Benami lawRecent trends and impact on Corporate structures

Moderated by Arun Giri – Tax Sutra

Presented by Sandeep Bhalla - Dhruva Advisors LLPAshwani Taneja - RRA TaxIndia

Recent news

Benami law

Benami Transaction – Background

C

A

Sale consideration

Transfer of title

Factors leading to the origin of Benami lawFraud on creditors | Tax evasion | Black Money

Corrupt practices

Beneficial owner

Benamidar

Seller

B

Impact on Other Laws

Repealed: Sec.81, 82 & 94 of Indian Trusts Act, 1882, Sec.66 of

Code of Civil Procedure, 1908; Sec.

281A of Income tax Act, 1961

History of Benami law

20 December 1972Reference made by

the Union Government to Law

Commission

7 August 1973

Law Commission’s 57th report titled as

Benami Transactions

19 May 1988

The Benami Transactions

(Prohibition of Right to recover Property)

Ordinance, 1988

Law commission’s 130th report titled as Benami Transaction

– a Continuum

5 September 1988The Benami Transactions

(Prohibition) Act, 1988

1

14th August 1988

Law not effectively enforced 2 3

1 November 2016*The Benami Transactions (Prohibition) Amendment

Act, 2016 came into force

4 5 6

* Old law continued to remain in force; was not repealed

Key Comparatives

*Amendment Act – Whether prospective or retrospective in operation?

72 Sections1

3

9 Sections 1

2 Confiscation of Property

3

Benami Transaction Rules notified

2Acquisition of Property

Benami Transactions Rules absent

4Imprisonment for 3 years OR fine OR both

4 Rigorous imprisonment for a period not less than 1 year but up to 7 years AND Fine up to 25% of Fair Market Value

The Benami Transactions (Prohibition) Act, 1988

The Prohibition of Benami Property Transactions Act, 1988 (w.e.f. 1.11.2016*)

5

No enforcement authority

5

Income tax authorities notified as enforcement authority

C

What is a Benami Transaction?

• Property transferred to or held by Benamidar; and

• Consideration paid by Beneficial owner; and

• Property held for benefit of Beneficial owner

A

Property held in Fictitious Name

Owner• Not aware of

ownership• Denies

ownership

Payer of Consideration • Not traceable • Fictitious

Transaction / Arrangement

B D

Exception • Person acting in fiduciary capacity - Executor, Trustee, Partner, Director • Karta• Spouse / child• Brother, Sister, lineal D/A (Jt. Ownership)

Consideration paid out of known sources

What is a Benami Transaction? (contd.)

Exclusion:Transaction covered by section 53A of Transfer of Property Act, 1882 are not considered as Benami Transaction, if:

i. Consideration for such property has been provided by the person to whom possession of the property has been allowed, but the person who has granted possession thereof continues to hold ownership of such property

ii. Stamp duty on such transaction or arrangement has been paid; and

iii. The contract has been registered

Properties transferred other than above, solely on execution of Power Of Attorney (POA) (irrespective whether registered or not) – whether the transaction is Benami?

What is Benami Property?

Inserted by Amendment

Act, 2016

Benami property

• any property which is the subject matter of benami transaction; and

• proceeds from such property

Property

• movable• immovable• tangible• intangible• corporeal• incorporeal• property in the converted form • proceeds from the property• legal documents / instruments evidencing - title to or interest in the property• right or interest in such property

Key aspects – Benami law

IO to have “Reason to Believe” & “material” in his possession

Provisional Attachment

Penalty, Fine and Prosecution Confiscation of Property

Whether IO is required to furnish the reasons to the person to whom notice is issued?

01 02

0304

Implications of Attachment

Shares Land & building

Implications of attachment

• Restriction on voting rights ?

• Restriction on right to participate in shareholder’s meeting ?

• Restriction on right to receive dividend ?

• Restriction on pledging of shares?

• Restriction on transfer of shares?

• Right of use of property ?

• Right to keep tenant/sub-tenant ?

• Right to receive rent ?

• Right of construction/development ?

• Right to mortgage ?

• Right of sub-division of plots ?

• Right of entering into development agreement?

• Right to sell / transfer ?

Other assets

• Bank account can be attached?

Authorities

Authorities under Benami law

Adjudicating authority to pass order confirming / revoking the provisional attachment within one year from the date of reference made by the IO

• Conducting inquiries, impound documents

• Provisional attachment of property

• Grants approval to IO

• Pass order confirming or revoking the provisional attachment

• Pass order for confiscation of property

Initiating Officer (IO)

ApprovingAuthority

Adjudicating Authority

Assistant / Deputy Commissioner of

Income Tax

Additional / Joint Commissioner of

Income Tax

Bench of three Members chaired by CIT / Joint Secretary

• Review the order passed by Adjudicating Authority

Appellate Tribunal

Bench of three Members

• To receive and manage the property

• To dispose of the property

Administrator

Income Tax Officer

Assistance from other Authorities

Customs and Central Excise Department

Income Tax Authorities

Narcotics Drugs and Psychotropic Substances Act

Recognized Stock Exchange

RBI

Foreign Exchange Management Act

SEBI

Central Government, State Government, local authorities or banking companies, notified by

Central Government

Any ‘body corporate’ constituted or established under State of Central

Act

Authorities

‘Shell Companies’ - PMO set up a task force in February 2017 under the joint chairmanship of the Revenue Secretary and Secretary, MCA

Interplay between Benami law and other laws

Benami law – Interplay with other laws

Benami law

SEBI Regulations

3

2

1

4 Companies Act, 2013

Income-tax Act,1961

Prohibition of Money Laundering

Act, 2003 andBlack Money law

● Whether Persons acting in concert are subject to Benami law?

● Implication under Income-tax Act on benamidar and beneficial owner vis-à-vis the unexplained investments and credits

● Impact on holding company structures for denial of beneficial ownership criteria

● Property outside India – whether covered under the Benami law or under Black Money law?

● PMLA invoked, Benami law applicable

● Significant Beneficial Owners Reporting

● Dematerialization of shares in Unlisted Public Company – step to curb benami dealing ?

Interplay with Income Tax Act

Whether a transaction

subjected to GAAR be also

exposed to the Benami

Law ?

Implication under section

56(2)(x) ?

Whether provisions of

Benami law can apply to the

transaction covered under

section 68 and 69A ?01 02

Whether application of

both the law is mutually

exclusive or it can be

cumulative also ?

04 03

Typical issues in holding company structures

Interplay with Income Tax Act - Holding Structures

• Benefits under tax treaties available to beneficial owners

• Beneficial Ownership of Assets and Income of SPV under challenge under the Income Tax Proceedings

• Can denial of tax treaties on beneficial ownership criterion be the basis for invoking Benami law?

Burden of showing that transaction is benami lies on the IO

Indian company

Hold Co SPV Singapore/ Mauritius

Ultimate Parent

Subscription of shares of I Co / ECB to I Co

Beneficial Owner?

100%

100%

Implications under Benami law

• Is the Ultimate Parent a Beneficial Owner?• Is SPV a Benamidar? Holding Property for the

Ultimate Parent- Consideration provided by Ultimate Parent

• Can shares held in Indian company be held as Benami Property? Subject to provisional attachment?

• Holding company structures – recognized under various commercial laws – Can it be subject to challenge under Benami law?

Significant Beneficial Owner disclosure under Companies Act 2013 – uncover Benami holding?

Significant Beneficial Owner (SBO)

Individual – acting alone or together, or through one or more persons or trust, possess one or more of the following rights or

entitlements in reporting company

1.

Holds indirectly, or together with

any direct holdings, not

less than 10% of the shares

2.

Holds indirectly, or together with

any direct holdings, not

less than 10% of the voting rights in the

shares

3.

Has right to receive or

participate in not less than 10%

of the total distributable

dividend, through indirect holdings alone, or together with

any direct holdings

4.

Has right to exercise or

actually exercises, significant

influence or control, in

any manner other than

through direct holdings alone

Objective threshold Subjective threshold

Key considerations

• SBO required to make disclosures of his beneficial interest to the Reporting Company, which in turn to be reported to Registrar of Companies

• SBO disclosures would enable the authorities to “follow the money” in monetary examinations including suspect accounts/assets held by Benamidars

• Holding of persons “acting together” is clubbed in respect of their shareholding / influence / control. However, this term has not been defined

⎼ For determining situations of “acting together”, can one take reference from definition of “Persons acting in concert (PAC)” from SEBI Takeover Regulations, 2011?

Impact on Corporate Structures

Factors relevant for determining the benami transactions

Position of the parties and their relationship to one another

Custody and production of the title deeds

Previous and subsequent conduct of the parties

Source of purchase consideration relating to the transaction

Nature and possession of the property after purchase

Motive of the transaction

Factors to determine the

benami transactions*

Jaydayal Poddar v. Bibi Hazra 1974 AIR 171 (SC) (1973)

Determination of beneficial owner of alleged property prerequisite for treating transaction as Benami

• Prerequisite for determining transaction as benami – identification of beneficial owner of alleged property• Evidences establishing the genuineness of transaction which are at arm’s length relevant to determine nature of

transaction as benami • Admissibility of written evidences vs. oral evidence • Attachment of properties as per rules prescribed

ManpreetEstate LLP

(Benamidar)

5 Individuals & 5 directors of Companies

RKW Developers(Beneficial owner)DHFL

Related party –common promoters, directors and office

Developer Seller

Employees

Lender

1

2

3

4

IO Allegation • Manpreet Estate LLP (MEL) has taken

loan from DHFL which was relatedparty of RKW Developers P L (RKW)

• Consideration received by sellerstransferred to RKW or to its relatedconcerns

• RKW was beneficiary of developmentactivity undertaken by MEL on saidproperty

IO v. M/s. Manpreet Estates LLP (FPA-PBPT-206/MUM/2018)(2019)

A bonafide purchase of property for adequate consideration cannot be confiscated

M/s. Virgo Buildestate Pvt. Ltd. vs. IO (FPA-PBPT-285/JP/2019) (2019)

M/s. Macro Township & others (Beneficial owner)

JDA

• Conversion AL• Surrender of land

Virgo Buildestate (interested party)

Shri. Pooran Mal Kanwat (Benamidar)

• Bonafide purchaser entitled for protection under section 27(2) in case property acquired prior to issue of notice • Burden of proof lies on the person who alleges that purchaser is not the bonafide purchaser • Provisional attachment of land set-aside• Sale proceeds continued to be attached

1

2

3

4

5

6

Purchase consideration

sale consideration

IO Allegation • Virgo not a bonafide purchaser • Virgo had a prior knowledge of the fact

that the land in question is benamiCommunity

Payment by Macro to Pooran Mal for acquisition of property fromcommunityPayment by Virgo to Pooran Mal for property taken on lease

Transfer of money received from Virgo by Pooran Mal to Macro

Possession in part performance of contract not benami transaction [Sec. 53A of ToPA]

Builder

1

2

4 Ramneek (Benamidar)

Pamela(Beneficial Owner)

• Difficult to hold that the property is Benami, if:⎼ Consideration for property provided by the person to whom possession of the property has been allowed⎼ No benefit is derived by Pamela for the period prior to 2012

• Benami law will not be applicable, if conditions of section 53A of ToPA are satisfied

Executed registered GPoA and Agreement to sell

Executed FBA on upon full payment of dues

Year 2009 to 2012 –Paid Rs. 64 lacs

Purchase flat and paid installment of Rs. 9.75 lacs

IO Allegation • IO alleged that till the execution of agreement

between Pamela and Ramneek in 2012, the

property was held by Ramneek for benefit of

Pamela

Smt. Pamela Bhardwaj and Sh. Ramneek Singh vs. IO (FPA-PBPT-4/CHD/2018) (2019)

3

Burden of proof and Intention of the person

P. Leelavathi (D) v. Shankaranarayana Rao (SC - Civil Appeal No. 1099 of 2008) (2019)

• Burden of proof on the person who assert the transaction is benami which is to be discharged by legal evidence

Mangathai Ammal (Died) vs. Rajeshwari and Ors. (SC - Civil Appeal No. 4805 of 2019) (SC)

• Intention of the person contributed to the purchase money relevant to determine the nature of transaction as benami

• The Amendment Act would not be applicable retrospectively

Followed in Smt. Pamela Bhardwaj case by Tribunal under the amended Benami law

Offences and Prosecution under Benami law

Offences and Prosecution under Benami law…

Particulars Who? Rigorous imprisonment

Fine

Guilty of offence of benami transaction

• Benamidar• Beneficial owner• Any other person who abets

or induce any person to enter into benami transaction

1-7 years 25% of FMV of property

Person furnish false information / false documents

Any person 6 months – 5 years

10% of FMV of property

Failure to comply with summons issued / furnish information required

Any person - Rs. 25,000 (Penalty)

Offences under Benami law non-compoundable

CBDT’s 2019 guidelines for compounding of offences

Prosecution proposals in relation to Benami cases shall be sent to the CBDT for approval by 31 December 2019

CBDT’s Central Action Plan (‘CAP’) for 2019-20

…Fine - Determination of FMV

FMV

• Price of property in the open market on date of transaction• Higher of (Unlisted equity shares) :

‒ Cost of acquisition ‒ FMV determined by Merchant Banker or Accountant as per DCF

method ‒ FMV determined by method prescribe as per Rule 11UA of Income

tax Rules

Ashwani Taneja ashwani@taxindia.net

Sandeep Bhallasandep.bhalla@dhruvaadvisors.com

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