Is Your Property Under the Benami Act’s Scrutiny?

In India, property ownership has often involved arrangements where the legal and beneficial ownership are separate. This practice has been prevalent in both familial and commercial settings, with one party financing the property and another holding the legal title. Such arrangements were particularly common with agricultural land due to statutory restrictions on ownership and transfer, while business assets were frequently held by trusted individuals for convenience or regulatory reasons. Historically, these arrangements did not attract legal scrutiny. However, the legal landscape has transformed significantly in recent years.

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The Prohibition of Benami Property Transactions Act, 1988, was in place for many years, but it was the Benami Transactions (Prohibition) Amendment Act, 2016, that fortified the legal framework. This amendment introduced a comprehensive system for the attachment, adjudication, confiscation, and prosecution of such properties. A notable judgment from the Supreme Court in the case of Manjula v. DA Srinivas illustrates the judiciary’s increasingly stringent stance on these transactions.

Supreme Court’s Emphasis on Transaction Substance

The Supreme Court case arose from a dispute where the respondent-plaintiff claimed ownership of certain agricultural properties based on a Will purportedly executed in his favor. The plaintiff admitted that the properties were purchased using his funds but registered in an employee’s name due to his ineligibility to purchase them directly. The defendants argued that this was an attempt to enforce a benami arrangement, which the Act prohibits. They further contended that the plaintiff could not invoke the fiduciary relationship exception based solely on an employer-employee relationship.

The Supreme Court emphasized that courts must look beyond the form in which a claim is presented and examine the substance of the transaction. Claims that involve succession, testamentary transfers, or declaratory relief cannot escape scrutiny if they reveal the characteristics of a benami transaction. The Court clarified that the fiduciary relationship exception under Section 2(9)(A)(ii) of the Act is limited to legally recognized relationships such as trustees, executors, partners, and company directors. An ordinary employer-employee relationship does not qualify simply because of mutual trust or confidence. This aspect of the judgment could have broader implications, particularly for informal nominee structures based on personal or commercial relationships rather than formal fiduciary obligations.

Retrospective Application of the Act

A critical facet of the judgment concerns the retrospective application of the 2016 Amendment. In this case, the properties were acquired in 2006 and 2011, before the amendment took effect. Nonetheless, the Court ruled that the 2016 Amendment applies retrospectively. The Court reasoned that the original 1988 Act already prohibited benami transactions, and the 2016 Amendment provided an enforcement mechanism. As these provisions are procedural, they can operate retrospectively. Confiscation under the Act is a civil consequence and does not equate to criminal punishment, allowing for retrospective application. However, penal provisions that create new offences or enhance punishments remain prospective.

This finding has significant implications for individuals and businesses holding properties through historical nominee arrangements. The judgment implies that older transactions may still face scrutiny under the current statutory framework when disputes arise or rights are enforced. In this case, the Court determined that the properties should be confiscated under Section 27 of the Act, as the transaction was found to be benami, with neither party entitled to claim the property.

While the judgment does not suggest that every historical arrangement with differing sources of consideration and title is automatically unlawful, it underscores that property structures based on informal understandings rather than legally documented arrangements are likely to face increased scrutiny.

About the Authors: Yogendra Aldak is an Executive Partner, Rashi Srivastava is a Principal Associate, and Shanelle Umarwadia is an Associate at Lakshmikumaran & Sridharan Attorneys.