In order to eliminate the twin menace of corruption and black money, the ‘Benami Transactions (Prohibition) Act’ was passed in 1988. However, the same was never implemented as the requisite rules and regulations were never put in place. Now, with the passing of the ‘Benami Transactions (Prohibitions) Amendment Act, 2016, an effective law has been put in place, to deal with benami properties. When a property is purchased in the name of a person who does not pay for it, generally, such transactions, subject to certain exceptions, are treated as benami transactions under the benami laws.
Making an investment in someone else’s name, has implications under the benami laws and the income tax laws, for the beneficial owner (the person who provides the funds to buy the property in another’s name), as well as for the benamidar (the person in whose name the property is purchased).
Income tax implications for the beneficial owner
When any consideration for purchase of a property is paid by a person, who does not want to show his identity and hence, makes such investments in someone else’s name and the funds used for such investments are not from the known sources of income of the person making the investments, then, such transactions are covered under the benami laws.
Section 69 of the Income Tax Act provides that if any investment is made by a person, which is not recorded in the books of accounts maintained by him, then, the value of such investments shall be deemed to be the income of the person who makes such investments and the same shall be taxed in the year in which such investments are made.
It may be noted that the income tax officer cannot straightway treat such investments as income. Before he proceeds to take such an action, he is duty bound to give an opportunity to the person concerned, to explain his side of the facts. So, even in cases where such benami investments have been made by a person in someone else’s name, this does not entitle the officer to treat the value of such investments as income of the person concerned. If the beneficial owner of the property is able to explain the source of such investment, the assessing officer cannot treat such investments as his income.
The source of such investments can only be explained, if the purchase has been accounted in the books of accounts maintained by him. So, making investment in a benami property has severe consequences.
Firstly, the property that is purchased in the name of a benamidar, can be confiscated by the government without giving any compensation for the same, in addition to the liability for penalty and prosecution under the benami transaction laws. Secondly, there is also the prospect of tax liability under the income tax laws, as well as penalty and prosecution.
Taxes on benami properties
For your regular income, the maximum rate of tax that you pay is 30 per cent. However, investments made in benami names shall be taxed at a flat rate of 60 per cent. Moreover, the person will have to pay a surcharge at 25 per cent and education cess at three per cent, on the tax amount. After taking into account all the taxes and surcharge, the tax liability will come to 83.25 per cent of the value of such investments. In addition to the tax liability, such person also will have to pay interest, for non-payment of advance and the delay in filing of tax returns, in case the return was filed belatedly on the tax so payable. In addition to the tax and interest, the beneficial owner will have to pay penalty at the rate of 10 per cent of the tax payable. So, in all probability, the aggregate tax liability together with interest and penalty, may be more than the value of the property.
Income tax implications for the benamidar
As the benamidar is the legal owner of the property, he shall be required to pay tax on the income that arises from such property. In cases where the legal owner has more than one house property, all other properties except one are treated as deemed to have been let out and such a legal owner has to offer income with respect to such properties, even if he has not received any income from such properties. Moreover, the benamidar is liable for concealment of facts before the tax authorities and for misstatement and therefore, can be liable for penalty under the provisions of the Income Tax Act.
(The author is a tax and investment expert, with 35 years’ experience)