Share Transfer done legally under Companies Act cannot be made as ground to draw presumption of Benami transaction

Rajasthan High Court: The transactions done legally under the Companies Act of transferring shares of one shareholder to another, if any, which may accrue on account of legally allowed transactions cannot be made as a ground to draw presumption of Benami transaction under the Benami Act, 1988

M/s Shri Kalyan Buildmart Pvt. Ltd. & Ors. vs the Initiating Officer, Deputy Commissioner of Income Tax (Benami Prohibition) & Ors.;06.10.2021; Rajasthan High Court

The Petitioners by way of this writ petition assail the provisional attachment orders passed by the initiating officer u/s 24(4) of the Prohibition of Benami Property Transactions Act, 1988 and the confirmation orders dated 30.01.2019 passed by the adjudicating authority under section 26(3) of the Prohibition of Benami property transactions Act, 1988.

Facts:

• Petitioner was incorporated with two stakeholders and directors. The agricultural land in question was purchased by the company in its name by executing four identical registered sale deeds.
• A reference was received from the Assistant Commissioner of Income Tax with relation to information regarding Benami property transaction in the case of Rajendra Kumar Jain & Ors. The necessary enquiries were initiated u/s 23 of the Benami Act, 1988 with reference to the aforesaid land.
• Towards the end of enquiry, it was revealed that huge payments were made by Rajendra Kumar Jain etc. For purchase of the aforesaid land in the name of Petitioner company.
• It was further contended that the company was incorporated only for the purpose procuring the agricultural land from the farmers as benamidar and dummy directors were shown.
• The property was purchased in the name of the company solely with the purpose to transfer shares of the company to the purchasers in order to avoid liability of payment of stamp duty and therefore, the property was a benami property originally acquired in the name of benamidar company through dummy directors by petitioner no. 2 to 4 and therefore was liable for confiscation under the Benami Act, 1988. Subsequently shares of the company were transferred by the dummy directors to petitioners no. 2 to 4 which reflected that the property by the company was benami and was actually bought by petitioner no. 2 to 4.
• Proceedings under section 90B of the Rajasthan Land Revenue Act, 1956 were undertaken and the Authorised Officer passed an order under section 90B on 04.04.2007 whereby the land was vested with the JDA.
• A notice was served u/s 24(1) of the Benami Act, 1988 to the petitioner company through its erstwhile directors, whereafter provisional attachment orders were passed on 12.01.2018 by initiating officer and the adjudicating authority confirmed the attachment proceedings. Challenging the said provisions, the present writ petition has been filed.

Petitioners’ Contention:

• Impugned orders holding the petitioner company as benamidar and the petitioner no.s 2 to 4 as beneficial owners on the ground that they are shareholders of petitioner company are wholly erroneous.
• The company has its own separate identification in law as a juristic person and the relation between the shareholders and the company cannot be said to be benamidar and beneficial owners as shareholders. That the company has throughout owned the property and mere change of shareholding would not make the property of the company as ‘benami’.
• That the entire premise of the case set up by the Respondents is thus inherently improbable and absurd and such proceedings of attachment are a complete abuse of process and suffer from grave non-application of mind and therefore, deserve to be set aside.

Observations and findings:

• The question regarding retrospectively of the amendments made in Benami Act, 1988 and brought into force w.e.f. 01.11.2016 was left open to be adjudicated only by the Supreme Court in pending SLP No. 2784/2020, Union of India & Anr. vs M/S Ganpati Dealcom Pvt. Ltd.
• The court therefore, limited its adjudication to examine that whether in facts and circumstances of the present case, the transaction can be said to be benami transaction under the provisions of the Benami Act, 1988.
• A company has its own articles of association. It is juristic person. The Directors may buy properties in the name of the company and company alone shall be its owner. In view of the aforesaid, the Court finds that in the present case, all the properties in question being in name of the petitioner company and all applications which have been moved to the JDA authorities for surrendering land u/s 90B of the Rajasthan Land Revenue Act and for setting up a commercial building, have been made in the name of the company. That the contention of the respondents with regard to the petitioner company being set up was clearly misreading of the provisions of the Companies Act.
• Merely because petitioners no. 2 to 4 can be said to be shareholders of the company, the Paradise Complex Ltd. would not make them owners of land of the company.
• The Benami Act, in opinion of the Court would not extend to the properties purchased by the company. After careful consideration of the benami act, 1988, it is apparent that a benami transaction would require one transaction made by one person in the name of another person where the funds are owned and paid by the first person to the seller while seller gets registered sale deed executed in favour of the second person i.e. from account of A, the amount is paid to ‘C’ who sells the property to ‘B’ and a registered sale deed is executed in favour of ‘B’.
• While in case of an individual, the aforesaid position may continue, however, in transaction for purchase of property by a company in favour of any person or in their own name would not come within the purview of benami transaction because the funds of the company are its own assets.
• The persons who have put monies in the company, any be considered as their shareholders but such shareholders do not have right to own properties of the company nor it can be said that the shareholders have by virtue of their share in the company invested their amount as benamidars. The transactions of the company are independent transactions which are only for the purpose of benefit of the company alone.
• On account of benefit accruing to the company, the shareholders would also receive benefit and they may be beneficiaries to a certain extent. This would however, not make the shareholders as beneficial owners in terms of definition as provided under section 2(12) of the Benami Act, 1988. Company as defined under the Companies Act, 1956 and incorporated thereunder, therefore, cannot be treated as benamidar as defined under the Benami Act, 1988.
• The company cannot be said to be a benamidar and its shareholders cannot be said to be beneficial owners within the meaning of the Benami Act, 1988. The entire case of the respondents rest on misinterpretation of the provisions of the Benami Act, 1988. It was observed by the court that going by the said logic, all the transactions in the corporate world made by the company would become benami transaction if the interpretation of definition as understood by the respondent was accepted by the court.

Held:

In view of the aforesaid, the entire proceeding initiated under the Benami Act, 1988 deserve to be quashed. Since, the transactions done legally under the Companies Act of transferring shares of one shareholder to another, if any, which may accurue on account of legally allowed transactions cannot be made as a ground to draw presumption of benami transaction under the Benami Act, 1988.

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