Retrospective Operation of the Benami Laws: The Confusion Remains

The Benami Transactions (Prohibition) Act, 1988 (Original Act) was enacted in the year 1988 with the object of prohibiting benami transactions. A benami transaction in simple terms refers to a transaction where a person actually purchasing a property does not do so in his own name, and does so in the name of another person, who is merely a “name lender” or a “benamidar”. Such person who pays consideration is commonly referred to as the “beneficial owner”.

The Original Act contained a mere 9 sections, including the power of acquisition of such benami property by an appropriate authority and also powers to prosecute offenders. Although the Original Act empowered the Central Government to make rules under Section 8, no such rules were ever framed. Therefore, the Original Act was widely regarded as a “toothless” legislation, which though empowered the State to confiscate properties, was rarely used and most importantly, no procedure, rules or mechanism were prescribed to give effect to the provisions of the Original Act.

With the change of dispensation in Parliament, the then Finance Minister, Late Mr. Arun Jaitley, sought to “give teeth to” this “toothless” legislation by introducing the Benami Transactions (Prohibition) Amendment Act, 2016. The Amendment was passed into law and came into force on 1-11-2016. The amended legislation was rechristened as the Prohibition of Benami Property Transactions Act, 1988 (New Act) and sought to amend the Original Act by adding as many as 72 sections and proper Rules for the effective implementation of the New Act.

But why did the Government opt for amending the Original Act instead of enacting a fresh legislation? The reason is not far to see, and was explained by Late Mr. Jaitley in Parliament in answer to a question where he categorically stated that:

Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28-year immunity would not have been in larger public interest, particularly if large amounts of unaccounted black money have been used to transact those transactions.”

But the question which arises is whether such a course is legally permissible? Can the legislature do something indirectly which it could not have done directly? The answer in my view is that such a course could not have adopted, especially given the strict provisions of the New Act, which have the effect of not only depriving a person of his property but also of initiation of criminal prosecution against a person found guilty under the New Act.

The Supreme Court has repeatedly held that amendment to a statute can be implemented retrospectively, however, such retrospective amendment cannot defeat the substantive rights of a party. It is well recognised that generally amendments to procedural laws may be retrospective, but when substantive rights of parties are affected, can such laws be implemented retrospectively?

The New Act was notified vide Notification No. 98 of 2016 dated 25-10-2016, which appointed the 1st day of November, 2016 as the date on which the provisions shall come into force.

Section 1(3) Remains Untouched

Interestingly, the New Act keeps Section 1(3) of the Original Act untouched, which provided that:

(3) The provisions of Sections 3, 5 and 8 shall come into force at once, and the remaining provisions of this Act shall be deemed to have come into force on the 19th day of May, 1988.

The aforesaid date of 19-5-1988 relates to the coming into force of the Presidential Ordinance whereas the date of 5-9-1988 relates to the date when the Original Act was brought into force. It is for this reason that Section 1(3) reads that Sections 3, 5 and 8 shall come into force at once.

In the New Act, Section 1(3) has been retained in its original form even though there are substantial amendments to Sections 3, 5 and 8. The said provision creates an anomalous situation with the use of the words “shall come into force at once”. What date does this relate to is something that requires deep consideration particularly in view of the substantive amendments brought about to the aforesaid sections. A literal reading of the words “shall come into force at once” lends credence to the interpretation that the amendments to the said section shall be effective only post 1-11-2016, thus making the provision prospective in its operation.

Substantive Amendments in the New Act

Substantive changes have been made to various provisions of the Original Act, and there is no doubt that such amendments are not mere procedural amendments. In fact, substantive changes affecting the vital rights of persons have been made to the New Act, thus warranting a prospective operation. Some of these substantive changes are:

Section 2(9) of the New Act expands the definition of “benami transaction” and brings within its fold certain transactions, which were hitherto not considered benami. This certainly qualifies as a substantive change of the scope and operation of the New Act.
Section 3 of the New Act seeks to make a distinction between transactions entered into prior to the New Act, by providing for a lesser punishment under Section 3(2) for past acts and a higher punishment under Chapter VII of the New Act for acts done after 1-11-2016. Such cases are covered by Section 3(3) of the New Act. This also leads us to the inevitable conclusion that the applicability of the new regime and punishment thereunder is only prospective.
Section 5 read with Chapter IV of the New Act provide for attachment, adjudication and confiscation of the properties under the New Act. Under the Original Act, though the provision for confiscation was present, however, the same was to be undertaken in terms of the procedure and rules prescribed. It is an admitted position that no rules were ever framed or brought into force for the said purpose.
Thus, even though the substantive provision for confiscation was present under the Original Act, the absence of rules framed thereunder would certainly militate against the prescription of the detailed procedure now laid down (and rules framed) under the New Act. This, some may argue, is directly contrary to Article 20 of the Constitution of India as Section 5 (without rules) of the Original Act was the “law in force” for transactions prior to 1-11-2016.
Even Chapter IV of the New Act tends to disturb various vested rights of persons, as it gives the Initiating Officer under the New Act the power to provisionally attach properties even before adjudication proceedings.
Various levels of the adjudication have been introduced under the New Act, which never existed earlier. Though these changes may be termed as “procedural”, the fact remains that creating layers of appeals, which were non-existent earlier, certainly represents substantive amendment affecting vested rights of parties.
Chapter VII of the New Act prescribes penalties, which were non-existent under the Original Act. These penalties cannot by any stretch of imagination be applied retrospectively, and any such misadventure would fall foul of Article 20 of the Constitution of India, 1950.

Interpretation by the High Courts

The question of whether the amendments brought about in the form of the New Act are to be applied prospectively or retrospectively have vexed various High Courts throughout the country. So far there is unanimity of judicial opinion (barring one) that the provisions of the New Act are to be applied prospectively. In Joseph Isharat v. Rozy Nishikant Gaikwad 1 , the Bombay High Court held:

7. What is crucial here is, in the first place, whether the change effected by the legislature in the Benami Act is a matter of procedure or is it a matter of substantial rights between the parties. If it is merely a procedural law, then, of course, procedure applicable as on the date of hearing may be relevant. If, on the other hand, it is a matter of substantive rights, then prima facie it will only have a prospective application unless the amended law speaks in a language “which expressly or by clear intention, takes in even pending matters”. Short of such intendment, the law shall be applied prospectively and not retrospectively.
As held by the Supreme Court inR. Rajagopal Reddyv.Padmini Chandrasekharan[2], Section 4 of the Benami Act, or for that matter, the Benami Act as a whole, creates substantive rights in favour of benamidars and destroys substantive rights of real owners who are parties to such transaction and for whom new liabilities are created.…These observations clearly hold the field even as regards the present amendment to the Benami Act. The amendments introduced by the legislature affect substantive rights of the parties and must be applied prospectively.

In Mangathai Ammal v. Rajeshwari[3] Supreme Court observed as follows:

42. It is required to be noted that the benami transaction came to be amended in the year 2016. As per Section 3 of the Benami Transaction (Prohibition) Act, 1988, there was a presumption that the transaction made in the name of the wife and children is for their benefit. By Benami Amendment Act, 2016, Section 3(2) of the Benami Transaction Act, 1988 the statutory presumption, which was rebuttable, has been omitted. It is the case on behalf of the respondents that therefore in view of omission of Section 3(2) of the Benami Transaction Act, the plea of statutory transaction that the purchase made in the name of wife or children is for their benefit would not be available in the present case. Aforesaid cannot be accepted. As held by this Court inBinapani PaulPratima Ghosh[4]the Benami Transaction Act would not be applicable retrospectively.

In Niharika Jain v. Union of India[5], the Rajasthan High Court observed:

93. … this Court has no hesitation to hold that the Benami Amendment Act, 2016, amending the Principal Benami Act, 1988, enacted w.e.f. 1-11-2016 i.e. the date determined by the Central Government in its wisdom for its enforcement; cannot have retrospective effect.
94. It is made clear that this Court has neither examined nor commented upon merits of the writ applications but has considered only the larger question of retrospective applicability of the Benami Amendment Act, 2016 amending the original Benami Act of 1988. Thus, the authority concerned would examine each case on its own merits keeping in view the fact that amended provisions introduced and the amendments enacted and made enforceable w.e.f. 1-11-2016; would be prospective and not retrospective.

The Calcutta High Court in Ganpati Delcom (P) Ltd. v. Union of India[6], held as under:

In Canbank Financial Services Ltd. v. Custodian[7], the Supreme Court specifically held in para 67 that the said Act of 1988 had not been made workable as no rules under Section 8 of the said Act for acquisition of benami property had been framed. These two cases were also cited by Mr Khaitan. Section 6(c) of the General Clauses Act, 1897 is most important. It lays down that repeal of an enactment, which necessarily includes an amendment, would not affect “any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed”, unless a different intention is expressed by the legislature. Without question, the omission on the part of the Government to frame rules under Section 8 of the 1988 Act rendered it a dead letter and wholly inoperative. Assuming that the appellant had entered into a benami transaction in 2011, no action could be taken by the Central Government, in the absence of enabling procedural rules. It is well within the right of the appellant to contend that the Central Government had waived its rights. It could also contend that no criminal action could be initiated on the ground of limitation. Now, these rights which had accrued to the appellant could not, in the absence of an express provision be extinguished by the amending Act of 2016. In other words, applying the definition of benami property and benami transaction the Central Government could not, on the basis of the 2016 Amendment allege contravention and start the prosecution in respect of a transaction in 2011.

However, taking a contrary view, the Chhattisgarh High Court in Tulsiram v. ACIT[8] , held as follows:

20. … It can also not to be said that provisions of the Amended Act of 2016 could not have been made applicable in respect of properties, which were acquired prior to 1-11-2016. The whole Act of 1988 as it stands today inclusive of the amended provisions brought into force from 1-11-2016 onwards applies irrespective of the period of purchase of the alleged benami property. Amended Act of 2016 does not have an existence by itself. Without the provisions of the Act of 1988, the amended provisions of 2016 has no relevance and the amended provisions are only laying down the proceedings to be adopted in a proceeding drawn under the Act of 1988 and the penalties to be imposed in each of the cases taking into consideration the period of purchase of benami property.

Conclusion

The amendments made by way of the New Act, in my view, are clearly substantive and not procedural in nature, and hence cannot be applied retrospectively. The New Act expands the scope of the law, casts a negative burden/onus on a person to prove that a property is not “benami property”, creates disabilities such as immediate attachment and subsequent confiscation and most importantly attracts criminal action. All these aspects lead to the inescapable conclusion that the New Act cannot and should not be applied retrospectively.

The golden words of the Supreme Court in CIT v. Vatika Township (P) Ltd.[9] that “The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of the day in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset”, are clearly applicable to the present situation.

The views taken by the various High Courts as highlighted above correctly lay down this position of law, and now all eyes will be on the Supreme Court to take a final view on this issue – once and for all. Till then the confusion remains.

[†] Practising Advocate, Delhi High Court.