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 the transferor’s income.
PROHIBITION OF BENAMI TRANSACTIONS
1. Any property , which is subject matter of Benami transactions, shall be liable to be confiscated by the Central Government.
2. No Benamidar shall re transfer the Benami property held by him to the beneficial owner or to any other person acting on his behalf. If in any case property is transferred then such transaction is null & void.
ATTACHMENT, ADJUDICATION AND CONFISCATION
1. Where the Initiating Officer (I.O) has reason to believe that any person is a Benamidar in respect of a property , he may after recording reasons in writing , issue a notice to the person to show cause within stipulated time why the property should not be treated as Benami property,
2. Notice is also served to Beneficial Owner if his identity is known,
3. If I.O is of the opinion that the person holding Benami property may alienate the property during notice period, then he may provisionally attach such Benami property for period not exceeding 90 days from date of notice.
4. The I.O after making such inquires within 90 days of notice:
i. Pass an order continuing the provisional attachment of the property (in case already attached) otherwise provisionally attach the property,
ii. Revoke the provisional attachment of the property (in case already attached) otherwise decide not to attach property.
OFFENCES AND PROSECUTION
1. The Beneficial owner, Benamidar and any other person who induces any person to enter into Benami transactions , shall be guilty of the offence of Benami transactions
2. Such person shall be punishable with rigorous imprisonment for a term for at least 1 year which may extend to 7 years and liable to fine which may extend 25% of the FMV of the property.
3. If any person who is required to furnish information under this act knowingly gives false information to any authority, then he shall be punishable with rigorous imprisonment for a term for at least 6 months which may extend to 5 years and liable to fine which may extend 10% of the FMV of the property.
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.