Benami Transactions Involving Corporate Entities
Benami Transactions Involving Corporate Entities
(Legal Framework, Corporate Structures, Liability, and Case Law Analysis)
1. Concept of Benami Transactions
A benami transaction is one where:
Property is held in the name of one person, but
Consideration is provided by another, and
The property is held for the benefit of the person providing the consideration
The governing statute is the Prohibition of Benami Property Transactions Act, 1988, as comprehensively amended in 2016 (“Benami Act”).
The law applies equally to individuals and corporate entities, including companies, LLPs, partnerships, and trusts.
2. Statutory Framework Applicable to Companies
(A) Definition Provisions
Under Section 2(9) of the Benami Act, a benami transaction includes transactions where:
The property is held by a company, LLP, or entity, but
The real owner (beneficial owner) is another person, including promoters, directors, or group entities
(B) Key Provisions Affecting Corporate Entities
Section 2(9) – Definition of benami transaction
Section 2(10) – Benami property
Section 2(12) – Beneficial owner
Section 3 – Prohibition of benami transactions
Section 24 – Provisional attachment
Section 26 – Adjudication
Section 27 – Confiscation
Section 53 – Criminal prosecution
3. How Benami Transactions Are Structured Through Companies
Corporate entities are often used to mask beneficial ownership. Common structures include:
(A) Shell or Front Companies
Property purchased in the name of a company
Funds infused by promoters or third parties
Company acts as a mere name-lender
(B) Layered Group Structures
One group company holds property
Another group entity or individual provides funds
No genuine business purpose
(C) Use of Employees or Nominees as Directors/Shareholders
Company controlled by real owner
Directors or shareholders have no financial capacity
Company exists only to hold assets
(D) Round-Tripping and Accommodation Entries
Funds routed through multiple entities
Final asset parked in a benami company
Courts treat substance over form as the governing principle.
4. Corporate and Personal Liability
(A) Liability of the Company
Property held by company can be provisionally attached and confiscated
Company may face prosecution if it is a knowing participant
(B) Liability of Directors, Promoters, and Beneficial Owners
Directors can be prosecuted if they:
Knew of the benami arrangement
Authorised or facilitated it
Promoters and beneficial owners face:
Rigorous imprisonment
Fine up to 25% of property value
(C) Vicarious Liability
While the Benami Act does not expressly provide vicarious liability, courts have applied:
Lifting of the corporate veil
“Controlling mind” doctrine
5. Burden of Proof and Evidentiary Standards
Authorities rely on:
Source of consideration
Financial capacity of the company
Control and enjoyment of property
Accounting treatment
Absence of commercial rationale
Direct evidence is rare; circumstantial evidence and surrounding circumstances are sufficient.
6. Interaction with Other Corporate Laws
Benami proceedings often coexist with action under:
Companies Act, 2013 (fraud, misrepresentation)
Income-tax Act (unexplained income)
Prevention of Money Laundering Act (PMLA)
IBC (treatment of confiscated assets)
Courts have upheld parallel proceedings.
7. Case Law Analysis
Case Law 1: Binapani Paul v. Pratima Ghosh
(Supreme Court of India)
Principle:
To establish benami, courts must examine:
Source of purchase money
Intention of parties
Custody and enjoyment of property
Relevance:
These principles continue to govern benami analysis even for corporate holders.
Case Law 2: Valliammal v. Subramaniam
(Supreme Court of India)
Principle:
Benami intention must exist at the time of purchase.
Relevance:
In corporate cases, later control or benefit is insufficient unless original funding and intent are shown.
Case Law 3: Jaydayal Poddar v. Bibi Hazra
(Supreme Court of India)
Principle:
Benami can be inferred from surrounding circumstances, not direct proof.
Relevance:
Critical for cases involving layered corporate structures and shell companies.
Case Law 4: Union of India v. Ganpati Dealcom Pvt. Ltd.
(Supreme Court of India)
Issue:
Whether amended Benami Act applies retrospectively.
Principle:
2016 amendments are prospective.
Relevance:
Important in corporate cases involving historical property holdings.
Case Law 5: M. S. K. Finance & Investment Co. Pvt. Ltd. v. Union of India
(Madras High Court)
Principle:
Benami Act applies fully to companies and corporate arrangements.
Relevance:
Rejected argument that companies cannot be benamidars.
Case Law 6: Joseph Isharat v. Rozy Nishikant Gaikwad
(Bombay High Court)
Principle:
Use of corporate entities to conceal beneficial ownership justifies lifting the corporate veil.
Relevance:
Direct authority for proceeding against promoters behind benami companies.
Case Law 7 (Additional): Aslam Merchant v. Competent Authority
(Bombay High Court)
Principle:
Control and enjoyment of property are key indicators of benami ownership.
Relevance:
Applied where companies exist only as asset-holding vehicles.
8. Defences Commonly Raised by Companies
Genuine commercial purpose
Adequate consideration from company’s own funds
Proper accounting and disclosure
Independent board control
Absence of benefit to alleged beneficial owner
Courts scrutinise such defences strictly.
9. Consequences of Benami Findings
Confiscation of property (without compensation)
Criminal prosecution
Disqualification of directors
Attachment impacting insolvency proceedings
Parallel tax and money-laundering action
Benami confiscation overrides most private claims.
10. Judicial Trend
Indian courts and authorities increasingly hold that:
Corporate form cannot shield benami ownership
Shell and conduit companies are legitimate targets
Promoters cannot distance themselves from controlled entities
Substance prevails over documentation
11. Conclusion
Benami transactions involving corporate entities represent serious economic and governance violations. The amended Benami Act has equipped authorities with powerful attachment, confiscation, and prosecution tools, while courts have supported veil-lifting and circumstantial proof.
Judicial position is clear:
Where a company is used as a façade to conceal real ownership, the law will look through the corporate structure and punish the real beneficiary.
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