Benami Transactions- Implications, Consequences & Analysis

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Benami Transactions- Implications, Consequences & Analysis

History

The act to prohibit benami transactions was enacted in 1988. It was ineffective because proper rules were not framed for the implementation.

The act was ammened on 1st November 2016 just before demonetization.

Why enter into a Benami Transaction?

 People enter into benami transactions because they have money earned from undisclosed sources. They do not disclose the sources because the sources could be illegal OR the sources are legal but they want to avoid payment of tax. Thus they buy assets in the name of someone else. Another reason why people enter into benami transactions is to divert the funds received from creditors so that the creditors cannot claim the properties in case of default.

The act was amended in 2016 to ensure that the benami transactions entered in between 1988 and 2016 would still fall in the purview of the act.

What is a Benami property?

In Legal terms

“property” means assets of any kind, whether movable or immovable, tangibleor intangible, corporeal or incorporeal and includes any right or interest orlegal documents or instruments evidencing title to or interest in the property andwhere the property is capable of conversion into some other form, then theproperty in the converted form and also includes the proceeds from theproperty.

In a nutshell it means every asset you can imagine & if you sold the asset, the proceeds from the sale of the same& if you converted into some other form then .

What is a Benami Transaction?

The law states the following as a benami transaction:

(A) a transaction or an arrangement—

  1. where a property is transferred to, or is held by, a person, and the consideration for suchproperty has been provided, or paid by, another person; andhas provided the consideration,

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitiousname; or

(C) a transaction or an arrangement in respect of a property where the owner of the property isnot aware of, or, denies knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing theconsideration is not traceable or is fictitious;

Transactions not classified as Benami

The following transactions though meet the requirements of a Benami transaction have been explicitly exempted.

When the property is held by—

a Karta, or a member of a Hindu undivided family, as the case may be, and the property is heldfor his benefit or benefit of other members in the family and the consideration for such propertyhas been provided or paid out of the known sources of the Hindu undivided familyindividual and the consideration for such property has been provided or paid out of the knownsources of the individual;

any person in the name of his brother or sister or lineal ascendant or descendant (parents orchildren), where the names of brother or sister or lineal ascendant or descendant and theindividual appear as joint-owners in any document, and the consideration for such property hasbeen provided or paid out of the known sources of the individual;

a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company,

a depository or a participant as an agent of a depository under the Depositories Act, 1996 and

any other person as may be notified by the Central Government for this purpose;

Punishment

Entering into a Benami transaction is prohibited. If caught one would be prosecuted, no matter how small the transaction.Benami property will be confiscated by the government.

Anyone who entersinto any benami transaction shall be punishable with imprisonment for a term which shall not beless than 1 year and shall not exceed 7 years. In addition to this, fine of 25% of the fair marketvalue of the property shall be payable.

In addition to it, any person who is a party to a benami transaction or has provided false information shall also be liable for prosecution for which the punishment shall not be less than 6 months up to 5 years and a fine which may extend up to 5 years and may include a fine up to 10%of the fair market value of the property.

A benamidar cannot transfer the property to the real owner. The transaction would be void.

Conclusion

The new law to prohibit Benami transactions is very stringent. It is very inclusive and leaves very little room for any mischief. The only way out as it appears is to explain the source of income for the asset purchased. Readers are advised not to enter into any Benami transactions in future.


Nicely written by-
-CA Bharat Jeswani
Author is a CA currently associated with M/s. SSRPN & Co. as a partner, Pune.
Also Auditor and Internal Controls Consultant.

email: bharat@bharatjeswani.com


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