Prohibited Transactions, and the Four Exceptions

Sub-section (2) closes the back door, and it is the sub-section students forget. If the benamidar sues the real owner, for possession say, the real owner cannot answer that he is the true owner and the other is a mere name. The defence is not allowed.

The combined effect is severe and deliberate: the person on the paper keeps the property. That is not because the law approves of him but because it will not lend its process to either party to an arrangement it has forbidden.

How the exceptions save the family cases

The exceptions are not in section 4. They are in the definition in section 2(9)(A), and that is why they work so completely.

Section 4 bars a claim to property held benami. If the transaction falls within one of the four exceptions, it is not a benami transaction at all, so the property is not held benami, so section 4 does not apply and the ordinary law of property governs.

So the four exceptions, restated for use:

(i) The Hindu undivided family exception. Property held by a karta or a member of a Hindu undivided family, for his benefit or the benefit of other members, where the consideration came out of the known sources of the Hindu undivided family.

(ii) The fiduciary exception. Property held by a person standing in a fiduciary capacity for another towards whom he stands in that capacity: a trustee, an executor, a partner, a director, a depository or a participant as agent of a depository, and any person notified by the Central Government.

(iii) The spouse or child exception. Property held by any individual in the name of his spouse or of any child of his, where the consideration came out of the known sources of the individual.

(iv) The joint-owner relative exception. Property held in the name of a brother, sister, lineal ascendant or descendant, where that relative and the individual appear as joint owners in a document, and the consideration came out of the known sources of the individual.

The common condition is known sources, in three of the four. This is where a problem question is decided. The father who buys a flat in his daughter's name out of his salary is inside exception (iii) and may assert his rights; the father who does it with unexplained cash is outside it, the transaction is benami, and section 4 shuts him out of court entirely.

Section 5: confiscation

Any property which is the subject matter of a benami transaction shall be liable to be confiscated by the Central Government.

One sentence, and it is the sanction that matters more than the prison term. The 1988 Act had an acquisition provision that was never made to work; section 5 as substituted in 2016 is backed by the machinery of Chapters III to VI, which is what [The Authorities, Notice and Adjudication] is about.

Note the consequence for the benamidar. Section 4 leaves him holding the property against the real owner, but section 5 allows the Government to take it from him. Neither party keeps it.

Section 6: no re-transfer

Sub-section (1). No person, being a benamidar, shall re-transfer the benami property held by him to the beneficial owner or any other person acting on his behalf.

Sub-section (2). Where property is re-transferred in contravention of sub-section (1), the transaction shall be deemed to be null and void.

Sub-section (3). Sub-sections (1) and (2) shall not apply to a transfer made in accordance with the provisions of section 190 of the Finance Act 2016.

Why section 6 exists

Without it the Act would be easy to defeat. A real owner facing confiscation would simply have the benamidar transfer the property back to him, and then argue that the property is no longer held benami.

Section 6 forbids the re-transfer and makes it void, so the property remains where the Act found it, and remains liable to confiscation under section 5.

Sub-section (3) preserves one route out. Section 190 of the Finance Act 2016 relates to the declaration scheme introduced in that year, under which a person could declare undisclosed income and pay tax on it. A transfer made in accordance with that provision is not caught. This book states no more about that scheme than that section 6(3) refers to it, because the Finance Act 2016 has not been read for this subject.

How the four sections work together

Take a benami transaction and follow it through.

Section 3 makes entering into it an offence, punished under sub-section (2) if before 1 November 2016 and under Chapter VII if on or after that date.

Section 4 stops the real owner recovering the property, by suit or by defence.

Section 6 stops the benamidar handing it back voluntarily, and makes any such re-transfer void.

Section 5 allows the Central Government to confiscate it.

The design is complete: the arrangement is criminal, unenforceable by the person who paid, incapable of being unwound by agreement, and liable to be taken by the State.

And the family transactions are outside all four, not because sections 3 to 6 spare them but because the definition in section 2(9)(A) never reaches them, provided the money came from known sources.

A worked example

In 2012 Mahesh bought a shop in his driver's name with his own money, for his own benefit. In 2019 he bought another in the name of a friend. He now sues the driver to recover the first shop; the driver sues to keep the second; and Mahesh asks the friend to transfer the second back to him.

Are both transactions prohibited? Section 3(1): no person shall enter into any benami transaction. Both are within section 2(9)(A) unless an exception applies, and neither driver nor friend is a spouse, child, sibling, family member or fiduciary.

What follows for the 2012 transaction? Section 3(2): whoever enters into a benami transaction before the commencement of the 2016 amendment, that is before 1 November 2016, is punishable with imprisonment up to three years, or fine, or both.

And the 2019 one? Section 3(3): whoever enters into a benami transaction on or after that date shall be punishable in accordance with Chapter VII, which is section 53, taken in [Confiscation, the Appellate Tribunal, Offences and the Rest].

Can Mahesh recover the first shop? No. Section 4(1): no suit, claim or action to enforce any right in respect of any property held benami against the benamidar or any other person shall lie by or on behalf of a person claiming to be the real owner.

Can he at least defend on that ground? No. Section 4(2): no defence based on any right in respect of property held benami shall be allowed in any suit, claim or action by or on behalf of a person claiming to be the real owner.

So does the driver keep it? Not that either. Section 5: any property which is the subject matter of a benami transaction shall be liable to be confiscated by the Central Government.

Can the friend simply transfer the second shop back? Section 6(1) forbids re-transfer by the benamidar to the beneficial owner or any person acting on his behalf; section 6(2) makes such a re-transfer null and void; and section 6(3) saves a transfer made in accordance with section 190 of the Finance Act 2016.

What it does NOT mean

Section 4 does not decide ownership. It bars the remedy, so the name on the paper prevails between the parties.

It does not help the benamidar keep the property. Section 5 makes it liable to confiscation by the Central Government.

Section 3(2) is not the current penalty. It applies to transactions before 1 November 2016; later ones go to Chapter VII.

Section 6 is not a bar on all transfers. It forbids a re-transfer to the beneficial owner or his nominee, and saves a transfer under section 190 of the Finance Act 2016.

The exceptions are not defences to a charge. A transaction within an exception is not a benami transaction at all.

"Known sources" is not a formality. Each family exception depends on it.

Quick revision

• s.3(1): no person shall enter into any benami transaction. s.3(2): entering into one before 1 November 2016: imprisonment up to three years, or fine, or both. s.3(3): entering into one on or after that date: punishable under Chapter VII.
• s.4(1): no suit, claim or action to enforce a right in respect of property held benami shall lie by or on behalf of a person claiming to be the real owner. s.4(2): no defence on such a right shall be allowed.
• s.5: benami property is liable to be confiscated by the Central Government.
• s.6: no re-transfer by the benamidar to the beneficial owner or anyone on his behalf; such a re-transfer is null and void; saving a transfer under s.190 of the Finance Act 2016.
• The exceptions in s.2(9)(A) keep ordinary family purchases outside the Act, provided the consideration came from known sources.

Test yourself

1. What does section 4 bar? Any suit, claim or action to enforce a right in respect of property held benami, brought by or on behalf of a person claiming to be the real owner, against the benamidar or any other person; and any defence based on such a right in any suit, claim or action by or on behalf of a person claiming to be the real owner.

2. Does that mean the benamidar keeps the property? No. Section 5 provides that any property which is the subject matter of a benami transaction shall be liable to be confiscated by the Central Government.

3. May the benamidar transfer the property back to the real owner? No. Section 6(1) forbids it, and section 6(2) makes any such re-transfer null and void, save where the transfer is made in accordance with the provisions of section 190 of the Finance Act 2016.

4. What is the punishment for entering into a benami transaction? For a transaction entered into before 1 November 2016, imprisonment for a term which may extend to three years, or a fine, or both, under section 3(2). For one entered into on or after that date, the punishment is that provided in Chapter VII, that is section 53.