Report No. 130

Benami Transactions - A Continuum

Chapter I

Introductory

1.1. The President of India, in exercise of powers conferred by clause (1) of Article 123 of the Constitution, promulgated an Ordinance, styled as 'Benami Transactions (Prohibition of the Right to Recover Property) Ordinance, 1988', being Ordinance No. 2 of 1988, on May 19, 1988. It came into force immediately on promulgation.

1.2. The Ordinance in terms partially implemented the recommendations of the Law Commission of India relating to benami transactions.1 It appears that the Minister of Law, Justice and Company Affairs, by his letter dated December 20, 1972, invited the Law Commission of India to examine the question of prohibiting benami transactions. The letter proceeded to recite 'the problem of property held benami has been causing concern to the taxing authorities for some time.

The Select Committee on the Taxation Laws (Amendment) Bill, 1969, had also suggested that Government should examine the existing law relating to benami transactions with a view to determining whether such transactions should be prohibited. The suggestion was reiterated in Parliament during the debate on the Taxation Laws (Amendment) 13111, 1971'.

1. LCI, 57th Report on Benami Transactions, August 1973.

1.3. Accepting the reference, the Law Commission undertook to examine the matter and let the Government have the benefit of its advice on the question of prohibiting the practice of holding property benami.

1.4. The Law Commission in its report analysed the nature of a benami transaction, its history as part of Indian legal system and its judicial recognition and concluded, after reference to the decision of the Federal Court,1 that all benami transactions need not be regarded as reprehensible and improper and that there is nothing inherently wrong in it and it accords within its legitimate scope with the ideas and habits of people.2 It was, however, further of the opinion that 'Every benami transaction is not harmless.

Past experience shows that benami transactions have often been resorted to for furthering illegal or questionable objects, including the evasion of taxes. Benami transactions are sometimes also resorted to in order to defeat creditors.3 After having examined legal and factual controversies attending upon benami transactions, a conclusion was reached as to what steps should be indicated for either prohibiting or regulating benami transactions with a view to minimising litigation.

It may be mentioned here that the guiding consideration of the Law Commission at the relevant time in formulating its recommendations was reducing litigation in the courts arising from benami transactions. It quoted with approval the observation that 'the law permitting and recognising benami transactions results in a lot of wasteful litigation.4. This approach influenced to some extent its recommendations.

1. Punjab Province v. Daulat Singh, AIR 1942.

2. LCI, 57th Report, para. 1.14.

3. Ibid., para. 1.15.

4. Hasman Gani Ahmed Sahib v. Vidhadhar Krishnarao Mung (Appeal No 533 of 1968) decided on 17-1-1969 by Patel and Wagle, JJ. quoted in para. 6.21, LCI, 57th Report.

1.5. The Law Commission examined three alternatives. They may be extracted:

"(i) Entering into a Benami transactions could be made an offence.

(ii) A provision may be enacted to the effect that in a civil suit a right shall not be enforced against the benamidar or against a third person by or on behalf of the person claiming to be the real owner of the property on the ground of benami; a similar provision could be made to bar defences on the ground of benami. (This provision would be based on the principle on which the existing provisions in the Civil Procedure Code and the new provision in the Income-tax Act are based, but could be wider in scope and more radical).

(iii) The present presumption of a resulting trust in favour of the person who provided the consideration may be displaced (as in England) by the presumption of advancement, in cases where the person to whom property is transferred is a near relative of the person who provided the consideration. (This would bring in the doctrine of advancement, so as to rebut the presumption of resulting trust under section 82 of the Trusts Act)."

Ultimately, it was of the considered opinion that the first alternative was not likely to be effective and the third alternative, though least drastic, yet the whole thing would turn upon the intention of parties and, therefore, the practical advantage of such a provision will be its elasticity. In other words, it would equally be ineffective and accordingly recommended1 the second alternative for implementation. In its view, the refusal to recognise benami transactions by denying a forum for the enforcement of rights based on benami and thereby making the benamidar the real owner would bring about a cessation of benami being part of Indian law. It also recommended certain consequential amendments.

1. LCI, 57th Report, paras. 6.24, 6.26 and 6.27.

1.6. The report was with the Government for about a decade and a half. Ultimately it appears that the Government of India resolved to implement the recommendations of the Law Commission. The Ordinance more or less bodily adopted the draft recommendation set out under the marginal note 'Recommendation'1 with one important variation that while the Law Commission was of the opinion that it is necessary to make an exception for past transactions, as the provisions of the Ordinance stand, the President appears to have resolved to make them retroactive.

The widespread belief held now is that the operation of the provisions of the Ordinance would be retroactive and even the past benami transactions would be governed by the provisions of the Ordinance if it becomes necessary for the parties to such past benami transactions to either file a suit to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person by or on behalf of the person claiming to be the real owner of such property or defend claiming right in respect of any property held benami whether against the person in whose name the property is held or against any other person. This understanding of the Ordinance has led to a debate in print media.2

The grievance therein stated is that 'such legislation cannot be enacted with retrospective effect for the person purchasing benami property before May 19 (date of the Ordinance) did so keeping in mind the laws relating to benami transactions prevalent at that time. How can the State snatch away his right to enforce his ownership of that property?'3

1. Ibid., para. 6.33.

2. Neena Vyas in The Statesman dated 4-6-1988, 'Benami Revolution May be Stillborn', p. 7.

3. Ibid.

1.7. Since the promulgation of the Ordinance, while broadly welcoming the attack on one of the court articulated institutions protecting unaccounted money, the pendulum has swung both the ways manifesting public reaction to this overdue legal reform. To cite only a few instances, one national daily published detailed, analytical and informative articles under the headings 'Benami Revolution may be Stillborn' and 'The Ordinance can prove Self-defeating',1 and the other of which note may be taken is 'The Benami Ordinance (1) Another Paper Tiger, and (2) Boon for Reducing Tax Burden'.2 In between, such views as "Banishing Benami Holdings'3 and 'Welcome Ordinance,4 have appeared.

1. Neena Vyas in The Statesman, Delhi Edn., dated 4th and 5th June, 1988.

2. K.N. Balasubramanian in The Economic Times, New Delhi Edn., dated 22nd and 23rd June, 1988.

3. Editorial, The Tribune, dated 21st May, 1988.

4. Editorial, National Herald, dated 23rd May, 1988.

1.8. The Ordinance was promulgated on May 19, 1980. In view of the provision contained in Article 123(2)(a) of the Constitution, in order to perpetuate its existence, an Act replacing the Ordinance will have to be put on the statute book within a period of six weeks from the reassembly of Parliament, failing which the Ordinance would cease to operate. The Parliament has reassembled. The process of replacing the Ordinance by an Act appears to have started.

1.9. On July 22, 1988 late in the evening, a communication was received from the Minister of Law, Justice and Water Resources setting out therein the circumstances leading to the promulgation of the Ordinance. In that very communication he referred to a communication from the Minister of Planning and Programme Implementation to the Prime Minister of India subsequent to the promulgation of the Ordinance and a decision of the Government of India to request the Law Commission to take up this question of benami transaction for detailed examination and to give its considered views as early as possible so that the Bill to replace the Ordinance may be drafted on the basis of the recommendations of the Law Commission and get the same passed before the close of the Monsoon Session of Parliament.

The next three days were holidays and the office was closed. There was a certain constraint on the time available to the Law Commission, both as to its existence as also to the time-frame within which a considered report can be submitted which may help the Government of India in drafting the Bill to be moved to replace the Ordinance. But the letter of the Minister of Law, Justice and Water Resources, after noticing that the Law Commission was very busy in finalising some of the reports, yet considered examination of the issue of benami transactions by the Law Commission very necessary 'in view of its importance and the reference of which will be a very progressive measure and can go a long way to curb the proliferation of black money in the country'.

The Law Commission, with considerable maladjustment of its work schedule, in larger public interest offered its services. If the Law Commission had time at its disposal as desired by it, this subject has such vast dimensions that an indepth study could have been undertaken. But within the parameters of the reference and the constraint on time, as detailed a study as possible with the help of the research staff of the Law Commission and a limited debate has been undertaken in preparing this report. Keeping within the time schedule, this is the report.

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