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Benami Transactions and Arbitrary Attachments – The First Chink in the Armour of Supreme Court’s Landmark PMLA Judgment?

  • By Utsav Saxena
  • August 27, 2022

Article Published in Live Law.

A 3 judge bench of the Hon’ble Supreme Court comprising of the Hon’ble Chief Justice  N.V. Ramana, Hon’ble Justice Krishna Murari and Hon’ble Justice Hima Kohli in Union of India vs M/s Ganpati Dealcom Pvt. Ltd, Civil Appeal No. 5783 of 2022 while dealing with a legal question whether the Prohibition of Benami Property Transactions Act, 1988 as amended by the Benami Transactions  (Prohibition) Amendment Act, 2016  has a prospective effect or not, has also touched upon the judgement passed by another 3 Judge bench of the Hon’ble Supreme Court in Vijay Madanlal Choudhary and Ors vs Union of India, SLP (Crl) No. 4634 of 2014 decided on 27.07.2022 wherein the Hon’ble Court has upheld the constitutional validity of twin conditions under Section 45 of Prevention of Money Laundering Act, 2002 amongst other provisions.

The Benami Transactions (Prohibition) Amendment Act, 2016 came into force on November 1, 2016 and has widened the scope of “benami transactions” under Section 2 (9) to add other transactions which qualify as benami, such as property transactions where:

  • the transaction is made in a fictitious name,
  • the owner is not aware of denies knowledge of the ownership of the property, or
  • the person providing the consideration for the property is not traceable.

The 2016 amendment has further modified the provision of Section 3 of the 1988 Act by bifurcating the offences into two separate categories on the basis of the time period of the benami transaction. Section 3(2) of the 2016 Act provides for punishment of 3 years to those benami transactions entered into from 05.09.1988 to 25.10.2016 and Section 3 (3) of the 2016 Act applied to transactions entered into after the commencement of the amended 2016 Act. Further, the substituted Section 5 of the 2016 Act empowered the Central Government to confiscate any property which is a subject matter of benami transaction.

The Apex Court in M/s Ganpati Dealcom Pvt. Ltd (Supra) while dealing with the constitutional validity of the provisions of the 1988 Act held that Section 3 (criminal provision) read with Section 2(a) and Section 5 (confiscation proceedings) of the 1988 Act are unconstitutional from inception for being “overly broad, disproportionally harsh and operate without adequate safeguards in place” and that the said provisions were “still-born” law.

That with regard to the question whether Section 3(1) and Chapter IV read with Section 5 of the 2016 Act have retrospective effect it was contended by the Centre that the 1988 Act was a valid enactment with certain procedural gaps that were filled retrospectively by the 2016 amendment. It was further submitted that the provision of confiscation under the 1988 Act, being in the domain of civil law is not punitive in nature and, therefore, is not hit by the prohibition under Article 20(1) of the Constitution.

The Top Court rejected the Centre’s contention that property forfeiture or confiscation under the 1988 Act was civil in nature and not punitive. The Hon’ble Court while declaring the confiscation proceedings as punitive held that the characterization of the confiscation proceedings under the 2016 Act as ‘civil’ might not be appropriate since interplay of the Section 27(3), Section 5 and 67 of the 2016 Act creates a confiscation procedure which is distinct form the other existing laws. The said unique procedure has also altered the substantive rights and evidentiary standard and therefore cannot be termed as ‘procedural’. It was further observed that the 2016 Act contemplates an in rem forfeiture wherein the taint of entering into such a benami transaction is transposed to the asset and the same becomes liable to confiscation. That since such a taint is being created not on the individual, but on the property a retrospective law would categorize itself as punitive.

The Hon’ble Court concluded by holding that the 2016 Amendment as not merely procedural, rather, prescribe substantive provisions. The Court further declared Section 3(2) of the 2016 Act unconstitutional for being violative of Article 20(1) of the Constitution.  The In rem forfeiture under Section 5 of the 2016 Act being punitive in nature was held to have only prospective effect. Consequently, the Apex Court quashed the prosecutions and confiscation proceedings initiated for transactions entered into prior to the coming into force the 2016 Act.

The 3 Judge Bench while discussing the aspect of confiscation of property also made a passing reference to the PMLA judgment of Vijay Madanlal Choudary (Supra) and opined that certain aspects of the PMLA judgment left much scope for arbitrary application of the law and held that “Having perused the said judgment, we are of the opinion that the aforesaid ratio requires further expounding in an appropriate case..”.

In Vijay Madanlal Choudary (Supra) the vires of a similar provision of Section 8 which allows confiscation of property was challenged amongst other provisions. Section 8(4) PMLA permits the Enforcement Directorate to take possession of the attached property at the stage of confirmation of the Provisional Attachment Order by the Adjudicating Authority. The Petitioners had challenged the vires of Section 8(4) primarily on the grounds being:

  • The Adjudicating Authority exercises no oversight over the Enforcement Directorate and that the such deprivation of property by taking possession with just one stage of confirmation deprives a person their right to property without due process of law.
  • The ED can take possession of the attached property without there being a chargesheet filed in the predicate offence, by virtue of the 2nd proviso to Section 5 (1) PMLA.
  • The effective confiscation of the attached property under Section 8(4) even before any proceedings have commenced before the appropriate Court is disproportionate, harsh and arbitrary.
  • Section 8 is dependent upon the accused being held guilty, therefore, the provision of Section 8(4) cannot be applied retrospectively for scheduled offence committed prior to the enactment of PMLA.
  • That ‘possession’ under Section 8(4) PMLA should be constructive/ symbolic possession instead of physical possession since confiscation is only subject to conviction under the Act and such confiscation only on the confirmation by the Adjudicating Authority in all practical sense leads to confiscation prior to such conviction.

The Apex Court while considering the validity of Section 8(4) PMLA read down the provision of Section 8(4) and held that the provision ought to be invoked only in ‘exceptional circumstance’ on case-to-case basis. The Hon’ble Court opined that the protection under Section 5(4) PMLA which permits the accused/ interested person to enjoy the property attached under Section 5 (1) PMLA be extended even after the attachment is confirmed by the Adjudicating Authority, PMLA. The Court while upholding the validity of Section 8(4) PMLA emphasised that confiscation can be resorted to only ‘by way of an exception and not as a rule’.

The observation in M/s Ganpati Dealcom Pvt. Ltd (Supra) is a step in the right direction since the Hon’ble Supreme Court in Vijay Madanlal Choudary (Supra) by not striking down Section 8(4) PMLA has given unfettered power to the Enforcement Directorate to deprive an individual of his property pending trial under the Act. It would also be pertinent to note that a review Petition has been filed before the Hon’ble Supreme Court in Vijay Madanlal Choudhary vs Union of India which was allowed to be listed by the Chief Justice of India.

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