India: Whether Cash Transactions During Demonetization Period Per-Se Fall Under The Scope Of Benami Act?

Last Updated: 5 June 2019
Article by Vijay Pal Dalmia, Partner and Rajat Jain

By
Vijay Pal Dalmia, Advocate
Supreme Court of India & High Court
Email id: vpdalmia@vaishlaw.com Mobile No.: +91 9810081079
LinkedIn: https://www.linkedin.com/in/vpdalmia/
Facebook: https://www.facebook.com/vpdalmia
Twitter: @vpdalmia
And
Rajat Jain, Advocate
Email id: rajatjain@vaishlaw.com Mobile No. 9953887311
LinkedIn: https://www.linkedin.com/in/rajat-jain-75772398/

Under The Benami Transactions (Prohibition) Act, 1988, the scope of benami transaction was very limited and it used to include only those transactions in which property is transferred to one person for a consideration paid or provided by another person.

However, after the advent of The Benami Transactions (Prohibition) Amendment Act, 2016 which is also be called as Prohibition of Benami Property Transactions Act, 1988 (hereinafter also referred as "2016 Act") which came on 1st November 2016, just a bit prior in time to the demonetization, the scope of benami transaction has been widened, and the punishment and penalties have been made more stringent.

Under Section 1 (9) of the 2016 Act, the term "Benami Transaction" has been defined as under:

  • A Benami Transaction means,-
    • a transaction or an arrangement-
      • 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
      • the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,

        except when the property is held by-
        1. a Karta or a member of a Hindu undivided family..........;
        2. a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity.........;
        3. any person being an individual in the name of his spouse or child ............;
        4. any person in the name of his brother or sister or lineal ascendant or descendant........; or
    • a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
    • a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership; or
    • a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious.

From a plain reading of the above Section, it is apparent now that the following transactions shall fall under the scope of Benami Transaction:

  1. Where the property is held by or transferred to another person, and the property is held by that another person, for the immediate or future benefit of the person who has provided the consideration for such property;
  2. Where a transaction has been made under a fictitious name;
  3. Where the owner is not aware or denies knowledge of the ownership of the property; and
  4. The person providing the consideration is not traceable.

That on 8th November 2016, as a measure to curb counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes, the Government of India has demonetized the currency notes of Rs 500 and Rs 1000 with effect from 9th November, 2016. Due to the demonetization of Rs 500 and Rs 1000 notes by the Government of India, these banknotes ceased to be a legal tender.

As the said currency notes ceased to be a legal tender which made it obvious that no transaction in the demonetized currency notes can take place after the effective date of demonetization.

The answer to the question whether a transaction in the demonetized currency done by a party after the effective date of demonetization can be considered as a benami transaction or not, will depend upon the transaction and the intention of the parties.

The Hon'ble Appellate Tribunal, PMLA (Benami Law), in the  case of V N Nandhini Devi vs. Sh. K. Visakh, Dy. Commissioner of Income Tax, Chennai, FPA/PBPT/57/CHN/2018 (along with other 27 appeals) (http://atfp.gov.in/writereaddata/upload//Judgement/Judgement_IA73BXIYNA_84359.PDF ), examined the action of the Initiating Officer, wherein the Officer provisionally attached the amount of Rs. 50,000/- of the Appellant, as the Appellant received on 17/11/2016 an amount of Rs. 50,000/- as salary advance from its employer Trust, which was later returned on the insistence of the Income Tax Authorities. While deciding in favour of the Appellant, Hon'ble Appellate Tribunal held as under:

"22. Thus, every cash transaction cannot be termed as a "benami" transaction. As per section 2(9) A of the Act, the following twin conditions need to be satisfied- 1) the property being held by a person who has not provided the consideration, 2) the property is held by that person for the immediate or future benefit, direct or indirect of the person who has provided the said consideration......

36. The impugned order is unsustainable as it punishes the appellants for wanting to defeat the purpose of demonetization, which has no direct nexus with the Act and is beyond the purview of the Act.....

46. The existence of the "benami" transaction has to be proved by the authorities i.e. the person who alleges the transaction (Sitaram Agarwal v. Subrata Chandra, (2008) 7 S.C.C. 716). The authorities have failed to discharge the burden of proof. The authority has purely gone on the premise that cash is transferred from one person to another, with an object to defeat demonetization. This is insufficient to establish a "benami" transaction...."

From the above judgment, it is apparent that only the cash transactions during the demonetization period which are fulfilling the prerequisite of the benami transaction provided under the 2016 Act, will only fall under the ambit of benami transaction. Hence, it can be concluded that every cash transaction during demonetization period cannot per-se be considered as benami transaction just because the parties have entered into the cash transaction to defeat the purpose of demonetization or otherwise.

This article can be read from here also: https://bit.ly/2XnxWJB

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