Benami transactions
India has grappled with black money problems for decades, and no sector has been more implicated than the real estate sector. The word "benami" means anonymous or nameless, and in India the term "benami transaction" is used to describe a transaction where one person pays for property but the property is transferred to/held by somebody else. The person who pays for the property is the real beneficiary (either at present or at some point in the future) but is not recorded as the legal owner of the property. This enables the payer/beneficiary to achieve undesirable purposes such as utilizing black money, evading the payment of tax and avoiding making payments to creditors.
The Act
The Benami Transactions Act, 1988 (the "Act") was enacted in 1988 to prohibit all benami transactions. The Act defined a "benami transaction" as "any transaction in which property is transferred to one person for a consideration paid or provided by another person". It stated that a person entering into a benami transaction was punishable with imprisonment up to 3 years or with a fine or with both. It did not allow any person to assert a claim over property held in a benami manner, except in the case of a hindu undivided family or in the case of property held on trust. It also stated that properties held benami could be acquired free of cost by "authority" (which was to be prescribed by Rules of the Central Government).
However, the Act was not comprehensive enough and lacked the teeth to make a big impact - Rules for the Act were not framed and benami transactions continued in India.
The Bill
The Benami Transactions (Prohibition) Amendment Bill, 2015 (the "Bill") seeks to amend the Act and give it the push required to enable it to put an end to benami transactions and allow the government to recover benami property.
The Bill seeks to: (i) amend the definition of benami transactions, (ii) establish adjudicating authorities and an Appellate Tribunal, and (iii) specify revised penalties for benami transactions.
Definitions amended
The Bill increases the scope of transactions which qualify as benami and includes property transactions where: (i) the transaction is made in a fictitious name, (ii) the owner is not aware of or denies knowledge of the ownership of the property, or (iii) the person providing the consideration for the property is not traceable or is fictitious.
The Bill specifies the following cases which will not fall within the scope of the definition of a benami transaction. When a property is held by: (i) a member of a Hindu undivided family, and is being held for his or another family member's benefit, and has been provided for or paid from known sources of income of that family; (ii) a person in a fiduciary capacity (such as a trustee, executor, partner, director of a company, depository or participant); (iii) a person in the name of his spouse or child, and the property has been paid from the person's known sources of income; and (iv) a person in the name of his brother or sister or lineal ascendant or descendant (where their respective names appear as joint-owners in any document), and the property has been paid from the person's known sources of income.
The Bill also adds to the definition of the word "property". It was defined in the Act as "property of any kind, whether movable or immovable, tangible or intangible, and includes any right or interest in such property". The Bill adds that property includes any right or interest or legal documents or instruments evidencing title to or interest in the property and where the property is capable of conversion into some other form, then the property in the converted form, and also includes the proceeds from the property.
Adjudicating authorities and an Appellate Tribunal established
The Bill establishes four authorities who will be able to conduct inquiries regarding benami transactions: (i) the Initiating Officer, (ii) the Approving Authority, (iii) the Administrator and (iv) the Adjudicating Authority.
If an Initiating Officer believes that a person is a benamidar (the person in whose name the benami property is held or transferred), he may issue a notice to that person to show cause why that property should not be considered benami.
The property may be attached for 90 days from the date of issue of the notice. The Investigating Officer will make enquiries, collect evidence and then pass an order (within 90 days from the date of issue of the notice) attaching, continuing to attach, revoking the attachment or deciding not to attach the property (in all cases with prior approval of the Approving Authority).
If an order is passed to continue holding the property, the Initiating Officer will refer the case to the Adjudicating Authority. The Adjudicating Authority will issue notices, call for and consider evidence and, after providing an opportunity to be heard to the relevant people, pass an order on whether or not to hold the property as benami.
If an order is made to hold the property as benami, a confiscation order shall be made, all rights and title in such property shall vest absolutely in the Central Government free of all encumbrances and the Administrator shall receive and manage the property.
The Bill also establishes an Appellate Tribunal to hear appeals against orders passed by the Adjudicating Authority.
Appeals against orders of the Appellate Tribunal will be to the respective High Court with jurisdiction.
Revised penalties
Under the Act, the penalty for entering into benami transactions is imprisonment up to 3 years or a fine or both. The Bill increases this penalty to rigorous imprisonment from 1 to 7 years and a fine which may extend to 25% of the fair market value of the benami property.
The Bill also provides a penalty (of rigorous imprisonment from 6 months to 5 years and a fine which may extend to 10% of the fair market value of the benami property) for providing false information in a proceeding under the Act.
The passing of this bill by Parliament will go a long way in improving the image of the Indian real estate sector.
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