Experts analyse SC’s latest order on Benami transactions


Post Supreme Court ruling, all the criminal prosecution or confiscation proceedings initiated under the Benami Transaction Prohibition Act before October 25, 2016, will now be treated as null and void. The Income Tax Department is yet to arrive at the number of such cases.

However, proceedings initiated after demonetisation, for cash deposited in benami bank accounts could see more and more people coming forward to accept the guilt and pay the penalty to end the matter. At the same time, Income Tax Department may reopen cases involving Benami transactions.

Though the Income Tax Department has not given details about the total number of cases identified, and prosecution initiated under the Act, a written answer by the Finance Minister, Nirmala Sitharaman, on July 02, 2019 in Rajya Sabha said, till May 31, 2019, show cause notices under the Prohibition of Benami Property Transactions Act, 1988, was issued in over 2,100 cases involving benami properties valued at over ₹9,600 crores.

Ashoo Gupta, Partner, Shardul Amarchand Mangaldas & Co says, the Supreme court’s order on the Benami Properties Act, 2016, will provide relief to litigants of ongoing cases who were subjected to the harsher punishments of the 2016 amendment. “Setting aside of the section 3(2) by the apex court could also lead to more admission of guilt by ‘benamidars’ who may accept the economic consequences in order to end prosecution,” he said.

Paras Nath, Partner, Tax & Regulatory Services, T R Chadha & Co LLP said, the Apex Court has held that the provision of Section 3(2) of the Benami Property Act, 1988 as unconstitutional for being manifestly arbitrary, as it is violative of Article 20(1) of the Constitution. “As an effect of Section 3(2) of the unamended 1988 Act is declared as unconstitutional, Section 3(2) of the 2016 Act also becomes unconstitutional,” he said.

Cash Deposit in Benami Accounts

Naresh Thacker, Partner, Economic Laws Practice says, any cash deposits in the Benami accounts under the un-amended act, i.e before 2016, were also prohibited under the Benami Transaction Act of 1988, except if such deposits were in the name of the wife or unmarried daughter. However, this exception was deleted in the 2016 amendment. The SC has now held that, prosecution cannot be held under the provisions of the 2016 amendment for any transactions carried out before 2016. “For example, the 2016 amendment introduced prosecution by special court, and punishment of imprisonment upto 7 years, while the punishment under the unamended act was only imprisonment upto 3 years or a fine,” he said.

Further, Thackar’s colleague, and Associate Partner with Economic Laws Practice, Pulkit Poddar, highlighted that, in a recent ruling, Madras High Court observed that, once demonetised, currency notes do not constitute legal tender for forming the part of ‘consideration’ under the Benami Transactions Act. However, the High Court left it open for the authorities to the verify mode of payment employed. It is an observation and not the ruling, he emphasised.

Paras Nath, Partner, Tax & Regulatory Services, T R Chadha & Co LLP said, since the very validity of Section 3(2) is held as unconstitutional now, the provision can not be enforced on the transactions. However, “if we refer the provisions of the Income Tax Act, the department has the right to reopen cases for reassessment, considering the prescribed conditions and time limits, and in case of unexplained transactions, addition can be made under applicable provisions,” Nath explained.

Published on

August 23, 2022

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