Benami Transactions (Prohibition) Act, 1988

People were quite curious when the 2016 change to the original Benami Act caused a sudden commotion in the country. Many individuals are concerned about how the Act will affect their property and what results it could have. In order for you to understand the Benami transactions and how they impact your investment, we have simplified it in this post.

Benami Transactions
Image Credit Credit: Getty Images. Benami Transactions

In India, one of the main industries for the production and investment of unreported income, or “black money,” is real estate. The Benami Transactions Act was designed to stop the use of black money and make sure that all real estate deals are made in the name of the actual owner and are funded by funds that are known to him.

Preventing the infusion of black money into the system would improve tax income for the government and aid in the reduction of corruption and unfair business practices. Additionally, it will improve the openness and integrity of real estate transactions.

Benami Transactions

Benami transactions roughly translate as “nameless.” Benami, then, is a term used to describe an asset having no actual owner or a false owner. Any type of property, whether mobile or immovable, may be obtained through a Benami transaction.

Benami Transactions
Image credit: Getty Images. Benami Transactions

The original Benami Act was adopted in 1988 to prohibit the use of black money, but it could not be fully implemented owing to several inherent limitations of the Act. As a result, an amendment was presented in 2016 to assure the Act’s successful implementation.

Since the law does not permit retroactive punishment, if a new Act were adopted, the transactions made between 1988 and 2016 would have protection. Instead, an amendment was published.

What is a Benami Property? 

In Bhim Singh v. Kan Singh (AIR 1980 SC 727), the Hon. Supreme Court defined a Benami property transaction as

The transaction is known as a Benami transaction, and the property is known as a Benami property when a person purchases a property using his or her own funds but in the name of another person without intending to gain anything from that other person.

In these situations, the true owner is the individual who donated the purchase money, and the transferee retains the property on his behalf.

The following is listed by the law as a Benami transaction:

(A) a deal or exchange of money—

  • When a person receives or holds property, and another person provides or pays for the consideration for the property, and the property is held for the immediate or future benefit, direct or indirect, of the person who provided the consideration,
  • A transaction or an arrangement involving a property that is carried out or made in a fictitious name.

C) A deal or agreement involving property in which the owner either isn’t aware of or denies knowing about the ownership;

(D) A deal or contract involving a piece of property in which the party giving the consideration cannot be located or is made up;

Which types of property are covered under the Benami Act?

All types of properties, whether mobile or immovable, are covered under the Benami transactions Act. The law’s definition plainly specifies that:

“Property” refers to assets of any kind, including those that are movable or immovable, tangible or intangible, corporeal or incorporeal, and includes any right or interest as well as any legal documents or instruments evidencing title to or interest in the property; if the property is capable of being converted into another form, the property will also be included in the converted form; and

For instance: A Benami transaction occurs when someone transfers old money into another person’s account during de-monetization with the understanding that the account holder will refund the funds in new money.

The Act forbids the benamidar from selling the Benami property to the actual owner (or to any person acting on his behalf). Such transactions would be regarded as worthless and useless.

The sale of a Benami property to a third party is not prohibited under the Act. The department can only attach the sale profits, not the actual property, if the property is sold to a third party and the transaction is completed by the registrar of the sale.

If any one of the following applies, a transaction is regarded as a Benami transactions:

  • Deals are made under bogus names, the owner is unknowing or denies knowing they are the owners, or the individual paying for the property cannot be located.
  • An initiating officer will issue a notice on the source of money to a suspected benamidar. If the response is unsatisfactory, the Benami Transactions Prohibition Act 2016 will be invoked.

Deals that are not considered Benami Deals

Any person who is an individual in the name of his spouse or in the name of any child of such individual and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

  • A member of a Hindu undivided family, as the case may be; and the property is held for his benefit or the benefit of other family members, as the case may be.
  • any person whose name appears on a record as a joint owner with that of his or her brother, sister, lineal ascendant, or descendant (parents or children), and the compensation for such property has been delivered or paid from the recognized sources of the individual;
  • a person acting in a fiduciary capacity for another person toward whom they are acting in that capacity, including a trustee, executor, partner, director of a company, a depository or a participant acting as a depository under the Depositories Act of 1996, as well as any other person the Central Government may notify for this purpose; Consider: Faith.

What does stock market Benami trading entail?

Benami trading is the indirect use of insider knowledge by a person in a position of authority who has access to price-sensitive information about a firm. By making investments under someone else’s name, he makes use of the knowledge for his own benefit. Typically, a chain of persons or companies passes the funds under the guise of a loan, and the person at the end of the chain trades in the shares on behalf of the first party.

Another type of Benami trading involves transferring funds to several legitimate businesses so they may purchase shares of a certain firm, raising the share price in the process. Before making a proposal to investors, this is done to demonstrate a high valuation of the shares and/or to deter shareholders from applying for the buy-back program.

These are a few methods used in Benami trading to manipulate the market for one’s own benefit.

For what reasons do people engage in Benami Transactions?

There are several reasons why someone may engage in a Benami transaction. People who engage in Benami transactions typically have funds obtained from illicit activities, or “black money.” Thus, in Benami transactions, when the transaction is performed in the name of another person but the consideration is paid by the individual out of his black money, people use the black money.

These people use the names of other persons or make up some fake identities to enter into such transactions, known as Benami transactions because they are unable to reveal the transaction in their own names owing to the use of black money.

What sanctions apply if a Benami Transaction occurs?

The provisions of the legislation ban engaging in benami transactions. Anyone who engages in a benami transaction is subject to a sentence of imprisonment that cannot be less than one year nor more than seven years. In addition, a fine equal to 25% of the property’s fair market value must be paid.

In addition to that, anyone who participates in a benami transaction or provides false information is also subject to prosecution, which carries a sentence of at least 6 months and a maximum of 5 years, as well as a fine that could last up to 5 years and equal up to 10% of the fair market value of the property.

The Act forbids the genuine owner from reselling a benami property to the benamidar, and it declares a transaction for such a re-transfer to be void if the benamidar transfers the property to the beneficial owner.

The government has the right to seize benami property without providing any kind of compensation.

Why does the Benami Act matter to me?

People who have access to black money and typically invest in real estate are the ones that engage in benami transactions. Such individuals who engage in Benami Transactions with black money would suffer a great deal as a result of this law since they would be subject to a heavy fine and maybe even prison time (as mentioned above).

Genuine transactions in which any property is purchased using funds from well-known sources of income and for the benefit of the buyer themselves will be unaffected. People rarely worry about this because they typically engage in real transactions.

.The real estate industry will be the main beneficiary as there would be more clarity on the title, or actual ownership, of the property.

It may also have a negative effect in India’s rural areas, where most transactions are made in cash and land records are in particularly bad shape. Even legitimate landowners may struggle to prove their title in such situations.

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