"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 riskThe 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 lawReferring 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:'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. '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. 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 ArbitrarinessThe 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...

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

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