The Appellate Tribunal under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act at New Delhi has dismissed a batch of 18 appeals filed by the Income Tax Department’s Benami Prohibition Unit, holding that a transaction cannot be treated as benami under Section 2(9)(C) of the Prohibition of Benami Property Transactions Act, 1988, when the alleged benamidars were aware of the allotment and subsequent buyback of shares.

The Bench of Justice Munishwar Nath Bhandari (Chairman) and V. Anandarajan (Member) upheld the Adjudicating Authority’s refusal to confirm the provisional attachment of the properties. The essential requirement of Section 2(9)(C)—that the owner of the property is unaware of or denies knowledge of the ownership—was not satisfied in the cases before it.

The batch of appeals arose from an order through which the Adjudicating Authority declined to confirm provisional attachment orders issued in connection with transactions involving M/s Shobikaa Impex Private Limited and several of its alleged job workers and contractors.

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The proceedings originated from a search and seizure operation conducted in the case of M/s Shobikaa Impex Private Limited. According to the Income Tax Department, the investigation revealed an alleged arrangement under which the company inflated its expenditure to reduce its taxable income.

The Department alleged that bogus expenses were recorded in the company’s books in the names of job workers and contractors despite there being no actual receipt of goods or services and no corresponding payment to those persons. The amounts were initially recorded as liabilities under the head “trade payables”.

As of March 31, 2017, approximately ₹117.65 crore was reportedly reflected in the company’s balance sheet as trade payables outstanding for more than one year.

According to the Department, these liabilities were subsequently converted into share capital and securities premium during the financial year 2017-18. Equity shares with a face value of ₹100 were allegedly allotted to the job workers at a premium of ₹750 per share. Similar allotments were stated to have been made in favour of several entities.

The investigation further alleged that separate bank accounts and email addresses were created in the names of the job workers but were operated by persons associated with Shobikaa Impex. These arrangements were allegedly used to fulfil statutory requirements and route funds through banking channels to give the transactions the appearance of genuine business dealings.

One of the cases concerned M/s Aabaa Knittings, a proprietary concern of R. Bharathi. The concern’s name was shown as a trade payable in the books of Shobikaa Impex for the financial year 2016-17 and subsequently as share capital during the following financial year.

The Department claimed that no corresponding asset was disclosed in the income tax returns or books of Aabaa Knittings. It also relied upon the alleged recovery of unsigned share certificates issued in Bharathi’s name, along with cheque books, letterheads and blank bills of Aabaa Knittings, from the premises of Shobikaa Impex.

On the basis of statements recorded during the income tax proceedings, the Department formed the view that Bharathi and the other job workers were unaware of the creation of trade payables, the allotment of shares, the transfer or buyback of those shares and the movement of funds in their names.

The transactions were consequently treated as benami under Section 2(9)(C) of the 1988 Act, which covers a transaction or arrangement concerning property where the owner is unaware of, or denies knowledge of, such ownership.

Provisional attachment orders were thereafter passed. However, the Adjudicating Authority refused to confirm the attachments, prompting the Deputy Commissioner of Income Tax, Benami Prohibition Unit, Chennai, to approach the Appellate Tribunal.

The Department argued before the Tribunal that the Adjudicating Authority had incorrectly relied upon the testimony given by the job workers during cross-examination. It contended that their subsequent statements contradicted the statements recorded by the Income Tax authorities during the earlier investigation.

The Department maintained that the earlier statements demonstrated that the job workers were unaware of the transactions carried out in their names. It argued that the subsequent change in their version during cross-examination should not have been accepted over the statements recorded during the Income Tax proceedings.

The Tribunal, however, found that the statements made during cross-examination in proceedings under the Benami Act showed that the persons concerned knew about the allotment of shares, their subsequent buyback and the receipt of consideration in their bank accounts.

The Bench framed the central question as to which statement should prevail when a statement recorded under the Income Tax Act conflicts with testimony given during cross-examination in proceedings under the Benami Act.

Answering the question, the Tribunal held that a statement recorded in proceedings under the Benami Act would prevail for determining whether the ingredients of a benami transaction were established under that enactment. This would include testimony elicited during cross-examination.

The Tribunal observed that Section 2(9)(C) applies specifically where the owner of the property is unaware of, or denies knowledge of, the ownership. Once the alleged benamidars admitted that they were aware of the allotment and other connected transactions, the statutory requirement could not be treated as fulfilled.

The Bench noted that the Department’s allegations might, at the highest, raise an issue concerning possible tax evasion through the creation of bogus trade payables. Such allegations, however, could not automatically be converted into a benami transaction unless all the ingredients of the relevant provision of the Benami Act were independently satisfied.

“If the person to whom shares were allotted had knowledge of the transaction and he or she remains owner of the property till buyback of shares by the company, a case would not fall under Section 2(9)(C),” the Tribunal observed in substance.

The Tribunal further held that any transaction carried out with the knowledge of the alleged benamidar could not be brought within the scope of Section 2(9)(C). The existence of potentially fictitious expenditure or questionable accounting entries would not, by itself, establish a benami arrangement under that clause.

The 18 job workers stated during cross-examination that they were aware of the shares allotted in their names and their subsequent transfer. They also confirmed that they had received the consideration in their respective bank accounts.

The Tribunal observed that if the entire arrangement were wholly fictitious and outside the knowledge of the alleged benamidars, there would have been no apparent reason for them to receive the buyback consideration in their bank accounts.

Accordingly, the Tribunal agreed with the Adjudicating Authority that the testimony given during cross-examination was directly relevant to determining whether the transactions fell within Section 2(9)(C).

The Bench also observed that proceedings under the Benami Act should not have been initiated, followed by provisional attachment, merely on the basis of “borrowed satisfaction” derived from the Income Tax investigation.

It pointed out that the principal allegation concerned accounting entries for trade payables that were subsequently used for the allotment of shares and their conversion into securities premium. The shares were later bought back and consideration was paid with the knowledge of the persons in whose names the shares had been allotted.

The Tribunal clarified that while the facts could have implications under the Income Tax Act, those implications could not substitute the statutory requirements prescribed under the Benami Act.

It also noted that the statements relied upon by the Department were recorded under Section 131 of the Income Tax Act and not under Section 132(4), as apparently presumed by the appellant authorities.

The Tribunal also examined an order passed by the Interim Board for Settlement under Section 245-B(4) of the Income Tax Act, under which the trade payables were reportedly accepted as genuine.

While the Adjudicating Authority had relied upon the settlement order, the Tribunal clarified that an order passed in Income Tax proceedings could not override the provisions of a separate statute.

It held that the settlement order would be final and conclusive in relation to the Income Tax proceedings covered by it, but would not automatically govern independent proceedings initiated under the Benami Act. The relevant provisions of the Income Tax Act did not possess an overriding effect over other enactments.

The Tribunal, therefore, disagreed with the Adjudicating Authority to the limited extent that its findings suggested that the settlement order could conclusively determine the Benami Act proceedings. Nevertheless, this disagreement did not affect the final outcome because the ingredients of Section 2(9)(C) had independently not been established.

The Adjudicating Authority had additionally taken note of an order passed by the Chennai Bench of the National Company Law Tribunal on April 26, 2024, cancelling the allotment of the equity shares.

Consequently, the property alleged to be benami in nature—the shares allotted to the job workers—was no longer in existence following the cancellation of the allotment.

The Tribunal also referred to the Adjudicating Authority’s observation that proceedings were selectively initiated against 18 job workers while four similarly placed persons were left out. Although the Tribunal did not approve the reasoning based on selective action, it found that the refusal to confirm the attachment was independently justified by the job workers’ admission that they knew about the allotment, buyback and payment of consideration.

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