India has had a law prohibiting benami transactions since 1988. Benami transactions involve transfer of property in the name of a person who acts as a front, with the consideration provided by another person. Such transactions are structured to defraud creditors, conceal ownership for social reasons, conceal illegal monies or untaxed funds.
The Benami Transactions (Prohibition) Act, 1988 (now renamed as the Prohibition of Benami Property Transactions Act, 1988), has recently been amended to bring in a stricter and more rigorous regime to discourage such surrogate transactions.
The need for a benami law in India was felt as early as 1969, when a select committee suggested to the government to have such a law. The country’s Law Commission was then mandated to examine the matter, and its recommendations (in the 57th Law Commission Report, 1973) were enacted as the law in 1988.
The 1988 law, however, was never notified. In addition, it was a hurried and incomplete piece of legislation, which suffered from several procedural infirmities. The authorities created under the act were not vested with enough power. Also, there was no appellate mechanism available under the law. Further, the rules required for the law’s implementation were never framed.
The law has now been amended radically. The new benami regime is more robust in terms of procedure – both legal and administrative. The definition of “benami transaction” has been widened and several kinds of transactions have been brought into its fold. Further, provisions for attachment and confiscation of property are now pivotal to the law.
Authorities are now empowered to attach benami property if they believe that it might be alienated to frustrate the proceedings. Also, once a property has been determined to be benami, it can be confiscated.
Penal provisions have been revised, providing for seven years of rigorous imprisonment along with a fine. Furnishing false information also attracts adverse consequences now. Perhaps with such developments in mind, a proper appellate mechanism is now in place under the new law.
One of the issues with the new law is that it seeks to cover transactions that are already covered by other overlapping laws. For instance, India already has a money laundering law in place – the Prevention of Money Laundering Act, 2002 – with provisions for attachment and confiscation. Properties purchased using proceeds of crime can be attached and confiscated.
Similarly, if unaccounted (or untaxed) monies have been used to purchase property, tax recovery can be effected by attaching and auctioning the property. It would be different if the intent was to further penalize tax defaulters by making the act of acquiring benami property a punishable offence in itself.
As an alternative to the new law, information discovery could have been strengthened. With the digitization of land records, information about property ownership could have been used to nab offenders. A one-time mechanism, for instance a property return, could have been used to create the database for the tax department to identify defaulters.
Enforcement of the new law has been entrusted to the Income Tax Department. In the wake of demonetization, the department has already begun investigations. Bank deposits in old currency made by persons whose creditworthiness does not match with such deposits are being investigated. Several provisional attachments have also been made.
Thus, the new law might be effectively used by the government to further the demonetization scheme India saw in November 2016. Intent to use the law to further this cause is also clear from the timing of the two. The new law was made effective from 1 November – a week before the introduction of the demonetization scheme.
It would be interesting to see how the new law is implemented in the near future. As mentioned above, investments in benami properties are always suggestive of an underlying offence or violation. Investigations of such transactions would reveal much more and lead to further investigations by other agencies which probe into other economic offences and money laundering.