Tax Updates: July and August 2022

Partner: Himanshu Sinha, Counsel: Aditi Goyal and Shashank Shekhar, Senior Associates: Bhuwan Dhoopar and Tushar Joshi Associate: Samyak Jain and Vibhu Gupta

Direct Tax

Supreme Court holds the Benami Transactions (Prohibition) Amendment Act, 2016 to be prospective

On 23 August 2022, the Supreme Court, in the case of UOI v Ganpati Dealcom Pvt. Ltd., held that the Benami Transactions (Prohibition) Amendment Act, 2016 (2016 Act) prescribes substantive provisions and would therefore apply prospectively.

In this case, a show cause notice under the 2016 Act was issued to the assessee-company, proposing to treat it as a benamidar for an alleged benami property purchased in 2011. The assessee–company responded to the notice denying the allegations. However, the adjudicating authority rejected these submissions and passed an order under the 2016 Act provisionally attaching the property.

Aggrieved, the assessee-company filed a writ petition before the High Court of Calcutta. A single judge bench passed an order directing the adjudicating authority to conclude the matter within 12 weeks. The assesseecompany thereafter filed an appeal against the order. The High Court quashed the show cause notice on the basis that the provisions of the 2016 Act do not have a retrospective application and would, therefore, not apply to a transaction undertaken in 2011.

Aggrieved by the order of the High Court, the Union of India approached the Supreme Court. The Supreme Court, after analysing the history of benami transactions in India, the framework of Prohibition of Benami Property Transactions Act, 1988 (1988 Act) and the 2016 Act held that the provisions of the 2016 Act are not procedural in nature. The amendments made by the 2016 Act are substantive and would thus apply prospectively. The key observations of the Supreme Court were:

• Section 3(2) of the 1988 Act which mandated a punishment of three years for those entering into benami transactions was vague, arbitrary and created an unduly harsh law.
• Section 5 of the 1988 Act, which provided for civil forfeiture of benami property, was manifestly arbitrary. The Union of India argued that this provision was civil in nature and could consequently be amended with retrospective effect. However, the Court held that there is an implicit recognition of forfeiture being a punitive sanction, as the officer is required to build a case against the accused for confiscation.
• Further, the 2016 Act created a confiscation procedure distinct from the procedure contemplated under any enactment in force in India at the time. It also altered substantive rights of evidentiary standards from ‘beyond reasonable doubt’ to ‘preponderance of probabilities’. Such a change cannot be termed as merely procedural.

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