1. Banning benami transactions: A tricky terrain

Banning benami transactions: A tricky terrain

We should think of simpler solutions to tackle the menace of black money in the real estate sector, such as increasing circle rates and reducing stamp duty.

By: , and | Published: September 14, 2015 12:21 AM

The Benami Transactions (Prohibition) (Amendment) Bill, currently pending before Parliament, seeks to effectively ban benami deals, reportedly a major source of generating black money in the real estate sector in India.

Through the ban, the government hopes to curb the generation of black money within the country, and also make it much more difficult for those entering into such transactions to defeat land ceiling laws or nullify the efforts of banks and other creditors to recover their debts. Nobody can disagree with these lofty intentions; whether these will be realised in their entirety is a different matter, since the effect of the proposed legislation on the economy is likely to be complex, and in some ways pretty harmful.

A benami transaction involves a deal in which a person acquires property for herself in the name of another person. It may be as innocuous as a father buying property for himself in the name of his child, just because he believes that she has been born under a lucky star and carrying out the transaction in her name will bring him luck. Until 1988, all such transactions were perfectly legal. In 1957, the Supreme Court—in the Sree Meenakshi Mills Ltd vs Commissioner of Income-tax case—drew a distinction between two kinds of benami transactions. The first of these related to a sale in which the seller had a genuine intention to transfer ownership of property to the buyer; however, the transfer was effected not in the name of the actual buyer, but his nominee or benamidar. The other kind of benami transaction related to a sham sale in which the seller never had any intention to sell, but merely transferred the property in question to a nominee while continuing to exercise the rights of the real owner.

However, because the latter kinds of transactions had become too frequent for comfort, in 1988 Parliament banned them altogether, and made the property involved in such transactions liable for confiscation. Further, the persons entering into such transactions were punishable with imprisonment up to three years. In other words, along with sham transactions, genuine benami transactions, sanctioned by many centuries of custom and usage, were also declared illegal. While enacting this law, however, Parliament failed to provide for an adjudication and appellate machinery, or for detailed procedures.

Twenty-seven years later, these defects are sought to be rectified. Concomitantly, the definition of a benami transaction is sought to be widened to include all cases where the ostensible owner is fictitious or untraceable; or is unaware of, or denies his ownership; or where the person providing the consideration is untraceable. This makes for a radical departure from the existing law. The implementation of the Act is proposed to be handed over to income-tax authorities. Some exceptions to what comprises a benami transaction have been provided for. These include cases where the property is held in trust or where it is held by a member of the Hindu Undivided Family (HUF), but the consideration comes from the family’s resources; or where the property stands in the name of the spouse or a minor child, but has been purchased by a person from his own income. The sanction for entering into a benami transaction is confiscation, besides imprisonment, which has now been enhanced from a maximum of three years to seven years; and a fine which may extend to 25% of the market value of the property.

The cumulative effect of all these measures is likely to be mixed; these measures are bound to make it more difficult for people to enter into benami transactions designed to defeat ceiling laws, or the efforts of banks and other creditors to realise their debts. They might also deter real estate developers from acquiring land parcels in benami names. But it is unlikely that they will have any impact whatsoever on a large majority of property transactions in which substantial consideration is delivered in cash.

The effect of these provisions on trade and commerce may, in some ways, even be negative. Some transactions likely to be impacted readily come to mind. Currently, when a person takes a loan for commercial purposes, but cannot, when required, produce her creditors for cross-examination, she might not only have to suffer such a loan being treated as income from undisclosed sources, but may also have to face penalty proceedings for filing inaccurate particulars of income and prosecution for evasion of tax. A further consequence of the new enlarged definition of a benami transaction (“…an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious”) could be to render such a person liable for confiscation of property, along with further prosecution and fine for entering into a benami transaction.

The same might be the fate of a company that genuinely raises share capital, but cannot produce for cross-examination the shareholder concerned, who may be one amongst thousands. Similar, too, would be the plight of a foreign company, which is a shareholder in a joint venture company in India, if it creates an Indian subsidiary to hold its shares, look after its interests in India and help it to comply with local laws. It is important that all genuine commercial transactions should be protected from the rigours of the proposed amendments, because to discourage such transactions does not appear to be the purpose of the new law.

The amending law is also likely to have a very serious impact in rural India where, because of large number of cash transactions and poor state of land records, even genuine landowners may find it difficult to establish their titles. In such circumstances, such draconian provisions can be used arbitrarily to declare even genuine property owners as benamidars of someone else. As a precaution, a serious inquiry before the matter goes to the adjudicating authority is essential. The time taken for conducting such inquiry may be extended from the proposed period of 30 day to three months. This would give the affected person more time to prove that she is the genuine owner of the property in question. Also, the powers granted to the initiating officer are quite arbitrary. After giving a reasonable opportunity of being heard, she must be made to record detailed reasons to establish at the preliminary stage itself that, prima facie, the statutory test of a benami transaction is fulfilled. As a further check, she should mandatorily be required to take the approval of her commissioner or chief commissioner. This is because what is involved in the proceedings is confiscation of a citizen’s property.

Most important of all, the government must ask itself the question whether it is necessary to bring such a draconian law under which the action of the authorities is likely to be fiercely contested at every step. Unproductive litigation will inevitably increase. Vesting arbitrary and draconian powers in officials has hardly ever worked in the past. Two failed schemes of compulsory acquisition are clear pointers to what should not be done. In both, the results achieved were hardly commensurate with the time, money and effort expended by the tax administration. Is it possible to think of a simpler solution to tackle the menace of black money in the real estate sector, such as increasing circle rates and reducing stamp duty? The advice on taxation in the Mahabharata is apt: A ruler should be like a leech which draws impure blood. It does this in such a mild manner that the victim is not even conscious of what is happening.

Padmini Khare Kaicker and RD Onkar are managing partner and partner at BK Khare and Co. Hardayal Singh was formerly chief commissioner of Income Tax and ombudsman to the Income Tax Department, Mumbai

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