Introduction
The Supreme Court in UOI v. Ganpati Dealcom (P) Ltd [2022] 141 taxmann.com 389 (SC) considered the retroactive application of the provisions dealing with prosecution and confiscation under the Benami Transactions (Prohibition) Amendment Act, 2016 [for short the ‘2016 Act’]. While deciding with the same, the Supreme Court also decided the legality and constitutional validity of the provisions dealing with the prosecution and confiscation under the Prohibition of Benami Property Transactions Act, 1988 [for short ‘the 1988 Act’] i.e. after nearly 34 years. The reason for deciding the constitutional validity of a provision after a period of 34 years is explained hereinafter. An attempt is made to explain the ratio of the Supreme Court , reason for deciding the constitutional validity of provisions dealing with prosecution and confiscation under the 1988 Act and the ramifications of the Supreme Court decision in a simplified manner.
Relevant legislative Scheme of the 1988 Act and the 2016 Act, it’s interplay and it’s implementation by the Government
Prosecution
Under the 1988 Act, Section 3 sub-Section (3) provided that “Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both.” However, till 2016 no prosecution was ever launched by the Government.
Under the 2016 Act, Section 53 provided that “where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami shall be guilty of the offence of benami transaction.” and that such person was punishable with rigorous imprisonment for a term which shall not be less than one year but which may extend to seven years and will also be liable to fine which may extend to 25% of the fair market value of the property.
Thus, the maximum period of imprisonment prescribed u/s 53 by the 2016 Act was more than that prescribed under Section 3 of the 1988 Act. As a result, the Government purportedly started or desired to prosecute the benamidars and the beneficial owners of a benami transaction u/s 53 of the 2016 Act even if the Benami transaction took place prior to 2016 under the pretext that the 2016 Act has retroactive application as same is only an Amendment Act and procedural in nature. The action of the Government in initiating action under the 2016 Act was challenged before various High Courts, majority of which ruled that the 2016 Act cannot apply retrospectively.
At this Juncture it is important to note that the 2016 Act did not delete Section 3 sub-section Ramification of Recent Supreme Court Decision . . .
(3) of the 1988 Act but it was renumbered as Section 3 sub-section (2). Thus after the 2016 Act, punishment for entering into the benami transaction was provided u/s 3(2) as well as Section 53. Thus, to overcome the issue of retrospectivity, the Government in several cases contended that prosecution was launched or will be launched u/s 3(2) and not under Section 53 as Section 3(2) existed since 1988 and thus if a Benami transaction has taken place prior to 2016, still prosecution can be launched.
Thus, the controversy before the Supreme Court was not limited to retrospective applicability of Section 53 of the 2016 Act but also extended to legality and validity of Section 3(2) of 1988 Act as amended by the 2016 Act.
Confiscation
Under the 1988 Act, Section 5 provided that “all properties held benami shall be subject to acquisition by such authority, in such manner and after following such procedure, as may be prescribed”. However, no authority, manner or procedure was prescribed till the 2016 Act was brought in force. Thus, till 2016 no confiscation/ acquisition proceedings had ever taken place. The 2016 Act substituted Section 5 and provided that “Any property, which is subject- matter of benami transaction, shall be liable to be confiscated by the Central Government”. Further Section 27 to 29 provided for the procedure of confiscation.
The Government contended that confiscation is a civil punishment and thus confiscation provisions introduced by the 2016 Act would apply even to benami transactions entered into prior to 2016 as power to confiscate was available even under the 1988 Act. Thus, the controversy before the Supreme Court was not limited to retrospective applicability of confiscation provisions introduced by the 2016 Act but also extended to legality and validity of Section 5 of the 1988 Act as amended by the 2016 Act.
Other Provisions
Apart from the provisions concerning prosecution and confiscation, the 2016 Act also brought into effect certain substantive changes in the law such as it provided definition of beneficial owner which was not there in the 1988 Act. Under the 1988 Act only a tripartite benami transaction was recognised whereas under the 2016 Act the gamut of benami transaction also included bi-partite transaction. Under the 2016 Act even proceeds from a benami property was a benami property. The definition of benami property as well as benamidar was widened. Hence the issue arose whether such expanded definition of benamidar, beneficial owner and benami transaction could be applied to transactions undertaken prior to the enactment of the 2016 Act.
Findings of the Supreme Court.
The findings of the Supreme Court can be summarised as under :
- Section 3(3) of the unamended 1988 Act was declared as unconstitutional for being manifestly Further, Section 3(2) of the 2016 Act was also declared unconstitutional as it was violative of Article 20(1) of the Constitution. In rem forfeiture provision under Section 5 of the unamended Act of 1988, prior to the 2016 Amendment Act, was held to be unconstitutional for being manifestly arbitrary. In rem forfeiture provision under Section 5 of the 2016 Act was held to be punitive in nature and thus could only be applied prospectively and not retroactively. It was held that the 2016 Amendment Act was not merely procedural, rather, prescribed substantive provisions.
- It was held that the concerned authorities under the 2016 Act cannot initiate or continue criminal prosecution or confiscation proceedings for transactions entered into prior to the coming into force of the 2016 Act, viz., 25.10.2016. As a consequence of the above declaration, all such prosecutions or confiscation proceedings shall stand quashed.
- The Court left open the question of constitutional validity of forfeiture proceedings contemplated under the 2016 Amendment Act.
Ramifications
The decision of the Supreme Court is a well reasoned order considering each and every argument of the Government as well as that of the purported benamidars and beneficial owners. However, the decision will have many unintended consequences as it has weakened the fight of the Government against corrupt politicians, bureaucrats and various businessman who have purchased properties with dubious means after obtaining accommodation entries and a mechanism of an Amendment Act was thought off by the Government to bring them under the ambit of Benami Law and to prosecute them and confiscate their benami properties. Empirically it was seen that the action under the 2016 Act was initiated mostly on the basis of various investigations carried out by Income tax department and other investigation agencies prior to 2016 wherein details of various benami transactions were unearthed.
The changes in the 1988 Act were made as part of the government’s assault on black money and was one of the harshest steps taken by it along with the demonetisation of high-value bank notes with this intent. The Finance Minister, Nirmala Sitharaman, on July 02, 2019 in Rajya Sabha said, till May 31, 2019, show cause notices under the Prohibition of Benami Property Transactions Act, 1988, was issued in over 2,100 cases involving benami properties valued at over Rs. 9,600 crores. All these actions, majority of which were against benami transactions entered into prior to 2016 will be nullified now.
However, it is surprising that the Government did not produce (as nothing is mentioned in the order) any statistics about the nature of actions initiated under the 1996 Act and the consequences it will have on the fight against black money. Also, no stress appears to have been given by the Government in it’s arguments on the jurisprudence on economic offences. In State of Gujarat v. Mohanlal Jitamali Porwal & Ors (1987) 2 SCC 364 it was held as under :
“The entire Community is aggrieved if the economic offenders who ruin the economy of the State are not brought to book. A murder may be committed in the heat of movement upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequences to the community”.
In Ram Narain Popli v. CBI (2003) 3 SCC 641 (SC) it was held as under :
“… Unfortunately the last few years, the Country has seen an alarming rise in white-collar crimes which has affected the fibre of the Country’s economic structure. These cases are nothing but private gain at the cost of public, and lead to economic disaster.”
The above arguments which go to the root of the matter could have convinced the Supreme Court to consider the phrase “Better Late than never”.
The decision of the Supreme Court on retroactive application of the benami law will also put the Government on the back foot in the hotly contested issue of the retroactive application of ‘Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’.