The Supreme Court on August 23 struck down one of the provisions of the Benami Transactions (Prohibition) Act of 1988, which provides for the punishment of a maximum jail term of three years or a fine or both for those indulging in ‘benami’ transactions—where property is purchased with the identity of the true buyer is concealed. It termed the provision unconstitutional on the ground of being manifestly arbitrary. It makes it clear that authorities cannot initiate or continue criminal prosecution and confiscation proceedings for transactions entered into prior to the coming into force of the new act, i.e., October 25, 2016.
1. What does the Prohibition of Benami Property Transaction Act, 1988, deal with?
The act was enacted to prohibit benami transactions and also to recover property held benami and for matters connected with or incidental to such matters.
2. What is a benami property as per the act?
Benami property as per Section 2 (8) of the act means any property which is the subject matter of a benami transaction and also includes the proceeds from such property.
3. What is a benami transaction as per the act?
A benami transaction as per Section 2 (9) of the Act means:
“(A) a transaction or an arrangement—
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,
except when the property is held by—
(i) a karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the central government for this purpose;
(iii) any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendent and the individual appear as joint owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or
(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.
Explanation —For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for the time being in force—
(i) 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;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered;”
4. What is the punishment for doing a benami transaction?
As per Section 53 of the act, if a person is found guilty of entering into a benami transaction in order to, among other things, defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, that person faces a minimum of one year’s rigorous imprisonment for a term, which may extend to seven years. The person will also be liable to a fine which may extend to 25 percent of the fair market value of the property.
5. Can benami property be confiscated?
Yes, benami property can be confiscated under the provision of Section 5 of the act.
6. What are some of the important amendments to the act in 2016?
The Benami Transactions (Prohibition) Amendment Act, 2016, which came into force on October 25, 2016, contained 72 section compared with the previous nine sections.
The new act widened the definition of benami transaction, and also provided for the attachment, adjudication and confiscation of property.
The penalties described above were codified under Chapter VII.
7. What is the impact of the order of the Supreme Court dated August 23, 2022?
The order passed by the Supreme Court in the matter of UOI vs M/s Ganpati Dealcom Pvt Ltd has held:
A. Section 3(2) of the act which prescribes a punishment of up to three years or fine as unconstitutional. (The response to Q 4 above will remain the same)
B. Forfeiture provisions under Section 5 of the unamended act, i.e. prior to the new act coming into force, as unconstitutional and manifestly arbitrary.
C. That authorities cannot initiate or continue criminal prosecution and confiscation proceedings for transactions entered into prior to the coming into force of the new act, i.e., October 25, 2016.
The author is Partner, IndusLaw