’ denotes a transaction effected by a person (‘beneficial owner’) without using his own name, but in the name of another (‘benamidar’). [Sundaram Nadar v. Sukumaran 2000 (3) CTC 473] [legal crystal.com/795645]

A benami transaction is one where one (‘beneficial owner’) buys property in the name of another (‘benamidar’), or gratuitously transfers his property to another (‘benamidar’), without indicating an intention to benefit the other [Ranagappa v. Ranagaswami AIR 1925 Mad. 1005.]

Para 1.5 of the 57th Report of the Law Commission sets out the meaning of ‘benami transaction’ as follows –

“1.5 Meaning of ‘benami transaction’.—Purchase or holding of properties in the name of another is known in India as a benami transaction. This custom has been recognised by Indian Courts for a long time. Literally, the word ‘benami’ 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 name of that person, popularly known as the ‘benamidar’, as the Privy Council pointed out is simply an alias for that of the person beneficially interested. 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 the real owner.”

Para 1.9 of the said report explains that the essence of benami transactions ‘is the use of an alias in respect of the holding of property, usually (but not always), with the object of concealing the real owner’.

In G. Bahadur v. K. Visakh, Asstt. CIT, Chennai [2018] 100 taxmann.com 179/259 Taxman 556 (PBPTA – AT), the Appellate Tribunal for Prohibition of Benami Property Transactions Act, New Delhi observed as under –

“22. The characteristic of a ‘benami’ transaction is that there must be a mere lending of name without any intention to benefit the person in whose name it is made i.e. a mere name lender. The mischief sought to be punished by the Act are only such transactions which have a name lending element without deriving any benefit therein i.e. “benami” transactions. (Para 1.5 Law Commission Report No. 57 and Statement Object and Reasons of the 1988 Act) .”

The Appellate Tribunal further held that, the Act should be interpreted in a manner so as to punish only transactions that have mere lending of name without any intention to benefit the person in whose name it is made.

The term ‘benami transaction’ is defined in section 2(9) of the PBPT Act. Earlier, before the amendment of the Act by the 2016 Amendment Act whereby its title also got changed from BPT Act to PBPT Act, the term was defined in section 2(a) of the BTP Act.

Section 2(a) of the BTP Act defined “benami transaction” to mean “any transaction in which property is transferred to one person for a consideration paid or provided by another person”. Thus, there were two ingredients of a benami transaction in the definition given by section 2(a) of the BPTA –

1. a transfer of property for consideration; and
2. the consideration is provided not by the transferee but by another person for the transferee

The 2016 Amendment Act has substituted section 2 of the BPTA Act with effect from 1-11-2016. New clause (9) of the new substituted section 2 gives an exhaustive definition of the term ‘benami transaction’.

There are 4 categories of Benami Transactions as defined in section 2(9) of the PBPT Act –

1. Category I – Transaction or arrangement where consideration is provided by a person other than the transferee [Section 2(9)(A)]
2. Category II – Transaction or arrangement in respect of a property is carried out or made in a fictitious name [Section 2(9)(B)]
3. Category III – Transaction or arrangement in respect of a property where owner of the property is not aware of, or denies knowledge of, such ownership [Section 2(9)(C)]
4. Category IV – Transaction or arrangement in respect of a property where the person providing the consideration is fictitious or untraceable [Section 2(9)(D)]

It may be noted that prior to the amendment of the Act w.e.f. 1-11-2016 by the 2016 Amendment Act, the definition of ‘benami transaction’ in section 2(a) covered only Category I benami transactions which are now covered by section 2(9)(A).

In ACIT v. Tupelo Builders (P.) Ltd. [2022] 145 taxmann.com 270 (Delhi – Trib.), it was held as under –

• A perusal of the definition in section 2(9)(A) shows that for a property to be classified as Benami, the first premise is the payment of purchase consideration by “ANOTHER PERSON” i.e. a person other than the person in whose name the property is held.
• A perusal of the remaining clauses of section 2(9) of the Benami Act show that the second premise to classify a transaction as Benami is the non-disclosure of facts or source of consideration or creation of fictitious ownership which shows the real transaction to be different from the apparent transaction.

The common thread running through all the 4 categories of benami transactions as above is that it is a transaction or arrangement in respect of ‘property’. If a transaction or arrangement is not in respect of property, it is not a benami transaction. The property which is the subject matter of a benami transaction is known as ‘benami property’ [Section 2(8) of the PBPT Act]

Sub-clause (A) of new clause (9) covers the case where consideration for property is provided by a person other than the transferee which case was also covered in the old definition in section 2(a) of the BPTA. Sub-clauses (B) to (D) include situations which were not covered in the old definition. It may be noted that sub-clause (A) is subject to certain exclusions or exemptions which are listed in sub-clause (A) itself. These exclusions do not apply to benami transactions covered by sub-clauses (B) to (D) of section 2(9). Parliament has advisedly not extended the exclusions and exemptions listed in items (i) to (iv) of sub-clause (A) to the other sub-clauses i.e. sub-clauses (B) to (D).

The four categories of benami transactions and exclusions applicable to each category are summarised in the Table below –

The following table summarises the distinguishing features of all the 4 categories of benami transactions –

Sub-section (3) of section 1 provides that—

• The provisions of sections 3, 5 and 8 shall come into force at once, and
• The remaining provisions of this Act shall be deemed to have come into force on the 19th day of May, 1988.

Section 1(3) shall apply to all sections in the Act whether originally enacted in 1988 or newly inserted by the 2016 Amendment Act. Section 1(3) was not amended by the 2016 Amendment.

In view of section 1(3), it has been held that the definition in section 2(9) shall have retrospective applicability with effect from 19-5-1988. [Tulsiram v. Asstt. CIT [2019] 112 taxmann.com 129/[2020] 270 Taxman 309 (Chhattisgarh); Arun Das v Smt. Aparna Das [2021] 132 taxmann.com 285 (Tripura); Macro Entertainment (P.) Ltd. v. Union of India [2017] 87 taxmann.com 360 (Cal.); K. Nagarajan v. The Adjudicating Authority [2021] 130 taxmann.com 166/[2022] 284 Taxman 237 (Mad.)]

It is submitted with great respect that, in view of the Supreme Court decision in Union of India v. Ganpati Dealcom (P.) Ltd. [2022] 141 taxmann.com 389 holding that the 2016 amendments are not retrospectively or retroactively applicable, the above decisions in Tulsiram, Arun Das, Macro Entertainment and K. Nagarajan can no longer be regarded as laying down the correct law –

In Ganpati Dealcom (P.) Ltd. v. Union of India [2019] 112 taxmann.com 367/[2020] 269 Taxman 489 (Cal.), it was held that, as the Benami Transactions (Prohibition) Amendment Act, 2016 came into force with effect from 1-11-2016, the new definitions of ‘Benami Transaction’ and ‘Benami Property’ inserted in the 1988 Act by the 2016 Amendment Act could not be utilized to charge an appellant with contravention or conviction in respect of transactions carried out prior to 1-11-2016 (e.g. a transaction carried out in 2011).

In Shri Joseph Isharat v. Mrs. Rosy Nishikant Gaikwad (Second Appeal No. 749 of 2015 along with Civil Application No. 1428 of 2015 decided by the Bombay High Court on 1st March, 2017), the Court held that the definition of ‘benami transaction’ in section 2(9) shall not have any retrospective operation to transactions entered into on or before 1-11-2016.

In Anis Ur Rehman v. Mohd. Tahir [2019] 101 taxmann.com 319/261 Taxman 488 (Delhi), the Delhi High Court dissented from the view taken by Bombay High Court Joseph Isharat v. Mrs. Rozy Nishikant Gaikwad (supra). The Delhi High Court held as under –

• There does not arise any issue as regards the retrospective application of the provisions of section 2(9) of the Amended Act (PBPT Act) inasmuch as the unamended Act (BPTA), by virtue of section 4(3) created three exceptions to benami transactions, firstly, when there existed an HUF, secondly, when there is a fiduciary relationship and thirdly, when there is a relationship of a trustee. By the provisions of section 2(9) of the PBPT Act, what has happened is that the expressions HUF, fiduciary capacity and trustee have been defined, giving them the meaning which the law required, and this was done to remove any doubt or confusion with respect to the meaning of the expressions fiduciary capacity and trustee as found in the repealed provisions of section 4(3).
• Therefore, by defining the expressions fiduciary capacity and trustee, it is not as if any vested right existing under the earlier provisions of section 4(3) is taken away.
• This argument of the existence of a vested right under the repealed provision of section 4(3) would have been available, if the expressions fiduciary capacity or trustee were specifically defined under the repealed provision of section 4(3) as including certain transactions in these expressions and specifically otherwise barring certain transactions as benami (as not being exempted from being benami), and that now by the altered definition of the benami transaction in the PBPT Act defining and specifically specifying what is included (and thus also excluded) in the expressions fiduciary capacity and trustee, such alleged existing earlier exclusions in the expressions fiduciary capacity and trustee became in the PBPT Act allowed as non-prohibited transactions.
• But, that is not so, inasmuch as, there were no definitions/meaning given to the expressions fiduciary capacity and trustee in the repealed provisions of section 4(3) prescribing the exclusions to these expressions which will thus not be exempted as not being benami, being fiduciary/trustee transactions.
• Once that is so, therefore, there did not exist any vested right, and hence, there does not arise any issue of taking away of any vested right on account of the PBPT Act giving definitions and meaning to the expressions fiduciary capacity and trustee by the four exceptions (and one Explanation) to prohibited benami transactions as prescribed in section 2(9) of the PBPT Act.

When the impugned judgment was passed on 19.12.2016, what was, and is now applicable is the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act) which became applicable w.e.f. 1.11.2016. As per Section 2(9) of the Amended Act (PBPT Act) what is a Benami Transaction is stated/specified, and also those transactions which are not benami are also stated/specified. As per the suit plaint/averments, in the present case the existence of the properties in the name of the respondent/defendant/wife will fall as an Exception to the prohibited benami transaction in view of Section 2(9)(A)(b) Exception (iii) inasmuch as it is legally permissible for a person to purchase an immovable property in the name of his spouse from his known sources, and in which position, the property purchased will not be a benami property but the property will be of the de jure owner/plaintiff/husband and not of the de facto owner (in whose name title deeds exist), being the respondent/defendant/wife in the present case.—Manoj Arora v. Mamta Arora [2018] 96 taxmann.com 241/258 Taxman 1 (Delhi).

Sub-clause (A) is subject to certain exclusions or exemptions which are listed in sub-clause (A) itself. These exclusions do not apply to benami transactions covered by sub-clauses (B) to (D) of section 2(9). Parliament has advisedly not extended the exclusions and exemptions listed in items (i) to (iv) of sub-clause (A) to the other sub-clauses i.e. sub-clauses (B) to (D).

It may be noted that there is a modicum of genuinity in the benami transaction covered by section 2(9)(A). Such transaction was perfectly legal and enforceable before the BPT Act was enacted in 1988. Hence, these exceptions have been provided to section 2(9)(A). Transactions in other sub-clauses i.e. sub-clauses (B) to (D) of clause (9) of section 2 have some illegality or hanky-panky apparent even without them being included in section 2(9). In fact, benami transactions of the type in section 2(9)(B) if done in shares (share applications in fictitious names) are prosecutable offences under section 38 of the Companies Act, 2013. The Benami Transactions in section 2(9)(B) also amount to ‘cheating by personation’ under section 416 of IPC, 1860.

In terms of sub-clause (A) of clause (9) of section 2, the term ‘benami transaction’ covers a transaction or arrangement –

• where a property is transferred to, or is held by, a person for a consideration provided, or paid by, another person; and
• the property is held for the immediate or future benefit, direct or indirect, of the person providing the consideration.

In old definition in section 2(a), benami transaction was defined to mean

“any transaction in which property is transferred to one person for a consideration paid or provided by another person”.

Thus, there are two very noteworthy changes vis-a-vis the old definition –

• Under the old definition, the mere providing of consideration by a person other than the transferee would make the transaction a Category I benami transaction. Though the definition did not require intention of the person providing the consideration to be taken into account to determine whether transaction is benami or not, judicial rulings interpreted the definition to hold that such intention was crucial on determining transaction was benami or not. Under the new definition in section 2(9)(A), a transaction where condition (a) above (payment of consideration by person other than transferee/on record owner) is satisfied will not automatically attract the taint of benami unless condition (b) is also satisfied. Condition (b) is regarding the intention of the other person paying or providing the consideration. If that other person intends that he himself shall be the real owner of the property, then only the transferee/on record holder shall be characterised as mere benamidaar or name-lender and the transaction shall attract the taint of benami;
• Old definition of benami transaction did not cover sham transactions where possession is not given to the benamidar. Courts held that sham transactions will not be covered under the Benami Act. In old definition, benami transaction was defined to mean “any transaction in which property is transferred to one person for a consideration paid or provided by another person”. The words “property is transferred to” in section 2(a) implied transfer of both title and possession of property. In new definition in section 2(9)(A), these words have been replaced by the words “property is transferred to, or is held by” which cover cases of both transfer of title only and transfer of both title as well as possession. Besides, after the 2016 amendments, the term benamidar covers a mere ‘name lender’.Therefore, in view of the above changes in definitions of benami transaction and benamidar, it does not matter if possession of property is given or not given to the benamidar.

Court decisions have drawn a distinction between a ‘benami transaction’ and a ‘sham transaction’. For a transaction to be ‘benami transaction’, there has to exist an actual transaction or arrangement which has taken place. In a sham transaction or bogus transaction or fictitious transaction, no transaction has actually taken place and the transaction is merely shown to have taken place on paper. This is where a benami transaction differs from a sham/bogus/fictitious transaction. In Sree Meenakshi Mills Ltd. v. CIT [1957] 31 ITR 28 (SC), the Supreme Court explained that the word ‘benami’ is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, when A sells properties to B but the sale deed mentions X as the purchaser. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word ‘benami’ is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B. The fundamental difference between these two classes of transactions is that whereas in the former (benami transactions) there is an operative transfer resulting in the vesting of title in the transferee, in the latter (sham transactions) there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. In benami transactions, it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But 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.