IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA ITA Nos.14 and 15 of 2002 Judgment reserved on: 29.7.2008. Date of decision: 4th August, 2008. Sham Sunder Aggarwal (in both cases) ..Appellant Versus Asstt. Commissioner of Income Tax ..Respondent Coram The Hon’ble Mr. Justice Deepak Gupta, Judge. The Hon’ble Mr. Justice V.K.Ahuja, Judge. Whether approved for reporting?1 Yes For the Appellant.: Mr.Rajesh Garg, Advocate. For the Respondent: Mr.Vinay Kuthiala & Ms.Vandana Kuthiala, Advocates. Deepak Gupta, J. These two Income Tax Appeals are being disposed of by one judgment since they have both been admitted on the following identical questions of law: “1.Whether the Tribunal was right in law in holding that the appellant was liable to explain the investments made in the properties owned by Prem Singh under Section 69 of the Income Tax Act, in spite of the specific provisions of the Benami Transaction Prohibition Act, 1988 and repealed Section 281 (A) of the Income Tax Act?. 2.Whether the Ld.Tribunal was justified in restoring appeal filed by the revenue to CIT (Appeals), when noting has been said about the additions deleted by the CIT (Appeals) especially in view of the fact that the said deletion made by 1 Whether the reporters of the local papers may be allowed to see the Judgment?yes 2 the CIT (Appeals) have been rather approved by the Ld.Tribunal?.” The brief facts necessary for decision of the appeals are that the Income Tax Department carried out search and seizure action under Section 132 of the Income Tax Act at the residential and business premises of the assessee on 14.5.1992. In these operations a cash amount of Rs.1,56, 875/- was recovered. According to the observations of the Assessing Officer the assessee had been carrying on business of purchase and sale of land. The modus operandi allegedly by the assessee was that he would obtain General Power of Attorney in the name of different persons including one Sh.Prem Singh alleged to be his servant. The properties were purchased in the name of Prem Singh since he was a Himachali agriculturist. The dispute in these cases is short. The question that arises is whether the income tax authorities can ask the assessee to furnish explanations for the investments allegedly made by him in respect of the property registered in the name of Prem Singh? The learned Tribunal has held that the Department was well within its right to ask for an explanation from the assessee and in case the explanation is not accepted to add the un-explained investments to the income of the assessee. The 3 assessee is only aggrieved by this portion of the order of the learned Tribunal. We have heard Sh.Rajesh Garg, learned counsel for the appellant and Sh.Vinay Kuthiala, learned counsel for the respondent. The main argument of Sh.Garg is that the appellant cannot be treated as the assessee in the case. According to him under the provisions of the Benami Transactions ( Prohibition ) Act, 1988 (hereinafter referred to as the Benami Act) the person in whose name the property is registered is for all intents and purposes the true owner of the property and therefore the Income Tax Department can only ask him to explain the source from which the property was purchased. According to him, a person in whose name the property is not registered cannot be made liable to pay tax in respect of this property. With a view to properly appreciate the rival contentions of the parties it would be pertinent to mention that prior to the enactment of the Benami Act, Section 281 (A) of the Income Tax Act which read as follows: “281(A) No suit to enforce any right in respect of any property held benami, whether against the persons in whose name the property is held or against any other person, shall be instituted in any court by or on behalf of a person hereafter in this section referred to as the claimant claiming to be the real owner of such property unless notice in the prescribed form and the property has been given by the 4 claimant within a period of one year from the date of acquisition of the property to the Commissioner.” The Benami Act was enacted by parliament with a view to prohibit benami transactions and the right to recover such benami property. This Act was came into force on 5th September, 1988. Sections 3 to 5 of the Act read as follows: “3. Prohibition of benami transactions. (1) No person shall enter into any benami transaction. [(2) Nothing in sub-section (1) shall apply to- (a) the purchase of property by any person in the name of his wife or unmarried daughter and it shall be presumed, unless the contrary is proved, that the said property had been purchased for the benefit of the wife or the unmarried daughter; (b) the securities held by a- (i) depository as a registered owner under sub-section (1) of section 10 of the Depositories Act, 1996; (ii) participant as an agent of a depository. Explanation.- The expressions “depository” and “participant” shall have the meanings respectively assigned to them in clauses (e) and (g) of sub-section (1) of section 2 of the Depositories Act, 1996.] (3) Whoever enters into any benami transaction shall be punishable with imprisonment for a term which may extend to three years or with fine or with both. (4) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), an offence under this section shall be non-cognizable and bailable. 4. Prohibition of the right to recover property held benami. (1) No suit, claim or action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property. (2) No defence based on any right in respect of any property held benami, whether against the person in whose name the property is held or against any other person, shall be allowed in any suit, claim or action or by or on behalf of a person claiming to be the real owner of such property. 5 (3) Nothing in this section shall apply,- (a) where the person in whose name the property is held is a coparcener in a Hindu undivided family and the property is held for the benefit of the coparceners in the family; or (b) where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity, and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity. 5. Property held benami liable to acquisition. (1) All properties held benami shall be subject to acquisition by such authority, in such manner and after following such procedure as may be prescribed. (2) For the removal of doubts, it is hereby declared that no amount shall be payable for the acquisition of any property under sub- section(1).” Section 281(A) of the Income Tax Act was repealed by repealing Section 7 of the Benami Act. A bare perusal of Section 281(A) of the Income Tax Act clearly shows that a person who had purchased property in the name of some other person could not institute a suit against the person in whose name the property was registered unless he had within one year of the date of acquiring the property informed the Income Tax authorities that he had purchased the property in the name of such other person. The purpose behind this Rule was simple. For the purposes of Income Tax the authorities recognized that certain persons were entering into benami transactions. These persons were disentitled from claiming the property back from the benamidar unless they had informed the income tax authorities about the purchase which also meant that they had to explain the source of their funds. 6 With the imposition of the Benami Act, the legislature in its wisdom decided that the right to recover property would stand prohibited. Obviously the intention was to do away with benami transactions once and for all. Therefore, a person who purchased property in the name of another person could not legally enforce his right to recover the property purchased Benami by going to Court. Even if he could prove that he had provided the entire proceeds for the purchase of the property and he was the true purchaser of the property, such person, under the Benami Act is prohibited from recovering this property from the registered owner. Benami transactions were per se aimed at defrauding public revenue and creditors and therefore, it was decided to put a stop to such benami transactions. However, this does not mean that if the Income Tax authorities have reliable information that a person has purchased property in the name of some other person he cannot be asked to disclose the source of funds utilized to purchase the benami property. We cannot accept the argument of the appellant. If such an argument is accepted it would amount to giving premium to a person who does an illegal act. The argument of the appellant is that even if a property is bought benami, the provider of the funds cannot be asked to disclose the source of his funds nor can the said funds be added to his income because it is only benamidar i.e. 7 the person in whose name the property is registered who is liable to pay the tax. There is an inherent fallacy in this argument. As pointed out above Benami Act only prohibits the benami transactions and recovery of such property held benami. Anybody who enters into a benami transactions is liable to be punished with imprisonment. It has been made a criminal offence. It would indeed be very strange if we hold that the person indulging in such benami transaction can be held criminally liable and punished for such criminal offence but cannot be asked to disclose the source of his funds. The Benami Act only prohibits the setting up of a claim by the real owner against benamidar. It has no impact on the provisions of the Income Tax Act. The Income Tax authorities can always ask the assessee from where he has received the funds used to finance the benami transaction. Merely because the transaction is illegal does not mean that the transaction has not taken place. Once it is proved that a benami transaction has taken place, the income tax authorities would be well within their jurisdiction to ask the person who has financed such transaction as to what is the source of his funds. If he fails to give any valid explanation, the income tax authorities can add this unexplained investment to his income. The mere fact that the benamidar can also be held liable to pay tax on account of the property held by him is no ground to hold that the person 8 who essentially indulges in this illegal transaction should not be made liable to pay tax or the undisclosed funds. We may add that while taking this view we are fortified by a judgment of the Division Bench of the Kerala High Court in Commissioner of Income-Tax vs. K.Mahim, (1995) 213 I.T.R. 820, wherein it was held as follows: “What he Income-tax Officer primarily seeks to establish is not the benami nature of the transaction, but the source of the investment for the purchase of the property, whether it proceeded from the assessee or the persons in whose name he property is held. Being so, the prohibitions contained in sections 3 and 4 of the Act do not affect the consideration of this question including the question of benami which incidentally arises. The enquiry being mainly about whether the source of the investment was made by the assessee, the benami character of the acquisition of the property is only subsidiary, and any finding thereon is only incidental, so long as the source of funds is the assessee. This is apart from the fact that sections 3 and 4 do not bar such an enquiry in an income-tax assessment.” In view of the above discussion, we find no merit in the appeals which are accordingly dismissed. Both the questions of law are answered against the assessee and in favour of the revenue. ( Deepak Gupta ), J. August 4, 2008 ( V. K. Ahuja ), J. PV