Benami Transactions (Prohibition) Act, 1988 - iPleaders

Rachit Garg

13–17 minutes ( may 16th 2021)

This article is written by Riya Jain, from the Institute of Law, Nirma University. The article deals
exhaustively with the regulation for the prohibition of Benami Transactions under Benami
Transactions (Prohibition) Act, 1988.

Table of Contents

 Introduction

 Statements of objects & reasons

 Key Terms under the Act

 Benami transaction differs from sham transaction

 The exceptions of the benami transaction

 Penalty

 Implication under the Income Tax Act, 1961

 Relevant case laws

 Conclusion

 Reference

Introduction

The Benami Transaction (Prohibition) Act, 1988, was enacted for the purpose of preventing and
restricting Benami transactions and right to recovery of Benami property and otherwise any
transaction incidental thereto. The widespread transactions dealing in Benami property in the
country with the view of tax evasion on the ground that real owner is prohibited for enforcing his
right, interest, claim or action in the impugned property in the court unless he produced documents
mentioning income of that property for want of income tax or had given prior notice of claim to the
property to concerned income tax authorities.

The Act postulates provision on restriction upon right of recovery of property held benami under the
Act by way of enforcing or taking defence of such right, claim or interest against person in whose
name property is held or any other person claiming it be the real owner of the property as provided
under Section 4 of the Act. Therefore this section constructs a vital role in handling Benami
transactions in relation with property held Benami.

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Statements of objects & reasons

The benami transactions were recognized under British Rule in 1778 by Mr. Justice Hyde’s. Later in
the year 1854, a committee formed for review of the case in Gopeekrist Gosain v. Gungapersuad, the
committee observed that benami transactions are the custom of the country and must be recognised
till the legislature makes the law under such head. On such a suggestion, the Indian Trusts Act under
section 81 and 82 gave legal approval for the practice of Benami transactions and the court is bound
to enforce it.

The Parliament introduced Section 281A of the Income Tax Act, 1961 for prohibiting Benami
transactions and their implications by barring any institution of suit for Benami transactions. The
framework for Benami transaction took its shape by formulation of Law Commission in its 57th
report, The Law Commission has submitted its 130th Report titled “Benami Transactions – a
Continuum” on following provisions:

1. All agreements in consonance with benami transactions after the commencement of new
law will be an offence.

2. The benami property must be subject to acquisition by such authority in the same manner
and procedure as may be prescribed under rules of legislature. Provided that no amount
shall be payable for the acquisition of property.

3. Section 81 and 94 of the Indian Trust Act,1882 shall be repealed.

President promulgates the Benami Transaction (Prohibition of the right to recover property),
Ordinance on 19 May 1988. The Ordinance barred instituting any claim, action or suits as against
Benami transaction for enforcing recovery of any rights in Benami property or defence on rights in
Bemani property cannot be permitted except the right to institute suit regarding HUF members and
fiduciary relationship. It repealed Section 82 of the Indian Trusts Act, 1882, Section 66 of the Code of
Civil Procedure and Section 281A of the Income-tax Act, 1961.

Key Terms under the Act

‘Benami’ is a Persian word that means analogous or without a name. In such transactions, persons
vested with no benefit other than transfer and legally recorded name in the property are called
benamidar. The person paying consideration to such as the benami property fit of interest either at
present or future time like tax evasion, avoiding payment to creditors, utilizing black money and
therefore is called the beneficiary owner. The following transactions falls under the definition of
Benami transactions:

 Property held in benami transactions is carried out under a fictitious name.

 The real owner of the property has no knowledge or denies having any knowledge of the
ownership of such property.

 Where the person providing the consideration is untraceable or fictitious i.e. beneficiary
owner identity is unknown.

The benami transactions are the transaction which involves the transfer of property for the
consideration paid by another. The apex court observed in the case Bhim Singh v. Kan Singh, benami
transactions deals with person’s who are capable of purchasing property with his consideration but
in the name of another person with the intention of benefitting such another person. In such
transactions, the transferee holds the possession of the property for the benefit of the person who

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contributed to such property and he is the real owner. For example, the director of the company
knows about fluctuations in the prices of shares. However, he is not entitled to purchasing or selling
the shares but if he entered into an agreement with third parties by providing consideration for the
purpose of purchasing shares in his name then in such instance, these transactions would amount to
Benami transactions.

The property is defined under Section 2(c) of the Act means property of any kind whether movable
or immovable, tangible, or intangible, including any right or document proving title or interest in
such property.

Benami transaction differs from sham transaction

In Benami transactions, there must exist transaction or agreement for sale or purchase of property
along with transfer of right, possession and title to the transferee but on other hand, in sham
transaction, transaction happens to be executed on papers but actual owner vest with all rights,
claim, possession and title to the property; in other words no transaction take place but shown to be
done on papers. The act excluded sham transaction under Section 2(a) and court in various cases
debar sham transactions from the provisions of Benami Transactions (Prohibition) Act, 1988.

In the case of Sree Meenakshi Mills Ltd. v.. CIT, the court observed that the word Benami consists of
two classes of transaction which differ in their legal grounds and real character. In one sense, it states
a real transaction in which a person purchasing or selling property is no same to a person paying
consideration like A purchase the property in the name of B with payment of money out of his
known source of income. These transactions are called Benami transactions. However, sometimes
sham transactions are also termed as Benami Transactions.

The exceptions of the benami transaction

The benami transactions exclude the following transactions under the head of benami transactions,
as given under Section 4(3) and Section 3 (2) of the Act:

1. Property possessed by the member of HUF or coparcener for the benefit of coparceners in
the family, consideration of which is paid from known sources of income.

2. Property is held under a fiduciary relationship in which a person holding property is a trustee
or another person for the benefit of all persons for whom he is the trustee as responsible for
standing in his capacity.

3. Property is held in the name of spouse or unmarried daughter in which consideration is paid
from known sources of income unless proven contrary that such property had been
purchased for the benefit of the spouse of the unmarried daughter.

Penalty

The penalty under the Act shall be punishable with imprisonment which may extend to three years
or fine or both as prescribed under Section 3(3) of the Act. it also entails confiscation and acquisition
of all properties in relation with benami transactions by such authority in such manner and
procedure as may be prescribed. The offences punishable for prohibition of benami transactions
shall be non-cognizance and bailable.

Implication under the Income Tax Act, 1961

In the enforcement of the Income Tax Act 1961, it was found that benami transactions acted as a
mechanism to defraud and evade tax by indulging in such illegal agreement and thereby digressing

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from real and legal transactions. To give effect to such transactions, Parliament introduced Section
281A of the Income Tax Act which states that- ‘Effect of failure to furnish information in respect of
property held benami,’ in the sense that property held benami can be challenged in any suit before
any court of law to enforce any right whether against whose name property is registered or any
other person claiming it to be real owner unless notice containing particulars has been given by
claimant within one year from the date of acquisition to Chief Commissioner or Commissioner. Since
section 281A of IT Act did not impact such an effect of prohibition, Parliament enacted Benami
Transaction (Prohibition) Act, 1988. The act repealed section 281A of IT Act i.e. totally debar suit of
any kind including exception under Section 7 of the Act along with other provisions.

Recently, Rashtriya Janata Dal chief Lalu Prasad and his family members were booked for benami
transactions through cooperative banks investing in some benami property which led to arrest of
Lalu Prasad, his son, wife and daughter under Benami Transactions Act,1988 for transactions worth
1000 crore. The IT department confiscated 12 plots, farmhouses, lands and buildings in Delhi and
Patna. Such instances diminishes the economical growth and development of the country by way of
converting black money in cash form into investment in benami property in order to distribute the
allocation of money and thereby save consideration in any kind.

Relevant case laws

1. Ouseph Chacko v. Raman Nair: The word ‘held’ in Section 4 refers to ‘possessed or occupied’.
Section 4 has no application if there is no possession or occupation of the property for the
purpose of amounting to Beami as sham transactions are not benami transactions and
therefore does not fall under Section 4 of the Act.

2. Mahinder Singh v. Pardaman Singh: The burden of proof for proving that the transaction is
benami lies on the person complaining about such transactions. Further, the principle for
determining whether the transaction is benami or not can be ascertain by showing that
money paid has been incurred by the person other than the person in whose favour such
property is transferred and the intention of such person must be evaluated from the facts
and circumstances of each case, relationship of the parties and ulterior motive through
his/her conduct.

3. Mithilesh Kumari v. Prem Behari Khare: The expression “any property held benami” is not
limited to any particular time, date or duration i.e. the Benami Transactions (Prohibition) Act,
1988 is retrospective in operation. If the property is found to have been held benami no suit,
claim or action to enforce any right in respect thereof shall lie. Sub-section (2) of Section 4
similarly nullifies the defences based on any right in respect of any property held benami.

The benamidar before the enactment of the Benami Transactions (Prohibition) Act, 1988 could not
have any right, title and interest in the property, which the benamidar could convey. By the principle
of fictional relation back as propounded by the Supreme Court in Mithilesh Kumari (supra), the
benamidar should be deemed to have title to the property on the date he executed the deed or
release.

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Conclusion

Every party has the right to enter into agreement for the purpose of sale or purchase of movable or
immovable, tangible or intangible property as guaranteed under Article 19(g) prescribing the right to
trade and carry on any business within the limit of reasonable restriction. However, any illegal
transaction unnamed or named under another person having no flow of consideration but otherwise
held the property for the benefit of another person stands illegal because it falls short of the
principle that property must be transferred in favour of a person at whose favour the transaction was
executed.

The Act empowers the Central Government to carry out rules for the purpose of the Act for
authorising authority to acquire property held benami, manner and procedure while undergoing
acquisition of the property. This Act was amended in 2016 to provide a comprehensive regulation for
authority, transaction and other relevant matters in order to build a strong framework of law
governing benami transactions.

The growth of benami transactions while existence and enforcement of the Act show that strict
regulation and comprehensive awareness regarding the prohibition of benami transactions is the
need of the hour. The imposition of harsh punishment to the offenders of benami transactions for
the purpose of reducing what tenders to lower economic development of the country at the cost of
people dealing in legal and valid transactions.Since the person holding benami property took the
right of another person to hold that property in legal terms and conditions.

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Offences and penalties under the Benami Transactions Act - iPleaders
Vanshika Kapoor
17–22 minutes ( September 24 ,2024)

This article has been written by Bhavisha Manish Ramrakhyani pursuing the Diploma in International
Contract Negotiation, Drafting, and Enforcement Course from LawSikho, and edited by Shashwat
Kaushik. In this article, we will take note of offences and penalties under the Benami Transactions Act
but before that, we must understand what Benami Transactions are and learn some key points of
Benami Transactions (prohibition) Amendment Act, 2016.
Table of Contents
 What are benami transactions
 Offences under the Benami Transactions (Prohibition) Amendment Act, 2016
o Benami transactions
 Definition and context
 Offence
 Objective
 False information
o Definition and context
o Offence
o Objective
 Abetment of benami transactions
o Definition and context
o Offence
 What are the penalties under the Benami Transactions Act
o Involvement in benami transactions
o Providing false information
o For abetment of Benami transactions
 Additional provisions and penalties
o Confiscation of the property
o No right to reclaim
 Landmark case laws on the Benami Transactions Act in India
o Shri. Mudapallur Varieth Gangadharan vs. the Deputy Commissioner of Income Tax
(2022)
o Union of India vs. Ganpati Dealcom
 Conclusion
 References

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What are benami transactions
Benami transactions are those that are done by a person on behalf of another person, who is the real
beneficiary. These types of transactions are mostly seen in property cases.

Let’s understand this with a simple example.

Suppose Mr. A wants to buy a building but he does not want to have it registered under his name. He
asks Mr. B to be the purchaser and provides the money for the same and Mr. B follows through. Now
Mr. B registers the building in his name by purchasing it legally. However, despite Mr. B being the
legal owner, the actual control and benefit of property lie with Mr. A.

This type of transaction, where the real beneficiary tries to conceal his identity in the name of
someone else, is called a Benami transaction. You must be wondering why you are going through this
hassle when Mr. A could have purchased the building by himself. The motive behind this transaction
can be tax evasion, hiding black money, bypassing property laws or hiding the identity of the real
owner.

Why was the Benami Transactions (Prohibition) Amendment Act, 2016 enacted?

The parliament passed the Benami Transactions (Prohibition) Amendment Act, 2016 which aimed at
regulating black money, in August 2016 and came into effect in November , 2016 in the same year.
The above law is an amendment to the Benami Transactions Act, 1988 and therefore its name has
changed to the Prohibition of Benami Property Transactions (PBPT) Act, 1988. The revised act
strengthens the original legislation by improving legal and administrative mechanisms. The main aim
of this Act is to bring back illegal money into the mainstream economy.

Offences under the Benami Transactions (Prohibition) Amendment Act, 2016

Here is the list of offences as defined under this act:

Definition and context

A benami transaction is a form of financial arrangement where an individual purchases a property

Offence

Entering into a Benami transaction: Any person who enters into or does any other act that satisfies
the definition of a Benami transaction as given under Section 2(9) commits an offence under this
Act. This includes both the person who finances the transaction (the beneficial owner) and the
person in whose name the property is held (the benamidar).

Objective

Tax evasion, hiding black money, or concealing assets from creditors, authorities or legal scrutiny are
some of the primary objectives behind Benami transactions.

Example:

To avoid tax liability or hiding ownership, Person A buys a piece of land but registers it in Person B’s
name, such as that of a friend or relative. In this case, Person A is recognised as being the beneficial
owner, while Person B acts as the benamidar.

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False information

Definition and context

False allegations consist of deliberately giving wrong or misleading data to government officials with
the intent of avoiding compliance with the Act.

Offence

False statements: Untrue information about ownership, source of funds or any other material
particularly relating to Benami property.

Fake documents: Falsifying or modifying papers that misrepresent the real nature of the deal on a
property.

Any other form of false information: This could involve actions like hiding papers, tendering false
testimony, or any other means of deception to authorities.

Objective

Usually, providing false information is an attempt to distract officers from discovering benami
transactions so that legal consequences are not meted out to them.

Example:

Person A’s claim as the rightful owner of a property through fake documents, when in reality person
B was the one who gave money for buying it, entails falsifying evidence.

Abetment of benami transactions

Definition and context

Abetment in view of benami transactions indicates the act of conniving, aiding or instigating another
individual to enter into a benami transaction. This can be advice, facilitation, or active participation
during the transaction process.

Offence

 Encouragement or inducement: This refers to encouraging a person to indulge in a benami

 Aiding: This is giving support while entering into any benami transaction. It can be financial;
it can involve legal advice among others.

 Active participation: Creating fake documents for executing the benami transaction, giving a
false witness or acting as an agent

Example:

If Person C advises Person A to buy property on behalf of Person B so that they do not have to pay
taxes and helps him with all necessary documents and financial transactions needed by Person A
then Person C will be liable for abetting the said Benami Transaction.

I hope you now have a clear idea about the offences under this Act.

What are the penalties under the Benami Transactions Act

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The Amendment Act of 2016 regarding Benami Transactions serves as a significant piece of
legislation that seeks to address the issue of benami transactions. It aims to deter individuals from
engaging in such activities by establishing severe penalties for those found guilty of benami offences.

One of the key consequences outlined in the Act is imprisonment. Individuals convicted of benami
transactions can face rigorous imprisonment for a term that may extend up to a period of seven
years. This strict punishment aims to emphasize the seriousness of the offense and deter potential
offenders from partaking in such activities.

Additionally, the Act imposes financial penalties on individuals involved in benami transactions.
Offenders may be liable to pay fines that can be as high as 25% of the fair market value of the
property involved in the transaction. These substantial fines are intended to serve as a financial
disincentive and to discourage individuals from engaging in benami transactions for monetary gain.

Furthermore, the Amendment Act of 2016 also includes provisions for the confiscation of properties
acquired through benami transactions. If an individual is found guilty, the court may order the
confiscation of the property involved in the transaction. This strict measure is designed to prevent
offenders from benefiting from their ill-gotten gains and to ensure the recovery of properties that
have been illegally acquired.

In the case of benami transactions involving public servants, the Act imposes even more stringent
penalties. Public servants found guilty of engaging in benami transactions are subject to both
imprisonment and disqualification from holding public office. This additional punishment aims to
uphold the integrity and transparency of public institutions and deter public officials from abusing
their power for personal gain.

The Amendment Act of 2016 regarding Benami Transactions plays a crucial role in promoting
transparency and responsibility in financial dealings. By establishing severe penalties for benami
offenses, the Act discourages individuals from engaging in such illicit activities and helps to maintain
the integrity of the nation’s financial system.

Involvement in benami transactions

 Prison sentence: Any individual convicted of partaking in a benami transaction could face a
sentence of imprisonment ranging from one year to a maximum of seven years.

 Fine: Apart from going to jail, the person who commits the crime may also have to pay a fine
that could be 25% of the property’s fair market value.

 Here’s why: The phrase ” imprisonment” suggests a type of jail time that includes difficult
work. The fine, which can amount to 25% of the property’s market value, serves as a
discouragement for benami deals.

Providing false information

 Imprisonment: If you lie by saying things that are not true, or give false papers, or deceive to
get around the rules of the law, you can go to jail for at least six months, and up to five years.

 Monetary: You may also have to pay a big fine, which could be up to 10% of the value of the
thing you gave misinformation about.

 Here’s why: This rule is for those who try to trick the people in charge by giving them wrong
details. This is not okay and so the law wants to stop it by making the punishment very
serious.

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For abetment of Benami transactions

 Penalty: If you help or make someone do a secret deal, you face the same punishment as
those in the deal. This means you could go to jail for at least a year and up to seven years
and pay a fine up to 25% of the property’s value.

 Here’s why: Helping includes advising, making it easy, or pushing someone to do a secret
deal. By making the penalties for helping the same as those for direct involvement, the law
makes sure that those who make it happen are just as responsible.

Additional provisions and penalties

Confiscation of the property

The rule gives officers the power to hold and take away suspected properties. Once confirmed, such
properties are given to the government without paying any kind of compensation to the real owner.
This acts as a direct method to eliminate property held illegally, thereby serving as a punitive
measure.

No right to reclaim

The real owner can’t get the property back from the government once it has been taken away under
the rule. This rule stops the real owner from trying to get control over the property through legal
means, making the confiscation process stronger.

The rule also stops civil courts from dealing with any case related to anything that the officers or
Court of Appeal can decide. By stopping civil courts, the rule makes sure that problems related to
suspected deals are only handled by the chosen officers, making the decision process simpler.

Landmark case laws on the Benami Transactions Act in India

Shri. Mudapallur Varieth Gangadharan vs. the Deputy Commissioner of Income Tax (2022)

In the case of Shri. Mudapallur Varieth Gangadharan vs. the Deputy Commissioner of Income Tax
(2022), the court examined a crucial legal question concerning the potential conflict between the
Insolvency and Bankruptcy Code (IBC) and the Benami Transactions Act. The court’s objective was to
determine whether these two acts could coexist harmoniously, or if there was a need to resolve any
contradictions.

The Insolvency and Bankruptcy Code (IBC) is a comprehensive legislation enacted in 2016 to
streamline and regulate insolvency proceedings in India. It aims to provide a time-bound and
efficient framework for resolving corporate insolvencies. On the other hand, the Benami Transactions
(Prohibition) Act, 1988, is a law that seeks to address the problem of benami transactions, where
properties are held in the name of one person (the benamidar) while the real owner (the beneficial
owner) remains hidden.

The court’s analysis focused on determining whether the objectives and provisions of these two acts
were fundamentally incompatible or complementary. The court noted that both the IBC and the
Benami Transactions Act are special acts, meaning they are designed to deal with specific and
distinct issues. The IBC primarily governs insolvency proceedings, while the Benami Transactions Act
targets the prohibition of benami transactions.

The court emphasized that the two acts do not inherently conflict with each other. The IBC provides
for the inclusion of assets in the liquidation process if they form part of the liquidation estate. If a

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property that is subject to a benami transaction is part of the liquidation estate, the liquidator has
the authority to add it to the liquidation assets.

Furthermore, the court clarified that the Benami Transactions Act does not impose any restrictions
on the liquidator’s ability to include such properties in the liquidation process. The liquidator’s
primary responsibility is to ensure the fair and equitable distribution of the liquidation assets among
the creditors.

In summary, the court concluded that there is no inherent conflict between the Insolvency and
Bankruptcy Code and the Benami Transactions Act. Both acts can coexist and operate harmoniously.
The liquidator, as appointed under the IBC, has the authority to include properties subject to benami
transactions in the liquidation assets if they form part of the liquidation estate. This decision provides
clarity and guidance for resolving potential conflicts that may arise in the context of insolvency
proceedings and benami transactions.

Union of India vs. Ganpati Dealcom

In the case of Union of India v. Ganpati Dealcom (2022), the Supreme Court of India undertook a
thorough examination of the retrospective application of the amended punishment prescribed under
Section 3(2) of the Benami Transactions (Prohibition) Act. This case presented a crucial opportunity
for the apex court to clarify the scope and constitutionality of the 2016 amendment to the Benami
Transactions Act, which had introduced enhanced penalties for engaging in benami transactions.

The Benami Transactions (Prohibition) Act, enacted in 1988, aimed to combat the practice of benami
transactions, wherein an individual purchases property or other assets in the name of another
person to conceal the true ownership. The original Act criminalized benami transactions only if they
were done with the intent to defraud creditors or evade taxes. However, the 2016 amendment
significantly expanded the scope of the Act by making the mere act of paying consideration for a
benami transaction without any specific intent to defraud creditors a punishable offense.

The Supreme Court was faced with the question of whether the enhanced punishment under the
amended Section 3(2) of the Benami Transactions Act could be applied retrospectively to
transactions that occurred before the amendment came into force. The court recognized that
retrospective application of penal laws generally raises concerns about fairness and due process, as
individuals may be punished for actions that were not considered criminal when they were
performed.

After careful consideration of the relevant provisions of the Act and the principles of criminal
jurisprudence, the Supreme Court concluded that the unamended Section 3 of the Benami
Transactions Act, which criminalised the mere act of paying consideration for a benami transaction
without the intention of defrauding creditors, was unconstitutional. The court held that this
provision violated the fundamental principle of legality, which requires that individuals be given fair
notice of what conduct is prohibited and what penalties may be imposed for such conduct.

Consequently, the court determined that the enhanced punishment under the 2016 amendment
could not be applied retrospectively to transactions that occurred before the amendment came into
effect. The court reasoned that since the original Act did not criminalize benami transactions in the
absence of an intent to defraud creditors, individuals who engaged in such transactions before the
amendment cannot be punished under the amended provision.

The Supreme Court’s decision in Union of India vs. Ganpati Dealcom has significant implications for
the interpretation and application of penal laws in India. It reinforces the principle that retrospective

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application of penal laws is generally not permissible, particularly when it comes to expanding the
scope of criminal liability. By emphasizing the importance of fair notice and due process, the court
has provided guidance to ensure that individuals are not punished for conduct that was not clearly
prohibited by law at the time it was performed.

Conclusion

The new law in India, the Benami Transactions (Prohibition) Amendment Act, 2016, aims to stop
secret property deals. This Act is a big move to stop money tricks and make the money system in
India fair and clear.

If you do secret property deals, you could go to jail for 1-7 years and pay fines up to 25% of your
property’s worth. If you lie, you could go to jail for 6 months to 5 years and pay fines up to 10% of
the property’s worth. If you help, you will face the same punishment.

The law states that the government can take your secret properties without paying and you can’t get
them back. This aims to stop hiding cash and pay less tax through secret deals. It sets a high bar for
people to be open and fair. The goal is a more clear and fair money scene in India.

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