Buying property is a major financial decision. Most buyers look at a location, price, legal title and potential appreciation of value. However, there is an additional aspect worth considering. What if the property is registered in the name of one person, while another person purchased it and stands to benefit from the ownership? These types of transactions are known as benami property transactions.

There can be legal complications in such cases, especially when the arrangement hides the identity of the buyer or the source of funds.

Indian law covers benami property transactions, and a buyer needs to be aware of the relevant legal provisions. They allow for reporting suspicious property transactions and determining if a buyer of property is eligible to purchase it. In this guide, we will discuss the meaning of benami property, legal provisions, and what to do if one suspects a benami property transaction and needs to report it.

What Is Benami Property?

Section 2 of the Prohibition of Benami Property Transactions Act 1988 defines benami property as property involved in a benami transaction. In simple terms, this may happen when a property is held in one person’s name but another person has provided the money to buy it and benefits from owning it. However, the law also includes specific conditions and exceptions that determine whether a transaction is considered benami.

The law also covers some transactions where a fictitious name or untraceable name is used.

In other words, if someone buys a property in the name of another person, and this satisfies the definition of a benami transaction, then it qualifies as benami property.

Note that it is not enough for the property to be bought with some illicit funds. If the facts satisfy the definition of benami property as given by the law, then it is benami property.

We can look at an example to better understand the concept. Suppose a person buys a residential plot and registers it in the name of another person. If the former remains the beneficial owner and this satisfies the definition under the law, then it is benami property. However, if the buyer purchases the plot with illegal funds, it does not automatically become benami property. To determine if it is benami property, one has to look at whether the facts satisfy the definition. 

What Is Benami Property in India?

In India, benami property can take various forms: land, residential flat, building, etc. So can the proceeds of benami property.

In other words, the law has provisions for different forms of benami properties, and the relationship among the three parties – benamidar, beneficiary, and the one giving consideration is essential in finding out whether it is benami property.

Benamidar refers to the individual who holds the property in his or her name. It also covers a person who provides the name for holding the property. The beneficial owner is the person who is supposed to receive the benefits of the property. The person providing the consideration is the person buying the property in short, the purchaser.

As we can see, a property where the owner and the purchaser are different people can be benami property, depending on the facts.

However, it is not always illegal. Some transactions are legitimate: a gift from one person to another, a family arrangement that is legitimate, and certain transactions covered by exceptions in the law. We will discuss exceptions later.

Benami Property Meaning: Common Examples

In Hindi, benami property is referred to as benami sampatti. Many people might come across the term while reading about hidden wealth, suspicious property purchases or land with concealed beneficial ownership. Let us look at some examples of benami property.

1. Property in someone else’s name

An example is where a person is purchasing property in the name of someone else. If a person purchases a property and registers it in their name, but they have agreed to transfer it to someone else, it is benami property if the facts satisfy the definition under the law.

2. Fictitious identity

Another example is where a property is purchased in the name of a fictitious person. Specifically, the law covers benami transactions in which a person purchases the property in the name of a fictitious person. It is a specific example of benami property.

3. Hiding beneficial ownership

One person purchases a property in the name of another and the true beneficial owner is hidden. If the facts satisfy the definition, then it qualifies as benami property.

4. Untraceable source of consideration

A person purchases a property in the name of another, where the consideration came from an untraceable or fictitious source. It is an example of benami property covered by the law.

The examples are not an exhaustive list, but they do provide some insight into the different ways in which property can become benami property.

Understanding the Benami Property Act of 1988

The Prohibition of Benami Property Transactions Act, 1988 is an act concerning the prohibition of Benami property transactions. It was amended substantially by the Benami Transactions (Prohibition) Amendment Act, 2016. The amended provisions came into force on 1 November 2016. The amendment added more teeth to the law. It empowers the authorities to take stronger action against people entering into benami transactions.

In short, the amended law makes it easier to detect and confiscate benami property.

The key sections of the law are:

• Section 2: Defines benami transaction, benami property and benamidar
• Section 3: Prohibits benami transactions
• Section 5: Provides for confiscation of benami property
• Section 24: Deals with notice and provisional attachment of benami property
• Section 26: Adjudication of benami property

The law provides for a number of procedures and the authorities have to follow them before they can declare a property benami and confiscate it. Even if one is not entirely happy with the ruling, one can approach the appropriate courts and challenge it. It is important to note that simply stating that a property is benami is not enough for it to be declared benami.

Are All Property Transactions in Another Person’s Name Illegal?

No, and it is a crucial distinction. However, the law allows certain exceptions. This means some transactions remain legal even when one person holds the property in their name while another person pays for it.

The law allows certain property transactions under specific conditions. For example:

• The property is held by Karta or any member of a Hindu undivided family for the benefit of the family and the consideration for the property comes from known sources of the family’s funds.
• A person may purchase a property in the name of their spouse or child using funds from known sources. However, the transaction must meet the conditions set out in the law.
• Another example covers joint ownership by a brother, sister, lineal ascendant or lineal descendant, where the conditions relating to joint ownership and the source of funds are met.
• A registered transaction involving possession of property as per a contract meets certain requirements.
• The exceptions do not mean that purchasing property in the name of another person is entirely legitimate it has to meet certain requirements.

However, a family relationship alone does not make a property transaction legal under the Benami Act. One should consult with a property lawyer or tax expert, to understand if the transaction is legitimate or not.

Is Benami Property Legal to Buy?

It depends on the situation. In summary, buying a property that is the subject of a prohibited benami transaction can be risky. One has to be aware that the authorities can take action if they find out that a benami transaction took place. The property can become the subject of attachment and confiscation if it meets the requirements of the law.

A buyer of property should not assume that a property is not benami just because they possess a sale deed.

One should also be wary when purchasing a property. Before making a large down payment, a buyer needs to take some precautionary steps to ensure that they are not purchasing benami property.

Some of those include:

• Make sure that the seller is the actual owner of the property.
• Verifying that the ownership of the property is legitimate.
• Making sure that whoever possesses the property is the one selling it.
• Reviewing the purchase consideration and payment records.
• Asking about any notices, attachments, litigation and any claims on the property,
• Obtaining independent legal opinion before paying large sums of money.

All of those are precautionary measures, but unfortunately a title search is not foolproof. Nor will it always find out facts that could suggest that a property is benami. If there are suspicions about the beneficial ownership, it is best to consult with a professional.

How to Identify Benami Property?

There is no general checklist of information typically obtained through a public source that determines with certainty that a property is benami. Buyers or others considering further action in relation to a property may identify red flags.

1. Inconsistencies between source of funds

If the prospective buyer or another connected person asks about the purchase’s source of funds that may implicate that the true owner’s financial interests were not disclosed, a reasonable response in that context should raise concerns. Alone, this issue does not confirm a benami transaction.

2. The named owner has no interest in the property and cannot manage it

A person or entity that owns the property is unable to provide reasonable information about its purchase or other relevant terms may be a factor that raises concerns. Alone, it does not confirm that a benami transaction has occurred.

3. Source of funds and other available documents raise inconsistencies

Bank documents, loan records and any other materials that relate to the purchase of the property may raise concerns if they reveal a transaction structure that is inconsistent with the explanation provided or recorded.

4. There are inconsistencies between ownership records

Documents associated with the title or sale deed, or the statements made or recorded, may raise inconsistencies that require verification and resolution.

5. Different explanations from the buyer and owner

When the buyer and a third party with a financial interest in the sale are giving significantly different information about the purchase, before acting, carefully consider seeking independent legal advice on the matter.

Documents that may come into Play During Verification

Depending on the particular circumstances of the property, documents relevant to its ownership, purchase history and source of funds may include:

• Registered sale deed or conveyance deed.
• Previously registered documents and ownership records in relation to the property.
• Receipts, bank statements or any other materials relevant to the purchase.
• Financing, loan or funding-related documents.
• Documented declarations, agreements or undertakings made by any relevant party.
• Court records, notices or other official correspondence in relation to the property.

In practice, documentation relevant to a property and its ownership history may be restricted under applicable law. Information held by private entities regarding personal finances, family assets and the like is generally not made publicly available. Consider using information that is lawfully accessible and seek professional advice.

Read More: Can You Sell a Property in Cash in India? Income Tax Rules

How to Report Benami Property in India?

When a person has credible information or documentary evidence regarding a benami property that is relevant and material to a tax case under the Income Tax Act, 1961, they may use official resources provided by the Income Tax Department on the Benami Transactions Informants Reward Scheme, 2018.

The scheme provides procedures and specific rules that outline the information that an informant would find useful in relation to a benami property and the relevant authority in the Income Tax Department to which the information should be reported.

The reporting process may involve several steps:

Step 1: Determine facts about the suspected benami transaction

As a potential reporter, carefully document and record information pertaining to the property’s location, details of the transaction, the names of any relevant parties and other relevant information.

Step 2: Find supporting evidence

Also make copies of relevant documents and evidence that you can legally access and retain. Documents, records or other materials relevant to a benami property transaction may include, depending on the circumstances:

Ownership-related records, documents or other materials relevant to the property or its ownership history.

Other documents that support the suspicion that the property is benami or that one party has an interest in facilitating the transaction.

Step 3: Follow guidance for reporting through the Income Tax Department

The Income Tax Department has issued guidelines regarding reporting suspected benami transactions. Review the current guidance on reporting benami property. The Department sets out the specific process, applicable documents and designated reporting authority.

A form for filing details pertaining to an alleged benami property is published. Review these requirements before submitting a report or sending any personal details and supporting documents if necessary.

Step 4: Give factual details of your knowledge and evidence 

On official reporting forms, provide factual details, information and evidence for reviewing authorities.

Step 5: Retain evidence and documents for future use

Retain a copy of the information and supporting documents provided to the authority and any confirmation or reference received in response.

The authority designated to receive the report assesses it and decides on the appropriate course of action and further response. The provision of information does not guarantee that a formal proceeding will occur, or that a reward will be issued. Information pertaining to the reward scheme and the determination by the competent authority is relevant.

Guidance should be sought with regard to the Income Tax Department’s scheme for determining whether a reward applies and the competent authority’s instructions regarding the submission of the information.

What Happens if Property Is Found to Be Benami?

Upon receipt of information that establishes sufficient evidence or material suspicion that a property is benami, the concerned authority will take action according to the procedures established by the Act. For the relevant persons, a notice and provisional attachment of property may follow.

The persons will be asked to clarify the transaction and provide any additional information and documents. Following that process, the matter will be heard according to the procedures in the adjudication scheme.

If a court finds that the property meets all of the requirements to be benami under the Act, the property will be confiscated pursuant to the applicable law. Additionally, fines and criminal proceedings will be taken against any person found to have engaged in a benami transaction.

Depending on the matters of fact and law, an adjudication proceeding can decide that the property is benami. However, some property ownership disputes require a different legal approach. Any person with information about a benami transaction should not assume that the outcome will be a confiscation hearing or that any third party’s interests are without standing.

If a notice is received with regard to a benami transaction, seeking urgent legal advice from a property and tax attorney is important to receive guidance regarding subsequent steps. Any deadline for response and retention of supporting documents and records should be considered.

Why Benami Property Checks Matter for Real Estate Investors?

For buyers, conducting property due diligence goes beyond examining the sale deed, ownership history or purchase price. Understanding the property’s ownership structure and whether it affects the transaction’s legality is important in order to avoid issues in the future.

It often applies when large land plots, commercial properties, inherited assets or multi-party transactions are involved. Before a large purchase is completed, a prudent buyer will thoroughly review the transaction to ensure there are no issues. They may also want to ensure there are no unusual legal factors that require careful review.

At The Whitelisted Estates, buying decisions involve a property due diligence approach that considers a range of ownership and related documents in order to review any issues that the transaction may raise. The scope of those considerations should be determined, and complex or difficult matters should be referred to qualified professionals.

Conclusion

The concept of benami property can be relevant in a number of circumstances. Under Indian law, such property falls under the prohibitions contained in the Prohibition of Benami Property Transactions Act, 1988 and subsequent amendments. The relevant provisions can be relevant for any person that buys property and considers its title and purchase history.

While the Act prohibits several types of benami transactions, it also creates several exceptions. If a person is considering buying a property and has concerns about its ownership, they should carefully review the documents and records and identify any discrepancies. If credible information indicating that the property is benami is available, consulting the Income Tax Department’s guidelines on the Benami Transactions Informants Reward Scheme, 2018 may be an option.

A transaction review generally carries less risk than attempting to resolve a dispute after a purchase is completed.

Benami Property Law in India: FAQs