In a major relief to all the parties accused of being involved in benami transactions, a three-judge bench of the Supreme Court in the case of Ganpati Dealcom Pvt. Ltd. has quashed all prosecution and forfeiture proceedings pertaining to transactions entered into before October 25, 2016. The old benami law i.e. Benami Transactions Act of 1988 ( “Benami Act”) was amended on the said date by the Benami Transactions (Prohibition) Amendment Act, 2016 (“2016 Amendments”) and the Supreme Court declared Section 3 and Section 5, introduced through this amendment, as unconstitutional.
The Government had introduced the 2016 Amendments to reinvigorate the 28-year-old toothless legislation as a part of its campaign against black money. Government authorities, by relying on these new provisions, had issued several notices and initiated criminal prosecution and forfeiture proceedings against such alleged defaulters. The Finance Minister had reported in the Rajya Sabha that show-cause notices were issued in more than 2,100 cases involving benami properties valued in excess of INR 9,600 crore until July, 2019.
The Benami Act was the first law in India to criminalise benami transactions in India. It had very minimal provisions and did not provide for any machinery provisions to make the law workable. The definition of the term ‘benami transaction’ was also very vague and included all transactions pertaining to the transfer of property wherein the consideration was paid by a person other than the purchaser. The forfeiture related provisions were delegated to an authority to make laws relating to the forfeiture of benami properties. In view of these difficulties, the Benami Act was never operationalised until the enactment of the 2016 Amendments.
The 2016 Amendments sought to rectify the lacunae in the Benami Act through significant amendments. It formulated a robust mechanism to enforce benami proceedings. The ambit of ‘benami transaction’ was expanded to include all such transactions that were done with ulterior motives viz. benamidar denying knowledge of ownership, the person providing consideration not being traceable, or arrangements where benefits flow back to the real owner, etc. It also clarified that the proceeds from the transfer of benami property should also be considered as benami property. Besides, the offences committed post introduction of the 2016 Amendments saw the punishment duration going up from three years to seven years , while the those committed before the amendments continued to be punishable for three years.
As per the Benami Act, the income tax authorities would be conducting the benami proceedings. The income tax department has constituted a dedicated unit to deal with benami cases (“Benami Wing”). Typically, the intelligence wing of the income tax department gathers information regarding tax evasion basis which search and seizure proceedings, or survey proceedings, as the case may be, is carried out under Section 132 or 133 of the Income Tax Act, 1961 (“IT Act”). Seized unaccounted cash and relevant documents are subject to the proceedings under the IT Act and in certain cases, proceedings could be initiated by the Benami Wing, if the information gathered during the tax proceedings suggested that Benami Act would be attracted.
In the past, Benami Act was primarily invoked in the following type of cases:
(i) Accommodation entries: Under this method, the taxpayer’s own unaccounted money would be routed back to him through fictitious companies either as a share application money or as a loan. The accommodation entry operators would typically incorporate multiple companies, which would not have any legitimate business, but would operate as mere entry providers for a commission, i.e. these companies would get the unaccounted money from a particular taxpayer and thereafter would infuse the same money into some of the taxpayer’s entities as share application money. The income tax department had initiated hundreds of cases under the IT Act against the taxpayers who were involved in the round-tripping of money through accommodation entry providers. Further, benami proceedings have also been initiated against such taxpayers who allegedly evaded taxes and hence their entry provider entities acted as benamidars. For instance., in Ace Infracity Developers P. Ltd. v. DCIT (2019) 110 taxmann.com 463, the tax authorities have initiated benami proceedings against the taxpayer entities which received accommodation entry services.
(ii) Unknown source: Under this classic case of benami transactions, properties are purchased in the name of another person, but the control of the property remains with the person who has paid the money. In Tulsiram v. ACIT (2019) 112 taxmann.com 129, the petitioner had allegedly purchased vast lands exceeding 200 acres without any known source of income. During interrogation, the petitioner submitted that he could not recollect how the properties were purchased. Accordingly, benami proceedings were initiated to confiscate his properties.
(iii) Demonetisation: Post the demonetisation, the Government had provided a small window period to deposit the scrapped notes. During the window period, the unaccounted money owners had purchased properties and paid the consideration in cash. In Marg Realities Ltd v. DCIT (2022) 134 taxmann.com 137, benami proceedings were initiated against the taxpayer on the ground that it had received an amount of INR 105 crore in demonetised currency as a part of consideration towards the sale of the property.
In the case before the Supreme Court, Ganpati Dealcom Pvt. Ltd (“Company”) had purchased a property for INR 9.44 crore on May 02, 2011, and subsequently, the shares of the Company were sold for a consideration of INR 19.10 Lakh to related parties on March 31, 2012. Benami proceedings were initiated against the Company. The Company challenged the proceedings before the Calcutta High Court which quashed the proceedings on the ground that the 2016 Amendments do not provide for retrospective application of amended provisions and hence, in the absence of such specific provisions, the provisions forming part of 2016 Amendments, especially those pertaining to criminal proceedings, cannot be implied to be retrospective in nature.
The Supreme Court observed that the Benami Act is merely a shell and lacks the substance of a criminal legislation as there is no requirement for mens rea, which is a prerequisite for any criminal prosecution. The Court noted that the element of mens rea was introduced only through Section 53 in 2016. The vagueness has made the charging Section for initiating criminal proceedings under the Benami Act (i.e. Section 3) susceptible to serious arbitrariness, which can also lead to judicial transgression.
Similarly, the Court also struck down the forfeiture provisions contained in Section 5 of the Benami Act by observing that it is a ‘half-baked provision’, which did not even provide any mechanism to ascertain when such forfeiture would be warranted. It held that the absence of substantive provisions coupled with the omissions made the Benami Act to be both fanciful and oppressive and accordingly, ruled that such provisions should not be implemented. The Court also struck down Section 3(2) of the 2016 Amendments, which imposed punishment for the transactions that took place prior to the insertion of the new provisions through 2016 Amendment (i.e. from the date of the 1988 Act to October 25, 2016) by holding the same to be violative of Article 20(1) of the Constitution of India, which requires that criminal punishment / liability cannot be imposed retrospectively.
The Supreme Court’s judgment on this matter was keenly awaited by several stakeholders, especially the parties against whom the prosecution proceedings have been initiated for benami transactions. This ruling provides them with the much-needed relief by treating criminal prosecution or forfeiture proceedings initiated under the legislation before October 25, 2016, as null and void. As indicated above, thousands of cases have been initiated by the Government post the 2016 Amendments.
While benami proceedings may have to be quashed basis the Supreme Court decision in respect of transactions taking place prior to the introduction of 2016 Amendments, it may be noted that the Government may expedite the ongoing proceedings under the IT Act in such cases. It is worthwhile to highlight that Section 68 of the IT Act also empowers the tax authorities to impose taxes on unexplained cash credits and, therefore, transactions under the purview of Benami Act may also have to be reviewed carefully under the IT Act. Further, the provisions of the IT Act also provide for severe penal and prosecution proceedings in cases of tax evasion.
This decision of the Supreme Court may trigger controversy from the perspective of the Black Money (Undisclosed Foreign Income and Assets) and Imposition Act, 2015 (“Black Money Act”). Primarily, the Black Money Act was introduced to penalise and prosecute taxpayers who have stashed undisclosed amounts of money abroad. It may be noted that the Black Money Act was also introduced along with 2016 Amendments with an intention to clamp down on unaccounted money. The Black Money Act also penalises transactions in a retrospective manner. Section 72(c) provides that the year in which the tax department initiates proceedings against undisclosed foreign income shall be deemed to be the year in which the transaction took place for the purposes of the Black Money Act. Going by the rationale of this judgment, particularly in relation to the observation that imposition of criminal punishment in a retrospective manner is a violation of Article 20(1) of the Constitution of India, the retrospectivity of Section 72(c) of the Black Money Act may also be challenged by the aggrieved persons!
 Union of India v. M/s. Ganpati Dealcom Pvt. Ltd. Civil Appeal No. 5783 of 2022 dated August 23, 2022