Decoding Benami Transactions: Understanding the Legal Implications

Consider the following scenarios:

1. A person acquires property in his daughter-in-law’s name. All the consideration is paid by him and he exercises all the control over the property.
2. A Fixed Deposit is held in a fictitious name.
3. An account is opened in an employee’s name, but all transactions are orchestrated by the employer.
4. A person with access to price-sensitive information of a company, prohibited from trading in its shares due to insider trading regulations, sidesteps this by purchasing shares in the name of an unrelated third party.

If you see these practices as common ways to save on taxes or generate profits and are considering entering into such transactions, pause for a moment! All the scenarios mentioned are instances of Benami transactions carrying serious legal consequences.

Let’s understand the definition of Benami properties and transactions and the laws that prohibit them in detail:

Meaning of Benami Property:

The term ‘Benami’ is a Hindi word that means ‘without a name’. However, this doesn’t imply properties lack an owner; rather, the property is purchased by someone else and held in the name of another person such as a spouse, children, friend, employee or even a non-existent person.

As per Section 2(8) of Prohibition of Benami Property Transaction Act, “Benami Property” means any property which is the subject matter of a Benami transaction and also includes the proceeds from such property.

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Assets classified as Benami Property include intrinsic value, movable or immovable, tangible or intangible items, legal documents, real estate, jewelry, financial securities, and more. The person in whose name the property is acquired neither pays for nor enjoys it. This ‘on paper’ owner is termed the ‘Benamidar.’

Meaning of Benami Transaction:

A Benami Transaction, as defined by Section 2(9) of the Prohibition of Benami Property Transaction Act, 1988, involves:

1. A property transferred to or held by a person, with consideration provided by another person, held for the immediate or future benefit of the person providing the consideration.
2. A transaction carried out in a fictitious name.
3. A transaction where the owner denies knowledge of such ownership.
4. A transaction where the person providing consideration is not traceable or is fictitious.

Reasons why people enter into Benami Transactions:

1. To conceal actual wealth.
2. To evade statutory dues and taxes.
3. To exceed permissible property limits.
4. To divert illicit funds.
5. Inheritance planning.
6. To convert black money to white money.
7. To defraud banks by hiding actual property details.

Benami Property Laws:

The Benami Transactions (Prohibition) Act, 1988, was the first Indian law aimed at curbing Benami Transactions. The Benami Transactions (Prohibition) Amendment Act, 2016, further enhanced this law with 72 sections, creating the Prohibition of Benami Property Transactions Act, 1988.

The amended law identifies, regulates, and prohibits Benami Transactions by providing for a wider definition of Benami Transaction, states provisions for property attachment, adjudication and confiscation, establishes adjudicating authorities and an Appellate Tribunal to deal with benami transactions, and specifies the penalty for entering into benami transactions.

Benami Property Consequences:

Engaging in Benami transactions can lead to severe consequences under Prohibition of Benami Property Transactions Act, 1988 such as:

1. Confiscation of Benami property.
2. Engaging in a benami transaction with the intent to evade legal provisions, statutory dues, or creditors may lead to imprisonment ranging from 1 to 7 years and a fine of up to 25% of the fair market value of the property.
3. Providing false information may lead to imprisonment between 6 months to 5 years and a fine up to 10% of the fair market value of the property.
4. Confiscation of deposits of people using accounts of other people to convert their unaccounted wealth into white money.

Benami Property Tax Implications:

Tax implications and penalties under the Income Tax Act, 1961 can include:

1. A fixed 60% tax rate on Benami investments, with a 25% surcharge.
2. Liability of Benamidars to pay taxes on income generated by their holdings.
3. Application of Income Tax regulations on beneficial owner to pay for notional rent on multiple residential properties.
4. Penalties for misrepresenting facts and concealing information u/s 270A

Benami Property Disclosure: Failure to disclose benami properties as mandated by law can result in adverse legal consequences. Transparency and proper documentation are crucial to avoid legal ramifications.

The Ministry of Corporate Affairs (MCA), through a notification dated March 24, 2021, has amended Schedule III to the Companies Act. The amendment introduces additional disclosures, including information about benami transactions. Companies must disclose details of any ongoing or initiated proceedings related to benami properties. This includes reasons for non-disclosure in the books of accounts, the nature and status of the proceedings, and the company’s stance.

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The Central Government had also introduced reward schemes for individuals providing information about benami properties.

Identification of Benami Property: Key questions to identify Benami Property include:

1. Who paid for the asset?
2. What is the source of the money?
3. Who possesses the property after purchase?
4. What are the motives and circumstances of the transaction?
5. What is the relationship between parties?
6. Who controls the property?
7. Who holds the title deeds?
8. Is there income disclosure in tax returns?

Exceptions to Benami Transactions:

1. If a property is held for the benefit of a Karta or a member of an HUF, and the compensation comes from the recognized sources of the HUF.
2. Individuals in fiduciary roles, such as trustees, executors, partners, company directors, depository participants, or others specified by the central government, holding assets for the benefit of someone else.
3. An individual who holds property in the name of their spouse or children, and the contribution or payment for the property comes from their recognized sources.
4. Any person who jointly owns property with a brother, sister, lineal descendant, or descendant. The consideration for the property, however, should come from the person’s recognized sources.

The Final Word:

The Prohibition of Benami Property Transactions Act, 1988, stands as a formidable tool against corruption, black money, money laundering, tax evasion, and undue land concentration. At Master Brains, our legal and tax consultants are dedicated to guiding you on the right path for managing your taxes, finances, and wealth:

👉 We employ a proactive approach, analyzing personal and business transactions to identify potential defaults or mistakes that might breach Benami Transaction Act provisions. This preventive strategy aims to avert costly and lengthy litigations in the future.

👉 If you receive a notice, our legal experts specialize in handling show-cause notices issued under the Prevention of Money Laundering Act 2002, The Benami Transaction Act 1988, and Black Money Act 2015. They can assist you in crafting appropriate responses to such notices.

👉 Furthermore, we offer representation in front of all appellate and adjudication authorities for cases related to alleged violations of The Money Laundering Act 2002, Benami Transactions, or Black Money Act.

Read more about our services – https://masterbrains.co.in/pmla-benami-transactions-and-black-money/. For expert assistance, contact us at +91-8595867402 or send your inquiries to www.masterbrains.co.in.

Your peace of mind and legal well-being are our top priorities.