2025 (12) TMI 258 - AT - Benami Property

Immovable property declared benami under Section 2(9)(A) PBPT Act; shell company loans, time-barred debts ignored

The Deputy Commissioner of Income-Tax, Mumbai Versus M/s Dhanrishi Commosales Pvt. Ltd., Shri Nagin Meghraj Parekh, Sh. Pradip Shantilal Shah and The Principal Officer, Kotak Mahindra Bank

The AT under SAFEMA allowed the appeal, setting aside the Adjudicating Authority's order and declaring the attached immovable property as 'benami ... Property Transaction - Provisional Attachment Order - Nature of the acquisition 'benami transaction' and 'benami property' within the meaning of Sections 2(8) and 2(9) - share application money/loans - purchase of immovable property worth crore of Rupees was in the name of the benamidar with no actual liabilities on the date of transfer of shares - funds routed through the lender and shell company, with dummy/ namesake directors, that has been incorporated for the purpose of providing accommodation entries - time-barred debt - Section 25(3) of the Indian Contract Act, 1872 - requirement of proof of the genuineness of loans advanced using share premium received upon subscription of shares via private placement - validity of the overdraft facility and part repayment to the lender through Kotak Mahindra Bank on the benami character of the transaction - right of Bank - failed to produce any document to show that share application money was ever converted into deposit or loan money, on account of non-allotment of shares to M/s Rudrapriya Dealers Private Limited (M/s RDPL) - no loan agreement ever executed between RDPL and DCPL - HELD THAT:- There is no year-to-year acknowledgment of outstanding loan by DCPL in favour of RDPL. Accordingly, the loan advancement made by RDPL on various dates as mentioned became time-barred after the expiry of the period of three years from the date of respective advancement of amount to DCPL. Nothing on record that any written and signed contract acknowledging the debt was executed by DCPL in favor of RDPL as per Section 25(3) of the Contract Act after the expiry of period of limitation, or any acknowledgment was issued by DCPL in favour of RDPL regarding the outstanding dues as per Section 18 (1) of the Limitation Act. Therefore, technically RDPL lost its legal right to recover the said loan advanced to DCPL. This points towards direction that the amount tendered by RDPL to DCPL is apparently a benami property and the transaction as a benami transaction, which was utilized for purchasing the property as mentioned. Our view is fortified with the fact that the said amount was tendered for purchase of shares, which were never allotted by DCPL. Later-on the said amount was shown as unsecured interest free loan. Therefore, there is no pecuniary advantage to RDPL in any manner against the investment in DCPL, rather it caused loss to RDPL on account of depreciation of amount due to inflation. As per record of RDPL, it has not earned any profit for making the investment with DCPL, which was later on shown as loan without interest and without security Benami Transaction - It is not clear as to how and why the six shareholders procured the huge amount from various entities for pumping the funds into the newly incorporated RDPL, which was further transferred to DCPL without any security, written agreement or clause for interest. Therefore, even the six constituents of RDPL are not the real investors. We fail to appreciate that when RDPL was not doing any profitable business, in any manner, then why they purchased the shares of RDPL at premium, by obtaining the funds from various other entities. We fail to understand that a company which is allegedly indebted to RDPL for sum giving loan to some other entity, without discharging its own loan liability. We also failed to understand that if DCPL was enjoying the unsecured interest free loan facility from RDPL, then why it took the OD facility from Kotak Mahindra Bank on 28.02.2019, for making part payment to RDPL and thereby making itself liable to pay interest to Kotak Mahindra Bank. Further, we fail to appreciate that why the part payment was tendered to RDPL in the month of May- July 2019, instead of repaying the full amount. This shows that this particular loan facility was availed by DCPL as an eyewash to escape from the rigours of the proceedings under PBPT Act. Accordingly, this case is clearly covered within the definition of Section 2(9)(A) of PBPT Act. Accordingly, the right of Kotak Mahindra Bank needs to be protected irrespective of the fact of benami transaction, as the show cause notice was issued on 31.05.2019 and the Provisional Attachment Order was passed on 31.07.2019, after grant of OD facility by the Kotak Mahindra Bank, without any knowledge that the properties are likely to be attached under PBPT Act. Appellant DCIT is also at liberty to initiate separate proceedings qua Sh. Pratik Vira, who stepped into the shoes of former director/beneficial owner Sh. Pradip Shantilal Shah from the date of transfer of shares on 27.12.2018. Thus, the impugned order dated 18.08.2020 passed by the Adjudicating Authority is hereby set-aside and thereby the present Appeal is hereby allowed and the attached property is hereby declared as Benami property - This order is subject to the right of Kotak Mahindra Bank and consequences to follow accordingly. Appeal Allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the acquisition of Office Unit No. 21, Sunshine Tower, by the company in whose name it stands constitutes a 'benami transaction' and 'benami property' within the meaning of Sections 2(8) and 2(9) of the Prohibition of Benami Property Transactions Act, 1988. 2. Whether the routing of funds through M/s Rudrapriya Dealers Pvt. Ltd. and multiple shell entities, and the subsequent treatment of 'share application money pending allotment' as unsecured, interest-free, time-barred loan, establishes that the consideration did not belong to the ostensible purchaser but to undisclosed persons. 3. Whether the identified individuals who later became shareholders/directors of the ostensible purchaser are the 'beneficial owners' in relation to the property within Section 2(12) read with Section 2(9)(A) of the Act. 4. Whether the absence of statements recorded under Section 19 of the Act and the non-tracing of a direct money trail from the alleged beneficial owners to the benamidar or lender are fatal to the proceedings, or whether circumstantial evidence and human probability suffice to discharge the burden of the Initiating Officer. 5. What is the effect of the overdraft facility and part repayment to the lender through Kotak Mahindra Bank on the benami character of the transaction and the rights of the bank. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Character of the acquisition as 'benami transaction' / 'benami property' under Sections 2(8), 2(9) Legal framework: The Tribunal recited and applied Sections 2(8), 2(9)(A)-(D), 2(10) and 2(12) of the Act defining 'benami property', 'benami transaction', 'benamidar' and 'beneficial owner'. Interpretation and reasoning: The Tribunal examined: (i) the ostensible purchaser-company's incorporation in May 2012 with negligible own funds and no real business; (ii) immediate inflow of Rs. 9.02 crore shown as 'share application money pending allotment' from the lender company; (iii) purchase of the under-construction property on 28.12.2012 entirely from such funds; (iv) subsequent re-characterisation in the 31.03.2016 balance sheet of that 'share application money' as an unsecured, interest-free loan of Rs. 10.36 crore from the lender; (v) absence of any loan agreement, security, or repayment schedule; and (vi) absence of any business activity or profits in the lender, which had merely channelled high share-premium funds obtained from six entities recently incorporated and themselves funded almost entirely by share premium. The Tribunal noted that the funds reaching the ostensible purchaser were traceable to multiple layering through shell/pass-through entities, with one such premium-contributing entity having the admitted accommodation-entry operator as director. The bank account of the lender showed credits from scores of other shell entities rather than from its six declared premium-contributing shareholders. The Tribunal characterised these inflows as 'bogus share premium', observing that the subscribers had no real creditworthiness and that no justification existed for paying a premium of Rs. 999 on a face value of Rs. 1 to a newly incorporated, non-operational company. The Tribunal held that the funds so reaching the ostensible purchaser were 'unaccounted income' introduced through a planned arrangement, and that the ostensible purchaser had no real, independent source of consideration. Applying nemo dat quod non habet, it held that the shell entities had no genuine ownership in the monies and could not convey such ownership to the lender, which, in turn, could not pass genuine consideration to the ostensible purchaser. The Tribunal further held that the subsequent re-labelling of 'share application money' as unsecured loan, without compliance with the Companies Act regime on private placement, time-bound allotment, refund, or treatment as deposits, and without any contemporaneous documentation, was an afterthought to camouflage the true nature of the transaction once proceedings against the accommodation entry operator commenced. Conclusions: The Tribunal concluded that the property was acquired from funds not belonging to the ostensible purchaser, and that the entire arrangement constituted a 'benami transaction' within Section 2(9), giving rise to 'benami property' under Section 2(8). The transaction clearly fell within Section 2(9)(A); and, given the routing through fictitious/pass-through entities, also attracted the rationale of Section 2(9)(D), though the principal classification was under Section 2(9)(A). Issue 2 - Nature of funds routed through the lender and shell entities; impact of Companies Act and limitation law Legal framework: The Tribunal discussed Section 42 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 concerning time limits for allotment and refund of application money, and the consequences of non-allotment leading to treatment as deposits. It also referred to Section 25(3) of the Indian Contract Act, 1872, and Section 18 of the Limitation Act, 1963, on revival and acknowledgment of time-barred debts. Interpretation and reasoning: It was found that: (i) the ostensible purchaser received Rs. 9.02 crore from the lender before purchase of the property, booked as 'share application money pending allotment', which was directly used to pay the purchase consideration; (ii) additional Rs. 1.34 crore was received later; (iii) no shares were ever allotted to the lender; (iv) no refund of such money was made; (v) no documentary evidence existed of conversion of application money into a lawful loan or deposit; (vi) no loan agreement, security, or interest clause existed between the parties; and (vii) there was no acknowledgment of debt within the limitation period, nor any subsequent written promise reviving a time-barred debt. The Tribunal held that, for limitation purposes, the lender's alleged loan claims became time-barred three years after each advancement. In the absence of any written acknowledgment or fresh promise under Section 18 of the Limitation Act or Section 25(3) of the Contract Act, the lender irrevocably lost its enforceable legal right to recover. This demonstrated that the lender did not behave as a genuine creditor and gained no pecuniary advantage from advancing Rs. 10.36 crore, undermining the genuineness of any loan narrative. On the Companies Act position, the Tribunal observed that the ostensible purchaser misused the 'share application money' directly for acquisition of immovable property without allotment or refund and without compliance with Section 42 and the deposit rules. The post facto description of the sum as 'unsecured loan' was considered a strategic afterthought after the search of the accommodation entry operator. Conclusions: The Tribunal drew an adverse inference that the funds received from the lender did not represent a real, enforceable loan or genuine share capital but were benami consideration introduced through shell entities. The entire flow of funds was held to be part of an arrangement to facilitate a benami transaction, reinforcing the conclusion that the consideration did not belong to the ostensible purchaser. Issue 3 - Identification of 'beneficial owners' under Sections 2(9)(A), 2(12) Legal framework: The Tribunal applied the definition of 'benamidar' in Section 2(10) and 'beneficial owner' in Section 2(12), together with Section 2(9)(A) requiring that the property be held for the immediate or future benefit of the person who provided the consideration, directly or indirectly. Interpretation and reasoning: The Tribunal first found that the company in whose name the property stood was the benamidar. It rejected the proposition that an incorporated company could not, in law, be a benamidar merely because it is a juristic person and holds legal title, and held that the cited precedents relied upon by the respondents were inapplicable to the detailed factual matrix of this case. On beneficial ownership, the Tribunal observed: (i) At the time the two individuals were inducted as directors (18.12.2012), the ostensible purchaser's only substantial asset was the Rs. 9.02 crore 'share application money pending allotment' from the lender; no shares had been allotted to the lender. (ii) Shares were later transferred to these individuals at face value on 01.02.2013, despite the company holding an immovable property worth Rs. 9.60 crore and having no real corresponding liabilities, indicating that they acquired substantive economic control for a grossly understated consideration. (iii) The lender's inability to enforce recovery (due to limitation) and the ostensible purchaser's behaviour (including advancing loans to others while allegedly indebted, and not fully repaying the lender even after availing an overdraft) showed that the lender had no real beneficial interest. (iv) The continuing director and the later incoming director (who replaced one of the two) and their associated entities received funds from the ostensible purchaser, with incomplete explanation, strengthening the inference that economic benefits flowed to them. (v) The Tribunal noted that the ostensible purchaser, though claiming to use rental income to service an overdraft and repay the lender, also made payments to the continuing director's firm and to entities of the incoming director, indicating enjoyment of benefits inconsistent with the claim that all income was applied solely to debt servicing. While acknowledging that the Initiating Officer had not traced a direct trail from the original unknown investors to the alleged beneficial owners, the Tribunal held that, in light of the entire arrangement, the failure to allot shares to the lender, the time-barred status of the alleged loan, the nominal acquisition of shares, and subsequent financial flows, the two individuals (and their successor in shareholding) indirectly became beneficial owners of the property held in the name of the ostensible purchaser. Conclusions: The company in whose name the property stands was held to be the benamidar, and the identified shareholders/directors were held to be the beneficial owners within Section 2(12), with the transaction falling squarely within Section 2(9)(A). The respondents' contention that they were merely ordinary shareholders taking commensurate risk and reward was rejected. Issue 4 - Standard of proof; role of circumstantial evidence; necessity of statements under Section 19 and direct money trail Legal framework: The Tribunal referred to the jurisprudence on burden of proof and the use of circumstantial evidence and 'test of human probabilities', including Sumati Dayal v. CIT and CIT v. Durga Prasad More, and to the Supreme Court's decision in PCIT (Central) v. NRA Iron & Steel Pvt. Ltd. on scrutiny of share capital/share premium transactions. Section 19 of the Act (recording of statements) was discussed in response to the Adjudicating Authority's criticism. Interpretation and reasoning: The Adjudicating Authority had held against the Initiating Officer on the grounds that (i) there was 'no material' by way of enquiry or statement under Section 19; and (ii) no direct proof that the alleged beneficial owners had funded the lender or provided consideration. The Tribunal disagreed. It held that the Initiating Officer had conducted a detailed enquiry by analysing ITRs, MCA records, bank statements, and director/shareholder structures of all relevant entities, and by relying on the statement of the accommodation-entry operator recorded under the Income-tax Act. It held that Section 19 does not mandate recording of statements as a sine qua non to establish benami transactions; documentary and circumstantial material, if cogent, can suffice. The Tribunal further held that, under Section 2(9)(A), it is sufficient if the consideration is 'provided' or 'paid' by another person, directly or indirectly; a strict, linear tracing of funds from the alleged beneficial owners' bank accounts into the purchase consideration is not necessary, particularly when the modus operandi of accommodation entry providers inherently involves layering through fictitious entities. Applying the 'test of human probabilities', the Tribunal treated as highly implausible: (i) shell companies paying huge premiums to a non-operational company; (ii) that company advancing entire funds as interest-free, unsecured 'loans' which become time-barred, without any commercial benefit; (iii) transfer of shares at face value in a property-holding company; and (iv) ostensible debtors lending out money while claiming to owe large, unpaid, interest-free sums. These factors, coupled with the direct link of one shareholder-entity to the admitted accommodation entry operator, were held sufficient to prove the benami nature of the transaction. Conclusions: The Tribunal held that the Initiating Officer had discharged the burden of proof through documentary and circumstantial evidence. Recording of statements under Section 19 and demonstration of a direct money trail from the alleged beneficial owners were not indispensable where the preponderance of probabilities clearly supported a benami arrangement. The contrary findings of the Adjudicating Authority were set aside. Issue 5 - Effect of overdraft facility from Kotak Mahindra Bank and the bank's rights Interpretation and reasoning: The ostensible purchaser had obtained an overdraft facility of Rs. 3 crore from Kotak Mahindra Bank on 28.02.2019, part of which was used to pay the lender shortly before the provisional attachment. The respondents argued that this showed genuine loan repayment and negated the allegation that the earlier funds were non-repayable. The Tribunal, however, noted that: (i) if the ostensible purchaser was already enjoying a large, unsecured, interest-free loan, there was no commercial rationale to avail an interest-bearing overdraft merely to make a part payment; (ii) the borrower did not seek to repay the entire alleged loan of Rs. 10.36 crore; and (iii) the timing of this facility and repayment, shortly before initiation of benami proceedings, suggested an 'eyewash' to project genuineness. At the same time, the Tribunal recognised that Kotak Mahindra Bank had granted the overdraft prior to the Show Cause Notice (31.05.2019) and Provisional Attachment Order (31.07.2019), and without knowledge of impending benami proceedings. Conclusions: The benami character of the original acquisition remained unaffected by the later overdraft and part repayment. However, the Tribunal held that the rights of Kotak Mahindra Bank arising from the overdraft facility must be protected notwithstanding the declaration of the property as benami, as the bank acted bona fide prior to attachment. The declaration of benami property and setting aside of the Adjudicating Authority's order were made expressly subject to the bank's rights and to further consequences in accordance with law.