Comprehensive Analysis of Definition of Benami Transaction

 A journey into the evolution of the definition

It is natural that the comprehensive analysis of the definition of benami transaction in the benami act has to start with reproducing the definition itself. Section 2(9) of Prohibition of Benami Transactions Act, 1988 defines Benami Transaction. As per this, Benami Transaction means:

1. A transaction or arrangement:

2. a) Where the property is transferredto, or is heldby, a person and the consideration for such property has been provided, or paid, by another person and

3. b) The property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration

except where the property is held by:

1. Karta or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or other members of the family and the consideration for such property has been provided or paid out of known sourcesof the Hindu Undivided Family;

2. A person standing in fiduciary capacityfor the benefit of another person towards he stands in such fiduciary capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose

iii. Any person being an individual in the name of his spouse or in the name of any child of such individual and consideration of such property has been provided or paid out of known sources of the individual,

1. Any personin the name of his brother or sister or lineal ascendant or descendent, where the name of brother or sister or lineal ascendant or descendent and the individual appear as joint ownerin any document and the consideration for such property has been provided or paid out of known sources of the individual; or

2. A transaction or arrangement in respect of a property carried out or made in a fictitious name; or

3. a transaction or arrangement in respect of a property, where the owner of the property is not awareof, or denies knowledgeof, such ownership

4. a transaction or an arrangement in respect of a property, where the person providing the consideration is not traceableor fictitious.

Explanation: for the removal of doubts, it is declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of Transfer of Property Act, 1882, if under any law for the time being in force:

1. the consideration of such property has been provided by the person to whom the possession of the property has been allowed but the person who has granted the possession thereof continue to hold ownership of such property,

2. the stamp duty on such transaction or arrangement has been paid and

iii. the contract has been registered.

It is noteworthy that the definition under the amended act is an improvement upon the definition in 1988 act. It is important to also reproduce that definition also because a comparative study of the two versions unravels some of the veiled facets of the new definition. It reads “benami transaction means any transaction in which a property is transferred to one person for which the consideration is provided or paid by another person.”

The analysis would also not be complete without brining on the table the definition of benami transaction in the benami transaction bill of 2011, which bill never became the act. As per this bill, benami transaction means:

1. a transaction or arrangement:

2. a) Where a property is transferred to, or is held by, a person for a consideration provided, or paid by another person; and

3. b) The property is held for the immediate or future benefit, direct or indirect, of the person providing the consideration, except where the property is held by

4. i) A karta, or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or other member of the family; or

5. ii) a person standing in fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company or legal advisor, depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose

6. A transaction or arrangement in respect of a property carried out or made in a fictitious name; or

7. A transaction or arrangement in respect of a property, where the owner of the property is not awareof, or denies knowledgeof, such ownership 

Dissecting the elements of benami transaction

In the exercise of comprehensive analysis of benami transaction, next logical step is to cull out the elements that make the core of the definition. These are:

1. Definition is exhaustive

2. Significance of two cumulative conditions-payment by another person and holding of property for benefit of person paying or providing the consideration

3. Transaction or Arrangement is in the core of every type of benami transaction

4. Property is held for the benefit, immediate or future, direct or indirect.

5. Person standing in fiduciary capacity.

6. Known sources.

7. Consideration is provided or paid.

Benami Transactions in Pre- Coded Era

Codification of benami transaction and restrictions thereon started with promulgation of ordinance in 1988.  But benami transactions predate the present act by few centuries. In this long journey, came into existence some principles, doctrines, reports, judgements, laws in relation to benami transactions/properties. Some of these have been overridden or still have, direct or indirect, relevance to understand the nuances of the definition of benami transaction in the present act. We may, therefore, make brief references to these doctrines, principles.

Doctrine of “Resulting trusts”

This doctrine has its origin in the English Law.[1]   Simply put, this means that where a person purchases a property in the name of a third person, a trust “results” in favour of the purchaser. This however is not an absolute rule. It is presumption which varies according to the facts. This principle goes on a strict analogy to the rule in common law, that, where a feoffment is made without a consideration, the use results to the feoffer. Principle on the similar lines was adopted in section 82 of the Indian Trust Act, 1882, which section stood repealed by benami Transactions (Prohibition) Act, 1988.     

Principle of Advancement

It is an old established rule of trust law in England. It acts as an exception to the normal rule of “the presumption of resulting trust”.   As per this principle, when the parties are related, the presumption of a resulting trust may be overridden by a presumption of advancement. This is nineteenth century rule under which a man who give property to his fiancée, wife or children, it is presumed to do so by way of gift, unless contrary intention be found. This presumption of advancement is also weak. It applies in the absence of admissible evidence about the transferor’s actual intention.

Privy Council Cases

As far back as in 1854, benami transactions were described by privy council[2] in following terms “the system of acquiring and holding property and even of carrying on business in names other than those of real owner, usually called the benami system, is and has been a common practice in this country…… .  The rule applicable to benami transactions, was stated with considerable distinction in a judgement of this board delivered by Sir George Farwell. Referring to benami dealing, their lordship say “ it is quite unobjectionable and has a curious resemblance to the doctrine of an English law that the trust of the legal estate results to the man who pays the purchase money, and this again follows the analogy of a common law that a feoffment is made without consideration, the use results to feoffer. So long, therefore, as a benami transaction does not contravene the provisions of law, the courts are bound to give it effect. As already observed, the benamidar has no beneficial interest in the property or business that stand in his name; he represents, in fact, the real owner and so far as their relative legal position is concerned, he is a mere trustee for him.”

Indian Case laws

Honourable Supreme Court of India in its judgement[3] of 1980 had the following to say about benami transaction. “two kinds of benami transactions are generally recognised 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 money, and he is the real owner. The second case which is loosely termed as benami is a case, when the person who is the owner of the property execute the conveyance in favour of another without intention of transferring the title of the property thereunder. In this case, the transferor continues to be the real owner. The difference between the two kinds of transactions referred to above lies in the fact that whereas in the former case, there is operative transfer from the transferor to the transferee, though the transferee holds the property for the benefit of the person who has contributed the purchase money, the latter case, there is no operative transfer at all and title rests with the transferor, notwithstanding the execution of the conveyance. One common feature, however, in both these cases is that the real title is divorced from the ostensible title and they are vested in different persons. The question whether or not a transaction is benami transaction or not depends upon the intention of the person who has contributed the purchase money in the former case and upon the intention of the person who has executed the conveyance in the latter case. The principle underlying the former case is also statutorily recognised in section 82 of the Indian Trusts Act, 1882, which provides that where property is transferred to one person for a consideration provided or paid by another person and it appears that such other person did not intend to pay or provide consideration for the benefit of the transferee, transferee must hold the property for the benefit of the person paying or providing the consideration.” A similar ruling was given by the honourable Delhi High court in the year 1991.[4] Therefore, a clear distinction exist between the benami transaction per se and that transaction which is loosely called benami, but in fact has the character of “ sham transaction” and this distinction will have to be kept in mind when analysing the definition in the present act.

Statutory modifications relevant to benami

It is not that all benami transactions were unobjectionable in this era. A clear distinction was recognised between “good benami transaction” and “bad benami transaction”, and the latter was looked down upon or its effect ignored or modified through other enactments. As far as in 1984-85, it was observed that “since its first establishment, the British Government, in exercise of its legislative functions have from time to time made attempts to check the inveterate practice obtaining in India of holding property by any other person in the name of another. This practice, having its origin in the dishonest motive of defrauding creditors of their just and lawful dues, has had so large and widespread prevalence here that this legislature cannot altogether put an end to it by drastic enactment declaring this practice absolutely illegal in all cases.”

Law commission in its 130^th report made some very hard -hitting observation on the legitimacy of benami transaction and justification thereof in following terms “The question posed during the debate was that the Law Commission should not start with a brief that the motivation behind benami was always and necessarily illegitimate. It was said with emphasis that benami transactions can also be for the legitimate purposes. An illustration was given during the debate that take a case where “A” not only intensely love wife but also holds the belief that she is the harbinger of good luck and, therefore, “ A” would like to buy the property or transfer the property with him to his wife without any intention of transferring any beneficial interests. Proceeding further, it was said that in order to establish his bona fide, “ A” would continue to show the property in his wealth tax return or in his income tax return, and therefore any suggestion that transaction was entered into with a view to defeating tax laws would stand negated. It was, therefore, asserted that in such a case, to make wife an owner and deprive the real owner at the property would be irrational, apart from being more illegitimate than the illegitimate benami transaction itself. The commission remains unconvinced. If “A” loved his wife so intensely and believed her to be harbinger of good luck, why should he not transfer the property to her and disclose the transaction. Such a hypothetical illustration cannot conceal the fact that ordinarily benami transactions are entered into for various illegitimate purposes. The primary aim is to defeat the tax laws, such as wealth tax, gift tax and income tax as also estate duty when it was in force which has come back in different form. The law commission made numerous efforts by raising question repeatedly whether there is any area in which benami transaction operates, it holds the cover of legitimacy in the sense of justifiable social morality and in which to derive unjust enrichment was absent. Though the commission struggled hard, it could not come across any.”

In order to defang the malaise of benami system, various enactments introduced provisions. Section 66 of the code of Civil Procedure Code 1908, section 41 and 53 of the Transfer of Property Act 1882, section 281A, 175, 178, 230 A of the Income Tax Act, section 247 to 250 of the Companies act 1956, sections 206, 207, 415, 421 of the Indian Penal Code  are some of the examples of statutory modifications to the recognition of benami transactions.

Analysing the elements of benami transaction

 Definition is exhaustive

It starts with the word “means”, and not “includes”. It is well established that definition stating with “means” are exhaustive and would refer to what is contained therein, in strict terms only. What that term means and is known in common parlance is irrelevant. There is logic to this. The act provides criminality and deprivation of the right to property, which is the constitutional right and therefore would run havoc to define benami transaction in inclusive or general terms.

Definition provides for two cumulative conditions

In a significant departure from the ordinance of 1988 and the Principal Act of 1988 (before its Amendment by Act of 2016), the act now provides for two cumulative conditions to be met to be called benami transactions in clause A. These are (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. The original act of 1988, however, provided that in this Act, unless the context otherwise requires benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person.

The rationale of the second condition is succinctly explained by the Ministry of Finance[5] which reads “from the stand point of view of the transfer, it is wholly immaterial as to from whom the consideration comes. The transferor is concerned with the payment of consideration for the transfer and once it is received by him from and on behalf of the transferee in realty or ostensibly, he would have no regard for any other matter. The circumstances in which another person pays or provides the consideration to the transferee to be passed on to the transferor may be manifold. A person may provide consideration money to the transferor out of charity or under some jural relationship such as creditor and debtor or the like. The final relationship between such other person and the transferee has nothing to do with jural relationship between the transferor and the transferee. The intention of the other person paying or providing the consideration is in substance the main factor to be considered and of great importance. If the other person really intends that he should be the real owner of the property, then only the transferee may be considered as a benamidar, whether the transferee is a fictitious person or real person having no intention to acquire any title by means of transfer. it was perhaps for this reason that the intention of the person actually paying or providing consideration to the transferee was incorporated as an essential element in the provisions of section 82 of Indian Trusts Act. It would appear to be unreasonable to rest the provision relating to benami transaction on the payment or provision of consideration alone by a person other than the transferee. To have such a provision in sweeping language may make the provision unworkable in actual implementation. The actual payment or provision of consideration has been made the dominant factor, but by itself it may have no real substance unless the person paying the consideration does so with the intention of actually benefitting himself.

In view of the above, it is proposed that the payment alone by the other person should not be the only consideration for deciding benami transaction, rather intention of the other person should be considered for a benami transaction. Therefore, to hold a transaction a benami transaction, it is proposed that to provide additional test that the benami transaction should be holding the property for the benefit of the person providing the consideration.

Transaction or arrangement is in the core of every type of benami transaction

The existence of transaction or arrangement is the pre-condition in every type of benami transaction. Transaction portends existence of a positive act of the parties involved, which includes an element of volunteerism in it. Term “arrangement” is used in the company of transaction and applying doctrine of noscitur a sociis takes colour form “transaction”, and in fact each one of the terms may presumed to take colour from each other. This doctrine is a legitimate rule of construction to construe words in an act of parliament with reference to words found in immediate connection with them, when two or more words which are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense. The term arrangement also indicates some scheme, understanding or concerted action. It also means to plan, position highlighting existence of conscious mental state. 

Property is held for the benefit, immediate or future, direct or indirect of the persons paying or providing consideration

It has been explained above that this the second test that must be fulfilled to qualify as benami transaction. The term “benefit” has not been defined under the act. Our search in the allied acts, namely, Indian Trusts Act, 1882, the Indian succession Act, 1925, Indian Partnership Act, 1932, Income Tax Act 1961, The Depositories Act 1996, Prevention of Money Laundering Act 2002, The Limited Liability Partnership Act 2008 and companies Act 2013 have revealed that the term is not defined there either.

In such a situation, the term has to be interpreted to mean what is understood in commercial world or in the contextual sense in the act.

First, we find lot of references of the term “benefit” in the income tax act, 1961, though not defined in that act also, and obviously had come for judicial interpretation. One such earliest decision is from honourable Madras High Court[6], which held that “characteristics of a benefit is that it is to be real and not notional, concrete and not abstract, certain and not conjectural. It is also held that if the benefit received by a person is illusory or so slight as to be construed as negligible, then it would not amount to a direct or indirect benefit to that person. From the above, it would seem that if a transaction is to be treated as benami transaction, the person providing thee consideration must get some real and tangible benefit from the property. The benefit could be an immediate benefit i.e. at the time of purchase of property or the benefit at the future point of time.  The underlying principles concept of direct and indirect benefit is fairly laid down in several laws and in several judgements, but still each case has to be tested on its own facts whether or not there is indirect benefit.

But in our opinion, the term “benefit” in benami transaction is little drastic for a reason. This is that “benefit” in the definition has to be construed in contextual sense rather than what is understood generally and found in dictionaries. But, before this point of view is espoused, for deliberation purposes in the least, one can refer the meaning of “benefit” in the dictionaries. In the free dictionary by Farlex it means “any profit or acquired right or privilege acquired through a contract.” Meaning of benefit in Merriam dictionary is “A something that produces good or helpful results or that promotes well- being.”

For the purpose of the definition under the act, use of “benefit” is not to be read in standalone manner and what has to be referred to is complete phrase, which is, “property is held for the benefit”. Read in that context, it would be akin to “ beneficial ownership”, which means that each and every benefit, which is direct or indirect, present or future, which arise or may arise from the property,  should go to and belong to the person paying the consideration and that too as part of the understanding in the transaction or arrangement. Further, this “holding of property for his benefit” should be as a matter of right and not a gratuitous act on the part of the transferee. In other words, it would be akin to effective and actual ownership of the property by the person paying the consideration. Contrary to the general understanding, if any benefit, direct or indirect, immediate or future, is passed on or vested under the transaction to the transferee, it would take the transaction or arrangement out of the purview of benami.

Person standing in fiduciary capacity

This is the most perplexing of the elements of the definition. In the context of the unamended principal act of 1988, this single issue saw maximum of the litigations. Question, at the outset, is whether the ratios decidendi of those judgements hold good in the post amendment era. In my opinion, most of them would do or serve as guiding principles and it is apt to summarise them for the benefit of the readers.

Before embarking on that exercise, it makes sense to reproduce the way fiduciary relationship are dealt with in through the evolution journey of the act.

In the unamended act of 1988. Section 3 provided for the prohibition on benami transaction as defined in section 2. Section 4 further barred suit in respect of benami property by the real owner. But sub section 3 of section 4 created an exception in the following words” nothing in this section will apply when the person in whose name the property is held is a trustee or other person standing in fiduciary capacity and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

The amended act stipulates in section 2(9) that “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, except when the property is held by:

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose.”

In the bill of 2011, which was introduced in parliament nut could become enactment, exception from benami transaction was provided in following words” a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, agent, director of a company or legal adviser, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose”.

In this regard reference should also be made to paragraph 2.11 of the 58^th report of Standing committee of parliament constitute to examine benami bill of 2011:

The National Institute of Public Finance and Policy (NIPFP) submitted the following views in regard to Clause 2(g):

“An exception has been carved out where a property is held by a person standing in a fiduciary capacity. Most of the lawyers will act in a fiduciary capacity. In fact, a legal advisor has been specifically included in the exception. Thus, properties held and managed in tax heavens by lawyers will be out of the ambit of the Act.

Most of the benami properties will be held either in the name of near relatives or by lawyers ……acting in a fiduciary capacity. Leaving all these categories out will severely restrict the operation of the Act to only those cases where properties are held in the name of trusted employees, servants, etc. It is therefore doubtful if the Act in its present form will achieve the avowed objective of prohibiting the holding of property in benami.”

Courts Judgements

1. Honourable supreme court in its judgements of 1994[7], on this subject, held “Therefore, the High Court is clearly right in its holding that the petitioner as an agent and trustee acted in the fiduciary capacity on behalf of the respondent-plaintiff as general power of attorney. He held the property in cestui que trust for and on behalf of the respondent though he fraudulently got inserted his name in the sale certificate issued by the court without the respondent’s knowledge and consent. Section 4 of the Benami Transactions (Prohibition) Act does not stand in the way for the declaration of title and possession of the plaint schedule property. The courts below were, therefore, wrong in dismissing the suit relying on Section 66(1) of CPC. The High Court was perfectly right in reversing the decree of the appellate court and that of the trial court and decreeing the suit as prayed for. The petition ‘is accordingly dismissed.”

2. The same Court in its judgement in 1999 [8]held the same principle in following words “Section 4 which contains the prohibition to recover the property held benami expressly, provides in sub-section (3), clause (b) that the said Section is not to; apply, inter alia. in a case where the property is held in the name of a trustee. In view of the finding of the high Court in its judgment of 27th August, 1987 that the property was being held in the name of the respondent as a trustee, the cestui que trust, of the respondent invoking the provisions of the Benami Transactions Ordinance or the Act did not arise. The provisions of the Act did not prohibit a suit being filed against a trustee for the recovery of the trust property.”

3. But couple of judgements of Delhi HC[9]on the issue of interplay between exclusion under section 4(3) of the original act of 1988 and the main limb of the definition is on a little different tangent from the decisions of the highest court above, or so at least it appears on the first reading. Some observation of Delhi High court in Shri Amar N Gugani are worth reproducing and done in the ensuing paragraphs.

4. “In a way, therefore, there may be some ostensible conflict between the provision of Section 4(3)(b) of the Benami Act and Section 7 of the same Act which repeals the provisions of the Indian Trusts Act, 1882, however, one has to read and interpret Section 4(3)(b) in a manner which is in accord with the legislative intention to bar claims against properties held as benami. The concept of trust was always inbuilt once a transaction was a benami transaction as the benamidar was the trustee for the real owner. But in spite of the concept of trust being inbuilt in benami transactions, the Benami Act provided that no rights could be asserted in a benami property by the actual/de jure owner.  Putting it differently, once Sections 81, 82 and 94 of the India Trusts Act, 1882 have been repealed, they cannot be brought in from the back door, so to say, by giving the same content contained in the repealed provisions of Sections 81, 82 and 94 of the Indian Trusts Act, 1882 to Section 4(3)(b) of the Benami Act.  If we give such an interpretation, the entire Benami Act will fall and it will be as if the same has not been enacted.  Therefore, Section 4(3)(b) which provides that the property which is held as a trustee or in a fiduciary capacity must be interpreted in the sense that the trustee or a person who is holding the property in a fiduciary capacity has either committed a fraud and got the property title in his name or is in furtherance of  law holding property in his name however in the capacity of a trustee or in fiduciary capacity, although the real owner is somebody else”

5. “It need not be again said, but at the cost of repetition it bears note that the expression “trustee” or “fiduciary relationship” cannot be interpreted in such a manner that the definition of “benami transaction” provided under Section 2(a) of the Benami Act and prohibited by Sections 4(1) & 4(2) of the Benami Act is totally washed away, inasmuch as, it is the benami transactions which are sought to be completely barred by the provisions of the Benami Act.” “In the judgment in J M Kohli’s case (supra) certain cases where there is a relationship of trust and fiduciary relationship, and which cases are exempted from operation of the Benami Act and they fall under the exception of Section 4(3)(b) of the Benami Act are given in para 9 by reference to the judgments of the Supreme Court in the cases of C. Gangacharan Vs. C. Narayanan 2000 (1) SCC 459 and P.V. Sankara Kurup Vs. Leelavathy Nambiar 1994 (6) SCC 68. These Supreme Court judgments held as to when a relationship of trustee would be covered under section 4(3)(b) of the Benami Act for the same not to be a benami transaction which is barred as per Section 2(a) read with Sections 4(1) and 4(2) of the Benami Act. Para 9 of the judgment in J M Kohli’s case (supra) gives the facts of these two Supreme Court judgments and hence the factual reasons why those cases fell in the exception of Section 4(3)(b) of the Benami Act.”

6. This brings us to our take on the exclusion on account of fiduciary relationship in the context of the present act. In our view, there could be two possible interpretations. First of these two interpretations emerges from the reading of sub clause (ii) of the exceptions to clause A of section which states as under “A person standing in fiduciary capacityfor the benefit of another person towards whom he stands in such fiduciary capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose”.  As per this interpretation a person standing in fiduciary capacity would be one which are given in the inclusion limb of the clause only, which means trustee, executor, partner, director of a company, a depository etc. and not the person who are known to stand in a fiduciary capacity in any other manner or otherwise. But that interpretation, in our view, would be not without doing violence to the language of the clause. The second of the interpretation takes cue from the judgements, referred to above in the context of unamended act of 1988. But there is slight problem in squarely relying or taking cue from them because of the significant departure in the definition of benami transactions before and after amendment. In the amended definition, it is essential that property is held for the benefit of the person paying or providing the consideration. Accordingly, perhaps, wherever property is so held there is implicit or explicit fiduciary relationship between the transferee and person paying or providing the consideration. Read in that context, how can definition include or exclude the same scenario at the same time is a dilemma. Be as it may be, our view is that benami act has repealed only specific sections of the Indian Trusts Act, 1882 and the institution of trust still exists in several other provisions of the said act. Benami Act has not done anything to throw out the legal concept of fiduciary relationship and all that the relationship follows in law. On that premise, what survives of “fiduciary relationship” by the operation of law or judge made law or otherwise and what is specifically included in the clause (ii) would be not within the purview of the benami transactions, the fulfilment of two limbs of clause “A” notwithstanding. That in all probability, in our view would be harmonious interpretation of the main limb and exception clause.

 Known sources

This phrase has been used in sub clauses (i), (iii) and (iv) dealing with benami transaction in Clause A of section 2(9) of the act. in this regard one has to underline the difference between known source of income and known source. Following extract from the standing committee report[10] on the amendment bill throws full light on this change and worth reading: “ 9.13 The Institute of Chartered Accountants of India (ICAI), in their written submission stated that the exception to benami transaction as laid down in section 2(1) of the Bill uses the expression consideration paid on provided for the property by the Karta or member of HUF out of the known sources of income of HUF in sub clause (i) and in case of individual out of the known sources of income of the individual is of wider import and contemplates situations where loan funds may be provided for acquiring the property.  Loan funds are not income and therefore expression “out of known sources” can be used instead of “known source of income” to bring in clarity in such cases. 9.14 In this context the Ministry of Finance, furnished their following views: “The term ‘’known source of income’’ was used in consultation with Ministry of Law and Justice to provide for investment where the source of funding was clearly identifiable. However, if the Committee recommends, the matter shall be examined in consultation with Ministry of Law and Justice. Although the intention of the provision is that the source of funds should be explained, ambiguity may arise on account of the present language of the provision. The matter will be examined further and, if necessary, an amendment will be moved with the approval of the competent authority.”

 Consideration is provided or paid

In the definition, wherever the act speaks of the remittance of consideration to the transferor by other person, it uses the terms either “Provided” or “paid”.  This means that the act envisages three situations (a) when consideration is paid and provided by a person other than transferee, (b) when consideration is provided by the person other than transferee and (c) when consideration is paid by person other than transferee.

When the issue travelled to the highest court of the country under the old act of 1988, it had following to say[11]”.   “The word “provided” in S. 2(a) of the Benami Transactions (Prohibition) Act cannot be construed in relation to the source or sources from which the real transferee made up the funds for buying the sale consideration. The words “paid or provided” are disjunctively employed in the clause and each has to be tagged with the word “consideration”. The correct interpretation would be to read it as “consideration paid or consideration provided”. If consideration was paid to the transferor, the word provided has no application for such sale. The question of providing the consideration would arise, only if the consideration was not paid in regard to a sale transaction. Any other interpretation may harm the interest of persons involved in genuine transactions, e.g., a purchaser of land might have availed himself of loan facilities from banks to make a purchase money. In such a case it cannot be said that since the money was provided by the bank it was a benami transaction. So even if the appellant had availed himself of the help rendered by his father for making up the sale consideration that would not make the sale deed a benami transaction so as to push it into the forbidden area envisaged in S. 3(1) of the Act.”

It seems that the interpretation given by the honourable supreme court turns on the facts of its own case and may not be laying the law of the land in that sense. Provided, in our view, in the old as well as new act is cover cases of indirectly paid also. Paid is to be construed in the sense of effective payment and therefore would include cases where it is irreversibly and on non- returnable basis provided by the person other than transferee.

[1] This general principle of resulting trust was established in 1788 in Dyer Vs Dyer Case 2 Cox 92

[2] Gur Narayan case

[3] Bhim Singh Vs Kar Singh AIR (1980) 727

[4] Krishan Kumar Vs Harnam Dass (1991) 56 Taxman 233 (Delhi)

[5] Paragraph 2.10 of the 58^th report of Standing Committee on Finance (2011-12), Ministry of Finance (department of Revenue) on the benami Transactions (or Prohibition) bill 2011.

[6] Manic Kavsaagan Vs ITO 53 ITR 295

[7] PV Sankar Kurup Vs Leelavathy Nambiar (1994) AIR 2694

[8] C. Gangacharan Vs C. Naryanan dated 14^th December 1999

[9] Shri Amar N. Gugnani Vs Naresh Kumar Gugnani CS (OS) 478/2004 (Delhi) and JM Kohli Vs Madan Mohan Sahni RFA 207/2012 (Delhi) 7^th May 2012

[10] Standing committee on finance (2015-16) Sixteenth Lok Sabha, Ministry of Finance (Department of Revenue), the Benami Transactions Prohibition (Amendment) Bill 2016, 28^th Report

[11] Pawan Kumar Gupta Vs Rochiram Nagdeo (1994) 4 SCC 24

 

 

Comprehensive Analysis of Definition of Benami Transaction

 

A journey into the evolution of the definition

It is natural that the comprehensive analysis of the definition of benami transaction in the benami act has to start with reproducing the definition itself. Section 2(9) of Prohibition of Benami Transactions Act, 1988 defines Benami Transaction. As per this, Benami Transaction means:

1. A transaction or arrangement:

2. a) Where the property is transferredto, or is heldby, a person and the consideration for such property has been provided, or paid, by another person and

3. b) The property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration

except where the property is held by:

1. Karta or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or other members of the family and the consideration for such property has been provided or paid out of known sourcesof the Hindu Undivided Family;

2. A person standing in fiduciary capacityfor the benefit of another person towards he stands in such fiduciary capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose

iii. Any person being an individual in the name of his spouse or in the name of any child of such individual and consideration of such property has been provided or paid out of known sources of the individual,

1. Any personin the name of his brother or sister or lineal ascendant or descendent, where the name of brother or sister or lineal ascendant or descendent and the individual appear as joint ownerin any document and the consideration for such property has been provided or paid out of known sources of the individual; or

2. A transaction or arrangement in respect of a property carried out or made in a fictitious name; or

3. a transaction or arrangement in respect of a property, where the owner of the property is not awareof, or denies knowledgeof, such ownership

4. a transaction or an arrangement in respect of a property, where the person providing the consideration is not traceableor fictitious.

Explanation: for the removal of doubts, it is declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of Transfer of Property Act, 1882, if under any law for the time being in force:

1. the consideration of such property has been provided by the person to whom the possession of the property has been allowed but the person who has granted the possession thereof continue to hold ownership of such property,

2. the stamp duty on such transaction or arrangement has been paid and

iii. the contract has been registered.

It is noteworthy that the definition under the amended act is an improvement upon the definition in 1988 act. It is important to also reproduce that definition also because a comparative study of the two versions unravels some of the veiled facets of the new definition. It reads “benami transaction means any transaction in which a property is transferred to one person for which the consideration is provided or paid by another person.”

The analysis would also not be complete without brining on the table the definition of benami transaction in the benami transaction bill of 2011, which bill never became the act. As per this bill, benami transaction means:

1. a transaction or arrangement:

2. a) Where a property is transferred to, or is held by, a person for a consideration provided, or paid by another person; and

3. b) The property is held for the immediate or future benefit, direct or indirect, of the person providing the consideration, except where the property is held by

4. i) A karta, or a member of a Hindu Undivided Family, as the case may be, and the property is held for his benefit or other member of the family; or

5. ii) a person standing in fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company or legal advisor, depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose

6. A transaction or arrangement in respect of a property carried out or made in a fictitious name; or

7. A transaction or arrangement in respect of a property, where the owner of the property is not awareof, or denies knowledgeof, such ownership 

Dissecting the elements of benami transaction

In the exercise of comprehensive analysis of benami transaction, next logical step is to cull out the elements that make the core of the definition. These are:

1. Definition is exhaustive

2. Significance of two cumulative conditions-payment by another person and holding of property for benefit of person paying or providing the consideration

3. Transaction or Arrangement is in the core of every type of benami transaction

4. Property is held for the benefit, immediate or future, direct or indirect.

5. Person standing in fiduciary capacity.

6. Known sources.

7. Consideration is provided or paid.

Benami Transactions in Pre- Coded Era

Codification of benami transaction and restrictions thereon started with promulgation of ordinance in 1988.  But benami transactions predate the present act by few centuries. In this long journey, came into existence some principles, doctrines, reports, judgements, laws in relation to benami transactions/properties. Some of these have been overridden or still have, direct or indirect, relevance to understand the nuances of the definition of benami transaction in the present act. We may, therefore, make brief references to these doctrines, principles.

Doctrine of “Resulting trusts”

This doctrine has its origin in the English Law.[1]   Simply put, this means that where a person purchases a property in the name of a third person, a trust “results” in favour of the purchaser. This however is not an absolute rule. It is presumption which varies according to the facts. This principle goes on a strict analogy to the rule in common law, that, where a feoffment is made without a consideration, the use results to the feoffer. Principle on the similar lines was adopted in section 82 of the Indian Trust Act, 1882, which section stood repealed by benami Transactions (Prohibition) Act, 1988.     

Principle of Advancement

It is an old established rule of trust law in England. It acts as an exception to the normal rule of “the presumption of resulting trust”.   As per this principle, when the parties are related, the presumption of a resulting trust may be overridden by a presumption of advancement. This is nineteenth century rule under which a man who give property to his fiancée, wife or children, it is presumed to do so by way of gift, unless contrary intention be found. This presumption of advancement is also weak. It applies in the absence of admissible evidence about the transferor’s actual intention.

Privy Council Cases

As far back as in 1854, benami transactions were described by privy council[2] in following terms “the system of acquiring and holding property and even of carrying on business in names other than those of real owner, usually called the benami system, is and has been a common practice in this country…… .  The rule applicable to benami transactions, was stated with considerable distinction in a judgement of this board delivered by Sir George Farwell. Referring to benami dealing, their lordship say “ it is quite unobjectionable and has a curious resemblance to the doctrine of an English law that the trust of the legal estate results to the man who pays the purchase money, and this again follows the analogy of a common law that a feoffment is made without consideration, the use results to feoffer. So long, therefore, as a benami transaction does not contravene the provisions of law, the courts are bound to give it effect. As already observed, the benamidar has no beneficial interest in the property or business that stand in his name; he represents, in fact, the real owner and so far as their relative legal position is concerned, he is a mere trustee for him.”

Indian Case laws

Honourable Supreme Court of India in its judgement[3] of 1980 had the following to say about benami transaction. “two kinds of benami transactions are generally recognised 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 money, and he is the real owner. The second case which is loosely termed as benami is a case, when the person who is the owner of the property execute the conveyance in favour of another without intention of transferring the title of the property thereunder. In this case, the transferor continues to be the real owner. The difference between the two kinds of transactions referred to above lies in the fact that whereas in the former case, there is operative transfer from the transferor to the transferee, though the transferee holds the property for the benefit of the person who has contributed the purchase money, the latter case, there is no operative transfer at all and title rests with the transferor, notwithstanding the execution of the conveyance. One common feature, however, in both these cases is that the real title is divorced from the ostensible title and they are vested in different persons. The question whether or not a transaction is benami transaction or not depends upon the intention of the person who has contributed the purchase money in the former case and upon the intention of the person who has executed the conveyance in the latter case. The principle underlying the former case is also statutorily recognised in section 82 of the Indian Trusts Act, 1882, which provides that where property is transferred to one person for a consideration provided or paid by another person and it appears that such other person did not intend to pay or provide consideration for the benefit of the transferee, transferee must hold the property for the benefit of the person paying or providing the consideration.” A similar ruling was given by the honourable Delhi High court in the year 1991.[4] Therefore, a clear distinction exist between the benami transaction per se and that transaction which is loosely called benami, but in fact has the character of “ sham transaction” and this distinction will have to be kept in mind when analysing the definition in the present act.

Statutory modifications relevant to benami

It is not that all benami transactions were unobjectionable in this era. A clear distinction was recognised between “good benami transaction” and “bad benami transaction”, and the latter was looked down upon or its effect ignored or modified through other enactments. As far as in 1984-85, it was observed that “since its first establishment, the British Government, in exercise of its legislative functions have from time to time made attempts to check the inveterate practice obtaining in India of holding property by any other person in the name of another. This practice, having its origin in the dishonest motive of defrauding creditors of their just and lawful dues, has had so large and widespread prevalence here that this legislature cannot altogether put an end to it by drastic enactment declaring this practice absolutely illegal in all cases.”

Law commission in its 130^th report made some very hard -hitting observation on the legitimacy of benami transaction and justification thereof in following terms “The question posed during the debate was that the Law Commission should not start with a brief that the motivation behind benami was always and necessarily illegitimate. It was said with emphasis that benami transactions can also be for the legitimate purposes. An illustration was given during the debate that take a case where “A” not only intensely love wife but also holds the belief that she is the harbinger of good luck and, therefore, “ A” would like to buy the property or transfer the property with him to his wife without any intention of transferring any beneficial interests. Proceeding further, it was said that in order to establish his bona fide, “ A” would continue to show the property in his wealth tax return or in his income tax return, and therefore any suggestion that transaction was entered into with a view to defeating tax laws would stand negated. It was, therefore, asserted that in such a case, to make wife an owner and deprive the real owner at the property would be irrational, apart from being more illegitimate than the illegitimate benami transaction itself. The commission remains unconvinced. If “A” loved his wife so intensely and believed her to be harbinger of good luck, why should he not transfer the property to her and disclose the transaction. Such a hypothetical illustration cannot conceal the fact that ordinarily benami transactions are entered into for various illegitimate purposes. The primary aim is to defeat the tax laws, such as wealth tax, gift tax and income tax as also estate duty when it was in force which has come back in different form. The law commission made numerous efforts by raising question repeatedly whether there is any area in which benami transaction operates, it holds the cover of legitimacy in the sense of justifiable social morality and in which to derive unjust enrichment was absent. Though the commission struggled hard, it could not come across any.”

In order to defang the malaise of benami system, various enactments introduced provisions. Section 66 of the code of Civil Procedure Code 1908, section 41 and 53 of the Transfer of Property Act 1882, section 281A, 175, 178, 230 A of the Income Tax Act, section 247 to 250 of the Companies act 1956, sections 206, 207, 415, 421 of the Indian Penal Code  are some of the examples of statutory modifications to the recognition of benami transactions.

Analysing the elements of benami transaction

 Definition is exhaustive

It starts with the word “means”, and not “includes”. It is well established that definition stating with “means” are exhaustive and would refer to what is contained therein, in strict terms only. What that term means and is known in common parlance is irrelevant. There is logic to this. The act provides criminality and deprivation of the right to property, which is the constitutional right and therefore would run havoc to define benami transaction in inclusive or general terms.

Definition provides for two cumulative conditions

In a significant departure from the ordinance of 1988 and the Principal Act of 1988 (before its Amendment by Act of 2016), the act now provides for two cumulative conditions to be met to be called benami transactions in clause A. These are (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. The original act of 1988, however, provided that in this Act, unless the context otherwise requires benami transaction means any transaction in which property is transferred to one person for a consideration paid or provided by another person.

The rationale of the second condition is succinctly explained by the Ministry of Finance[5] which reads “from the stand point of view of the transfer, it is wholly immaterial as to from whom the consideration comes. The transferor is concerned with the payment of consideration for the transfer and once it is received by him from and on behalf of the transferee in realty or ostensibly, he would have no regard for any other matter. The circumstances in which another person pays or provides the consideration to the transferee to be passed on to the transferor may be manifold. A person may provide consideration money to the transferor out of charity or under some jural relationship such as creditor and debtor or the like. The final relationship between such other person and the transferee has nothing to do with jural relationship between the transferor and the transferee. The intention of the other person paying or providing the consideration is in substance the main factor to be considered and of great importance. If the other person really intends that he should be the real owner of the property, then only the transferee may be considered as a benamidar, whether the transferee is a fictitious person or real person having no intention to acquire any title by means of transfer. it was perhaps for this reason that the intention of the person actually paying or providing consideration to the transferee was incorporated as an essential element in the provisions of section 82 of Indian Trusts Act. It would appear to be unreasonable to rest the provision relating to benami transaction on the payment or provision of consideration alone by a person other than the transferee. To have such a provision in sweeping language may make the provision unworkable in actual implementation. The actual payment or provision of consideration has been made the dominant factor, but by itself it may have no real substance unless the person paying the consideration does so with the intention of actually benefitting himself.

In view of the above, it is proposed that the payment alone by the other person should not be the only consideration for deciding benami transaction, rather intention of the other person should be considered for a benami transaction. Therefore, to hold a transaction a benami transaction, it is proposed that to provide additional test that the benami transaction should be holding the property for the benefit of the person providing the consideration.

Transaction or arrangement is in the core of every type of benami transaction

The existence of transaction or arrangement is the pre-condition in every type of benami transaction. Transaction portends existence of a positive act of the parties involved, which includes an element of volunteerism in it. Term “arrangement” is used in the company of transaction and applying doctrine of noscitur a sociis takes colour form “transaction”, and in fact each one of the terms may presumed to take colour from each other. This doctrine is a legitimate rule of construction to construe words in an act of parliament with reference to words found in immediate connection with them, when two or more words which are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense. The term arrangement also indicates some scheme, understanding or concerted action. It also means to plan, position highlighting existence of conscious mental state. 

Property is held for the benefit, immediate or future, direct or indirect of the persons paying or providing consideration

It has been explained above that this the second test that must be fulfilled to qualify as benami transaction. The term “benefit” has not been defined under the act. Our search in the allied acts, namely, Indian Trusts Act, 1882, the Indian succession Act, 1925, Indian Partnership Act, 1932, Income Tax Act 1961, The Depositories Act 1996, Prevention of Money Laundering Act 2002, The Limited Liability Partnership Act 2008 and companies Act 2013 have revealed that the term is not defined there either.

In such a situation, the term has to be interpreted to mean what is understood in commercial world or in the contextual sense in the act.

First, we find lot of references of the term “benefit” in the income tax act, 1961, though not defined in that act also, and obviously had come for judicial interpretation. One such earliest decision is from honourable Madras High Court[6], which held that “characteristics of a benefit is that it is to be real and not notional, concrete and not abstract, certain and not conjectural. It is also held that if the benefit received by a person is illusory or so slight as to be construed as negligible, then it would not amount to a direct or indirect benefit to that person. From the above, it would seem that if a transaction is to be treated as benami transaction, the person providing thee consideration must get some real and tangible benefit from the property. The benefit could be an immediate benefit i.e. at the time of purchase of property or the benefit at the future point of time.  The underlying principles concept of direct and indirect benefit is fairly laid down in several laws and in several judgements, but still each case has to be tested on its own facts whether or not there is indirect benefit.

But in our opinion, the term “benefit” in benami transaction is little drastic for a reason. This is that “benefit” in the definition has to be construed in contextual sense rather than what is understood generally and found in dictionaries. But, before this point of view is espoused, for deliberation purposes in the least, one can refer the meaning of “benefit” in the dictionaries. In the free dictionary by Farlex it means “any profit or acquired right or privilege acquired through a contract.” Meaning of benefit in Merriam dictionary is “A something that produces good or helpful results or that promotes well- being.”

For the purpose of the definition under the act, use of “benefit” is not to be read in standalone manner and what has to be referred to is complete phrase, which is, “property is held for the benefit”. Read in that context, it would be akin to “ beneficial ownership”, which means that each and every benefit, which is direct or indirect, present or future, which arise or may arise from the property,  should go to and belong to the person paying the consideration and that too as part of the understanding in the transaction or arrangement. Further, this “holding of property for his benefit” should be as a matter of right and not a gratuitous act on the part of the transferee. In other words, it would be akin to effective and actual ownership of the property by the person paying the consideration. Contrary to the general understanding, if any benefit, direct or indirect, immediate or future, is passed on or vested under the transaction to the transferee, it would take the transaction or arrangement out of the purview of benami.

Person standing in fiduciary capacity

This is the most perplexing of the elements of the definition. In the context of the unamended principal act of 1988, this single issue saw maximum of the litigations. Question, at the outset, is whether the ratios decidendi of those judgements hold good in the post amendment era. In my opinion, most of them would do or serve as guiding principles and it is apt to summarise them for the benefit of the readers.

Before embarking on that exercise, it makes sense to reproduce the way fiduciary relationship are dealt with in through the evolution journey of the act.

In the unamended act of 1988. Section 3 provided for the prohibition on benami transaction as defined in section 2. Section 4 further barred suit in respect of benami property by the real owner. But sub section 3 of section 4 created an exception in the following words” nothing in this section will apply when the person in whose name the property is held is a trustee or other person standing in fiduciary capacity and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity.”

The amended act stipulates in section 2(9) that “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, except when the property is held by:

(ii) a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose.”

In the bill of 2011, which was introduced in parliament nut could become enactment, exception from benami transaction was provided in following words” a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, agent, director of a company or legal adviser, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose”.

In this regard reference should also be made to paragraph 2.11 of the 58^th report of Standing committee of parliament constitute to examine benami bill of 2011:

The National Institute of Public Finance and Policy (NIPFP) submitted the following views in regard to Clause 2(g):

“An exception has been carved out where a property is held by a person standing in a fiduciary capacity. Most of the lawyers will act in a fiduciary capacity. In fact, a legal advisor has been specifically included in the exception. Thus, properties held and managed in tax heavens by lawyers will be out of the ambit of the Act.

Most of the benami properties will be held either in the name of near relatives or by lawyers ……acting in a fiduciary capacity. Leaving all these categories out will severely restrict the operation of the Act to only those cases where properties are held in the name of trusted employees, servants, etc. It is therefore doubtful if the Act in its present form will achieve the avowed objective of prohibiting the holding of property in benami.”

Courts Judgements

1. Honourable supreme court in its judgements of 1994[7], on this subject, held “Therefore, the High Court is clearly right in its holding that the petitioner as an agent and trustee acted in the fiduciary capacity on behalf of the respondent-plaintiff as general power of attorney. He held the property in cestui que trust for and on behalf of the respondent though he fraudulently got inserted his name in the sale certificate issued by the court without the respondent’s knowledge and consent. Section 4 of the Benami Transactions (Prohibition) Act does not stand in the way for the declaration of title and possession of the plaint schedule property. The courts below were, therefore, wrong in dismissing the suit relying on Section 66(1) of CPC. The High Court was perfectly right in reversing the decree of the appellate court and that of the trial court and decreeing the suit as prayed for. The petition ‘is accordingly dismissed.”

2. The same Court in its judgement in 1999 [8]held the same principle in following words “Section 4 which contains the prohibition to recover the property held benami expressly, provides in sub-section (3), clause (b) that the said Section is not to; apply, inter alia. in a case where the property is held in the name of a trustee. In view of the finding of the high Court in its judgment of 27th August, 1987 that the property was being held in the name of the respondent as a trustee, the cestui que trust, of the respondent invoking the provisions of the Benami Transactions Ordinance or the Act did not arise. The provisions of the Act did not prohibit a suit being filed against a trustee for the recovery of the trust property.”

3. But couple of judgements of Delhi HC[9]on the issue of interplay between exclusion under section 4(3) of the original act of 1988 and the main limb of the definition is on a little different tangent from the decisions of the highest court above, or so at least it appears on the first reading. Some observation of Delhi High court in Shri Amar N Gugani are worth reproducing and done in the ensuing paragraphs.

4. “In a way, therefore, there may be some ostensible conflict between the provision of Section 4(3)(b) of the Benami Act and Section 7 of the same Act which repeals the provisions of the Indian Trusts Act, 1882, however, one has to read and interpret Section 4(3)(b) in a manner which is in accord with the legislative intention to bar claims against properties held as benami. The concept of trust was always inbuilt once a transaction was a benami transaction as the benamidar was the trustee for the real owner. But in spite of the concept of trust being inbuilt in benami transactions, the Benami Act provided that no rights could be asserted in a benami property by the actual/de jure owner.  Putting it differently, once Sections 81, 82 and 94 of the India Trusts Act, 1882 have been repealed, they cannot be brought in from the back door, so to say, by giving the same content contained in the repealed provisions of Sections 81, 82 and 94 of the Indian Trusts Act, 1882 to Section 4(3)(b) of the Benami Act.  If we give such an interpretation, the entire Benami Act will fall and it will be as if the same has not been enacted.  Therefore, Section 4(3)(b) which provides that the property which is held as a trustee or in a fiduciary capacity must be interpreted in the sense that the trustee or a person who is holding the property in a fiduciary capacity has either committed a fraud and got the property title in his name or is in furtherance of  law holding property in his name however in the capacity of a trustee or in fiduciary capacity, although the real owner is somebody else”

5. “It need not be again said, but at the cost of repetition it bears note that the expression “trustee” or “fiduciary relationship” cannot be interpreted in such a manner that the definition of “benami transaction” provided under Section 2(a) of the Benami Act and prohibited by Sections 4(1) & 4(2) of the Benami Act is totally washed away, inasmuch as, it is the benami transactions which are sought to be completely barred by the provisions of the Benami Act.” “In the judgment in J M Kohli’s case (supra) certain cases where there is a relationship of trust and fiduciary relationship, and which cases are exempted from operation of the Benami Act and they fall under the exception of Section 4(3)(b) of the Benami Act are given in para 9 by reference to the judgments of the Supreme Court in the cases of C. Gangacharan Vs. C. Narayanan 2000 (1) SCC 459 and P.V. Sankara Kurup Vs. Leelavathy Nambiar 1994 (6) SCC 68. These Supreme Court judgments held as to when a relationship of trustee would be covered under section 4(3)(b) of the Benami Act for the same not to be a benami transaction which is barred as per Section 2(a) read with Sections 4(1) and 4(2) of the Benami Act. Para 9 of the judgment in J M Kohli’s case (supra) gives the facts of these two Supreme Court judgments and hence the factual reasons why those cases fell in the exception of Section 4(3)(b) of the Benami Act.”

6. This brings us to our take on the exclusion on account of fiduciary relationship in the context of the present act. In our view, there could be two possible interpretations. First of these two interpretations emerges from the reading of sub clause (ii) of the exceptions to clause A of section which states as under “A person standing in fiduciary capacityfor the benefit of another person towards whom he stands in such fiduciary capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of the depository under the depositories act, 1996 and any other person as may be notified by the central government for this purpose”.  As per this interpretation a person standing in fiduciary capacity would be one which are given in the inclusion limb of the clause only, which means trustee, executor, partner, director of a company, a depository etc. and not the person who are known to stand in a fiduciary capacity in any other manner or otherwise. But that interpretation, in our view, would be not without doing violence to the language of the clause. The second of the interpretation takes cue from the judgements, referred to above in the context of unamended act of 1988. But there is slight problem in squarely relying or taking cue from them because of the significant departure in the definition of benami transactions before and after amendment. In the amended definition, it is essential that property is held for the benefit of the person paying or providing the consideration. Accordingly, perhaps, wherever property is so held there is implicit or explicit fiduciary relationship between the transferee and person paying or providing the consideration. Read in that context, how can definition include or exclude the same scenario at the same time is a dilemma. Be as it may be, our view is that benami act has repealed only specific sections of the Indian Trusts Act, 1882 and the institution of trust still exists in several other provisions of the said act. Benami Act has not done anything to throw out the legal concept of fiduciary relationship and all that the relationship follows in law. On that premise, what survives of “fiduciary relationship” by the operation of law or judge made law or otherwise and what is specifically included in the clause (ii) would be not within the purview of the benami transactions, the fulfilment of two limbs of clause “A” notwithstanding. That in all probability, in our view would be harmonious interpretation of the main limb and exception clause.

 Known sources

This phrase has been used in sub clauses (i), (iii) and (iv) dealing with benami transaction in Clause A of section 2(9) of the act. in this regard one has to underline the difference between known source of income and known source. Following extract from the standing committee report[10] on the amendment bill throws full light on this change and worth reading: “ 9.13 The Institute of Chartered Accountants of India (ICAI), in their written submission stated that the exception to benami transaction as laid down in section 2(1) of the Bill uses the expression consideration paid on provided for the property by the Karta or member of HUF out of the known sources of income of HUF in sub clause (i) and in case of individual out of the known sources of income of the individual is of wider import and contemplates situations where loan funds may be provided for acquiring the property.  Loan funds are not income and therefore expression “out of known sources” can be used instead of “known source of income” to bring in clarity in such cases. 9.14 In this context the Ministry of Finance, furnished their following views: “The term ‘’known source of income’’ was used in consultation with Ministry of Law and Justice to provide for investment where the source of funding was clearly identifiable. However, if the Committee recommends, the matter shall be examined in consultation with Ministry of Law and Justice. Although the intention of the provision is that the source of funds should be explained, ambiguity may arise on account of the present language of the provision. The matter will be examined further and, if necessary, an amendment will be moved with the approval of the competent authority.”

 Consideration is provided or paid

In the definition, wherever the act speaks of the remittance of consideration to the transferor by other person, it uses the terms either “Provided” or “paid”.  This means that the act envisages three situations (a) when consideration is paid and provided by a person other than transferee, (b) when consideration is provided by the person other than transferee and (c) when consideration is paid by person other than transferee.

When the issue travelled to the highest court of the country under the old act of 1988, it had following to say[11]”.   “The word “provided” in S. 2(a) of the Benami Transactions (Prohibition) Act cannot be construed in relation to the source or sources from which the real transferee made up the funds for buying the sale consideration. The words “paid or provided” are disjunctively employed in the clause and each has to be tagged with the word “consideration”. The correct interpretation would be to read it as “consideration paid or consideration provided”. If consideration was paid to the transferor, the word provided has no application for such sale. The question of providing the consideration would arise, only if the consideration was not paid in regard to a sale transaction. Any other interpretation may harm the interest of persons involved in genuine transactions, e.g., a purchaser of land might have availed himself of loan facilities from banks to make a purchase money. In such a case it cannot be said that since the money was provided by the bank it was a benami transaction. So even if the appellant had availed himself of the help rendered by his father for making up the sale consideration that would not make the sale deed a benami transaction so as to push it into the forbidden area envisaged in S. 3(1) of the Act.”

It seems that the interpretation given by the honourable supreme court turns on the facts of its own case and may not be laying the law of the land in that sense. Provided, in our view, in the old as well as new act is cover cases of indirectly paid also. Paid is to be construed in the sense of effective payment and therefore would include cases where it is irreversibly and on non- returnable basis provided by the person other than transferee.

[1] This general principle of resulting trust was established in 1788 in Dyer Vs Dyer Case 2 Cox 92

[2] Gur Narayan case

[3] Bhim Singh Vs Kar Singh AIR (1980) 727

[4] Krishan Kumar Vs Harnam Dass (1991) 56 Taxman 233 (Delhi)

[5] Paragraph 2.10 of the 58^th report of Standing Committee on Finance (2011-12), Ministry of Finance (department of Revenue) on the benami Transactions (or Prohibition) bill 2011.

[6] Manic Kavsaagan Vs ITO 53 ITR 295

[7] PV Sankar Kurup Vs Leelavathy Nambiar (1994) AIR 2694

[8] C. Gangacharan Vs C. Naryanan dated 14^th December 1999

[9] Shri Amar N. Gugnani Vs Naresh Kumar Gugnani CS (OS) 478/2004 (Delhi) and JM Kohli Vs Madan Mohan Sahni RFA 207/2012 (Delhi) 7^th May 2012

[10] Standing committee on finance (2015-16) Sixteenth Lok Sabha, Ministry of Finance (Department of Revenue), the Benami Transactions Prohibition (Amendment) Bill 2016, 28^th Report

[11] Pawan Kumar Gupta Vs Rochiram Nagdeo (1994) 4 SCC 24