Understanding Benami Property – Everything You Need to Know Right Now

Our government has been taking significant steps to end the use of black money, including the Income Disclosure Scheme, the Black Money Act, and Demonetization. The words "Benami Act," "Benami Transactions," and others have always drawn much attention in this context.

The Benami Transactions (Prohibition) Act, of 1988 is considered the first-ever legal definition of Benami transactions. The Benami Transactions (Prohibition) Amendment Act of 2016 altered 8 of the Act's provisions, which had previously been in effect. According to Section 2(8) of the Act, a Benami transaction involves any property, including the revenues from that property, that is the subject of the Benami transaction. To make everything concerning the Benami Property Act easier for you to grasp, we've broken it down into the parts below.

What is Benami Property?

When a property is bought in the name of someone who isn't the true beneficiary, it is referred to as a "Benami" property. Such Individuals who acquire property for the benefit of someone else are called a "Benamidar". Meanwhile, the property they have acquired for the benefactor is termed a Benami Property, meaning that it was not purchased in the owner's name by the person paying the money.

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Why do People opt for Benami Transactions?

Buying and holding a Benami Property is done for the buyer's direct or indirect advantage. 

Most often, avoiding taxes is the driving force behind such transactions. 

Example of Benami Transaction: Imagine that a man is purchasing a home in the name of his daughter-in-law. The lady purchases the land, but it is her father-in-law who pays the price. In this scenario, the house may be referred to as a "Benami Property". 

Such properties come under the purview of the Benami Property Act. The true property owner in such a Benami transaction is the one who funds the acquisition and not the person in whose name it was acquired. Benami Transactions that happen in India are not limited to Real Estate. Sometimes this includes transactions involving gold, financial instruments, and legal records.

List of Things Every Benami Property Owner Must Know About

1. What is covered by the Benami Transactions (Prohibition) Act, of 1988?

The Benami Transactions (Prohibition) Act, of 1988 and its recent amendment were passed to put a stop to Benami transactions, as well as to reclaim property that had been held in that manner and for issues related to or incidental to those issues.

2. What does the legislation define as a Benami Property?

According to Section 2(8) of the prohibition of the Benami Property transactions act, the Benami transaction involves any property, including the revenues from that property, that is the subject of the Benami transaction.

3. What is the definition of a Benami transaction as per the Legislation?

A Benami transaction, according to Section 2(9) of the Act, is one in which:

1.  a transaction or an agreement—
   1. when a person receives a property transfer or holds the property on their behalf and another person provides or pays the consideration for the property; and
   2. The property is kept for the present or future, direct or indirect, for the benefit of the person who has paid the price.

However, there are exceptions to the Benami Property Prohibition Act.

Exceptions are as follows —

(i) a Karta or part of a Hindu undivided family, as applicable, and the asset is held for his benefit or the welfare of other family members, and the compensation for such property has been supplied or paid from the recognised sources of the Hindu undivided family;

(ii) a person acting in a fiduciary position for the benefit of another person toward whom he is acting in that capacity, including a trustee, executor, partner, partner of a company, director of a company, a depository or a participant acting as an agent of a depository under Depositories Act, 1996 (22 of 1996), and any other person that the central government may inform for this purpose;

(iii) Any person who is an individual who holds property in the name of his spouse or any of his children and who has contributed or paid the price for the property from their recognized sources;

(iv) any person who owns property jointly with a brother, sister, lineal descendant, or descendant and whose name appears on any document under that name; provided, however, that the consideration for the property was given or paid from the person's recognized sources;

2. an agreement or transaction involving property that is formed or carried out under a false name; or
3. a deal or agreement involving a property in which the owner either isn't aware of or denies knowing about the ownership;
4. a deal or agreement involving a piece of real estate is fictional when the party giving the money or other payment cannot be located.

Benami transaction does not include any transaction that involves allowing possession of any property to be taken or retained in partial performance of a contract alluded to in section 53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law currently in effect—

(i) even though the person to whom control of the property has been awarded has considered it, the person who originally donated it still retains ownership of it;

(ii) the transaction or agreement has been subject to paid stamp duty; and

(iii) The agreement has been recorded;

4. What are the Consequences of Engaging in a Benami Transaction?

According to Section 53 of the Act, a person who is found guilty of engaging in a Benami transaction with the intent to, among other things, subvert legal requirements, avoid paying statutory fees, or avoid paying creditors faces action on Benami Property of a minimum sentence of one year in rigorous prison and a term that may go up to seven years. A fine of up to 25% of the property's fair market value may also be imposed on the offender.

5. Can a Property Belonging to Benami be Seized?

Yes, under the provisions of Section 5 of the Act, Benami Property may be seized.

6. What are the Significant Revisions in the 2016 Act?

With 72 sections as opposed to the nine included before, the Benami Transactions (Prohibition) Amendment Act, 2016, which took effect on October 25, 2016, has more provisions. A wider definition of a Benami transaction was included in the new law, including provisions for property attachment, adjudication, and confiscation. Chapter VII of the laws contains the penalties mentioned above.

7. How would the Supreme Court's August 23, 2022, order affect things?

The case of M/s Ganpati Dealcom Pvt Ltd v. Union of India is often described as a landmark case when it comes to Benami Property and the provisions of the 2016 Act. Before the judgment, there were questions about the retroactive applicability of the 2016 Act. However, in its ruling in UOI v. M/s Ganpati Dealcom Pvt Ltd, the Supreme Court stated the following:

1. Section 3(2) of the statute, which imposes a fine or sentence of up to three years in prison, is unconstitutional. (Q4's answer will be the same as it was before.)
2. As unlawful and blatantly arbitrary forfeiture clauses under Section 5 of the original legislation, which is to say before the new Act went into effect.
3. That confiscation and criminal prosecution measures cannot be started or continued by the authorities for transactions made before the new legislation took effect on October 25, 2016, which is when the transactions were made.

8. Taxes on Benami Properties

A fixed rate of 60% is applied to Benami investments. In addition to paying the tax amount, the individual must also pay a 25% surcharge. For example, if the fair market value of the property is Rs. 10 lacs, a direct tax of 25% (i.e Rs. 2.5 lacs) will be levied on the property owner. 

Due to their status as the property's legitimate owner, Benamidars are liable to pay taxes on any income their holdings generate. The income tax regulations will apply if the legal owner owns more than one residential property, in which case notional rent will be required. The owner will need to declare income on those properties even if they generate no revenue. The Benamidar may be held accountable for misrepresenting the truth to the income tax authorities and concealing information. As a result, may be subject to penalties under the Income Tax Act.

The Benami Transactions (Prohibition) Act is an attempt to crack down on money laundering. It will create a transparent economy with lesser black money. Nevertheless, the legal and financial aspects of Real estate can be confusing. Consult the experts at NoBroker about any laws related to real estate. All you need to do is to leave a comment below this article. Our executive will be in touch with you soon. 

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