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Report No. 130

Chapter IV

Benami Transactions and Motivations for the Same

4.1. If legislations were to be enacted on the lines of the Ordinance alone, a legitimate criticism would be voiced as to how the State or the society at large is benefitted by making an ostensible owner a real owner and depriving the real owner of his beneficial interest, both are parties to a benami transaction. Benami transaction generally implies that when one purchases the property in the name of other, the other being a name lender, and the purchaser did not propose to transfer beneficial interest to him, the name lender is a benamidar and the one who advances consideration is the real owner and also described as holder of beneficial interest in the property.

It should, however, not be understood that benami transaction emerges only from a transaction of sale and purchase of property. In fact, in modern times and at least since the advent of the Constitution, when attempts were made to destroy vested interest in land by abolition of zamindari as well as abolition of estates and simultaneously making the tiller the owner of the land, large scale benami transactions have come into existence where the real owner of land whose holding would exceed the ceiling prescribed under agrarian reform laws would permit the land to be held by the tiller without transferring ownership rights to him.

Thereby, he succeeds in defeating the agrarian reform laws and perpetuates his holding. To illustrate, section 57 of the Bombay Tenancy and Agricultural Lands Act, 1948, provided that on the tillers' day - April 1, 1957 - the tenant shall become the owner of the land. The title was to be transferred by the operation of law and it became indefeasible subject to some of the provisions of the Act. Decades after the statute was in operation, a survey in Borsad taluk of Kaira district of Gujarat State revealed thousands of concealed tenancies.

In the process, the holder defeated socially beneficent legislations - one, the aforementioned Act and another, the Act prescribing ceiling on agricultural holding. Same modus operandi was resorted to when Urban Land Ceiling Act came into force. In fact, knowledge of such situation probably led the Minister of Planning and Progamme Implementation to state in his letter dated May 25, 1988, which led to the present reference, that comprehensive legislation may be enacted `to effectively checkmate the transactions in fictitious names or those in the names of dogs, cats and long dead persons, etc.'.

4.2. Benami transaction activities have thus encompassed all areas of property relationships. Whatever be the nature of the property, there can be a benami holder of it. An impression, therefore, requires to be removed that benami transactions are generally the outcome of sale and purchase of property.

4.3. The information so far collated in the preceding paragraphs would necessitate a serious question to be posed and answered. The question posed during the debate was that the Law Commission should not start with a belief, according to them not legitimate, that the motivation behind benami was always and necessarily illegitimate. It was said with emphasis that benami can be also for legitimate purposes. An illustration was given during the debate that take a case where 'A' not only intensely loves his wife but also holds the belief that she is the harbinger of good luck and, therefore, 'A' would like to buy the property or transfer the property with him to his wife without any intention of transferring any beneficial interest.

Proceeding further, it was said that in order to establish his bona fides. 'A' would continue to show the property in his wealth tax return or in his income-tax return and, therefore, any suggestion that the transaction was entered into with a view to defeating tax laws would stand negatived. It was, therefore, asserted that in such a case, to make wife an owner and deprive the real owner of the property would be irrational, apart from being more illegitimate than the illegitimate benami transaction itself. The Commission remains unconvinced.

If 'A' loved his wife so intensely and believed her to be the harbinger of good luck, why should he not transfer the property to her for good and disclose the transaction? Such an hypothetical illustration cannot conceal the real fact that ordinarily benami transactions are entered into for various illegitimate purposes. The primary aim is to defeat the tax laws, such as wealth tax, gift tax and income-tax, as also estate duty when it was in force and which has come back in a different form.

Continued benami transactions would have an impact on the same. Similarly, socially beneficent legislations were enacted both by the States and the Centre for equitable re-distribution of property and for removing inequalities in income, simultaneously with status and opportunity. And benami were entered into with the sole and avowed aim of defeating the same. Howsoever, one may dislike this, it cannot be wished away.

4.4. The Law Commission made numerous efforts by raising the question repeatedly whether there is any area in which if benami transaction operates, it would have the cover of legitimacy in the sense of justifiable social morality and in which to derive unjust enrichment was absent. Though the Commission struggled hard, it could not come across any.

It may be that the attention of the Law Commission may have escaped that rarest of rare case where benami may be treated as legitimate and justified socially and ethically and consistent with the mores of the day, yet the illegitimate area or the illegitimate motivation behind entering into benami transactions is so wide and so vast that small invisible area of so-called legitimacy may be ignored. Therefore, the Law Commission is of the firm opinion that benami transaction in any form in respect of any kind of property, tangible or otherwise, should be covered within the proposed legislation.

4.5. Before we conclude on this chapter, it is necessary to point out that certain tax laws have confirmed legitimacy on the benami transactions and derived benefit in the form of revenue collection from it. It was, therefore, said that if now all benami transactions are invalidated and an all-enveloping prohibition is imposed, the revenue laws would suffer less of revenue. Reference in this connection was made to section 27 of the Income-tax Act, 1962 dealing with income from house property. The various sub-sections of section 27 deal with transfer of property by husband to wife and vico versa. It also involves the case of importable estate.

The Law Commission is unable to appreciate how a total prohibition of benami transaction and the holder being made the real owner would defeat revenue laws. If one escapes, the other pays, and if it is suggested that the other may not be within the dragnet of the tax laws and that both would benefit by the prohibition and abolition of benami transactions. In the immediate future such effect may be produced but the long term interest would help in defending such spurious transactions between husband and wife. Section 22 may be read accordingly.

But it was pointed out that where transfer of flats is prohibited either by the rules of the co-operative society which has built the flats or by the rules of authorities like the Delhi Development Authority, a modus operandi has come into existence whereby violating the law, the flat is sold and the purchaser would pay the amount and take an irrevocable power of attorney and enter into possession.

It was further said that the provisions of the Income-tax Act have recognised such transfers and treat the attorney as owner for the purpose of income-tax as per the provisions of the Finance Act 1987. If the sole purpose of entering into such a transaction is the violation of existing Iaw which has been passed after due consideration, it is time that no recognition is conferred and the law is allowed to take its own course. Even in the name of revenue loss, violation of existing laws cannot be protected.

4.6. The Law Commission would like to make it very clear that some of the provisions of the tax laws may become anachronistic because of the present approach of the Law Commission. This is inevitable. The tax laws were enacted at a time when benami was a part of Indian law. Such laws would have to conform to the changing legal order. Yet a further solution is offered in this behalf in the next chapter.

Benami Transactions - A Continuum Back

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