Understanding Beneficial Ownership under Benami Act

Table of content

1. Beneficial Owner
2. Obligations of beneficial owners in benami transactions in shares
3. Obligations of the company as regards beneficial ownership of its shares

Check out Taxmann's Law Relating to Prohibition of Benami Property Transactions Act 1988 which provides a comprehensive section-wise commentary on the law relating to Benami Act. It is rendered in an easy-to-read & follows a 'FAQ' format. It also includes the legislative history and effective date of applicability based on given Case Laws. Flow Charts & Tables have been provided in this book for reference. This book will be helpful for practitioners of Civil Law, Criminal Law, Company Law, Income-tax, etc.

1. Beneficial Owner

The term ‘beneficial owner’ is defined by Section 2(12) of the PBPT Act. The ingredients of the definition are as under:

• Beneficial owner is the person for whose benefit the benami property is held by Benamidar.
• It is immaterial whether the identity of beneficial owner is known or not known.

It will be a Category IV benami transaction under section 2(9)(D) if the beneficial owner is not known or is untraceable.

The “Keep away from Benami Transaction” leaflet of Income-Tax Department clarifies as under:

“Benami” means “no name” or “without name”. Benami properties are those that are held by an owner through proxies. The property is purchased in the name of or held in the name of a person who neither paid for it nor actually enjoys it. It may even be held in the name of a non-existent person. Such front person is known as ‘Benamidar’. This name is only an alias for the actual owner, the ‘Beneficial Owner’. Thus, the Benami property transaction is where the ‘Beneficial Owner’ buys the property in the name of a Benamidar but seeks to enjoy it himself.

Thus, a ‘Beneficial Owner’ is a person (whether his identity is known or not) for whose benefit the benami property is held by a benamidar. Sometimes the Benamidar cannot know or disclose the identity of the real owner. He may have only taken money and placed some signatures. Even in these conditions, the property will be benami.

Where applicant company returned an amount received from a company towards supply of ceramic tiles on finding out that said company was not genuine and it was involved in money laundering activity, applicant could not be held to be a beneficial owner of amount in question [Iscon Ceramic (P.) Ltd. v. Initiating Officer [2019] 107 taxmann.com 420/265 Taxman 364 (PBPTA – AT)] The facts of the above case were as follows:

• The appellant was the manufacturer of ceramic wall tiles. It received an enquiry to supply ceramic tiles from company ACPL.
• The party confirmed an order for value of more than Rs. 75 lakhs against which the appellant asked the party to make advance payment of Rs. 75 lakhs.
• The payments by RTGS for Rs. 17.50 lakhs, Rs. 22.50 lakhs, Rs. 19 lakhs and Rs. 16 lakhs was received by appellant from ACPL through one DMPL in its bank account.
• After receiving proceeds, the appellant inquired to party whether proceeds were made out of deposit of cash in his account for disposal of cash in the period of demonetisation. The party denied that money remitted by them was made by depositing cash in their account.
• However, the appellant wanted to make sure that the party was genuine and not involved in money laundering activity and hence, it asked his CA to verify the nature of business, turnover etc. of party who had remitted money in its account for purchase of goods.
• From MCA site, it could get the information that party had not involved into any business activity in the past and, hence, credentials of the party were not good. The applicant decided to remit the money back to party as per advice given by their CA and accordingly, the appellant remitted back Rs. 22.50 lakhs, Rs. 16 lakhs and Rs. 36.50 lakhs by RTGS using 3 cheques.
• However, the Adjudicating Authority held that the applicant was a beneficial owner of the benami property by way of cash received in his account from DMPL on behalf of ACPL and, accordingly, attached the bank account of the appellant in which said amount in question was received.

It was held by the Appellate Tribunal as under:

• Keeping in view the peculiarity of the fact of this case i.e. transfer of money through RTGS in the account of the appellant, who after due enquiry, returned the money next day, is not a benami transaction falling within the definition as prescribed under the Act.
• From the above, it is clear that there was no benami transaction so far as the appellant is concerned so there is no question of the appellant becoming the beneficial owner. No material has been placed nor available on record proving that the appellant had entered into any benami transaction or in any way a beneficial owner.
• It is clear from the impugned order that the Adjudicating Authority, on the basis of material, facts and circumstances has held that the Initiating Officer has not said anything substantial against the appellant and also has considered the plea of the appellant that it is not claiming the amount lying in the bank account of benamidar. The most important aspect is also that the Initiating Officer has not challenged the aforesaid findings of the Adjudicating Authority.
• The allegation levelled by respondent on the appellant is without any substance. The allegations are based merely on presumption. Presumption, unless supported with proof, does not take the shape of evidence. No prima facie evidence, for the purpose of continuation of attachment, has been placed.
• Considering the aforesaid facts and circumstances of the case, the pleadings of the parties and the documents relied upon by the parties, the Adjudicating Authority ought to have held specifically that the appellant is not a beneficial owner. Having regards to the aforesaid facts, circumstances, pleadings of the parties and the documents relied upon by the parties, the appellant is not a beneficial owner within the meaning of the definitions defined under section 2(12) of PBPT Act, 1988. So, the impugned order is varied/modified to the extent that the appellant is not a beneficial owner, for the purpose of present proceedings, hence its name is removed as beneficial owner from the list.

2. Obligations of beneficial owners in benami transactions in shares

Section 89(1) of the Companies Act, 2013 provides for declaration in respect of beneficial interest in any share by “the registered owner” of a share i.e. a person whose name is entered in the register of members of a company as the holder of shares in that company but who does not hold the beneficial interest in such shares. In other words, sub-section (1) casts an obligation on benamidar/the registered owner to declare to the company the name of the beneficial owner of that share and other details. Sub-section (1) of section 89 read with Rule 9(1) of the Companies (Management and Administration) Rules, 2014 provides that the registered owner of a share shall make a declaration to the company specifying the name and other particulars of the person who holds the beneficial interest in such shares. Such declaration is to be made in Form No. MGT. 4 within 30 days from the date on which his name is first entered in the register of members of that company. Sub-Section (2) of section 89 read with Rule 9(2) provides that every person who holds or acquires a beneficial interest in share of a company not registered in his name (“the beneficial owner”) shall make a declaration to the company specifying the nature of his interest, particulars of the person in whose name the shares stand registered in the books of the company and such other particulars as may be prescribed in Form No. MGT. 5 within 30 days of acquiring such beneficial interest.

“Beneficial interest in a share” includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i) exercise or cause to be exercised any or all of the rights attached to such share; or

(ii) receive or participate in any dividend or other distribution in respect of such share.

Sub-section (3) read with Rule 9 provide that where any change occurs in the beneficial interest in such shares, the registered owner and the beneficial owner shall, within a period of thirty days from the date of such change, make a declaration to the company in Form No. MGT. 4 and in Form No. MGT. 5 respectively.

Sub-section (6) read with Rule (3) provides that where any declaration under this section is made to a company, the company shall make a note of such declaration in the register concerned and shall file, within thirty days from the date of receipt of declaration by it, a return in Form No. MGT. 6 with the Registrar in respect of such declaration with such fees or additional fees as may be prescribed.

Provisions of Rule 9/Section 89 shall not apply to in relation to a trust which is created to set up a Mutual Fund or Venture Capital fund or any other fund approved by SEBI.

No right in relation to any share in respect of which a declaration is required to be made under this section but not made by the beneficial owner, shall be enforceable by him or by any person claiming through him.[Section 89(8)] If any registered owner of shares or beneficial owner of shares fails to make a declaration as required under sub-section (1) or sub-section (2) or sub-section (3), he shall be liable to :

• a penalty of fifty thousand rupees and in case of continuing failure,
• with a further penalty of two hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees.

If a company, required to file a return under sub-section (6), fails to do so before the expiry of the time specified therein, the company and every officer of the company who is in default shall be liable to a penalty of one thousand rupees for each day during which such failure continues, subject to a maximum of five lakh rupees in the case of a company and two lakh rupees in case of an officer who is in default.

3. Obligations of the company as regards beneficial ownership of its shares

Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures. Realizing this, jurisdictions world over have been putting in place mechanisms to identify the natural person controlling a corporate entity. Changes have been made by many jurisdictions, for example Russian Union and UK in their laws to bring in transparency in company ownership and control. The English Companies Act, 2006 was amended in 2015 to require certain companies and LLPs to create and maintain a ‘Persons with Significant Control’ Register and make it available to public, as well as file the information with the UK Companies House. A publicly accessible central registry of UK company beneficial ownership information has also been established. Regulatory concerns have been raised in India also, drawing on examples set by these jurisdictions. The Ministry of Finance suggested the introduction a Register of Beneficial Owners by mandating it in the Companies Act.

To facilitate investigation of beneficial ownership of shares for curbing money laundering, benami, tax evasion and illicit money, a need was felt for provisions requiring every company to maintain ‘Register of significant beneficial owners’. Accordingly, the provisions of section 90 have been substituted by the Companies (Amendment) Act, 2017 with effect from 13-6-2018 to make provisions regarding ‘Register of significant beneficial owners in a company’.

The following points are noteworthy:

• Section 90 of the Companies Act, 2013 provides that a declaration is to be given to the company by every individual who is a ‘significant beneficial owner’ in a company.
• A ‘significant beneficial owner’ in a company is every individual who holds beneficial interests of not less than 10%, in shares of the company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company. [Section 90(1)]
• Such individual would be regarded as ‘significant beneficial owner’ if he holds 10% or more beneficial interests as above whether acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India. [Section 90(1)]
• Pursuant to its powers under section 90, the Central Government has notified the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules).
• Clause (h) of sub-rule(1) of Rule of the SBO Rules defines “significant beneficial owner” to mean an individual referred to in sub-section (1) of section 90, who acting alone or together, or through one or more persons or trust, possesses one or more of the following rights or entitlements in such reporting company, namely:

(i) holds indirectly, or together with any direct holdings, not less than ten per cent of the shares;

(ii) holds indirectly, or together with any direct holdings, not less than ten per cent of the voting rights in the shares;

(iii) has right to receive or participate in not less than ten per cent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

(iv) has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

Note the following:

• There are six Explanations below clause (h) which clarify the definition in clause (h)
• Explanation I to clause (h) clarifies if an individual does not hold any right or entitlement indirectly under (i), (ii) or(iii) above, he shall not be considered to be a significant beneficial owner.
• Explanation II clarifies an individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely:—

(i) the shares in the reporting company representing such right or entitlement are held in the name of the individual;

(ii) the individual holds or acquires a beneficial interest in the share of the reporting company under sub-section (2) of section 89, and has made a declaration in this regard to the reporting company.

• Explanation III clarifies that an individual shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company, namely:—

(i) where the member of the reporting company is a body corporate (whether incorporated or registered in India or abroad), other than a limited liability partnership, and the individual,—

(a) holds majority stake in that member; or

(b) holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of that member;

(ii) where the member of the reporting company is a Hindu Undivided Family (HUF) (through karta), and the individual is the karta of the HUF;

(iii) where the member of the reporting company is a partnership entity (through itself or a partner), and the individual,—

(a) is a partner; or

(b) holds majority stake in the body corporate which is a partner of the partnership entity; or

(c) holds majority stake in the ultimate holding company of the body corporate which is a partner of the partnership entity;

(iv) where the member of the reporting company is a trust (through trustee), and the individual,—

(a) is a trustee in case of a discretionary trust or a charitable trust;

(b) is a beneficiary in case of a specific trust;

(c) is the author or settlor in case of a revocable trust;

(v) where the member of the reporting company is,

(a) a pooled investment vehicle; or

(b) an entity controlled by the pooled investment vehicle, based in member State of the Financial Action Task Force on Money Laundering and the regulator of the securities market in such member State is a member of the International Organization of Securities Commissions, and the individual in relation to the pooled investment vehicle,

(A) is a general partner; or

(B) is an investment manager; or

(C) is a Chief Executive Officer where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

• Explanation IV.—Where the member of a reporting company is,—

(i) a pooled investment vehicle; or

(ii) an entity controlled by the pooled investment vehicle, based in a jurisdiction which does not fulfil the requirements referred to in clause (v) of Explanation III,

the provisions of clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation III, as the case may be, shall apply.

• Explanation V.— If any individual, or individuals acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be “acting together”.
• Explanation VI.—For the purposes of this clause, the instruments in the form of global depository receipts, compulsorily convertible preference shares or compulsorily convertible debentures shall be treated as “shares”.
• “majority stake” means :

(i) holding more than one-half of the equity share capital in the body corporate; or

(ii) holding more than one-half of the voting rights in the body corporate; or

(iii) having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate;

• The significant beneficial owner shall, while making the declaration, specify the nature of interest and other particulars in prescribed manner and time to the company [section 90(1)]. Declaration is to be filed in Form No. BEN-1 within 30 days of acquiring significant beneficial ownership or any change therein.
• The Central Government has been empowered to specify class or classes or persons who shall not be required to make the said declaration. Rule 8 of the SBO Rules provide that rules shall not be made applicable to the extent the share of the reporting company is held by,—

(a) the authority constituted under sub-section (5) of section 125 of the Act;

(b) its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.

(c) the Central Government, State Government or any local Authority;

(d) (i) a reporting company, or

(ii) a body corporate, or

(iii) an entity,

controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;

(e) Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvITs) regulated by the Securities and Exchange Board of India;

(f) Investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

• Every company shall maintain a register of the interest declared by individuals as above and changes therein which shall include the name of individual, his date of birth, address, details of ownership in the company and such other details as may be prescribed. [Section 90(2)]
• The above register maintained shall be open to inspection by any member of the company on payment of such fees as may be prescribed. [Section 90(3)]
• Every company shall file a return of significant beneficial owners of the company and changes therein with the Registrar containing names, addresses and other details as may be prescribed within such time, in such form and manner as may be prescribed. [Section 90(4)]
• Declaration is to be filed with registrar of Companies in Form No. BEN-2 within 30 days of receiving declaration in Form No. BEN-1 from significant beneficial owner.
• Sub-section (4A) of section 90 provides that every company shall take necessary steps to identify an individual who is significant beneficial owner in relation to the company and require him to comply with the provisions of this section.
• Section 90(5) provides that a company shall give notice, in the prescribed manner [Form No. BEN-4], to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe— (a) to be a significant beneficial owner of the company; (b) to be having knowledge of the identity of a significant beneficial owner or another person likely to have such knowledge; or (c) to have been a significant beneficial owner of the company at any time during the three years immediately preceding the date on which the notice is issued, and who is not registered as a significant beneficial owner with the company as required under this section.
• The information required by the notice as above shall be given by the concerned person within a period not exceeding thirty days of the date of notice. [Section 90(6)]
• Section 90(7) provides that the company shall,

(a) where that person fails to give the company the information required by the notice within the time specified therein; or

(b) where the information given is not satisfactory, apply to the Tribunal within a period of fifteen days of the expiry of the period specified in the notice, for an order directing that the shares in question be subject to restrictions with regard to transfer of interest, suspension of all rights attached to the shares and such other matters as may be prescribed. Rule 7 provides that the reporting company shall apply to the Tribunal,—

(i) where any person fails to give the information required by the notice in Form No. BEN-4, within the time specified therein; or

(ii) where the information given is not satisfactory, in accordance with sub-section (7) of section 90, for order directing that the shares in question be subject to restrictions, including

(a) restrictions on the transfer of interest attached to the shares in question;

(b) suspension of the right to receive dividend or any other distribution in relation to the shares in question;

(c) suspension of voting rights in relation to the shares in question;

(d) any other restriction on all or any of the rights attached with the shares in question.

• On any application made under sub-section (7), the Tribunal may, after giving an opportunity of being heard to the parties concerned, make such order restricting the rights attached with the shares within a period of sixty days of receipt of application or such other period as may be prescribed. [Section 90(8)]
• The company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions placed as above, within a period of one year from the date of such order. If no such application has been made within one year as aforesaid, such shares shall be transferred without any restrictions to the authority constituted under section 125(5), in such manner as may be prescribed. [Section 90(9)]
• The Central Government is empowered to make rules for the purposes of this sub-section [sub-section (9A)]
• If any person fails to make a declaration as required under sub-section (1), he shall be liable to
  • a penalty of fifty thousand rupees and
  • in case of continuing failure, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees. [Sub- section (10) of section 90]
• If a company, required to maintain register under sub-section (2)and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein,
• the company shall be liable to
  • a penalty of one lakh rupees;
  • in case of continuing failure, with a further penalty of five hundred rupees for each day, after the first during which such failure continues, subject to a maximum of five lakh rupees; and
• every officer of the company who is in default shall be liable to
  • a penalty of twenty-five thousand rupees and
  • in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees. [Sub-section (11)]
• If any person wilfully furnishes any false or incorrect information or suppresses any material information of which he is aware in the declaration made under this section, he shall be liable to action under section 447 of the Companies Act, 2013. [Section 90(12)]

The SBO Rules defines ‘reporting company’ means a company as defined in clause (20) of section 2 of the Act, required to comply with the requirements of section 90 of the Act;

Rule 2A of the SBO Rules deals with duty of the reporting company. Sub-rule (1) of Rule 2A provides that every reporting company shall

• take necessary steps to find out if there is any individual who is a significant beneficial owner, as defined in clause (h) of rule 2, in relation to that reporting company, and
• if so, identify him and cause such individual to make a declaration in Form No. BEN-1.

Sub-Rule (2) provides that without prejudice to the generality of the steps stated in sub-rule (1), every reporting company shall give notice to its member (other than an individual)seeking information in accordance with sub-section (5) of section 90 in Form No. BEN-4 in all cases where the member holds not less than 10% of its:—

(a) shares, or

(b) voting rights, or

(c) right to receive or participate in the dividend or any other distribution payable in a financial year,

Rule 3 deals with obligation of significant beneficial owners to make a declaration to the reporting company of significant beneficial ownership under section 90. Rule 3 provides as under:

• Every individual, who subsequently becomes a significant beneficial owner, or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within thirty days of acquiring such significant beneficial ownership or any change therein.

Rule 4 casts a duty upon the reporting company to file a return of significant beneficial owners in shares as under:

• Upon receipt of declaration under rule 3 from the SBO,
• the reporting company shall file a return in Form No. BEN-2 with the Registrar in respect of such declaration,
• within a period of thirty days from the date of receipt of such declaration by it,
• along with the fees as prescribed in Companies (Registration Offices and Fees) Rules, 2014.

Rule 5 provides that the company shall maintain a register of significant beneficial owners in Form No. BEN-3. The register shall be open for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the Board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection.

3.1 Provisions of section 90 of the Companies Act, 2013 shall apply to LLPs also, with effect from 1-4-2022

The provisions of section 90 of the Companies Act, 2013 are applicable to Limited Liability Partnerships (LLPs) incorporated in India under the Limited Liability Partnership Act, 2008 (LLP Act, 2008).

Section 67(1) of the LLP Act, 2008, as amended by the Limited Liability Partnership (Amendment) Act, 2021, provides for the application of the provisions of the Companies Act, 2013 to LLPs. In exercise of the powers conferred by sub-section (2) of section 1 of the Limited Liability Partnership (Amendment) Act, 2021 (31 of 2021), the Central Government has, vide Notification No. S.O. 621(E), dated 11-02-2022, notified on the 01st day of April, 2022 as the date on which the provisions of sections 1 to 29 of the said Act shall come into force. Section 2 of the Limited Liability Partnership (Amendment) Act, 2021 provides that “Throughout the Limited Liability Partnership Act, 2008 (hereinafter referred to as the principal Act), for the words and figures “the Companies Act, 1956” wherever they occur, the words and figures “the Companies Act, 2013” shall be substituted. Section 67(1) was one of the places in LLP Act, 2008 where the words “the Companies Act, 1956” occurred and the same stands substituted with “the Companies Act, 2013” with effect from 01.04.2022.

Section 67(1) of the LLP Act, 2008, provides that the Central Government may, by notification in the Official Gazette, direct that any of the provisions of the Companies Act, 2013 specified in the notification—

(a) shall apply to any limited liability partnership; or

(b) shall apply to any limited liability partnership with such exception, modification and adaptation, as may be specified, in the notification.

Section 1(4)(f) of the Companies Act, 2013 provides that the said Act shall apply to “such body corporate incorporated by any Act for the time being in force as the Central Government may specify by notification subject to such modifications, exceptions or adaptations as may be specified in the notification”. Section 3(1) of the LLP Act, 2008 provides that “A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners”.

In exercise of its powers under section 67(1) of the Limited Liability Partnership Act, 2008, the Central Government (The Ministry of Corporate Affairs) has, vide Notification F. No.17/30/2018-CL-V, dated 11-02-2022, directed that section 90 of the Companies Act, 2013 shall apply to LLPs with the following modifications:

(i) the word “contribution” shall be substituted for the word “shares” wherever it occurs in section 90;

(ii) for the word “company” wherever it occurs, the word “limited liability partnership” shall be substituted;

(iii) for the word “member” wherever it occurs, the word “partner” shall be substituted;

(iv) for the word “officer” wherever it occurs, the word “designated partner” shall be substituted;

As the Limited Liability Partnership (Amendment) Act, 2021 comes into force with effect from 01-04-2022, the amended section 67(1) also comes into force with effect from 01-04-2022. Therefore, the obligation under section 90 of LLP Act, 2008 shall apply with effect from 01-04-2022.