Prohibition of Benami Transactions Act & Interplay with Income Tax Act

Prohibition of Benami Transactions Act & Interplay with Income Tax Act WIRC of ICAI Sub-Regional Conference, Rajkot June 24, 2018

Chronology of Law relating to Benami Transactions Prohibition

Law Commission 57th Report Cause of reference – problem of property held benami causing concern to tax authorities – whether such transactions should be prohibited Origin of benami Joint Hindu Family system & desire to make provisions To defraud creditors To evade taxes To avoid political & social risks Principle that transaction is presumed to be for the benefit of the person providing money Creates resulting trust by virtue of s.82 of Indian Trusts Act, 1882 English law – presumption of resulting trust; presumption of advancement in case of wife or child Indian law – no presumption of advancement in case of wife or child Law Commission Reports

Law Commission 57th Report Clubbing provisions adequate to deal with transfer to wife/minor child S.281A requires disclosure of benami transactions – no further radical measures required for checking evasion of direct taxes Recommendation – law should provide that where property is transferred benami, the benamidar will become real owner Law Commission Reports

No suit, claim or action permissible to enforce any right in respect of any property held benami No defence based on any right in respect of any property held benami shall be allowed in any suit, claim or action Exceptions – Property held by coparcener in HUF for benefit of coparceners Property held by trustee/person standing in fiduciary capacity for benefit of another person Repealed s.82 of Indian Trusts Act, s.66 of Code of Civil Procedure, & s.281A of Income Tax Act Benami Transactions (Prohibition of Right to Recover Property) Ordinance, 1988

Law Commission 130th Report Reason - suggestions which would help in drafting bill to replace ordinance Approach - entire gamut of umbrella of protection to benami must be completely, fully & effectively folded up Should be retroactive and no time need be given to rectify past benami transactions Recommendations – provision for acquisition of property Future benami transactions should be made an offence Doctrine of advancement to be introduced for properties held in names of wife or unmarried daughter Benami should cease to be part of Indian tax laws Law Commission Reports

Law Commission 130th Report Deletion of sections 81, 82 and 94 of Indian Trusts Act Machinery for enforcement of civil laws Charity Commissioners be given powers to investigate private trusts Law Commission Reports

Prohibition of entering into any benami transaction Non-cognizable and bailable offence punishable with 3 years imprisonment Purchase in name of wife/unmarried daughter not benami – presumed that purchased for their benefit No suit, claim or action permissible to enforce any right in respect of any property held benami No defence based on any right in respect of any property held benami shall be allowed in any suit, claim or action Exceptions – Property held by coparcener in HUF for benefit of coparceners Property held by trustee/person standing in fiduciary capacity for benefit of another person Benami property subject to acquisition by prescribed authority in Benami Transactions (Prohibition) Act, 1988

prescribed manner – no compensation payable for acquisition S.53 of Transfer of Property Act not to be affected - transfer of immoveable property made with intent to defeat or delay the creditors voidable at the option of any creditor so defeated or delayed Laws relating to transfer for illegal purpose not to be affected Repealed s.81, 82 & 94 of Indian Trusts Act, s.66 of Code of Civil Procedure, & s.281A of Income Tax Act Benami Transactions (Prohibition) Act, 1988

Statement of Objects & Reasons Inadequacy of 1988 Act found while drafting rules: No specific provision for vesting of confiscated property with Central Govt No appellate mechanism for action taken by authorities – bar on Civil Court jurisdiction Powers of Civil Court not conferred on authorities for implementation Benami Transactions (Prohibition) Bill, 2011

Exclusions from benami transactions – fiduciary capacity to include trustee, executor, partner, agent, director of a company or legal adviser, a depository or a participant as an agent of a depository Exemption for transactions in name of spouse, brother or sister, lineal ascendant or descendant – no presumption of advancement Benami property liable to confiscation by Central Govt No suit, claim or action permissible to enforce any right in respect of any property held benami No defence based on any right in respect of any property held benami shall be allowed in any suit, claim or action Benamidar cannot retransfer to beneficial owner or other person acting on his behalf Benamidar, beneficial owner and persons abetting or inducing benami transaction to be regarded as offenders Detailed procedures, including appeals Benami Transactions (Prohibition) Bill, 2011

The purpose of bringing out the Ordinance in curbing benami transactions lost over the years as no rules for implementation of the Benami Transactions (Prohibition) Act, 1988 framed. Govt should bring in this long overdue legislation with due seriousness and implement it at the earliest The Bill needs modification with a view to harmonizing it with the observations / recommendations of the Second ARC on prohibition of benami transactions, and the United Nations Convention Against Corruption (UNCAC) Recommended enactment of the Bill without any further delay subject to the observations made/modifications suggested Reference to the UNCAC may be made in the Bill to make it clear that the various provisions of the Bill have an international basis Extend the provisions of the Bill to the State of Jammu and Kashmir also in consultation with the State Government Standing Committee on Finance Report

Relevant terms such as “transaction”, “arrangement”, “consideration provided or paid” have not been defined in the Bill. Further, the terms namely, “trustee”, “executor”, “partner”, “agent”, “director of a company or legal adviser”, “relevant date” have neither been defined nor added by way of explanations in the Bill - specific definition of these terms in context of the Bill will remove ambiguity and leave no scope for misinterpretation Proposed exemptions under Clause 2(A)(b) should be pruned and there should be no exemption other than purchasing property by any person in the name of his / her spouse or unmarried daughter on the lines of the Benami Transactions (Prohibition) Act, 1988 - with such a long list of exemptions, the very purpose of the proposed measure would be defeated Need to bring in more clarity by modifying definition of “property” in clause 2(p) for achieving convergence with the UNCAC - not clear as to Standing Committee on Finance Report

….whether the benami property or proceeds thereof that have been transformed or converted, in part or in full, into other property be treated as property Look into the entire gamut of exempted as well as non-prohibitive list of transactions and make it minimal as far as possible so that no unscrupulous element could circumvent the provisions of the law Necessary clarification may be provided in the enabling Clause, specifying the manner of confiscating the benami property involving agricultural land after examining the constitutional / legal position Clause 6 on prohibition of retransfer of property to beneficial owner – whether infringes the provisions of the Transfer of Property Act, 1882? Whether directly or indirectly confers ownership of such benami property on benamidar? No separate chapter dealing with obligations of any officer or authority of the Central Govt or State Govt or a local authority to render assistance for all or any of the purposes specified in clause 9(1) Standing Committee on Finance Report

Tracking the source of money in a benami transaction is a challenge. Such constraint could be addressed by creating an in-built mechanism in the proposed Act whereby suspicious transactions are mandatorily referred to the Initiating Officer or Approving Authority If the impounded records are relevant for filing of appeal, the Approving Authority may be empowered to retain the documents until filing of an appeal or for a stipulated period from the date of confiscation order issued by the Adjudicating Authority - maximum time-limit may be prescribed for Adjudicating Authority also for retaining the (impounded) documents Not clear as to whether the manner of attachment of property involved in money-laundering as provided in the Second Schedule to the Income-Tax Act would also be applicable for the purposes of Clause 13(3) of the Benami Transactions (Prohibition) Bill, 2011 Prior approval to be taken by Initiating Officer from Approval Authority Standing Committee on Finance Report

for passing an order provisionally attaching the property Provision of empowering Initiating Officer to revoke provisional attachment of property is prone to misuse - appropriate authority other than Initiating Officer may be designated for recommending revocation of provisional attachment to Approving Authority Adequate checks and balances may be prescribed for checking use of discretionary powers bestowed on Initiating Officer so that genuine transactions are not subjected to avoidable harassment No time-limit prescribed for serving a notice by the Adjudicating Authority to the person concerned for adjudication of benami property Bill silent on the rules and procedures to be prescribed for manner of confiscating benami property by the Adjudicating Authority Bill silent on the rules to be prescribed for disposal of the acquired property by the Administrator Standing Committee on Finance Report

Unreasonable to expect the Appellate Tribunal functioning under PML Act, 2002 to expedite and dispose of a large number of cases falling under both PML Act, 2002 and proposed Act in a time-bound manner, that too without any corresponding increase in existing sanctioned strength of the Tribunal. Recommended to set up an Appellate Tribunal exclusively for speedy disposal of the cases under proposed Act No provision for Initiating Officer or Approving Authority to prefer an appeal against order of the Adjudicating Authority, as under PML Act Time-limit for disposal of appeals by Appellate Tribunal may be reduced to one year from the proposed period of two years Period of time of filing appeal to High Court should be reduced to 60 days for speedy disposal of cases, as under PML Act Maximum punishment of imprisonment of 3 years under the existing Act should be retained in the proposed law Standing Committee on Finance Report

Exhaustive list of parameters for any property or class of properties being eligible for exemption from the operation of the proposed Act may be provided by way of Rules Innocent legal heirs should be protected against the proceedings under the proposed Act - legal heirs in any case should not be sent to jail for the offences committed by their parents / guardians. In such cases, only confiscation of property will suffice. Maximum period of six months from the enactment of the law be prescribed to make rules Should be no time restriction for issue of orders to remove difficulties which may arise while giving effect to the provisions of the Bill, particularly in public interest Standing Committee on Finance Report

Notified on 10th August 2016 Came into force on 1st November 2016 Name of Act changed to Prohibition of Benami Property Transactions Act, 1988 Not applicable to Jammu & Kashmir Prohibition of Benami Property Transactions Rules, 2016 notified on 25th October 2016 – come into effect from 1st November 2016 Repeal of sections 81, 82 & 94 of Indian Trusts Act, 1882, section 66 of Code of Civil Procedure, 1908 and section 281A of Income Tax Act, 1961 (s.281A continues to be applicable in J & K) Benami Transactions Prohibition (Amendment) Act, 2016

Definition of benami transaction 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 Specifically included in definition of benami Property transaction or arrangement carried out or made in a fictitious name Property transaction or arrangement where owner is not aware of or denies knowledge of such ownership Property transaction or arrangement where person providing the consideration is not traceable or is fictitious Benami Transaction

Exceptions to main definition – Karta or member of HUF – held for benefit of members, consideration out of known sources of HUF Fiduciary capacity – includes trustee, executor, partner, director of a company, a depository or a participant as agent of depository Spouse or child of individual, where consideration out of known sources of individual Brother or sister or lineal ascendant or descendant, where name appears as joint-owner, consideration out of known sources transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in s. 53A of the Transfer of Property Act, 1882, if following conditions met: (i) consideration for such property has been provided by the person to whom possession of property has been allowed but the Benami Transaction

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. Benami Transaction

If only part consideration provided by another person – whether covered? Can part of property be regarded as benami? Gift not covered – consideration for property not provided by another person, not held for benefit of donor Provision of property itself by another person not covered, though provider may not be traceable Acquisition of property held for benefit of another person, with consideration provided by third person – not covered Benami Transaction

Transactions - whether benami? Unregistered agreements/MoUs for purchase of property where possession taken pending approvals of Collector/Government, with 90% of consideration paid Possession of property given under PoA with agreement to sell Property held in name of grandson Property held jointly with daughter-in-law Property purchased by son-in-law with interest-free loans from father-in-law Land purchased by aggregator for buyer, held in name of aggregator with funds provided by buyer Land/shares purchased by company, having nominal capital, with interest-free loans from a) shareholders; b) relatives of shareholders Shares purchased by customer through margin funding by broker Benami Transaction

Transactions - whether benami? Land purchased by person with loans from friends, with agreement to share appreciation on sale of land Person who has granted possession thereof continues to hold ownership of such property Property held by company in names of employees Grant of life interest in property – by gift/by will Donation received by religious/charitable trust from anonymous donors Property acquired by AOP held by member of AoP on behalf of AoP Development of property carried out in name of landowner, to whom consideration paid as deposit, with profits flowing to developer Buildings owned by co-operative housing society where consideration paid by members Benami Transaction

Transactions - whether benami? Bank disbursing home loan directly to seller, for house being purchased in name of borrower Shares of subsidiary company held by holding company in names of nominees Benami Transaction

Not only transactions, but also arrangements Arrangement – A measure taken, or a plan made in advance of some occurrence – Black’s Law Dictionary A transaction not concluded, an understanding may be covered Benami Transaction

No person can enter into any benami transaction – applicable post commencement of the Act No suit, claim or action to enforce any property rights by real owner against benamidar or any other person – no defence based on any property right allowed by real owner in any suit, claim or action Benami property liable to be confiscated by Central Government – shall vest in Central Govt free of all encumberances – no compensation Benamidar cannot re-transfer benami property to beneficial owner or any person acting on his behalf if done, such transaction deemed to be null and void Not applicable to transfer pursuant to s.190 of Finance Act 2016 (Income Declaration Scheme 2016) Implications of Benami Transaction

Nand Kishore Mehra vs Sushila Mehra (1995) 215 ITR 218 (SC) - a person permitted to purchase a property in the name of his wife or unmarried daughter under s.3(2) notwithstanding the prohibition to enter into a benami transaction contained in s.3(1), can enforce his rights arising therefrom, for, to hold otherwise would amount to holding that the statute which allows creation of rights by a benami transaction also prohibits the enforcement of such rights, a contradiction which can never be attributed to a statute Case Laws under pre-amended Act

Heirs of Vrajlal J Ganatra vs Heirs of Parshottam S Shah (1996) 221 ITR 391 (SC) - The question whether a particular sale is benami or not is largely one of fact. Though there is no formula or acid test uniformly applicable, the question depends predominantly upon the intention of the person who paid the purchase money. For this, the burden of proof is on the person who asserts that it is a benami transaction. However, if it is proved that the purchase money came from a person other than the recorded owner, there can be a factual presumption at least in certain cases, depending on facts, that the purchase was for the benefit of the person who supplied purchase money. Case Laws under pre-amended Act

Marcel Martins vs M Printer 21 taxmann.com 7 (SC) - The expression 'fiduciary capacity' may not be capable of a precise definition, it implies a relationship that is analogous to the relationship between a trustee and the beneficiaries of the trust. The expression is in fact wider in its import for it extends to all such situations as place the parties in positions that are founded on confidence and trust on the one part and good faith on the other. In determining whether a relationship is based on trust or confidence, relevant to determining whether they stand in a fiduciary capacity, the Court shall have to take into consideration the factual context in which the question arises for it is only in the factual backdrop that the existence or otherwise of a fiduciary relationship can be deduced in a given case Case Laws under pre-amended Act

Initiating Officer (ACIT/DCIT) – if reason to believe, record reasons, to issue show cause notice – to both benamidar as well as beneficial owner (if known) Power of provisional attachment of property by the Initiating Officer Power to call for information, impound documents, and conduct enquiry after obtaining prior approval of Approving Authority (Addl/Jt CIT) Draw up statement of case and refer it to Adjudicating Authority Opportunity of being heard to benamidar, Initiating Officer and person claiming to be owner Adjudication by the Adjudicating Authority – 1 year time limit Administrator to take possession of property on confiscation order Appeal to the Appellate Tribunal (Chairperson, Judicial Member, Administrative Member) – confiscation subject to appeal order Appeal to High Court Procedures

If benami transaction in order to defeat provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors – beneficial owner, benamidar and other person who abets or induces any person to enter into benami transaction shall be guilty of offence of benami transaction Whether requirement of offence of benami transaction essential prerequisite for order of confiscation? Rigorous imprisonment of not less than 1 year up to 7 years, and also fine up to 25% of the fair market value of the benami property Provision of false information or document – rigorous imprisonment for not less than 6 months up to 5 years, and also fine up to 10% of fair market value of property Penalties for Benami Transaction

Income tax law seeks to tax beneficial owner of income, with some exceptions (trustees, executors, etc) Income from benami property – can benamidar claim that income not taxable in his hands, but should be taxed in the hands of the beneficial owner? What point of time onwards? Confiscation of benami property and vesting in Central Govt – whether capital loss can be claimed by beneficial owner? Date of transfer – date of adjudication order, date of appellate order, or dismissal of final appeal? Section 69 – (made) unexplained investments – interplay Section 69A – (found to be owner of) unexplained bullion, jewellery, other valuable article or thing – interplay Section 60 – Transfer of Income without transfer of assets – interplay GAAR – Chapter X-A – disregarding any accommodating party - interplay Some Issues vis-à-vis Income Tax

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Prohibition of Benami Transactions Act & Interplay with Income Tax Act