The Income Tax (I-T) Department has hit a wall in a case of alleged benami deals involving troubled housing finance company DHFL and entities and persons linked to the promoter group, controlled by the Wadhawan family.
Tax officials’ attention was drawn to certain transactions in 2017 when DHFL funded the purchase of properties from individuals and firms run by persons who were employees of Wadhawan Group. The buyer of the properties (in Khar West, Mumbai) was Manpreet Estates, which is part of realty group Midcity that had dealt with DHFL.
The I-T Department pointed to the fact that the 10 property sellers — five individuals and five companies — transferred funds received from Manpreet, either directly or through intermediaries, to different concerns controlled or managed by RKW Developers, which again was connected to Wadhawan group.
The department alleged that the sellers — the five individuals and five companies’ directors, all of whom were employees of RKW — were dummies, unaware of the dealings. The transactions were in reality handled by two accountants of RKW who were employees of Wadhawan Group, tax officials had said. The department’s contended that Manpreet Estates was a ‘benamidar’ (front) and RKW Developers the ‘beneficial owner.’ In other words, the I-T Department alleged that the listed DHFL had routed loans to a company related to the promoter group through Manpreet.
However, a week ago, this claim was shot down by the Appellate Tribunal hearing cases under laws to curb benami transactions and money laundering, among other things. Under the Benami Transactions (Prohibition) Amendment Act which came into effect from November 2016, I-T officials check whether the official owner – on whose name a property, land, or any asset is registered – is also the ‘real owner.’ If not so, they often invoke the new law, which allows them to confiscate property, demand penalty equivalent to a quarter of the market value of the asset, and even put the real owner as well as the benamidar behind bars.
But “the court ruled that merely because Manpreet was funded by DHFL and DHFL was related to RKW, it cannot be held that the consideration was provided by the alleged beneficial owner (or RKW)… particularly, in light of evidence that the loan from DHFL was a genuine transaction and was done at arm’s length,” said advocate Ashwani Taneja, a former member of the I-T Appellate Tribunal, who represented Manpreet. “With a view to uphold the sale/conveyance deed executed between the parties, support was taken from Sections 91and 92 of the Indian Evidence Act.” (These sections deal with exclusiveness of documentary evidence.) Significantly, sales deeds of the 10 flats were not challenged by tax officials, though the department suspected the sellers were simply dummies acting on instruction of trusted Wadhawan employees.
Senior chartered accountant Dilip Lakhani said, “The scope and powers vested with authorities are expanded after amendments in the benami property Act in 2016. But it’s nonetheless essential that the adjudicating authority scrupulously follows procedure and discharge the burden cast to prove that the transactions are not bonafide. Here, the authorities seemed to have had a good case prima facie, but probably could not quite stitch together the apparent and underlying facts. The ruling, however, makes it clear that it is imperative to establish a direct link between the benamidar and beneficial owner to effectively implement the law.”
Thus, unless it is shown that ‘beneficial interest’ is held with the alleged ‘beneficial owner’ and the alleged ‘benamidar’ is holding the property ostensibly for the ‘benefit of the beneficial owner,’ the property cannot be termed benami.
The ruling comes at a time when the tax office is widely using the benami law to find out whether fronts have been used to mask the real ownership of assets.