Report No. 130

Chapter V

The Course of Future Action Indicated

5.1. On the earlier occasion when the Law Commission dealt with the subject of benami transactions, a very limited attack was directed against benami transactions by merely refusing the assistance of the court machinery to recover benami property by the real owner. Briefly, the real owner of the property is precluded from instituting a suit or bringing an action in respect of any property held benami against the benamidar or against any other person. Similarly, defence based on any right in respect of any property held benami, whether against the benamidar or against any other person, was not to be permitted by the court. This is the legal position under the Ordinance. A glaring lacuna appears in this limited approach.

5.2. Let it not be forgotten that the benami transactions were never entered into between rank strangers. Generally the relationship between the real owner and the ostensible owner was one of confidence or they were near blood relations. When land was transferred with a view to defeating ceiling laws or socially beneficent legislation, the benamidar was generally a farm labourer, a servant or a rent collector. In some of the cases, the benamidar was either a wife or a daughter or a very near blood relation. Encompassing the entire gamut of benami transactions, one thing that emerges unquestionably is that the real owner and the ostensible owner were either in a fiduciary relationship or blood relationship or close intimate friendship.

If such persons were the parties to benami transaction, as between them, a litigation was generally not even conceived. The Ordinance which follows the report of the Law Commission of 1973 merely prohibits court action at the instance of the real owner against the benamidar or a defence based on benami on behalf of the real owner. If these close intimate friends/relations would not resort to court proceedings, the Ordinance does not even remotely affect them or their benami transactions. The Ordinance will remain 'a paper tiger', ineffective in every manner. It would be inane.

5.3. Further, in worldly ways it can be easily circumvented. If the benamidar chooses to re-transfer the property to the real owner, there is nothing in the Ordinance which will come in the way of benamidar re-transferring the property to the real owner. Coupled with this is the fact that even after the Ordinance, there is no prohibition against entering into benami transactions. It is neither made illegal nor criminal.

Therefore, the net effect would be that even after the Ordinance and even after the Act replacing the Ordinance is put on the statute-book benami transactions can be entered into with impunity and as and when necessary the Ordinance or the Act replacing it would be rendered inane by voluntary re-transfer of property by the benamidar to the real owner. Should the Legislature legislate to merely put on the statute book something which is toothless, meaningless and wholly empty?

5.4. It is idle to speculate that benami transactions were entered into without any specific motivation behind them. And primarily the motivation was illegitimate. One can go into the motivation of a benami transaction and one would discover an attempt either to defeat tax laws or socially beneficent legislations or occasionally to shield money obtained by corrupt practices used in acquiring property.

If such were the motivations, it would be putting a premium on dishonesty to treat benami transactions as merely a problematic of civil law or transactional law. In fact, under the garb or the pretext of an apparently innocuous transaction, the real purpose and motivation was wholly illegitimate. Now, undoubtedly, benami was a part of Indian law. But when the notion of legality is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law should permit lifting of the veil to ascertain the reality so as to unearth illegitimacy behind the transaction.1

1. United States v. Milwaukee Refrigerator Transit Company, quoted in Pennington's Company Law, 5th Edn., p. 58, in the context of lifting a veil of corporate entity to ascertain the reality.

5.5. Viewed from this angle, one can confidently say that the real/beneficial owner on the one hand and the benamidar on the other were participes criminis. Both of them were participants in an activity apparently into a superficially viewed legal transaction but in reality and in substance into a criminal activity to shield the real owner from showing the property as his either in his wealth tax, income-tax or even the source of consideration with which the property was acquired. The real/beneficial owner and the benamidar share the same fraudulent intent and the same avowed intention of entering into a transaction tainted with criminality. Therefore, it can be said with confidence that they were participes criminis

5.6. By the operation of the Ordinance, one of the two parties to the illegitimate transaction obtains an undeserved advantage. If, as the Ordinance is understood, any action at the instance of the real-owner against the benamidar in relation to the property held benami is excluded from the cognizance of the court, obviously for all practical purposes the benamidar vis-a-vis the real-owner would become the owner of the property. And pro tanto the real/beneficial ownership of the real owner would be extinguished. To some extent this can be termed as unjust enrichment by the benamidar. Should the law permit it? That is the substantial question.

5.7. As the Ordinance stands, the benamidar cannot be deprived of property acquired benami by the real owner through the assistance of the court. Benamidar would for all practical purposes remain the owner and may be able even to transfer a good title, if he so chooses, to sell, mortgage or transfer the property. This unjust enrichment of the benamidar deserves to be dealt with by an appropriate provision.

One can draw the analogy from the provision contained in section 269C of the Income-tax Act, 1961 which provides that if any immovable property of a fair market value exceeding one hundred thousand rupees has been transferred by a person to another person for an apparent consideration which is less than the fair market value of the property and the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer, the competent authority can start a proceeding under section 269C read with section 269D for the acquisition of such immovable property. Sections 269C and 269D on their own force will not apply to a benamidar.

But an appropriate legislation may authorise competent authority under the tax laws to call upon the benamidar, the beneficiary of the Ordinance, to explain how and from where he had acquired the requisite fund for acquiring the property and if it is satisfactorily established that he was a mere name-lender without having invested a farthing in the transaction, a proceeding for acquisition of the property can be initiated. He is required to be paid nothing because he has invested nothing. This approach would to some extent strike at the illegitimacy of transactions and the acquisition of the property would be justified in larger national interest. Apart from this, people will think twice before lending their names.

5.8. There must be one more string to the bow. As pointed out hereinbefore, while the court assistance would be denied under the Ordinance to the real owner to recover the property transferred benami from the benamidar, nothing would come in the way of the benamidar re-transferring the same property inter vivos to the real owner. Obviously, when such re-transfer takes place, the provisions of the Gift Tax Act can be invoked if it is done without consideration or for a consideration other than cash or service rendered or any apparently named consideration which is not paid.

In such an event, the tax authorities must be empowered by a suitable provision to enquire into the legitimacy of the transaction. If it is satisfied that the attempt is to restore the property to the real/beneficial owner by a benamidar, the law should step in and interdict it from being done. If the real owner cannot recover property and the ostensible owner has no interest in the property, obviously a provision can be made for acquiring the property without payment of any consideration.

5.9. Along with the aforementioned two approaches, benami transaction should be prohibited by the proposed statute. Entering into a benami transaction should be made an offence. This aspect was examined by the Law Commission on an earlier occasion. It is not for a moment suggested that any prosecution should be launched for the benami transactions entered into prior to the date of the Ordinance. That would fail on the touch-stone of Article 20(1) of the Constitution. What is suggested here is that from the Gate of the legislation, a prohibition should be enacted against entering into benami transactions in future and if it is satisfactorily established, a punishment should be awarded.

There should be no consideration for such transaction. Power of wealth, if not curbed, is likely to destroy the power of office. At all times, power of wealth and power of office stand in confrontation. It is absolutely necessary in the larger interests of the society to have an effective check on power of wealth. Benami represents a facet of power of wealth. It has to be curbed. Therefore, such transaction in future should be prohibited and a provision for punishment should be incorporated.

5.10. There was one suggestion that emerged in the debate referred to earlier which needs to be examined here. It was said with a certain amount of feeling that even after extensive amendment of Hindu Law and more scientific and generous rules of inheritance under the Mohammedan Law, female heirs are at a comparative disadvantage in inheriting the property that should otherwise come to then. It was said that some exception should be made in favour of wife and daughter, more particularly, unmarried daughter, where either the father or the mother would like to buy a property in the name of the unmarried daughter or the husband would like to buy the property in the name of his wife.

The submission was that they are such near relations that any element of criminality cannot even be imagined amongst such intimate relations. Distinguishing the case of a son, it was said that he is bound to inherit the property of his father and, therefore, no exception should be made in his case. In view of the provisions of section 64 of the Income-tax Act, one is at a loss to understand how is the wife to be benefitted by becoming a benamidar in respect of some property, consideration of which is paid by the husband and transferred directly in the name of the wife.

The case of an unmarried daughter may stand on a different footing. However, if any exception is to be made for a property held benami by a wife or unmarried daughter, in the opinion of the Law Commission, a presumption should be added that to the extent the wife or the unmarried daughter becoming a benamidar of a property purchased or transferred by the husband or the father, as the case may be, the doctrine of advancement, as understood in the English law, may be incorporated in the Indian law and the husband or the father, as the case may be, will not be entitled to reclaim the property on the ground that either the wife or the unmarried daughter was a benamidar.

This would at least establish that the husband or the father, as the case may be, was genuinely interested in conferring some benefit on the wife or the unmarried daughter, as the case may be. Beyond that, no exception need be considered with regard to prohibiting benami transactions in future.