The onus to prove that the apparent is not the real in the case of a benami transaction is on the party who claims it to be so.
The word benami is made up of two Persian words, be which means without and nam which denotes name i.e nameless or without a name, and is used to denote transactions done without using ones own name. The benamidar has no beneficial interest in the property or business that stands in his name, he represents, in fact, the real owner, and as far as their relative legal position is concerned he is a mere trustee for him (Bilas Kunwar vs Dasraj Ranjit Singh, AIR 1915 PC 96).
As the practice of benami spread, law makers woke up to this problem and devised ways to identify such transactions and check its misuse. Section 281A of the IT Act 1961, effected from November 15, 1972 and later repealed by the Benami Transactions (Prohibition) Act 1988, (Benami Act) from May 19, 1988, provided a bar on institution of suits claiming ownership of benami property. The object of this provision was to curb the widespread practice of holding benami property. It debarred the real owner from enforcing his claim on such a property in a court of law, unless he declared his income from that property, or the property itself, for IT and wealth tax purposes or gave notice of his claim to the property to the IT authorities.
This provision became redundant after the enactment of the Benami Act. The law relating to benami transactions was initially introduced through an ordinance promulgated by the President of India. The Preamble to the Act, shows that this legislation is intended to prohibit benami transactions and the right to recovery of benami property. The Act provides that no suit, claim or action to enforce any right with respect to any property held benami shall be allowed. However, it made two exceptions regarding property held by the coparcener in a Hindu undivided family for the benefit of the coparceners and property held by a trustee or other person standing in a fiduciary capacity, for the benefit of another person. It has also repealed Section 82 of the Indian Trust Act, 1882, Section 66 of the Code of Civil Procedure and Section 281A of the IT Act, 1961.
The Benami Act defines a transaction in which property is transferred to one person for a consideration paid or provided by another person as benami. Under the IT Act, the charge of income tax is on the real or beneficial owner of the income and not on the nominal owner. The IT department has always attempted, to go behind the apparent ownership of the income and bring it to tax in the hands of the real owner. However, in certain cases if the department did fail, it is more because they could not muster up adequate evidence to prove the benami character of the transaction.
The question whether a particular transaction is benami or not is largely one of fact, and no uniform formula applicable to all situations can be laid down for determining this. Yet, in weighing the probabilities and for gathering the relevant indications, the courts are usually guided by the following:
The source from which the purchase money came;
The nature and possession of the property after the purchase;
Motive, if any, for giving the transaction a benami colour;
The position of the parties and the relationship, if any, between the claimant and the alleged benamidar;
The custody of the title deeds after the sale;
The conduct of the parties concerned after the sale.
However, these are not exhaustive indications and their efficacy varies according to the facts of each case.
A benami transaction has to be distinguished from a sham transaction. This distinction was brought out vividly by the SC in Shri Meenakshi Mills Ltd vs CIT Madras AIR 1975 SC 49 at p.66. The essence of a sham transaction is that though a deed of transfer is brought into existence, no title of any kind is intended to be passed to any person.
The onus to prove that the apparent is not the real in case of a benami transactions is on the party who claims it to be so. The law does not prescribe any quantitative test to find out whether the responsibility in a particular case has been discharged or not.
Thus the most difficult exercise is to establish the benami nature of a transaction. As a result, a rich case law has developed on the subject and has been analysed in a number of law text books. A recent decision where this concept has been lucidly explained is in Hemangini Finance & Leasing (P) Ltd, vs Tamil Nadu Mercantile Bank Ltd (1996) 3 CLJ 238 (CLB). One of the issues considered in this decision was whether the shares purchased from funds obtained on loan could be said to be held by the purchaser as a benami of the person giving the loan.
The court said, that while considering the words used in the Benami Transactions (Prohibition) Act, 1988, one should look into the sense in which the words have been used therein. So construed, purchase of property with loans given or provided by another cannot come within the definition of benami, as literal reading and application of the words paid or provided , as used in the definition of benami in Section 2(a) of the Benami Act, would result in absurdities.
In this case, the appellants are all incorporated companies and whatever shares had been purchased in their names are shown as property of the respective companies and they have sought to register such shares in their own names. Both the transferees and the lenders assert that both real title and beneficial interests are with the transferees and there is no dispute on this among themselves.
Therefore, considering the nature of the transactions, the circumstances surrounding the transactions etc, it is crystal clear that the real owners of the shares are those in whose names the shares were purchased and these are not benami holders.
