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Benami – A Law to be aware of

The search of options to earn higher return has always been actively pursued and is much more of a need today. Returns from investment sources generally viewed as relatively safe are even more actively pursued.

Seemingly innovative options may be exercised in ignorance of implications under law. Interest rates offered by banks to senior citizens are higher than those offered to others. Bank deposit made in name of a senior citizen parent to earn higher interest is one such case. Another is investment in name of a close relative falling in lower tax slab thereby leading to a higher net of tax return or higher net availability of funds from such investment.

Transactions such as above may be treated as “Benami” under The Prohibition of Benami Property Transactions Act, 1988 (“BenamiAct”). A “Benami Transaction” is prohibited. Such a transaction entered into may lead to very serious adverse consequence such as imprisonment and the “Benami Property” liable for confiscation.

Did you know that:

1. While a bank deposit made in name of a person’s child is not considered “Benami”, but if made in the sole name of a parent by the child may be considered so!
2. While a bank deposit made in sole name of grandchild may be considered “Benami”, but if made with name of grandparent also appearing as joint-owner is not so!
3. While a property purchased in sole name of brother may be considered “Benami”, but if purchased with name of such individual appearing as joint-owner along with the name of brother, it is not so!

Read on my views for a summary overview of few aspects of the BenamiAct…..

1. Word “Benami” is of Persian origin and means “the state of being without a name” as per lexico.com. A synonym in common use is “Furzee”.
2. A simple meaning of “Benami Transaction” is a transaction in which the identify of real owner is concealed by showing someone else as owner on record.
3. The property involved in “Benami Transaction” is called “Benami Property” and it includes the proceeds from such a Benami Property.
4. Property defined under the BenamiAct is very wide – it is asset of any kind, can be in any form like immovable property, shares, deposits. It also includes rights to a property.
5. The essential elements which constitute a type of “Benami Transaction” is where:
   1. A transaction actually takes place; in which
   2. A property is transferred to, or held by a person (could be individual, firm, company etc); for which
   3. Consideration is paid by any other person i.e. beneficial owner; for purpose of
   4. Immediate or future benefit, direct or indirect, of beneficial owner
6. There are exceptions to property so held in name of another which would not get considered as a “Benami Transaction”, few as under:
   1. In name of Spouse
   2. In name of any Child
   3. In name of brother or sister of an individual where name of individual appears as joint-owner in any document
   4. In name of lineal ascendant or descendant of individual where name of individual appears as joint-owner in any document

A crucial condition for the exception is that the property has to be provided or paid out of known sources of the individual.  

7. An example of what is a “Benami Transaction” and what is not under the BenamiAct is:

Bank Fixed Deposit	May be a Benami Transaction	Is Not a Benami Transaction
Made by	Son	Son
In Name of	Senior Citizen Father	Senior Citizen Father and Son, as joint-owners
Consideration paid	Son	Son
Remarks	Purpose is to benefit Son	Consideration paid from known sources of Son

 

Your Thoughts, Comments, Observations, Inputs are deeply appreciated.

Rajesh Lal
Chartered Accountant
☎: +91-9971033977
✉: rajeshlal@rajeshlalandco.com
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