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Explained | What Supreme Court’s order on benami transactions law means

The top court said the provisions that imposed imprisonment for benami transactions and permitted their confiscation were disproportionate and manifestly arbitrary and could not be implemented with retrospective effect.

August 31, 2022 / 12:00 PM IST

On August 24, the Supreme Court ruled on the validity of certain provisions of the Benami Transactions (Prohibition) Act, 2016, and quashed criminal proceedings for dealings that transpired from 1988 to 2016.

Terming the provisions of the law that imposed imprisonment for benami transactions and permitted their confiscation as “disproportionate” and “manifestly arbitrary,” the top court held they cannot be implemented with retrospective effect.

The law against benami transactions was enacted in 1988 and was amended in 2016, when its scope was expanded. The definition of “benami” was given a wider interpretation and penal provisions for violations of the law were introduced.  The punishments included confiscation of property and imprisonment for one to seven years and a monetary fine for some offences.

A benami transaction traditionally was recognised as one where property was transferred from one party to another while the consideration was paid by a third party. These transactions were recognised historically but under the 1988 law, they were held to be illegal. In 2016, the law was armed with stricter punishments.

The issue concerning the constitutional validity of the act reached the Supreme Court when the Centre appealed against a Calcutta High Court order. The high court had quashed a show-cause notice issued by the government under the 2016 amendment against a company for a transaction made in 2011.


‘No retrospective effect’

In a significant judgement, the three-judge bench of the Supreme Court said all criminal prosecutions related to transactions from 1988 to 2016 would stand quashed. This, the court said, was because the 2016 amendment could not be given retrospective effect. The law would operate prospectively, the court said.

A law is said to have retrospective effect when its operation also governs incidents that took place before it came into effect. Traditionally, laws, especially those that stipulate penal punishment for certain acts, are not permitted to be given effect retrospectively. The rationale behind barring retrospectivity is that no person can be punished for an act that was not illegal when it was committed.

The court held that sections of the 2016 amendment that made benami transactions punishable with imprisonment and provided for confiscation of property were “manifestly arbitrary”, “disproportionate” and hence unconstitutional. However, the court refrained from delving into the question of these provisions for prosecution of cases that took place after 2016 and limited its ruling to the question of retrospectivity.

‘Stillborn law’

The judgment noted that under the 1988 act, Sections 3 and 5, which provide for criminal proceedings and confiscation, respectively, were “overly broad, disproportionately harsh, and operate without adequate safeguards in place.”

This made the provisions “stillborn” and unconstitutional right from inception. By amending the law and giving it wider scope, new life could not have been breathed through these stillborn provisions, the court reasoned.

Moreover, the 1988 law excluded the critical aspect of mens rea, or criminal intent, for an offence while declaring all benami transactions to be illegal.

This blanket ban, the court noted, prejudiced legitimate transactions such as gifts. The element of mens rea was added in 2016, which effectively meant that only a benami transaction carried out with the intent of defeating the purpose of the law would be considered illegal.

This gap in the law not only made it susceptible to arbitrariness but also was one of the reasons that the criminal provisions under 1988 act were not utilised, the court noted. The amendment of 2016 could not, as such, “retroactively invigorate a stillborn offence,” the court said.

Effectively, after the judgment, criminal prosecution initiated for transactions from 1988 to 2016 all stand quashed. Additionally, for transactions carried out after October 2016, there exists no blanket ban on benami transactions and a transaction would be considered as an offence only if the crucial element of mens rea exists.
Shruti Mahajan
first published: Aug 31, 2022 12:00 pm
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