This article has been published on Insights Success at https://magazines.insightssuccess.in/2024/the-5-most-recognized-general-counsel-to-watch-out-in-2024-july2024/#page=34

Introduction:

For years, transgressors seem to have laundered enormous sums of money from the system by entering into transactions anonymously.  Such transgressors often invest in opaque properties or corporate facades, real or beneficial owners of which do not ostensibly appear on any public record.  This has the potential of thwarting economic development, hampering business operations, perpetuating crimes and compromising national security.  Therefore, to contain the flow of illicit funds in the economy and to expose the real or beneficial owners (or “warm bodies”) behind corporate facades, stringent compliances and offences have been brought into effect by the Legislature in India.  While the masquerade and Legislatively backed unmasking continues, fundamental and established principles of law seem to have been annihilated or given a go-bye by authorities in-charge of implementation.

In light of the above background, this article examines the recent trends under the Benami Transaction (Prohibition) Act, 1988 (“Act”).  It concludes that ground-level implementation of the Act has diluted the legal separation of a corporation from its owners, by egregious application of the doctrine of “lifting the corporate veil”.

Structure of the Act:

“Benami” translates to “no name” or “nameless”.  Simply put, it refers to purchases in the name of a name lending person, who does not pay any consideration for such purchases, such consideration having been paid by the real title holder, for whose benefit purchases have in actuality been made.  Given the potential of such purchases to generate and hold tax evaded black money,^[1] the President promulgated the Benami Transactions (Prohibition of the Right to Recover Property) Ordinance, 1988, which was ultimately superseded by the Act.  The Act, in its current form, covers three subjects, viz., the purchases or the “benami property”, the name lender or the “benamidar” and the real title holder or the “beneficial owner”.  As per the Act, “benami property” means:

• any property, which is transferred to or is held by a person, consideration for which has been provided or paid by another person, being the person for whose immediate or future or direct or indirect benefit the said property is held by the first mentioned person.^[2]
• any property, which is a subject matter of a transaction or arrangement carried out or made in a fictitious name.^[3]
• any property, which is a subject matter of a transaction or arrangement, where the owner of the property is not aware of or denies knowledge of such ownership.^[4]
• any property, which is a subject matter of a transaction or arrangement, where the person providing the consideration is not traceable or is fictitious.^[5]

As per the Act, a “benamidar” means a person or a fictitious person, in whose name the benami property is transferred or held, including a person who lends his/ her name.^[6]  Further, as per the Act, a “beneficial owner” means a person, whether his identity is known or not, for whose benefit a benami property is held by a benamidar.^[7]

Every person is prohibited to enter into a “benami transaction”.^[8]  Any property, which is subject matter of a benami transaction, is liable to be confiscated by the Central Government.^[9]  A benamidar is prohibited from re-transferring a benami property held by him/ her to the beneficial owner or any person acting in his/ her behalf.^[10]  In the event such re-transfer occurs, the same shall be deemed to be null and void.^[11]

A benamidar, beneficial owner or any other person, who abets or induces any person to enter into a benami transaction, to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, shall be punished with rigorous imprisonment for a term not less than 1 year, but which may extend to 7 years and shall also be liable to fine, which may extend to 25% of the fair market value of the property.^[12]

Egregious Application of the Act – Exemplified:

It is true that factual construct of each case requires due consideration in determining whether the provisions of the Act have appropriately been invoked.  However, the present article delves into one specific trend, which has the potential of turning the foreign investment prospects of India upside down.  Shares purchased by a company in another company is treated to be a benami property and the company purchasing the shares, a benamidar.  Further, directors of the company purchasing the shares are treated to be “dummy directors” and consequently, also benamidars, acting for and on behalf of the beneficial owner.  A company with whom the company purchasing shares enters into a transaction, including a transaction for availing any credit facility, is treated to be a beneficial owner.  Such re-characterization is typically done by authorities in-charge without specifically alluding to any benefit underlying the alleged benami transaction and accordingly, based entirely on irrelevant considerations.  Inter-alia, such considerations include business operations and/ or expenses of the company purchasing shares, as indicated in its financial statements; association of the said company and/ or the alleged “dummy directors” with the alleged beneficial owner; capital infusion in the company purchasing shares and eventual utilization thereof; and commonality in geographical location and/ or contact details of individuals responsible for affairs of the company purchasing shares and the alleged beneficial owner.  Pertinently, such re-characterization is done by turning a blind eye to declarations filed before and accepted by various Governmental authorities, such as the those specifically empowered by the Ministry of Corporate Affairs and the Ministry of Finance.^[13]

As regards the above, at the very outset, attention is directed at the decision in Salomon vs. Salomon^[14], which firmly established the concept of “corporate veil”.  “Corporate veil” refers to legal separation of a corporate from its owners, capacitating the corporate to own property and/ or to sue and be sued in its own name and insulating the owners from corporate debts.  The principle that a corporate is a separate legal entity, capable of holding property and suing and being sued in its own name, was further solidified in certain subsequent decisions.^[15]  The metaphorical veil is entitled to be “lifted” (and consequently, “pierced”) and the separate entity status of a corporate disregarded, where the veil is misused as a protection against mischief done or there exists sufficient unity of interest between the corporate and its owners.^[16]  Inter-alia, corporate veil is entitled to be lifted (and consequently, “pierced”) where there is clear-cut evidence of siphoning of funds and defrauding creditors;^[17] it is reasonable to conclude that the corporate was incorporated or is being used for tax evasion;^[18] and the corporate acts against public interest^[19] or in a manner that perpetuates crime^[20].^[21]  The doctrine of lifting of corporate veil stands as an exception to the general principle that a corporate is a separate legal entity.  Therefore, the said doctrine should be applied restrictively and with circumspection, where evidence of and rationale behind a corporate being a mere façade is writ large.^[22]  A conclusion to the contrary is likely to open floodgates of bringing every corporate structure within the radar of the Act.  Therefore, as per the available jurisprudence, the answer to the question whether corporate veil is entitled to be lifted (and consequently, pierced) on the basis of mere surmises^[23] and without insinuation of any benefit^[24], is an emphatic no.  This is more so where the concerned corporate duly observes formalities and completes records, which stand accepted by relevant departments of the Government.^[25]

In view of the above, the recent trend of lifting the corporate veil in the quest of the phantom owner, shrouded in mystery, is legally untenable, inasmuch as the same is done basis irrelevant considerations, without specifying the benefit available to such owner by putting in place a corporate façade and/ or in utter disregard to the view taken by relevant departments of the Government.

Conclusion:

The above-mentioned trend is likely to perpetuate reluctance in attracting and sustaining foreign investment, in complete contradiction to India’s assurance of ‘Ease of Doing Business’.  Difficulty in predicting return on investment with precision over a span of time, is an impediment to businesses entering and navigating the system.  Such prediction is only possible where regulations are coherent and certain; authorities in-charge of implementation are approachable and partner with businesses to understand the skills needed to ensure that businesses thrive; and economic policies remain uncontroversial.  Businesses, law makers and officers in-charge of implementation have to work in collaboration to maximize opportunities, keeping the competitive advantages relevant to a jurisdiction in mind.  Only a stable win-win situation is likely to transform India into a premier destination for ‘Ease of Doing Business’.

Footnotes:

[1]               Standing Committee on Finance (2015-16), Sixteenth Lok Sabha, Ministry of Finance, Department of Revenue, Twenty-Eighth Report, April, 2016; and Rajya Sabha debate dated 02.08.2016.

[2]               Section 2(8) read with section 2(9)(A) of the Act.

[3]               Section 2(8) read with section 2(9)(B) of the Act.

[4]               Section 2(8) read with section 2(9)(C) of the Act.

[5]               Section 2(8) read with section 2(9)(D) of the Act.

[6]               Section 2(10) of the Act.

[7]               Section 2(12) of the Act.

[8]               Section 3(1) of the Act.

[9]               Section 5 of the Act.

[10]             Section 6(1) of the Act.

[11]             Section 6(2) of the Act.

[12]             Section 53 of the Act.

[13]             Prism Scan Express Pvt. Ltd. vs. The Initiating Officer, DCIT (BPU – 2), Mumbai, appeals bearing FPA-PBPT-1079/Mum/2020, FPA-PBPT-1080/Mum/2020 and FPA-PBPT-1085/Mum/2020, decision dated 15.12.2023 (Appellate Tribunal), appeals wherefrom were withdrawn on account of review having been filed before the Deputy Commissioner of Income-Tax.  Refer in this regard, Prism Scan Express Pvt. Ltd. vs. Deputy Commissioner of Income-Tax, appeal bearing (ST) No. 10480 of 2024, order dated 29.04.2024 (Bombay High Court).  In the opinion of the author, the said decision is not good law, inter-alia, being against the decisions in UOI vs. Ganpati Dealcom (P.) Ltd., [2022] 141 taxmann.com 389 (Supreme Court); Kalyan Buildmart (P.) Ltd. vs. Deputy Commissioner of Income-tax (Benami Prohibition, Jaipur, [2021] 131 taxmann.com 99 (Rajasthan High Court); and Nexus Feeds Ltd. vs. ACIT, [2022] 137 taxmann.com 494 (Telangana High Court) [as affirmed in ACIT vs. Nexus Feeds Ltd., [2023] 153 taxmann.com 466 (Supreme Court)].

[14]             (1) 12 App. Cas. 589 (House of Lords).

[15]             Charanjit Lal Chowdhury vs. UOI, 1950 SCC 833 (Supreme Court); Bacha F. Guzdar vs. CIT, [1954] 2 SCC 563 (Supreme Court); Vodafone International Holdings B.V. vs. UOI, [2012] 6 SCC 757 (Supreme Court); Carrasco Investments Ltd. vs. Special Director, Enforcement Directorate, 1991 SCC OnLine Del 317 (Delhi High Court); and PCIT vs. UTV Software Communication Ltd., [2019] 103 taxmann.com 12 (Bombay High Court).

[16]             In the decision in State of UP vs. Renusagar Power Co., [1988] 4 SCC 59 (Supreme Court), it was held that lifting of corporate veil is permissible in expanding horizon of modern jurisprudence.

[17]             Singer India Limited vs. Chander Mohan Chandra, [2007] 7 SCC 1 (Supreme Court).

[18]             Vodafone International Holdings B.V. (Supra).

[19]             State of Rajasthan vs. Gotan Lime Stone Khanji Udyog, [2016] 4 SCC 469 (Supreme Court).

[20]             Life Insurance Corporation of India vs. Escorts Limited & Ors., [1986] 1 SCC 264 (Supreme Court).

[21]             Juggilal Kamlapat vs. CIT, AIR 1969 SC 932 (Supreme Court).

[22]             Balwant Rai Suleja vs. Air India Limited, [2014] 9 SCC 407 (Supreme Court) and CIT vs. Sahu Investment Mutual Benefit Co. Ltd., [2017] 86 taxmann.com 129 (Allahabad High Court).

[23]             Indostar Capital vs. ACIT, [2019] 105 taxmann.com 96 (Bombay High Court).

[24]             Glebe Trading (P.) Ltd. vs. ITO, [2020] 116 taxmann.com 866 (Income Tax Appellate Tribunal).

[25]             Supra Note 24.