THE BENAMI TRANSACTIONS: Meaning, Analysis and Implications

After Demonetization, the next focus of Indian government to curb black money is Benami Properties. Because of relaxed provisions, informal ways of doing things until now, it became part of a normal business to do certain things in the name of tax planning or to circumvent the laws. As a result, it is entirely possible that a person would enter into a Benami Transaction without even realizing the same.
However, with increased compliance, government effort to curb black money and provision of mandatory rigorous imprisonment for guilty, it is extremely critical to understand the meaning and implications of a Benami Transaction.
The Benami Transactions (Prohibition) Amendment Act, 2016, which is an amendment of the older Benami Transactions (Prohibition) Act 1988 defines and regulates the Benami Properties/Transactions and is effective from November 1, 2016.
What is a Benami Transaction?
In simple term, a Benami transaction is a transaction where the legal owner and payer of a property transaction are two different persons.
As per the revised provisions, a Benami transaction is:

1. A transaction where a property is transferred to or held by one person for direct or indirect, immediate or future benefit of another person, who has provided or paid the consideration, except when
   i.) An HUF is purchasing a property in the name of a Karta, or any other member from known sources;
   ii.) A person is holding the property in a fiduciary capacity (e.g. trustee, executor, partner of a partnership firm, director of a company, a depository participant, etc.);
   iii.) An individual is purchasing a property in the name of his spouse or any child provided the consideration is paid out of the known sources;
   iv.) Any person is purchasing anproperty in the name of his brother or sister or lineal ascendant or descendant, where he is one of the joint-owners, provided the consideration is paid out of the known sources; or
2. A transaction carried out in a fictitious name; or
3. A transaction where the owner of the property is not aware of or denies knowledge of such ownership;
4. A transaction where the person providing the consideration is not traceable or is fictitious.

Any transaction where possession of any immovable property is taken as a part performance of a contract is not a Benami transaction if the contract is registered and consideration as well as stamp duty have been paid.
Property would include asset of any kind, whether movable or immovable, tangible or intangible, and includes rights or interest as well as proceeds from the property.
Understanding the Meaning of a Benami transaction through Examples:
As it could be very difficult to know the meaning of the Benami Transactions just by reading the same, I have given following 15 examples to really understand the meaning:

1. Mr. A, an NRI and a resident of USA, gives a gift of Rs. 10,000,000 from his NRO account to his resident father, who invested in mutual funds in his own name as a single owner in India, with an intention to return the gift amount to his son in future, is a Benami Transaction.
2. Mr. B, an NRI and a resident of South Africa, purchased an office for Rs. 15,000,000 in the name of his mother Mrs. C and himself as joint holders from his NRE account, is NOT a Benami Transaction.
3. Mr. D, an NRI from New Zealand purchased an apartment for Rs. 10,000,000 and made payment of Rs. 7,500,000 officially by cheque from his NRE account and Rs. 2,500,000 unofficially in cash. For the registration, stamp duty payment, TDS as well as in all correspondence and documentation, Rs. 7,500,000 was used as official consideration of property, which was purchased in his name. In such case, while, cash was involved, this may NOT be a Benami transaction.
4. Mr. E, an NRI from Singapore purchased an office for Rs. 20,000,000. The payment of Rs. 8,000,000 was made unofficially in cash and Rs. 12,000,000 was made officially by cheques. However, only Rs. 3,000,000 was paid from his bank account and Rs. 9,000,000 was paid in cash to builder who arranged cheques of unknown persons. The documentation includes cheques information (cheque number, date, amount) of total Rs. 12,000,000 paid for the property. For the registration, stamp duty payment, as well as in all correspondence and documentation, Rs. 12,000,000 was used as official consideration of property, which was purchased in his name. This is a Benami transaction as 9,000,000 was not paid from Mr. E’s known sources / bank account.
5. Mr. F, an NRI and a resident of Germany, invested in equity shares of various listed companies of Rs. 10,000,000 in name of his wife Mrs. Heena and himself as joint holders from an account not disclosed to tax authorities (unknown source), is a Benami Transaction.
6. Mr. G, an NRI and a resident of Japan, invested in Bank FD of 5,000,000 in name of his wife Mrs. G as a single owner from his official NRO account, is NOT a Benami Transaction. However, income tax laws relating to clubbing provisions may apply.
7. Mr. H an Indian resident, held PPF account of Rs. 3,000,000 in name of his grand daughter, who is an NRI and a resident of UK as a single owner, is a Benami transaction. Also, it is not legal as NRIs are not allowed to open a PPF account.
8. Mr. I, an NRI and a resident of USA, held corporate deposits of Rs. 2,500,000 in name of his brother’s wife or wife’s brother as first holder and himself as second holder is a Benami transaction.
9. Mr. J, an NRI and a resident of Mexico booked (purchased rights in acquiring) a commercial property of Rs. 50,000,000 in name of Mr. Farhanitrate, which is a fictitious person, is a Benami transaction.
10. Mr. K, an NRI and a resident of Canada, purchased an apartment in name of his son Mr. L for Rs. 20,000,000 is NOT a Benami transaction.
11. Mr. M, an Indian resident, invested Rs. 10,000,000 in a bank FD in the name of his married daughter, Mrs. N, who is a US resident. If she has no knowledge and denies ownership of the FD, is a Benami transaction.
12. Gold of Rs. 5,000,000 was purchased in the name of Ms. M, an NRI from Dubai, UAE and the consideration was paid by Mr. Prerajulisation, who is not traceable, is a Benami transaction.
13. Mr.O, an NRI from Switzerland sold a Benami property for Rs. 50,000,000 by cheque and deposited the sale proceeds in his NRO bank account. The amount in the bank account is a Benami property.
14. Mr.P, an NRI from China sold a Benami residential property for Rs. 10,000,000 by cheque, deposited the sale proceeds in his NRO bank account, paid taxes and filed income tax return. He buys another property from his after-tax paid proceeds in his own name. Whether the transaction of buying and holding 2^nd property is a Benami transaction, is debatable. Also, issues could arise during the scrutiny of Income Tax return and sale of property.
15. Mr.Q has owned a Benami office property since 2010. As he is still holding the property on Nov 1, 2016, this would also be considered as a Benami transaction as per the new amended act and will be subject to the authority and penalty of the amended act.

Authority:
Four authorities who will conduct inquiries or investigations are i) Initiating Officer, (ii) Approving Authority, (iii) Administrator, and (iv) Adjudicating Authority.
On suspicion, an Initiating Officer can issue a notice to any Benamidar. Based on permission from an Approving Authority, an Initiating Officer may hold the property for 90 days. Upon end of 90 days, case may be referred to the Adjudicating Authority. The Adjudicating Authority will examine the documentary evidence and pass an order on whether the property is held as Benami. Based on the order, the Administer will receive and handle the property subject to prescribed conditions.
Any appeal against any orders passed by the Adjudicating Authority will be heard by an Appellate Tribunal and appeal against orders of the Appellate Tribunal will go to the high court.
Penalty or Consequences of a benami transaction:
Anyone found guild of entering into a Benami transaction would be liable for both financial penalty and imprisonment:

1. Financial Penalty of up to 25% of the fair market value of the property
2. Rigorous imprisonment for minimum of 1 Year to maximum of 7 year.

If anyone gives incorrect information or explanation in response to any inquiry to any authority

1. Financial penalty up to 10% of the fair market value of the property and
2. Rigorous imprisonment of minimum 6 months to maximum of 5 years.

My Advice:

1. Please do not be complacent and think that “nothing will happen to you” or “this is how things are done in India” or “I am a very small fish” or “no one will know” or “I have done this many times in past”, etc.
2. Before transferring money to someone else, relative or not, please define the nature of transfer; i.e. whether it is a loan, gift or income. The rules, requirements and conditions as per applicable laws (e.g. FEMA, Income Tax, etc.) for the respective nature need to be complied with.
3. It is important to realize that as Income Tax returns are filed individually, there is no “joint” concept in true sense and is mainly for convenience in India. Person who has invested the money is considered the real owner. Please ensure that the transaction is not a Benami Transaction.
4. If by mistake, you have entered into a Benami Transaction, seek an experienced professional help to remedy the same.