"Unduly Harsh" : Why Supreme Court Quashed Blanket Ban On Benami Transactions?

The effect of the Supreme Court's judgment in the case Union of India vs M/s Ganpati Dealcom Pvt Ltd is that there is no longer a blanket prohibition of benami transactions. The Court has declared the provisions of the Prohibition of Benami Property Transactions Act, 1988, which imposed a blanket ban on benami transactions, as unconstitutional for being "unduly harsh", "disproportionate" and "manifestly arbitrary".

The judgment delivered by a 3-judge bench comprising Chief Justice of India NV Ramana, Justice Krishna Murari and Justice Hima Kohli declared as follows :

"Section 3 (criminal provision) read with Section 2(a) and Section 5 (confiscation proceedings) of the 1988 Act are overly broad, disproportionately harsh, and operate without adequate safeguards in place. Such provisions were still­born law and never utilized in the first place. In this light, this Court finds that Sections 3 and 5 of the 1988 Act were unconstitutional from their inception."

For the uninitiated, Section 2(a) of the (unamended) Act defined "benami transactions", Section 3 imposed a prohibition against benami transactions and imposed criminal punishment for violating the same, and Section 5 provided for confiscation proceedings of benami properties.

Before the 2016 amendment to the Act, benami transaction was defined as any transaction in which property is transferred to one person for a consideration paid or provided by another person. To put it simply, the real beneficiary of the property is someone else other than the title-holder on record (who is a mere name lender).

Blanket ban on benami transactions put legimitate transactions also at risk

The Court's concern was with respect to the fact that before the 2016 amendment, the offence under Section 3 created strict liability, without any requirement of mens rea element, and this wide sweep of the provision put even legimitate transactions at risk. However, after 2016 amendment, Section 53 has been added to the Act, as per which benami transaction will be an offence only if it is done "in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors". However, such a qualification is not there with respect to Section 3.

Benami transactions were recognized by law

Referring to judicial precedents, some delivered by the Privy Council, the Court noted that benami transactions were recognized by law before 1988. The Court also noted that the Indian Trusts Act has recognized and accepted the principle behind benami transactions.

The Court illustrated that on a literal application of Section 2(e), the following transactions could have been caught in the web of the Act:

1. 'A' purchases property in name of his son's wife 'B', for the benefit of the son's family from person 'Y', treats the consideration as a gift to the son, and pays gift tax on it.
2. 'A' who is old and infirm, purchases a property in the name of 'B', intending that 'B' will hold the property in trust of the son of 'A', who is mentally retarded.
3.  A firm 'X' purchases property in the name of the working partner 'B' for the benefit of the firm 'X', making the payment out of the firm's funds.

Since there is no mens rea element in the provision, all that the prosecution needs to prove is that consideration was paid or consideration was provided by one person for another person and nothing more. However, the 2016 amendment brought back the concept of mens rea.

Also, as regards Section 5, which provided for confiscation proceedings, the Court noted that the Centre had not framed the necessary rules to operationalize this provision.

Manifest Arbitrariness

The Court noted that the 1988 enactment was "merely a shell, lacking the substance that a criminal legislation requires for being sustained".

The following reasons were cited :

First, the original Act did not have mens rea requirement. This was contrary to the Law Commission of India's recommendations. Further, under the amended 2016 Act, the aspect of mens rea, is brought back through Section 53. Such resurrection clearly indicates that doing away of the mens rea aspect, was without any rhyme or reason, and ended up creating an unusually harsh enactment.

Second, the provision ignored the essential ingredient of beneficial ownership exercised by the real owner. This makes the provision even more stringent and disproportionate. However, this requirement was brought back in 2016 amendment. It is a simple requirement under Article 20(1) that a law needs to be clear and not vague. It should not have incurable gaps which are yet to be legislated/filled in by judicial process.

Third, it was fairly admitted by the learned ASG, Mr. Vikramjit Banerjee appearing for the Union of India, that the criminal provision was never utilized as there was a significant hiatus in enabling the functioning of such a provision.

Fourth, reading Section 2(a) with Section 3(1) would have created overly broad laws susceptible to be challenged on the grounds of manifest arbitrariness. If this Court reads criminal provisions of the Benami Act to have had force since 1988, then the following deleterious consequences would ensue: (i.) Section 187C of the Companies Act, 1956 assured protection to nominal and beneficial holding of shares if the prescribed declaration duly made are at serious risk. (ii.) Benami cooking gas connections which have been regularized from time to time are at risk. (iii.) Housing colonies and benami allotments of DDA flats which have been regularised from time to time are at risk.

"The criminal provision under Section 3(1) of the 1988 Act has serious lacunae which could not have been cured by judicial forums, even through some form of harmonious interpretation. A conclusion contrary to the above would make the aforesaid law suspect to being overly oppressive, fanciful and manifestly arbitrary, thereby violating the 'substantive due process' requirement of the Constitution", the judgment authored by CJI Ramana stated.

Problems with Section 5

As regards Section 5, the Court noted that the provision was "half-baked" and left several crucial facts to be determined by delegated legislation through the rules to be framed by the Government. The following facts were left for rules :

• Whether the proceedings under Section 5 were independent or dependant on successful prosecution?
• The standard of proof required to establish benami transaction in terms of Section 5.
• Mechanism for providing opportunity for a person to establish his defence.
• No 'defence of innocent owner' was provided to save legitimate innocent buyers.
• No adjudicatory mechanism was provided for.
• No provision was included to determine vesting of acquired property.
• No provision to identify or trace benami properties.
• Condemnation of property cannot include the power of tracing, which needs an express provision.

 The Court observed that "such delegation of power to the Authority was squarely excessive and arbitrary as it stood".

"In any case, such an inconclusive law, which left the essential features to be prescribed through delegation, can never be countenanced in law to be valid under Part III of the Constitution. The gaps left in the 1988 Act were not merely procedural, rather the same were essential and substantive. In the absence of such substantive provisions, the omissions create a law which is fanciful and oppressive at the same time. Such an overbroad provision was manifestly arbitrary as the open texture of the law did not have sufficient safeguards to be proportionate", the Court observed.

In this background, the Court summarized its findings as follows :

(a.) Section 3(1) of 1988 Act is vague and arbitrary.

(b.) Section 3(1) created an unduly harsh law against settled principles and Law Commission recommendations.

(c.) Section 5 of 1988 Act, the provision relating to civil forfeiture, was manifestly arbitrary.

(d.) Both provisions were unworkable and as a matter of fact, were never implemented

 2016 amendment has no retrospective effect

Referring to the amended provisions, the bench noted that they were, in effect, creating new provisions and new offences. In this regard, the court observed:

"Therefore, there was no question of retroactive application of the 2016 Act. As for the offence under Section 3(1) for those transactions that were entered into between 05.09.1988 to 25.10.2016, the law cannot retroactively invigorate a stillborn criminal offence, as established above.

 As per the concession made by the Union of India and a fair reading of Section 53 of the 2016 Act, the offence under the aforesaid provision is prospective, and only applied to those transactions that were entered into after the amendment came into force, viz., 25.10.2016. Any contrary interpretation of Section 3 of the 1988 Act would be violative of Article 20(1) of the Constitution"

In the case at hand, the 2016 Act containing the criminal provisions is applicable only prospectively, as the relevant Sections of the pre-­amendment 1988 Act containing the penal provision, have been declared as unconstitutional. Therefore, the question of construction of the 2016 Act as retroactive qua the penal provisions under Sections 3 or 53, does not arise.. The continued presence of an unconstitutional law on the statute book, or the claim that such law was not challenged before Constitutional Courts, does not prevent this Court from holding that such unconstitutional laws cannot enure to the benefit of or be utilized to retroactively amend laws to cure existing constitutional defects. If such curing is allowed, then Article 20(1) of the Constitution would be rendered nugatory.

The Court made the following declarations :

a) Section 3(2) of the unamended 1988 Act is declared as unconstitutional for being manifestly Accordingly, Section 3(2) of the Benami Transactions (Prohibition) Amendment Act, 2016 [2016 Amendment Act] is also unconstitutional as it is violative of Article 20(1) of the Constitution.

b) In rem forfeiture provision under Section 5 of the unamended Act of 1988, prior to the 2016 Amendment Act, was unconstitutional for being manifestly arbitrary.

c) The 2016 Amendment Act was not merely procedural, rather, prescribed substantive provisions.

d) In rem forfeiture provision under Section 5 of the 2016 Act, being punitive in nature, can only be applied prospectively and not retroactively.

e) Concerned authorities cannot initiate or continue criminal prosecution or confiscation proceedings for transactions entered into prior to the coming into force of the 2016 Amendment Act, viz., 25.10.2016. As a consequence, all such prosecutions or confiscation proceedings stand quashed.

Effect of the judgment?

The effect of the judgment is that the blanket ban on benami transactions goes. Benami transactions amount to offence only if they are done "in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors", as prescribed in Section 53, and that too for transactions after October 25, 2016.

Case details

Union of India vs Ganpati Dealcom Pvt. Ltd | 2022 LiveLaw (SC) 700 | CA 5783 of 2022 | 23 August 2022 | CJI NV Ramana, Justices Krishna Murari and Hima Kohli

Headnotes

Prohibition of Benami Property Transactions Act, 1988 ; Section 3(2) - Benami Transactions (Prohibition) Amendment Act, 2016 - Section 3(2) of the unamended 1988 Act is declared as unconstitutional for being manifestly arbitrary. Accordingly, Section 3(2) of the 2016 Act is also unconstitutional as it is violative of Article 20(1) of the Constitution. (Para 18.1)

Prohibition of Benami Property Transactions Act, 1988 ; Section 5 - Benami Transactions (Prohibition) Amendment Act, 2016 - In rem forfeiture provision under Section 5 of the unamended Act of 1988, prior to the 2016 Amendment Act, was unconstitutional for being manifestly arbitrary - In rem forfeiture provision under Section 5 of the 2016 Act, being punitive in nature, can only be applied prospectively and not retroactively - Concerned authorities cannot initiate or continue criminal prosecution or confiscation proceedings for transactions entered into prior to the coming into force of the 2016 Act, viz., 25.10.2016. As a consequence of the above declaration, all such prosecutions or confiscation proceedings shall stand quashed. (Para 18.1)

Benami Transactions (Prohibition) Amendment Act, 2016 - The 2016 Amendment Act was not merely procedural, rather, prescribed substantive provisions. (Para 18.1)

Constitution of India, 1950 ; Article 32, 226 - Judicial Review - Constitutional Courts can test constitutionality of legislative instruments (statute and delegated legislations) - The Courts are empowered to test both on procedure as well as substantive nature of these instruments - The test should be based on a combined reading of Articles 14, 19 and 21 of the Constitution - doctrine of manifest arbitrariness - Referred to Shayara Bano v. Union of India, (2017) 9 SCC 1 (Para 15.7 -15.8)

Mens Rea - Mens rea is an essential ingredient of a criminal offence - A statute may exclude the element of mens rea, but it is a sound rule of construction adopted in England – and also accepted in India – to construe a statutory provision creating an offence in conformity with common law rather than against it, unless the statute expressly or by necessary implication excluded mens rea. The mere fact that the object of the statute is to promote welfare activities or to eradicate a grave social evil which by itself is not decisive of the question as to whether the element of a guilty mind is excluded from the ingredients of an offence. Mens rea by necessary implication may be excluded from a statute only 33 where it is absolutely clear that implementation of the object of the statute would otherwise be defeated. (Para 14.10)

Legislation - Legislature has power to enact retroactive/retrospective civil legislations under the Constitution. However, Article 20(1) mandates that no law mandating a punitive provision can be enacted retrospectively. Further, a punitive provision cannot be couched as a civil provision to by­pass the mandate under Article 20(1) of the Constitution which follows the settled legal principle that "what cannot be done directly, cannot be done indirectly". (Para 17.10)

Forfeiture - Forfeitures can be categorized as civil and criminal. On the civil side, there can be in rem or in personam forfeitures. Punitive forfeitures under the criminal law are in personam. Criminal forfeitures usually take place at the conclusion of a trial, when the guilt of the accused is established. Standards of evidentiary requirement differ greatly between civil and criminal forfeiture - The utility of independent provisions of forfeiture, distinct from criminal prosecution, needs to be utilised in a proportional manner, looking at the gravity of the offence. Few examples which may pass the muster of proportionality for having such stringent civil forfeiture, may relate to crimes involving terrorist activities, drug cartels or organised criminal activities - The application of such a provision to numerous other offences which are not of such grave severity, would be of serious risk of being disproportionate, if procedures independent of criminal prosecution are prescribed.(Para 17.15, 17.28)

Prevention of Money Laundering Act, 2002 ; Section 8 - Interim possession by authority before conclusion of final trial to exceptional cases - Ratio in Vijay Madanlal Choudary & Ors v. Union of India 2022 LiveLaw (SC) 633 requires further expounding in an appropriate case, without which, much scope is left for arbitrary application -  (Para 17.27)

Prohibition of Benami Property Transactions Act, 1988 ; Chapter IV - Characterization of the confiscation proceedings under Chapter IV of the 2016 Act as Civil may therefore not be appropriate. There is an implicit recognition of the forfeiture being a punitive sanction, as the Officer is mandated to build a case against the accused for such confiscation, wherein the presumption of innocence is upheld structurally. (Para 17.31)

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