The term "Benami Transaction" is used to describe a transaction where one person pays for the property but the property is transferred to somebody else. The amendment act of 2016 prohibits benami transactions and provides for confiscating benami properties.
This blog gives a detailed analysis of what a benami transaction is and how a benami transaction is being treated under the prescribed laws in force in India. Read the blog to know more about the Benami Transactions.
For more adept legal help or information about the Benami transactions or the impact of the 2016 Act on property transactions in India, connect to us for an expert legal consultation.
Benami transaction means any transaction of property which is done in the name of one person and consideration is paid by another person. Also, it must be in the future benefit, directly or indirectly, to the person who has paid the consideration.
This type of transaction mainly takes place in the real estate sector. Before 1988, Benami transactions were not illegal and there was no law for people who commit fraud by entering in such transactions. The only thing that was not allowed was to recover the property by the real owner from the benamidar.
Therefore, the Benami Transaction (Prohibition) Act came into force in 1988 with the intention of prohibiting benami transaction and right to recover the property held benami. This act was amended in 2016 and now referred to as the Benami Transaction (Prohibition) Amendment Act, 2016.
Table of Contents:
What is a Benami Transaction? Who is a Benamidar?
In simple terminology, benami transactions are those transactions where the property is acquired by the name of one person and for the said purpose consideration is being paid by another person. So, here the former one is the nominal owner and the latter one is the Real owner of the property.
The Privy Council in the case Pether Perumal v. Muni and held that the person who lends his name for purchasing the property and who is an ostensible owner i.e. the Benamidar is nothing but a true owner of the property who has beneficial ownership.
Under Section 10 of The Benami Transactions (Prohibition) Amendment Act, 2016 “Benamidar means a person or a fictitious person, as the case may be, in whose name the benami property is transferred or held and includes a person who lends his name”. A transaction is said to be benami if it is made under some fictitious name.
What are the exceptions of Benami Transaction?
The Act prescribes certain exceptions to Benami transactions under Section 2(9). The property will not be said to be benami if that property is held by:
Karta of Hindu Undivided Family and the property is held for his benefit or for any member of his family and the consideration has been paid from some known sources of the Hindu Undivided Family.
Any person transferring the property has a fiduciary relationship and is doing so for the benefit of another person such as trustee, partner or director of the company, or a depository or an agent of a depository under the Depositories Act, 1996 or any other person as may be notified by the Central Government regarding this.
Any person transferring the property in the name of his spouse or in the name of his child.
Any person transferring the property in the name of his brother or sister or lineal ascendant or descendant,
Provided the consideration paid for such transactions comes from known and traceable sources.
What are the amendments done in the Benami Transaction (Prohibition) Amendment Act, 2016?
The previous act of 1988 had only 9 sections. In the act of 2016, there are 72 sections.
It has widened the scope of the original act Benami Transaction (Prohibition) Act, 1988 and has been made strict.
It has clearly defined the meaning of benami transaction, its exceptions.
It has established the authorities to inquire into such matter.
It has amended the penalty for entering into benami transactions.
It has established an appellate tribunal for hearing appeals regarding benami transaction.
In the previous act, there was section for confiscating the benami property but not the procedure. In the amended act, the procedure is given.
Impact of Amended Benami Transactions Act on real estate
Real estate is a capital intensive assets class and considered as one of the main avenues for the investment of unaccounted money in India. Practically, the act should impact the real estate transaction volume especially land transactions and real estate prices adversely.
Moreover, the Act is amended with an aim to prohibit Benami transactions; meaning, all real estate transactions shall be in the name of the actual owner who is paying the consideration from his known sources.
One of the major problems in the real estate transactions is clarity of title which limits the investor, as well as financial Institution participation in the sector.
It is very evident through the past trends that the private equity and NBFCs are chasing only a few premium developers to provide debt or equity and staying away from the non-metros and small developers due to transparency issues in the transactions.
This Act has brought transparency in the real estate sector by adding a correct title to the property. Buyer’s confidence has increased as they will be buying at a reasonable price from the real owner of the property. Also, the Lender’s confidence has increased as there will be no multiple ownerships, unknown ownership, and false ownership now. When titles are not clear, it is very risky for the banks to provide loans on such property. So, bad debts have reduced.
Authorities Established under the Amended Act
The Act provides for four major Authorities i.e. The Initiating Officer, the Approving Authority, the Administrator and the Adjudicating Authority as appointed by the Central Government.
The office of the Initiating Officer will be held by an officer who is the Assistant Commissioner or a Deputy Commissioner as required by the Income Tax Act, 1961. The authorities will have the same powers as those of the Civil Courts under Civil Procedure Code, 1908.
Treatment of Benami Property under The Amended Act
Issuing a Show Cause Notice:
If the Initiating Officer receives some material that is good enough through which the officer has a reason to rely that a person can be considered as a benamidar with respect to particular property, then the officer can issue a show cause notice to a person to prove why the particular property shouldn’t be considered as Benami Property. The person has to give the reply within the time specified in the notice and it must be in writing.
Effect of Alienation After Notice:
After a person receives a show cause notice and then tries to alienate that particular property. then the property will be considered null and void and the transaction held invalid.
If the Initiating officer believes that the said property of the person is a benami property and the person can alienate the said property during the time prescribed under the notice, then in that case, the Initiating officer can pass an order and then attach the property provisionally in the prescribed manner for a particular period which will not exceed 90 days from the date of issuance of such notice. Moreover, before the attachment, the Initiating officer has to take the formal approval from the Approving Authority.
Reference To Adjudicating Authority:
Whenever the Initiating Officer passes any attachment order regarding the continuing of the provisional attachment of the property, he has to refer the case to the Adjudicating authority within 15 days from the date of the order of attachment.
Attachment And Confiscation:
Now, Adjudicating Authority will give the reasonable opportunity of hearing to the person who is a benamidar and after that Authority will pass an order through which they will either confirm or revoke the order of attachment.
If the Adjudicating Authority passes the order of confiscation then the Rights and title of the property shall be made in favor of Central Government and these rights will be free from all encumbrances. Moreover, the Govt. will not give any compensation with respect to such confiscation.
However, the person has a right to Appeal against the Order of the Adjudicating Authority. An appeal can be made before the Appellate Tribunal. The time period for the Appeal is 45 days from the date of the particular order.
The Administrator will have the ability to get and manage the property, in connection to which confiscation order is made. He is allowed to use such measures which are deemed fit and required for overseeing such property. He likewise has the power to implement ownership by giving reasonable notice to the occupier of the particular property.
An Appellate Tribunal must be formed by the Govt. which will hear the Appeals of the persons against the specific orders of the Adjudicating authority. This Tribunal shall have all the powers of Civil Court but the Tribunal is not restricted by the technicalities of Code of Civil Procedure, 1908 in order to expedite these proceedings.
Parties are allowed to Appeal before the Tribunal within maximum 45 days from the date of the order of the Adjudicating authority. Lastly, Tribunal has to furnish an order within one year from the date when the appeal is filed.
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Penalty for Benami Transaction
If a person enters into the Benami transaction by defeating the provisions of any law and that person also forces or induces another person to enter into the Benami Transaction, then the person will be guilty and must be punished for the offense of Benami transaction.
“A person found guilty of the offense of Benami transaction under Section 53(1) shall be punishable with rigorous imprisonment for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to twenty five per cent of the fair market value of the property”.
The act also provides that if a person has to give some information under this Act and he provides any false information to any authority with his willful intention, then the person will be punished with imprisonment which is not less than 6 months and can be extended up to 5 years and made also be liable for a fine of up to 10% of the fair market value of the said property.
The offenses given in the amendment act 2016 are stricter than the earlier Act, which only prescribed penalty by way of imprisonment for up to three years. Moreover, in the earlier act, a person was not liable to pay any fine.
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Written By: Parag Singhal
National Law University Odisha, Cuttack (4th Year)