The Benami Transactions (Prohibition) Amendment Act, 2016, which came into force on November 1 last, is an amendment to the earlier Act of 1988. The amendments have been put into place to stem transactions in assets bearing front (third and unrelated party) or fictitious names and check evasion of law through dubious means.

The Government amended the earlier Act instead of introducing a new one, effectively blocking an escape route for those who had entered into benami transactions since 1988. The reason it did this is because penal provisions contained in a new law cannot be applied with retrospective effect, and all violations prior to its enactment would have otherwise circumvented action.

Definition of benami

A transaction is deemed benami if:

The underlying property is acquired and held in the name of one person, but has been paid by another person who is the actual beneficiary and will enjoy the immediate or future privileges associated with that property. Effectively, the owner merely acts as a front and does not enjoy the asset, per se.

However, properties bought in the name of one’s spouse or child, or those held jointly with siblings or lineal ascendant or descendent will not be treated as benami if they have been paid for from known sources of the individual. Likewise, assets held by (i) a Karta, or a member of Hindu undivided family for his benefit or benefit of other members in the family provided the consideration for such property has been provided or paid for from known sources of the Hindu undivided family or (ii) a person in a fiduciary capacity e.g. a trustee, executor, partner, director of a company are also not treated as benami.

The underlying property is in a fictitious name, meaning the so-called owner does not exist, or is otherwise untraceable. The Government also has power to exclude properties held by charitable or religious organi-sations from this definition.

The term ‘property’ has been defined comprehensively to include all categories of assets whether movable (such as gold, stocks, mutual fund holdings and bank deposits), immovable (such as flats or land), tangible, intangible, corporeal, or incorporeal, any conversion into other form of such property and also the proceeds from such property. It includes any right, interest, legal documents or instruments that prove the title to or interest in the property.

The person on whose name the property has been bought is called the benamidar and the property acquired is benami property. The person who finances the deal is the real owner.

Although the Government had enacted the Act in 1988 to curb benami transactions, the law was never enforced due to lack of provisions in the Act for its implementation. The Amendment Act bars the real owner from re-transferring the property held benami from the benamidar or front.

Re-transfer of a benami property will be deemed to be void. Properties held benami are liable for confiscation by the Government without payment of compensation. Any person found guilty of engaging in benami deals risks rigorous imprison-ment for a term ranging between one and seven years, in addition to a fine which may extend to 25 per cent of the fair market value of the property. Under the earlier Act the penalty for entering into a benami transaction was imprisonment up to three years, or a fine, or both.

Unearthing benami properties

There are several ways in which benami transactions may get uncovered. Some of them are:

Ascertaining disproportionate income: The tax department keeps a check on high-value transactions. These transactions provide an inkling to the tax authorities to look into the person’s sources of income to ascertain whether he has the means to purchase such a property. Once it is established that the person does not have the income to purchase the underlying property, they will try to find the real owner.

Search and seizure: During such operations, if the tax authorities find bank pass books/shares/property documents in the names of other individuals in the custody of the person whose premises is being searched, it is quite likely that the assets will be benami.

The dispute route: In case there is a dispute between the real owner and the benamidar, the real owner may approach the court for relief. If the court holds that the property is benami it will in addition to dismissing the proceedings also notify the tax department.

The Amended Act stipulates penalties for providing false information. If any person required to furnish information under the Amendment Act knowingly submits false information or document, he faces rigorous imprisonment of anything between six months and five years. He shall also be liable to a fine of up to 10 per cent of the fair market value of the property. No prosecution shall be instituted against any person without previous sanction of the Central Board of Direct Taxes (CBDT).

The Amended Act provides a complete execution mechanism and gives the Initiating Office or the Approving Authority or the Adjudicating Authority the power to require any officer of the Central or State Government or local body or officer responsible for registering and maintaining books of accounts or documents containing records of transactions relating to properties or any other person to furnish information in relation to any person or matter related to a benami deal.

It directs Income tax authorities, officers from Customs and Central Excise, Narcotics Drugs and Psychotropic Substances Act, Securities and Exchange Board of India, Reserve Bank of India, Foreign Exchange Management Act etc. to assist the authorities in enforcement of the Amended Act. The Initiating officer can provisionally attach a property if on the basis of data available with him he believes that the benamidar may alienate the benami property.

The Amended Act also provides for an appellate mechanism consisting of an adjudicating authority and appellate authority. Appeals against orders ofthe appellate tribunal will lie in the high court.

People generally enter into Benami transactions in order to park their untaxed money. With the implementation of the Amended Act, exit from such Benami investments especially real estate, will become not only difficult but unpopular as well, due to the severe penalty such transactions attract.

People will be inclined to renounce such property rather than make an attempt to reclaim it because the externalities are so high.

With the enforcement of the Amended Act, an archived catalogue of land across India will become available to the Government, which will enable it to fast-track the process of providing affordable housing to the indigent and reduce the rising scarcity of land. People trying to escape the clutches of the law by selling off such Benami assets or depositing the black money into the accounts of their employees will not be let off the hook because proceeds from sale of such properties as well such deposits are also considered Benami under the Amended Act and will attract stringent penalties, including imprisonment.

The Amended Act is also likely to impact the process of bringing transparency in the real estate market and minimising title risks by adopting the practice of providing authentic names in property transactions thereby boosting investments and transactions in the real estate sector.

Henceforth, proper implementation of the Amended Act will induce confidence in investors and increase accountability for black money.

This new piece of legislation is well curated and if implemented diligently it could have a substantial impact in curbing the circulation of black money and restricting benami transactions. The Government will do well to build in adequate safeguards ensuring that the power vested in officers to confiscate properties or otherwise prosecute individuals isn’t misused, and that the common man is not at the receiving end of unnecessary and unwarranted harassment.

The writer is a partner at Shardul Amarchand Mangaldas & Co. The views expressed are personal.