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NRIs & Benami Property in India

The Prohibition of Benami Property Transactions Act, 1988 was amended in 2016 which gave the required teeth to Government to tackle the menace of Benami Property in India. The problem of property held as Benami has been causing concern to the tax authorities for quite some time. It all began in 1969 and the Act was passed in 1988 which had various lacunae and shortcomings and hence a new Amendment Act was introduced renaming the Title as The Benami Transactions (Prohibition) Amendment Act, 2016.

Inordinate Delay in implementation of the Act

The flourishing of black money in India is not due to lack of deterrent law but due to non-implementation of an enacted statute by the administration. Although twenty eight years ago the Act was passed by the Parliament, however, it was not implemented despite the request by the Central Vigilance Commission to the Government to empower the former under the Act and also prescribe rules for effective implementation. In this context, the Government justified that the Act was not made operational due to apparent lacunae and pitfalls in the same. Hence, recently the legislators drafted a new bill in tune with the current circumstances and requirements.

Meaning of Benami

The term “Benami” is originated from Persian compound word which implies “without a name”. According to Advanced Law Lexicon “Benami” means Nameless, fictitious, fraudulent, (a sale or purchase made in the name of someone other than the actual vendor or purchaser). The habit of holding land benami is very old in India. Benami purchases are very common in India, and are due to many considerations which may not find their counterpart in other countries. The word “Benami” is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example, the benami purchase, i.e. a real purchase by one in the name of another. Occasionally the word “benami” is used to refer to a sham transaction for example when A purports to sell property to B without intending that title should pass to B. “A Benami transaction is one where one buys property in the name of another or gratuitously transfers his property to another, without indicating an intention to benefit the other. The benamidar, therefore, has no beneficial interest in the property or business that stands in his name; he represents in fact the real owner and so far as their relative legal position is concerned, he is a mere trustee for him. The expression “Benami” denotes transactions for the benefit not of the persons taking part in the transactions but of the persons or persons not mentioned in the transaction. In other words, in simple terminology, Benami transactions are transactions where property is purchased in the name of one person but the consideration for the said purchase is paid by other person therefore the former will be the nominal owner and the latter will be the beneficial or real owner of the property.

What is Benami transaction as per Act?

(9) “benami transaction” means:-

(A) 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,

except when the property is held by –

(i) a Karta, or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 (22 of 1996) and any other person as may be notified by the Central Government for this purpose;

(iii) Any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the individual.

(iv) any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(B) A transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) 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;

(D) A transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;

Explanation – For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882, if, under any law for the time being in force –

(i) Consideration for such property has been provided by the person to whom possession of property has been allowed but the 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.

(24) “Person” shall include-

(i) An individual;

(ilia) Hindu Undivided Family;

(iii) A Company;

(iv) A Firm;

(v) an association of persons or a body of individuals, whether incorporated or not;

(vi) every artificial juridical person, not falling under sub-clauses (i) to (v); the definition is identical to the definition of ‘person’ in s. 2(31) of the Income-tax Act, 1961 except that local authority is not included herein.

(26) “Property” means asset of any kind, whether movable or immovable, tangible or intangible, corporeal or incorporeal and includes any right or interest or legal documents or instruments evidencing title 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.

Legal consequences of Benami transactions:

1. Benami transaction is a punishable offence – Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may be extended to three years or with fine or with both – Section 3(2) of the Act. After 1-11-2016 as per Sec. 53(2) shall be punishable with R.I. for a term which shall not be less than one year, but which may extend to seven years and shall also be liable to fine which may extend to 25% of the E.M.V. of property.

2. Prohibition of the right to recover property held benami – No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name this property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property – Section 4(1)

3. No defense based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action or by or on behalf of a person claiming to be the real owner of such property – Section 4(2).

4. Property held benami liable to confiscation – Any property, which is the subject matter of benami transaction, shall be liable to be confiscated by the Central Government – New Section 5 as substituted by the 2016 Amendment Act.

5. Prohibition on re-transfer of property by benamidar – No person, being a benamidar shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf – New section 6(1). Any such re-transfer shall be null and void – New section 6(2). However, this prohibition shall not apply where the re-transfer is made in accordance with the Income Declaration Scheme, 2016 – i.e., in accordance with section 190 of the Finance Act, 2016 – New section 6(3).

FAQs

Q.1 What is Benami Transaction? What is Benami Property?

Ans. Benami property can be any property whether movable or immovable, the source and ownership of which is not known. When the owner of the property is not able to define the source of funding of the property, the property could become benami.

Q.2 How does Benami transaction take place?

Ans. Benami transaction takes place between two parties. On the one hand is the beneficial owner of the property who pays the consideration for the benami transaction. On the other hand is the owner of the property in whose name the property has been purchased, such person is called the benamidar.

Q.3 What are the conditions to be fulfilled for a transaction to be classified as Benami?

Ans. As per the Benami Transaction (Prohibition) Amendment Act, 2016: A transaction shall be regarded as a Benami Transaction if it fulfills the following two conditions:

1) Property is held by or transferred to any person for which the consideration is paid by another person and

2) The property is held for the benefit or future benefit, either directly or indirectly, for the person who has provided such consideration.

Q.4 Whether Benami Property includes only Immovable property?

Ans. As per the Prohibition of Benami Property Transactions Act, Benami property includes both immovable property (like land or building) and movable property/assets. Q.4 What are the transactions that are also included in the definition of Benami Transaction?

Ans. Following are also considered as Benami Transactions:

• Any transaction or arrangement made in respect of a property carried out or made in a fictitious name.

• Any transaction or arrangement made in respect of a property, where the owner of the property is not aware of such ownership.

Q.5 Why do people enter into benami transactions?

Ans. Many people want to know why anyone enters into benami transactions. Reasons for entering into benami transactions:

(1) People who enter into Benami transactions are those who have money earned from unknown sources i.e., black money. Therefore, in order to utilize the black money, these persons enter into Benami transactions where the transaction is done in the name of another person but the consideration is paid by another person out of his black money. Since these persons cannot show the transaction in their own names therefore they use names of other persons or some fictitious names for entering into such transactions.

(2) Another reason for entering into Benami transactions is that people want to hide the ownership of the benami property from their creditors or from the banks in case where such people have taken loans from such banks. Some people also want to hide the ownership from their relatives.

Q.6 What are the transactions that are not classified as benami transactions?

Ans. As per the Benami Transactions Amendment Act, 2016, following transactions are not classified as Benami Transactions:

(1) If the property is held by a Karta or any member of the HUF and the property is held for the benefit of the members of the HUF and the consideration for such property has been paid through known sources of the HUF.

(2) A person standing in the fiduciary capacity for the benefit of another person towards whom he stands in such capacity. Ex: A trustee, a director of the company.

(3) In case of an individual, where the property is in the name of the spouse or in the name of any child of the individual and the consideration for such property has been paid out of known sources of the individual.

(4) In case of an individual, in the name of his brother or sister or lineal ascendant or descendant and where the names of the individual and brother/sister or lineal ascendant or descendant appear as joint owners.

Implications for NRIs

There is a thin line of difference as to whether a transaction will be deemed to be a Benami transaction or not. One can give the example of an NRI purchasing equity shares in his mother’s names but out of his own funds, which would constitute a Benami transaction. But, if said NRI is a joint holder of the shares, then the Act would not consider it a Benami transaction.

Therefore We encourages NRIs investing in India to be careful and seek professional assistance before executing deals since “penalties are draconian” and include fines, prosecution, and confiscation of property.

The Benami Act, 2016 has the power to strengthen anti-tax avoidance measures in India as well as to professionalize India’s real estate sector – notorious for its lack of transparency. Yet, the Act also has significant potential for punishing genuine property buyers unaware of the regulatory changes. NRIs and property owners in rural areas are particularly at risk because of a relative lack of clear titles. New property buyers should consult legal professionals before purchasing joint property or property under the name of relatives.

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