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Fight against benami properties may affect homebuyers, banks

LiveMint logoLiveMint 12-06-2017 Arkamoy Dutta Majumdar

Kolkata: As the income-tax (I-T) department digs deeper to dredge out so-called benami properties—ones held through proxies of the real owners—it is facing the unpleasant prospect of attaching real estate projects under implementation, affecting developers, customers and even banks.

Some of the properties under the department’s scanner for which provisional attachment notices have been issued may be under development, admitted four officers in the tax department. These officers, who asked not to be identified, added that they have just started the physical verification of properties they have identified as benami.

Attachment of properties under development will be an “unmitigated disaster” for both lenders and the embattled real estate sector, said a top banker who asked not to be named. “It will trigger a chain of defaults and cause a lot of inconvenience to homebuyers,” he added.

The department understands the implications for common people, said one of the I-T officers cited above. There was a lot deliberation internally, but the department concluded that there was no way out.

Sadly for lenders and homebuyers, it is almost impossible to identify a benami property from routine record searching.

The department, which has formed separate teams across India to investigate benami properties, has issued provisional attachment notices for over 400 properties, and attached properties worth Rs600 crore across 240 deals, according to a 24 May statement from the Central Board of Direct Taxes. Most of these 400 properties are land and buildings, although bank deposits and jewellery are also included.

In Kolkata, a key land aggregator is also under the department’s scanner, and several properties owned by it in the city and its suburbs have already been attached, according to the I-T officers.

It isn’t immediately known whether its under-construction residential complex in north Kolkata has been attached, but tax department officers said the group has been identified as “a proxy for unknown beneficiaries”, and any property owned by it is likely to be attached.

Mint is withholding the name at the request of the officers who fear naming the group and its interests could disrupt the ongoing investigation.

The man behind the group in Kolkata said the allegations were “completely baseless” and that he would legally challenge them at the appropriate time. “There was no concealment, and I have shown these properties in my books for at least 10 years,” this person claimed. “If they are questioning the source of funds, it is also quite clearly mentioned in my books.”

This instance is important because it highlights the larger issues involved in the taxman’s fight against benami properties.

Among the properties of the Kolkata-based group that have been attached is a large 17-acre plot in the city’s suburbs, where the group was looking to develop a 3.1 million sq. ft commercial-cum-residential complex, according to documents reviewed by Mint. It isn’t immediately clear if the group had started to take bookings for this project.

But a leading real estate developer in West Bengal has already started to build the residential complex in north Kolkata on another 3-acre plot owned by this group, under a development and marketing contract.

“The project was sold out within hours,” said the chief executive officer of the developer, clarifying that his enterprise didn’t have any ownership in the land. Construction has started and a “fair amount of money” has already been invested in the project, he added.

Asked how he would deal with potential attachment of the property by the department, the developer said the government should attach the “proceeds from the sale” and not the property itself.

“If the property is attached, construction will have to be halted, which, to my mind, is beyond reason,” this developer said.

He and his company are not being named because that will immediately disclose the identity of the group being investigated by the taxmen.

Section 6 of Benami Transactions (Prohibition) Act says that a property acquired through a proxy cannot be transferred back to the actual beneficiary or another proxy, but does not restrict sale to a third party.

But sale in this case means transfer by way of registration. If a benami property is sold to a third party and the transaction concluded by way of registry of the sale, the department can only attach the proceeds from the sale, not the property.

“Shouldn’t the department follow the same principle even in the case of a project under development?” asked the CEO cited above. “Though, technically speaking, title has not been transferred, seeds of third party interest have already been sown.”

I-T department officers said that if a benami transaction is identified, and the property in question is found to have been transferred to a third party, the department will send notices to current owners seeking clarifications. The current owners will only have to establish through evidence that they were not the original beneficiaries of the benami transaction or proxies, the officers added.

Only if the I-T department allows the developer to buy out the land, can the project in north Kolkata be rescued, according to a lawyer in Kolkata, who advises several real estate developers and who spoke on condition of anonymity.

But the department must be taken into confidence even if no attachment notice has yet been issued, and the consideration for the sale deposited in a frozen account, this person added.

But if a property is under development by its disputed owner itself, delays are inevitable. Some projects may even have to be scrapped, according to the lawyer.

A spokesperson for CBDT declined comment for this story. A detailed questionnaire sent to her remained unanswered till press time.

Asked about the implications of the attachment of projects under implementation, Nandu Belani, a leading real estate developer in Kolkata and president of lobby group Confederation of Real Estate Developers Associations of India in West Bengal said there is no option but to move court. And only through judicial intervention will this law get streamlined, he added.

Laws prohibiting benami transactions came into force in 1988, but the Union government gave them teeth only last year. Not only were the laws made more stringent through key amendments, the I-T department was made the implementing agency.

“There was no implementing agency previously, so no one cared much,” said the lawyer.

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