Benami property refers to assets that are held in the name of one person while the actual financial ownership lies with another. The term "benami" is derived from Persian, meaning "without name" or "in another's name." These transactions are characterized by a deliberate intention to conceal the real identity of the owner, often to evade legal obligations or scrutiny. In India, the practice of holding benami properties has been a long-standing issue, leading to the enactment of the Benami Transactions (Prohibition) Act, 1988, containing only 9 sections, later strengthened by the Benami Transactions (Prohibition) Amendment Act, 2016. The legislation seeks to curb the use of benami properties and confiscate such assets by the state.

Features of a Benami Property Transaction

1. Property purchased on someone else’s name.

2. Consideration is paid by someone else.

3. For the benefit of the person who paid consideration.

4. The identity of true owner is hidden.

5. Purpose is to evade tax or launder money.

Benami Property And Tax Evasion

Benami transactions are closely linked to tax evasion, as they are frequently used to launder black money and conceal unaccounted wealth. By acquiring assets under fictitious or proxy names, individuals can avoid declaring these assets in their income tax returns, thereby evading capital gains tax, property tax, and other liabilities. This practice not only distorts economic transparency but also undermines the integrity of the tax system. The government’s crackdown on benami properties is therefore a part of a broader effort to combat tax evasion, promote financial accountability, and bring more transactions into the formal economic fold.

Tax Evasion through Benami Transactions

Benami transactions are often used as a method to conceal wealth and evade taxes, particularly by individuals who want to avoid scrutiny from tax authorities. Here's how tax evasion typically happens through such transactions:

1. Concealment of Ownership: In a benami transaction, the actual owner of the property (the beneficial owner) purchases it in someone else’s name (benamidar). This helps the real owner hide their income and assets from the tax department, especially if the funds used are unaccounted or black money.

2. Undisclosed Income Investment: Individuals may channel black money into real estate under another person’s name to avoid declaring the source of funds. Since the income is not reported, it escapes taxation.

3. Avoidance of Capital Gains Tax: When properties are sold by a benamidar, the beneficial owner may avoid paying capital gains tax by not disclosing the transaction in their own name, or under-reporting the sale value.

4. Circumventing Wealth and Income Tax Laws: By transferring ownership on paper to someone with lower or no income, wealthy individuals may avoid higher tax liabilities under wealth or income tax provisions.

5. Use in Money Laundering: Benami property is often used to park illicit money which is later “cleaned” through multiple layers of transactions, making it difficult for authorities to trace the original source.

6. Inflated Expenses and Fictitious Ownership: In business, individuals may show properties as belonging to third parties to inflate expenses or claim false depreciation, thus reducing taxable income.

The Benami Transactions (Prohibition) Act, 1988, especially after its amendment in 2016, was strengthened to curb such malpractices by providing for confiscation of benami properties, prosecution of offenders, and stringent penalties including imprisonment and fines.

When a notice is served under the Benami Transactions (Prohibition) Act, 1988, it marks the beginning of formal legal proceedings against a suspected benami property. Here’s what happens next.

Section 24: Notice and Attachment of Property

1. Issuance of Notice [Section 24(1)]: When the Initiating Officer (IO) has reason to believe that a property is benami, they are required to issue a show cause notice to the benamidar, the individual in whose name the property is held asking them to explain why the property should not be treated as benami.

2. Notice to Beneficial Owner: As per the proviso to Section 24(1), if the beneficial owner (i.e., the real owner) is identifiable, the IO must also serve a copy of the notice to that person.

3. Timeframe: All necessary inquiries and service of notice must be completed by the IO within 90 days from the date of provisional attachment, if such attachment has been made under Section 24(3).

4. Mode of Service: As per Rule 6 of the Benami Transactions (Prohibition) Rules, 2016, service of notice can be carried out through various methods:

5. Direct Service: Personally delivering or tendering the notice to the concerned individual.

6. Service by Post: Sending the notice via registered post or speed post to the individual’s last known address.

7. Affixation: If the person cannot be located, the notice may be affixed to a conspicuous place at the person’s last known residence or workplace.

8. Newspaper Publication: In cases where prior methods fail, the notice may be published in leading newspapers, one in English and another in the local vernacular.

9. Electronic Means: Where permitted by law, notices may also be served through electronic communication, provided the mode is legally recognized and verifiable.

10. Importance of Proper Service: Proper service of notice is crucial to uphold the principles of natural justice. Failure to serve notice correctly may lead to the invalidation of proceedings and provide grounds for the affected party to challenge the action before the Appellate Tribunal or High Court, particularly if they were not given a fair opportunity to respond or present their case.

Procedure Of Attachment Of Property and Available Remedies

1. Initiation of Proceedings – Section 24(1): The process begins when the Initiating Officer (IO) has reason to believe, based on material in possession, that a property is benami. In such cases, the IO issues a show cause notice to the benamidar, the person in whose name the property stands asking them to explain why the property should not be treated as benami. If the beneficial owner (actual owner) is identifiable, a copy of this notice must also be issued to them.

2. Provisional Attachment – Section 24(3): If the IO suspects that the property may be transferred or alienated during the inquiry, they may, with the prior approval of the Approving Authority, issue a provisional attachment order for a period of 90 days. The attachment may cover both movable (e.g., vehicles, jewellery, cash) and immovable (e.g., land, buildings) assets.

3. Inquiry and Collection of Evidence – Section 24(4): During the 90-day period from the end of the month in which the notice was issued, the IO must conduct a detailed inquiry, gather relevant documents, and provide both the benamidar and the beneficial owner an opportunity to be heard. Based on the outcome, and with the Approving Authority’s consent, the IO may either continue or revoke the provisional attachment.

4. Reference to Adjudicating Authority – Section 24(5): If the provisional attachment is confirmed, the IO is required to refer the case to the Adjudicating Authority (AA) within 15 days, along with all supporting evidence and documents.

5. Adjudication – Section 26: The Adjudicating Authority then issues notices to all parties involved and gives them a chance to present their case. The Authority may also call for further evidence or hold additional inquiries. After evaluating all materials, it can either declare the property as benami or drop the proceedings. This decision must be made within one year from the end of the month in which the reference was received.

6. Confiscation – Section 27: If the property is declared benami, it is liable to confiscation by the Central Government. Importantly, no compensation is payable to either the benamidar or the beneficial owner.

7. Appeal – Section 46: Any person aggrieved by the order of the Adjudicating Authority has the right to appeal before the Appellate Tribunal within 45 days from the date of the order.

Judicial Approach

In Ace Infracity Developers Pvt. Ltd. v. Initiating Officer [FPA-PBPT-(464, 470, 722-724)/MUM/2019], the Appellate Tribunal held that the show cause notice issued under Section 24(1) of the Benami Act was invalid due to lack of territorial jurisdiction. The properties and parties involved were located in Ghaziabad, not Mumbai, violating CBDT guidelines. As a result, all subsequent proceedings, including attachment and reference to the Adjudicating Authority, were quashed.

In Kavita Infrastructure Pvt. Ltd. v. The Initiating Officer [FPA-PBPT-820/MUM/2019], Mumbai, the Appellate Tribunal for Benami Transactions stressed that issuing a provisional attachment under Section 24(3) without notifying the person in possession of the property amounts to a violation of their constitutional rights. The Tribunal highlighted the importance of adhering to due process, particularly the requirement of serving notice to the current holder of the property.

The case of M/s. Virgo Buildestate Pvt. Ltd. v. Initiating Officer [FPA-PBPT-285/JP/2019], adjudicated by the Appellate Tribunal for Benami Transactions, was decided on June 12, 2019. The Tribunal emphasized that the respondent should have issued a notice under Section 24(1) of the Prohibition of Benami Property Transactions Act, 1988, to the appellant before proceeding under Section 24(4)(a). The Tribunal noted that the appellant had acquired certain legal rights by stepping into the shoes of the alleged benamidar, and thus, serving notice was both fair and legal.

The issuance and proper service of notice play a pivotal role in proceedings under the Prohibition of Benami Property Transactions Act, 1988. As established through judicial precedents, adherence to due process and jurisdictional mandates is essential to uphold the principles of natural justice. Section 24 of the Act mandates the Initiating Officer to issue a show cause notice to the benamidar, and, where applicable, to the beneficial owner. Failure to do so can render the entire proceedings, including provisional attachment and adjudication, void. Hence, for the effective and lawful implementation of the Benami law, procedural safeguards, especially concerning notice, must be strictly followed to prevent arbitrary action and ensure fair opportunity for all parties involved.