Exit from benami properties to be tough after demonetisation

People planning to park their unaccounted wealth in real estate in the names of their drivers, maids or through shell companies, probably using demonetised notes of Rs 500 and Rs 1000 are in trouble , especially after prime minister Narendra Modi’s warning that more anti-graft steps are on the anvil and after the stringent Prohibition of Benami Property Transactions Act (PBPT Act) came into effect this month.

Under the Act, a transaction is named ‘benami’ if property is held by one person, but has been provided or paid for by another person. It also prohibits recovery of the property held benami from benamidar by the real owner. Benami properties are liable for confiscation by the government. People caught with benami properties could end up with up to seven years of rigorous imprisonment and pay a significant fine. Additionally, the properties will be confiscated. A person could also face rigorous imprisonment for upto five years for knowingly giving false information and will have to pay a fine of upto 10% of the market value of the property.

Punishment has been increased to seven years for those who have invested in benami properties and five years for those who knowingly give false information to others into such transactions. The former will have to pay a penalty of 25% of the fair market value of the benami property and those who give wrong information are liable to pay 10% of the fair value of the property, says Sunil Tyagi of Zeus Law, a law firm.

What this means is that a property worth Rs 1 crore will attract a penalty of Rs 25 lakh and seven years of imprisonment. The outcome is not only loss of asset but also penalty and punishment. So, someone who bought property in the name of his peon, driver or anybody unrelated to him and invested in agriculture property in their name, there is no escape.

What was the modus operandi? The benamidars would keep the original documents in person and execute a power of attorney that allows them to sell whenever the price appreciates. This mode of buying property was most common in case of agriculture land and urban properties bought under the name of shell companies.

Usually cash was used to buy such properties but now with a ban on Rs 500 and Rs 1000 notes, most commonly used denomination for investing in real estate, the government is perhaps warning people that they should not use their black money in investing in properties that are not in their name, says a real estate expert. With the Income Disclosure Scheme ending on September 30 this year, it may be difficult for people who bought such properties to exit without serious consequences, he says.

Pankaj Kapoor, managing director, Liases Foras, a non-brokerage real estate research, property research and data analytics firm, says that the new law could mean that the number of land transactions and investments in luxury apartments will come down drastically.  It is important to note that the realty market was dominated by land transactions when it was at its peak in 2006 to 2007 and 2011-2012. Almost 30% of transactions were in benami properties but that number has come down considerably since then, especially since the market has been stagnant for some years and investor interest has gone down. Currently, exposure of benami properties is not more than 5% to 10%, he says.

The government now needs to track incomes earned from agriculture which is very high, Kapoor says, adding if black money goes away, property prices could see a sharp correction.

S K Pal, Supreme Court lawyer, says that exits from benami properties will now become extremely difficult and people would prefer to lose wealth and relinquish such properties because of the penalty and the punishment it will attract. “Many would much rather relinquish his interest or rights over the property because the cons are so high. A power of attorney is a legal piece of document but now the driver and peon in whose name the property may have been bought will have to declare their source of income from which such properties were bought and their inability to do so may lead to more people relinquishing their interest in such properties going forward,” he says.

Credits Hindustan Times

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