The amendment in 2016 of the original Benami Act created a sudden storm in the nation, bringing about a lot of curiosity in people. Many people are worried about the impact of the Act on their property and its possible outcomes. In this article, we have simplified the Benami Act to understand how it affects your investment.
Real estate is one of the major sectors for the generation and investment of unaccounted money known as ‘black money, in India. The Benami Act was introduced to curb black money transactions to ensure that all real estate transactions are conducted in the actual owner's name. The consideration is paid from his known sources.
This will increase the tax revenue for the Government by stopping black money from pumping into the system and will help bring down corruption and unfair trade practices. Also, it will increase transparency and honesty in real estate dealings.
Benami means ‘without a name. Therefore an asset without a legal owner or a fictitious owner is called Benami. It can be a property of any kind, whether movable or immovable, acquired by Benami transaction.
The original Benami Act was introduced in 1988 to prevent black money, but due to some inherent limitations of the Act, it could not be implemented with full force. Therefore, an amendment was introduced in 2016 to ensure the successful enforcement of the Act.
An amendment was issued instead of a new Act because if a new Act were introduced, the transaction entered from 1988 to 2016 would get immunity as the law does not allow retrospective penalization.
The Benami Transaction Act aims to prohibit Benami transactions, and it states that any person entering into a Benami transaction shall be liable for prosecution.
The Hon’ble Supreme Court in Bhim Singh v. Kan Singh AIR 1980 SC 727 has explained Benami Property Transaction as
In such cases, the transferee holds the property to benefit the person who has contributed the purchase money and is the actual owner."
The law states the following as a Benami transaction:
(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,
(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;
Banani Act encompasses all kinds of properties, whether movable or immovable. The law gives the definition clearly states that:
For instance: In the case of de-monetisation, if a person deposits his old currency in the account of another person with an arrangement such that the account holder will return the money in the new currency is also a Benami transaction.
The Act prohibits resale of the Benami property from the benamidar to the actual owner (or to any person acting on his behalf). Such transactions would be considered null & void.
The Act does not prohibit the sale of a Benami property to a third person. However, if the property is sold to a third party and the transaction concluded by way of registry of the sale, the department can only attach the proceeds from the sale, not the property.
A transaction is considered a Benami transaction if any one of the following holds,
A suspected benamidar will be served a notice on the source of funds by an Initiating Officer. If the answer is not satisfactory, action will be initiated under Benami Transactions Prohibition Act, 2016.
When the property is held by—
Benami Trading is when a person of authority who has access to price-sensitive information of a company indirectly indulges in insider trading. He uses the information for his gain by investing the money in another person’s name. Usually, the money is passed in the name of a loan through a chain of several people/ entities and the person at the end of the chain trades in the shares on behalf of the first person.
There’s another form of Benami Trading, where the money is passed to various legitimate corporations to buy the shares of a particular company such that it increases the price of shares. This is done to show a high valuation of the shares before proposing to the investors or discourage the shareholders from applying to the buy-back scheme.
These are some of the ways benami trading is done to manipulate the market for personal gain.
There can be several reasons why people enter into a Benami transaction. Usually, people who enter a Benami transaction have money earned from unknown sources, i.e. black money. Thus, to utilise the black money, people enter into Benami transactions where the transaction is made in the name of another person, but the person pays the consideration out of his black money.
Since these people cannot show the transaction in their names due to the usage of black money, they use other people's names or create some fictitious names for entering into such transactions known as Benami transactions.
Another reason people enter into Benami transactions is that they want to hide the actual ownership of the Benami property from their creditors or the banks.
As per the provisions of the act, entering into Benami transactions is prohibited. Anyone who enters into any benami transaction shall be punishable with imprisonment for a term which shall not be less than 1 year and shall not exceed 7 years. In addition to this, a fine of 25% of the property's fair market value shall be payable.
In addition to it, any person who is a party to a Benami transaction or has provided false information shall also be liable for prosecution for which the punishment shall not be less than 6 months up to 5 years and a fine which may extend up to 5 years and may include a fine up to 10% of the fair market value of the property.
The Act further prohibits resale of the Benami property from the benamidar by the actual owner. Where the benamidar re-transfers the property to the beneficial owner, then the transaction for such re-transfer shall be deemed to be null & void.
Properties held as benami are liable to be confiscated by the Government without payment of any compensation.
Benami transactions are entered into by people who have black money and usually invest in real estate. People who have black money and enter into Benami Transactions would be very severely affected by this act. A huge penalty would be levied on them, and they can also be sent to jail (as mentioned above).
Genuine transactions where any property is acquired through payment from known sources of income and for their direct benefit will not be affected. Usually, people enter into genuine transactions and therefore, they don’t have to worry about this.
The significant impact will be on the real estate sector, where there will be increased clarity with respect to the title of the property, i.e. the actual ownership of the property.
It may also adversely impact the rural parts of India, where most of the transactions take place in cash and the state of land records are really poor. In such cases, even genuine landowners may find it challenging to establish their ownership.