Prohibition of Benami Property Transactions Act, 1988

Prohibition of Benami Transactions 

Topics covered in this article are as follows:

1. Legislative History
2. Prohibition against entering into Benami Transactions [Sub-Section (1)]l
   2.1 Position under the BPTA
   2.2 Position under the PBPT Act
3. ‘Enter Into’/‘Enters Into’… Meaning of this Phrase
4. Legal Consequences of Benami Transactions entered into prior To 1-11-2016
5. Legal Consequences of Benami Transactions entered into on or after 1-11-2016
6. No Bar on Income-Tax Deptt. from Enquiring Who is the Real Owner of the Property

1. Legislative History

   • Section 3 of the Prohibition of Benami Property Transactions Act, 1988 (‘PBPT Act/BPTA’) deals with ‘Prohibition of benami transactions’. Section 3, as originally enacted, contained four sub-sections.
   • Sub-section (1) of section 3 of the BPTA containing the prohibition against benami transactions remains as it is.
   • Sub-section (2) of section 3 of the BPTA which exempted certain transactions from the prohibition in subsection (1) has been omitted by the 2016 Amendment Act and sub-section (3) as originally enacted containing penal provisions for violation of prohibition in subsection (1) has been renumbered as sub-section (2).
   • Clause (a) of sub-section (2) of section 3 of the BPTA exempted purchase of property by any person in the name of his wife or unmarried daughter from this prohibition and also provided a rebuttable presumption that the property had been purchased for the benefit of his wife or unmarried daughter. Clause (b) of sub-section (2) of section 3 of the BPTA exempted securities held by a depository as a registered owner or by the participant as an agent of a depository. Thus, sub-section (2) provided for the concept of ‘permissible benami transactions’. As the new definition of benami transaction in clause (9) of section (2) as substituted by the 2016 Amendment Act excludes these transactions from the scope of ‘benami transactions’, the concept of ‘permissible benami transactions’ has become redundant and consequently, the 2016 Amendment Act has omitted sub-section (2) of section 3.
   • New sub-section (3) provides penal provision for entering into benami transaction on or after 1-11-2016 and by implication provides the penal provisions in new sub-section (2) shall apply to benami transactions entered into prior to 1-11-2016.
   • Sub-section (3) of section 3 provided that whoever enters into a benami transaction shall be punishable with imprisonment up to 3 years or with a fine or with both. The 2016 Amendment Act has renumbered this erstwhile sub-section (3) as subsection (2). The erstwhile sub-section (3) as originally enacted is the new sub-section (2). The punishment in new sub-section (2) shall apply to any benami transaction entered into prior to 1-11-2016 the date of commencement of the 2016 Amendment Act.
   • The 2016 Amendment Act has inserted a new sub-section (3) which provides that whoever enters into benami transaction on or after 01.11.2016 shall, notwithstanding anything contained in sub-section (2), be punishable in accordance with the provisions contained in Chapter VII.
   • Sub-section (4) of section 3 of the BPTA provided that an offense under this section shall be non-cognizable and bailable. Sub-section (4) has been omitted by the 2016 Amendment Act. New section 61 of the PBPT Act provides that “an offence under this Act shall be non-cognizable”.
   

2. Prohibition against entering into Benami Transactions [Sub-Section (1)]

   Sub-section (1) contains a prohibition against entering into benami transactions. Sub-section (1) provides that “No person shall enter into any benami transaction”. The prohibition in subsection (1) of section 3 applies both to the person who lends his name (benamidar) and also to the real purchaser (beneficial owner). Mohammad Anwaruddin v. Sabina Sultana [1989] 179 ITR 442 (AP).

   Although sub-section (1) has not been amended by 2016 Amendment Act and the prohibition against entering into benami transaction has remained unchanged, the definition of benami transaction has undergone a change with effect from 1-11-2016. Also, penal provisions applicable have undergone a change with effect from 1-11-2016.

   2.1 Position under the BPTA

   The prohibition in subsection (1) has to be read with reference to the old definition of ‘benami transaction’ in clause (a) of section 2 as it stood prior to substitution of section 2 by the 2016 Amendment Act and with reference to sub-section (2) of section 3 as originally enacted.

   Benami Transactions (Prohibition) Amendment Act, 2016 came into force with effect from 01-11-2016. The new definitions of ‘Benami Transaction’ (See Para 2.13-1 of Taxmann’s Law Relating to Prohibition of Benami Property Transactions Act 1988 [4^th Edition | 2021]) and ‘Benami Property’ (See Para 2.12 of Taxmann’s Law Relating to Prohibition of Benami Property Transactions Act 1988 [4^th Edition | 2021]) inserted 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). By applying amended definition of ‘benami property’ and ‘benami transaction’, department could not, on basis of 2016 amendment, allege contravention and start prosecution in respect of a transaction in 2011. [Ganpati Dealcom (P.) Ltd. v. Union of India [2019] 112 taxmann.com 367 (Calcutta)]

   In Mangathai Ammal v. Rajeswari [2019] 111 taxmann.com 275, the Supreme Court held that the Benami Transaction (Prohibition) Act would not be applicable retrospectively.

   In Tulsiram v. Assistant Commissioner of Income-tax [2019] 112 taxmann.com 129 (Chhattisgarh), the Chhattisgarh High Court held that provisions of PBPT providing for confiscation of properties found to be ‘Benami’ could be applied in respect of transactions carried out prior to 1-11-2016, i.e. date on which amended provision of law by virtue of Amendment Act, 2016 came into force.

   The Court held that to decide the core issue whether the 2016 Amendment Act can be made applicable for initiating proceedings against the petitioner in respect of the properties which were purchased or acquired prior to 01.11.2016, it would be necessary to read the Act of 1988 as a whole including the provisions inserted by the 2016 Amendment Act.

   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.” Thus, sub-section (3) clearly indicates that sections 3, 5 and 8 of the Act (PBPT Act) as it stands today shall be deemed to have come into force on the 19th day of May, 1988. The remaining provisions of the PBPT Act as it stands today shall be deemed to have come into force on 5.9.1988. The 2016 Amendment Act makes no changes in section 1(3).

   Sub-sections (2) and (3) of section 3 reads as under:

   (2) Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both.

   (3) whoever enters into any benami transaction on and after the date of commencement of the Benami Transactions (Prohibition) Amendment Act, 2016, shall, notwithstanding anything contained in sub-section (2), be punishable in accordance with the provisions contained in Chapter VII.

   Both these provisions of law have been inserted by the 2016 Amendment Act w.e.f. 1-11-2016. A plain reading of both these provisions makes it evident that sub-section (2) would be applicable upon any Benami Transactions made prior to 1-11-2016 and sub-section (3) would be applicable upon only those properties or Benami Transactions made on or after the commencement of the 2016 Amendment Act, i.e. 1-11-2016. This again leads us to draw a safe inference that the proceedings under the Act of 1988 could very well be initiated against a person who has entered into a Benami transaction irrespective of the date when the 2016 Amendment Act came into force.

   So far as Chapter IV particularly section 24 is concerned, the same is only a procedural law or procedural provision inserted in the original Act of 1988 by way of amendment w.e.f. 1-11-2016.

   The Court disagreed with the view taken by the Rajasthan High Court in Niharika Jain v. Union of India [2019] 107 taxmann.com 272 (Raj.) The Court also ruled that the judgment of the Supreme Court passed in the case of Mangathai Ammal (supra) applied to different fact situation and would not apply to the facts on hand.

   The Court explained that the judgment of the Supreme Court in the case of Mangathai Ammal  (supra) relied upon by the petitioners was delivered in an entirely different contextual background and facts of the said case also is entirely different as compared to the facts of the present case. Moreover, the said judgment has been passed in a Civil Appeal assailing the judgment and decree passed from the appeal decided by the High Court affirming the judgment of decree passed by the Civil Court in a suit for partition. In addition, the said judgment so far as referring to the provisions of the 2016 Amendment Act is concerned, was keeping in view the provisions of unamended sub-section (2) of section 3 which stood omitted by the 2016 Amendment Act, dealing with the property purchased by a person in the name of his wife or unmarried daughter. Thus, the principles or ratio laid down in the said judgment would not be applicable in the given facts and circumstances of the present case.

   The whole Act of 1988 as it stands today inclusive of the amended provisions brought into force from 01.11.2016 onwards applies irrespective of the period of purchase of the alleged benami property. The 2016 Amendment Act does not have an existence by itself. Without the provisions of the Act of 1988, the amended provisions of the 2016 Amendment Act has no relevance and the amended provisions are only laying down the proceedings to be adopted in a proceeding drawn under the Act of 1988 and the penalties to be imposed in each of the cases taking into consideration the period of purchase of benami property.

   The ruling in Ganpati Dealcom (supra) can be reconciled with Tulsiram (supra) as under:

   • The ruling in Ganpati Dealcom (supra) against retrospectivity of provisions of the Benami Transactions (Prohibition) Amendment Act, 2016 apply in the context of prosecution and punishment. Article 20(1) of the Constitution provides that “No person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence”. Now prosecution, conviction and punishment are action in personam (against the person) and Article 20 forbids retrospectively declaring any act as offence and retrospectively enhancing punishment for offence.
   • The ruling in Tulsiram (supra) is in the context of confiscation of benami properties which is not prosecuting and convicting any person. Confiscation is action in rem.

   The benami transactions covered by sub-clauses (B) to (D) of the new definition in clause (9) of section 2 [See Paras 2.13-4 to 2.13-6 of Taxmann’s Law Relating to Prohibition of Benami Property Transactions Act 1988 [4^th Edition | 2021]] would not be liable for prosecution and punishment if they were entered into prior to 1-11-2016. The distinction between benami transactions and sham transactions [See Para 1.6 (supra)] would be relevant for the applicability of the prosecution and punishment provisions if the transaction was entered into prior to 1-11-2016. Sham transactions entered into prior to 1-11-2016 would not be hit by the prosecution and punishment provisions of sections 3(3) and 53 of the Act. However, it would appear that the distinction between benami and sham transactions would not be relevant for transactions entered into prior to 1-11-2016 for applicability of confiscation provisions.

   2.2 Position under the PBPT Act

   The prohibition in sub-section (1) has to be read with reference to the new definition of benami transaction in clause (9) of the substituted section 2 if the transaction in question has been entered into on or after 1-11-2016.

   The benami transactions covered by sub-clauses (B) to (D) of the new definition in clause (9) of section 2 would not be liable for prosecution and punishment if they were entered into prior to 1-11-2016. However, it would appear that such transactions would attract the confiscation provisions in terms of the ratio in Tulsiram’s case

   It appears that sham transactions entered into on or after 1-11-2016 would be regarded as benami transactions.

   

3. ‘Enter Into’/‘Enters Into’… Meaning of this Phrase

   • Section 3(1) provides that no person shall enter into any benami transaction.
   • The penal provisions in sub-sections (2) and (3) of section 3 use the words ‘enters into any benami transaction’.
   • Section 53(1) uses the words enters into a ‘benami transaction’.
   • Thus, the words ‘benami transaction’ is invariably used in the context of the words ‘enter into’ or ‘enters into’.
   • These words suggest that benami transaction is a consensual act and not something imposed upon a person such as unauthorised access to his account or fraud.
   • Although section 2(9)(C) envisages a person becoming party to a benami transaction without knowledge, in the context of prosecution provisions, it always means something that is done consensually.
   • Thus, howsoever wide a meaning that can be given to ‘transaction or arrangement’, in the context of the prosecution provisions of section 3(2), section 3(3) and section 53, it must mean something done consensually.

4. Legal Consequences of Benami Transactions entered into prior To 1-11-2016

   The following are the legal consequences of benami transactions entered into prior to 1-11-2016.

   Benami transaction is a punishable offence

   1. Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both. [Section 3(2) of the PBPT Act].
      By applying the new amended definition of ‘benami property’ and ‘benami transaction’, Department could not, on basis of 2016 amendment (the Benami Transactions (Prohibition) Amendment Act, 2016), allege contravention and start prosecution in respect of a transaction entered into in 2011 [Ganpati Dealcom (P.) Ltd. v. Union of India [2019] 112 taxmann.com 367 (Calcutta)]Prohibition of the right to recover property held benami
   2. No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property. [Section 4(1) of the PBPT Act]
   3. No defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action or by or on behalf of a person claiming to be the real owner of such property. [Section 4(2) of the PBPT Act]
   4. Consequences in (b) and (c) above will operate subject to the exceptions in sub-section (3) of section 4. Sub-section (3) has been omitted by the 2016 Amendment Act.Property held benami liable to confiscation
   5. Any property, which is the subject matter of benami transaction, shall be liable to be confiscated by the Central Government [Section 5 of the PBPT Act].Provisions of the PBPT Act providing for confiscation of properties found to be ‘Benami’ could be applied in respect of transactions carried out prior to 1-11-2016, i.e. date on which amended provision of law came into force by virtue of the 2016 Amendment Act. A plain reading of sub-sections (2) and (3) of section 3 of the PBPT Act leads us to draw a safe inference that the proceedings under the PBPT Act could very well be initiated against a person who has entered into a Benami transaction irrespective of whether the transaction was entered into prior to 1-11-2016 or on or after that date and irrespective of the date when the 2016 Amendment Act came into force (i.e. whether it is prospective from 1-11-2016 or retrospective). So far as Chapter IV particularly section 24 is concerned, the same is only a procedural law or procedural provision inserted in the original Act of 1988 by way of amendment w.e.f. 1-11-2016. [Tulsiram v. Assistant Commissioner of Income-tax [2019] 112 taxmann.com 129 (Chhattisgarh)]Prohibition on re-transfer of property by benamidar
   6. No person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf [Section 6(1) of the PBPT Act]. Any such re-transfer shall be null and void. [Section 6(2) of the PBPT Act]. However, this prohibition shall not apply where re-transfer is made in accordance with Income Declaration Scheme, 2016 e. in accordance with section 190 of the Finance Act, 2016 [Section 6(3) of the PBPT Act].

    

   Also Read:  See also Para 3.2-1 of Taxmann’s Law Relating to Prohibition of Benami Property Transactions Act 1988 [ 4th Edition | 2021 ] for the definition of Benami transactions applicable prior to 1-11-2016

5. Legal Consequences of Benami Transactions entered into on or after 1-11-2016

   The following are the legal consequences of benami transactions entered into on or after 1-11-2016:

   Benami transaction is a punishable offence

   1. Whoever enters into any benami transaction on or after the date of commencement of the Benami Transactions (Prohibition) Amendment Act, 2016 (e. on or after 1-11-2016), shall be punishable in accordance with (new) Chapter VII of the Act – i.e. in accordance with new section 53 of the PBPT Act.[Section 3(3) of the PBPT Act] Section 53(1) of the PBPT Act provides that a person shall by guilty of the offence of benami transaction if he enters into a benami transaction in order to :
      • defeat the provisions of any law or
      • avoid payment of statutory dues or
      • avoid payment to creditors, the following shall be guilty of the offence of benami transaction:
        • beneficial owner;
        • benamidar, and
        • any other person who abets or induces any person to enter into benami

        Where any person is found guilty of the offence of benami transaction as above,

        • he shall be punishable with rigorous imprisonment for a term not less than one year but which may extend to 7 years and
        • shall also be liable to fine which may extend to 25% of the fair market value of the property. – [Section 53(2)].

      ‘Fair market value’ shall be determined in accordance read with section 2(16) provides that :

      ‘“fair market value”, in relation to a property, means-

      1. the price that the property would ordinarily fetch on sale in the open market on the date of the transaction; and
      2. where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with such manner as may be prescribed, i.e., rule 3 of the Prohibition of Benami Property Transaction Rules, 2016.’Rule 3 provides that for the purposes of sub-clause (ii) of clause (16) of section 2 of the Act, the price of unquoted equity shares shall be determined in the following manner, namely:—
      1. the price of unquoted equity shares shall be the higher of,—
         1. its cost of acquisition;
         2. the fair market value of such equity shares determined, on the date of transaction, by a merchant banker or an accountant as per the Discounted Free Cash Flow Method; and
         3. the value, on the date of transaction, of such equity shares as determined in the following manner, namely:—The fair market value of unquoted equity shares = (A+B – L) × (PV)/(PE)where,
            A = book value of all the assets (other than bullion, jewellery, precious stone, artistic work, shares, securities and immovable property) as reduced by,-
            1. any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any, and
            2. any amount shown as asset including the unamortized amount of deferred expenditure which does not represent the value of any asset;

            B = the price that the bullion, jewellery, precious stone, artistic work, shares, securities and immovable property would ordinarily fetch on sale in the open market on the date of transaction;

            L = book value of liabilities, but not including the following amounts, namely:—

            1. the paid-up capital in respect of equity shares;
            2. the amount set apart for payment of dividends on preference shares and equity shares;
            3. reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
            4. any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;
            5. any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
            6. any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;PE = total amount of paid-up equity share capital as shown in the balance sheet;PV = the paid-up value of such equity shares;The provisions of section 3(3) read with section 53 shall apply notwithstanding anything contained in section 3(2).

      Prohibition of the right to recover property held benami.

   2. No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property. [Section 4(1) of the PBPT Act]
   3. No defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner of such property. [Section 4(2) of the PBPT Act]Property held benami liable to confiscation
   4. Any property, which is the subject matter of benami transaction, shall be liable to be confiscated by the Central Government. [Section 5 of the PBPT Act]Prohibition on re-transfer of property by benamidar
   5. No person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf [Section 6(1) of the PBPT Act]. Any such re-transfer shall be null and void. [Section 6(2) of the PBPT Act]. However, this prohibition shall not apply where re-transfer is made in accordance with Income Declaration Scheme, 2016, e. in accordance with section 190 of the Finance Act, 2016 [Section 6(3) of the PBPT Act].

   Also Read:  See also Para 3.2-1 of Taxmann’s Law Relating to Prohibition of Benami Property Transactions Act 1988 [ 4th Edition | 2021 ] for the definition of Benami transactions applicable prior to 1-11-2016

6. No Bar on Income-Tax Deptt. from Enquiring Who is the Real Owner of the Property

   Question arises whether sections 3 and 4 of the PBPT Act bar the Income-tax Department from enquiring into who is the real owner of the property? Can these sections be set up as defence in assessment proceedings?

   Sections 3 and 4 of the PBPT Act do not bar an enquiry into real ownership of property for income-tax purposes. What section 4 of the PBPT Act interdicts is the setting up of a claim of benami in any suit, claim or action between the person claiming to be the real owner of the property and the benamidars. A proceeding for the purpose of assessment to income-tax in which the question of benami arises is not of such a nature. What the ITO primarily seeks to establish is not the benami nature of the transaction, but the source of the investment for the purchase of the property, whether it proceeded from the assessee or the persons in whose name the property is held. It being so, the prohibitions contained in sections 3 and 4 of the aforesaid Act do not affect the consideration of this question, including the question of benami which incidentally arises. The enquiry being mainly about whether the source of the investment was made by the assessee, the benami character of the acquisition of the property is only subsidiary, and any finding thereon is only incidental, so long as the source of funds is the assessee. This is apart from the fact that sections 3 and 4 of the Act do not bar such an enquiry in an income-tax assessment as to real ownership of a property. – CIT v. K. Mahim [1995] 81 Taxman 222/213 ITR 820 (Ker.) Prohibition contained in Benami Transaction Act against plea by any person claiming to be real owner does not extend to declaring a transaction as benami transaction in tax proceedings. – P.K. Narayanan v. ITO [1994] 49 ITD 229 (Coch. – Trib.)

Also Read: 

New Benami Law And Income Tax Act, 1961

Appeals and Rectification Remedies Under Benami Act

Machinery for Adjudication & Confiscation under the Prohibition of Benami Property Transactions Act (PBPT Act)