The Prohibition of Benami Property Transactions Act, 1988 (“1988 Act”), overhauled by the 2016 Amendment Act[1], constitutes a key pillar of India’s framework to curb benami holdings. Attachment and confiscation of property without compensation, the statutory bar on re-transfer of benami property, prohibition on enforcing rights or making claims in respect thereof, restrictions on transfers intended to defeat benami proceedings, and criminal prosecution together underscore the severe consequences under the regime, making careful legal evaluation indispensable. Yet a basic definitional question, one that courts recognised decades ago, does not seem to be resolved even after the 2016 Amendment Act, which is – does the definition of “benami transaction” covers what has consistently been called a “sham transaction”, i.e., a transfer of property made to a person without any intention of passing beneficial ownership?
The Supreme Court in Union of India v. Ganpati Dealcom[2] observed that “sham transactions” were left out of the definition of “benami transaction” under the 1988 Act[3], however in a passing remark noted that such transactions are now covered under the 2016 Amendment Act.[4] This decision has now been recalled in its entirety as it decided the issue of constitutional validity without there being a specific challenge by the party.[5] However, the decision has ignited the issue as to whether the provisions of the Benami Transactions (Prohibition) Act, 1988, as amended by the 2016 Amendment Act, extend to “sham transactions” previously governed by Section 81 of the Indian Trusts Act, 1882. The present article seeks to critically examine this aspect.
Two species of Benami transactions: The well-recognised distinction
The word “benami”, borrowed from Persian, means “without a name.” The “benamidar” is simply an alias or name lender for that of the person beneficially interested.[6] Its legal usage in India, however, has always covered two legally distinct phenomena that share little beyond the label. The distinction was drawn with precision by the Supreme Court in Thakur Bhim Singh v. Thakur Kan Singh[7] as under:
“Two kinds of benami transactions are generally recognized in India. Where a person buys a property with his own money but in the name of another person without any intention to benefit such other person, the transaction is called benami. In that case, the transferee holds the property for the benefit of the person who has contributed the purchase money, and he is the real owner. The second case which is loosely termed as a benami transaction is a case where a person who is the owner of the property executes a conveyance in favour of another without the intention of transferring the title to the property thereunder. In this case, the transferor continues to be the real owner.”
Thus, two kinds of transaction which can arise are as under:
(i)Where a person buys property with his own money in the name of another person without the intention to benefit such person (“benami transaction”).
(ii)Where a person who is the owner of the property executes conveyance in favour of another without the intention of transferring the title (i.e., the beneficial interest) to the property thereto (“sham transaction”).
In English law, such transactions raise a presumption of “resulting trust” in the favour of the person who has paid/provided the money or who has executed the conveyance without intending to transfer beneficial interest.[8]
In India, such transactions were recognised under Section 81 and 82 of the Indian Trust Act, 1882 (prior to their repeal), as obligations in the nature of trust. The relevant part of the said sections reads as under:
“81. Where it does not appear that transferor intended to dispose of beneficial interest –
Where the owner of property transfers or bequeaths it and it cannot be inferred consistently with the attendant circumstances that he intended to dispose of the beneficial interest therein, the transferee or legatee must hold such property for the benefit of the owner or his legal representative.
- Transfer to one for consideration paid by another –
Where property is transferred to one person for a consideration paid or provided by another person, and it appears that such other person did not intend to pay or provide such consideration for the benefit of the transferee, the transferee must hold the property for the benefit of the person paying or providing the consideration.”
Thus, the two types of transactions namely benami transaction (which involves consideration) and sham transaction (which does not involve any consideration), have been distinctly recognised both statutorily and judicially.
Definition of ‘benami transaction’ under 1988 Act.
The Benami Transactions (Prohibition) Act, 1988, before its amendment in the year 2016, defined the term ‘benami transaction’ as under:
“2. (a) benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person;”
The above definition covered transactions where property is transferred to a person for consideration provided by another, i.e., akin to those contemplated under Section 82 of the Indian Trusts Act, 1882.[9]
In case of transactions specified under Section 81 of the Indian Trust Act, 1882 no consideration is paid or provided. The transferor merely purports to transfer the property without intending to transfer beneficial interest thereto. In effect there is no operative transfer which is a classic “sham transaction”.
The Hon’ble Supreme Court in the case of Meenakshi Mills. Madurai v. Commissioner of Income-Tax, Madras[10] held that in cases where a person purports to transfer the property to another without intending to transfer the beneficial ownership, the question for determination is not whether who paid the consideration but whether any consideration was paid. The relevant extract of the decision is as under:
“In this connection, it is necessary to note that the word ‘benami’ is used to denote two classes of transactions which differ from each other in their legal character and incidents. In one sense, it signifies a transaction which is real, as for example when A sells properties to B but the sale deed mentions X as the purchaser. Here the sale itself is genuine, but the real purchaser is B, X being his benamidar. This is the class of transactions which is usually termed as benami. But the word ‘benami’ is also occasionally used, perhaps not quite accurately, to refer to a sham transaction, as for example, when A purports to sell his property to B without intending that his title should cease or pass to B. The fundamental difference between these two classes of transactions is that whereas in the former there is an operative transfer resulting in the vesting of title in the transferee, in the latter there is none such, the transferor continuing to retain the title notwithstanding the execution of the transfer deed. It is only in the former class of cases that it would be necessary, when a dispute arises as to whether the person named in the deed is the real transferee or B, to enquire into the question as to who paid the consideration for the transfer, X or B. But in the latter class of cases, when the question is whether the transfer is genuine or sham, the point for decision would be, not who paid the consideration but whether any consideration was paid.”
Thus, in view of the above, cases where no consideration is paid or provided (i.e., sham transactions covered by erstwhile Section 81 of the Indian Trust Act, 1882) will not be covered within the ambit of the unamended definition of the term “benami transaction” under Section 2(a) of the Benami Transactions (Prohibition) Act, 1988.
This view has been taken by the Madras High Court in N. Govindrajan v. Indian Overseas Bank[11] and the Full Bench of Kerala High Court in Bhargavy P. Sumathykutty v. Janaki Sathyabhama[12]and later also in the recalled decision of Supreme Court in Ganpati Dealcom[13].
Possible reason for such transaction escaping from the ambit of Benami Transactions (Prohibition) Act, 1988
In the year 1973, the government made a reference to the Law Commission asking for possible alternatives to curb benami transactions. The Law Commission, in its 57th Report, recommended prohibition of any suit or defence by the real owner by relying on the benami transaction. The Law Commission, inter alia, recommended repeal of Section 82 of the Indian Trust Act, 1882. Nothing was said regarding Section 81 of the Indian Trust Act, 1882.
In the year 1988, the President promulgated the Benami Transaction (Prohibition of the Right to Recover Property) Ordinance, 1988 to prohibit the right to recover property held benami. The term ‘benami transaction’ was not defined under the ordinance. The Ordinance more or less bodily adopted the draft recommendation of the 57th Law Commission Report[14]. Accordingly, the ordinance also repealed only Section 82 (and not Section 81) of the Indian Trust Act, 1882. This appears to be the possible reason for such transactions escaping the ambit of ‘benami transaction’. Later, in the year 1988, the Law Commission vide its 130th Report recommended that apart from Section 82 of the Indian Trust Act, 1882, Section 81 and 94 should also be repealed[15].
The recommendations of the Law Commission were accepted. The Benami Transaction (Prohibition) Act, 1988 when passed contained Section 7 which repealed all the three sections.
The act also contained the definition of ‘benami transaction’. However, as seen above, the definition covers only the transactions in which property is transferred to one person for a consideration paid or provided by another person, and not where the property is purported to be transferred without transferring the beneficial interest thereto (i.e., sham transaction).
Whether the definition of “benami transaction” under the 2016 Amendment Act covers “sham transaction”?
It appears that the above lacunae has not been rectified even by the Benami Transactions (Prohibition) Amendment Act, 2016. The relevant part of the definition of the term ‘benami transaction’ after the amendment is as under:
“(9) “benami transaction” means,—
(A) a transaction or an arrangement—
(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and
(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,
…
(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or
(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;
(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;
…”
Clause (A) requires a transaction or arrangement where property is transferred to or held by a person, the consideration for the property has been provided or paid by another person, and the property is held for the immediate or future benefit of the person who provided the consideration. This clause is an expansion of the old Section 2(a) in that it adds the ingredient of beneficial interest flowing back to the person paying the consideration[16]. But the foundational requirement of consideration paid by another person remains unchanged. A bipartite sham transfer involves no such consideration. Clause (A) does not cover sham transactions i.e., a bipartite transaction involving no consideration.
Clause (B) covers a transaction or an arrangement in respect of a property carried out or made in a fictitious name. “Fictitious” means invented and not true or not existing[17], not real, made up, or imaginary[18]. In a bipartite sham transfer, the transferee is a real person. The transaction is sham because the transferor had no intention to pass title, not because the transferee does not exist. Thus, a bipartite sham transaction does not appear to be covered on a plain reading of clause (B).
Clause (C) covers a transaction or arrangement where the owner of the property is not aware of, or, denies knowledge of, such ownership. This clause will cover cases where a person’s identity has been used without consent/knowledge of such person, for instance where a deed is fraudulently registered in an innocent third party’s name. Thus, clause (C) also does not capture the bipartite sham.
Lastly, clause (D) covers transactions where the person providing the consideration is not traceable or is fictitious. Sham transfer by its nature does not involve any consideration. Thus, clause (D) is also not applicable.
The Benami Transactions (Prohibition) Act, 1988 is a penal statute providing for confiscation of property and prosecution of the offender. It is a settled principle that penal statutes have to be construed strictly without any scope for intendment based on general purpose or object of law. If the legislature genuinely intended to cover sham transactions within the ambit of Benami Transactions (Prohibition) Act, 1988 (even by way of 2016 Amendment Act), the intention could have been expressed in clear and unambiguous terms, given the fact that High Courts had already taken a view that they are not so covered. In case the legislature has left some lacunae, Court cannot fill that lacunae on some presumed intention of Legislature[19].
24.Thus, the passing observation in the recalled judgement in Ganpati Dealcom[20] to the effect that the 2016 Amendment Act now encompasses such transactions does not, with respect, appear to align with the statutory definition. The Court did not undertake any analysis of the definition nor refer to the relevant provisions, and further this issue also did not arise for adjudication.
Conclusion
25.Although Section 81 of the Indian Trusts Act, 1882 stands expressly repealed, the definition of “benami transaction” does not appear to extend to such sham transactions, and despite the apparent legislative intent to cover them as reflected in the recommendations of the Law Commission, such transactions may fall outside the ambit of the Benami Transactions (Prohibition) Act, 1988 owing to the imprecise drafting of the definition, an issue that will ultimately have to be adjudicated by the courts in an appropriate case.
[1] The Benami Transactions (Prohibition) Amendment Act, 2016
[2] (2023) 3 SCC 315
[3] Ibid, Para 14.1
[4] Ibid, Para 17.32
[5] 2024 INSC 799
[6] Petherpermal v. Muniandi Servai, (1907-08) 35 IA 98 (Privy Council)
[7] (1980) 3 SCC 72
[8] Dyer v. Dyer, (1788) 2 Cox Eq Cas 92: 30 ER 42.
[9]The definition however did not expressly require that the beneficial interest be retained by the person providing the consideration. In the absence of this requirement, the definition risked extending even to bona gifts, as noted in Ganpati Dealcom (2022) supra. Although the decision is recalled, the observations remain, with respect, cogent and are likely to find acceptance in future adjudication.
[10] [1956] S.C.R. 691
[11] (1991) 1 Mad LW 649
[12] AIR 1995 Ker 42
[13] (2023) 3 SCC 315
[14] Para 6.33 of the 57th Law Commissioner Report
[15] Para 5.12 and 5.17 of the 130th Law Commissioner Report
[16] Lacuna in the original definition identified by the Ganpati Dealcom (2022) supra
[17] dictionary.cambridge.org
[18] vocabulary.com, merriam-webster.com
[19] Assistant Commissioner, Bangalore v. Velliappa Textiles Ltd. – 2003 (157) ELT 0369 (SC)
[20] (2023) 3 SCC 315