Madras High Court on Benami Attachments: Only Prima Facie Satisfaction Needed at Section 24 Stage

The Madras High Court, in Marg Realities Limited Vs DCIT and connected matters, has delivered an important ruling on the nature and limits of proceedings under the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act), particularly at the provisional attachment stage under Section 24.

Fourteen Writ Petitions, all linked by the allegation that the real (beneficial) owner of the assets was Mrs. V.K. Sasikala (VKS), were heard together. The Court ultimately dismissed all the petitions, holding that:

  • The satisfaction required under Section 24 is only prima facie and preliminary.
  • A full, detailed examination of facts, evidence, and legal issues is required only during adjudication under Sections 25 and 26.
  • Arguments based on (i) commercial character of transactions, (ii) partial consideration, and (iii) demonetized currency are matters for adjudication and not grounds to nullify provisional attachment at the initial stage.

The Court also directed the authorities to proceed expeditiously to adjudication and to provide the assessees with all relied-upon materials along with Section 26 notices.

Structure of the Writ Petitions

The High Court grouped the 14 Writ Petitions into three clusters, each concerning a particular asset allegedly held benami for VKS:

  1. Batch I – Spectrum Mall, Perambur, Chennai (Asset 1 / Property 1)
  2. Batch II – Marg Square and equity shares in Digital Accelerator Limited (Asset 2 / Property 2)
  3. Batch III – Ocean Spray resort and related assets (Asset 3 / Property 3)

Across all three batches, the assessees took substantially similar stands and raised overlapping legal objections to the proceedings initiated under the PBPT Act.

Batch I: Spectrum Mall, Perambur (W.P.Nos.3641, 8352 & 8540 of 2020)

Background Facts

  • Ganga Foundations Private Limited (the company), along with landowners D.V. Balaji and Shanmugadurai, developed a mall at Perambur, Chennai, around 2011.
  • As per their development arrangement, 65% of the built-up area was to go to the builder and 35% to the landowners.
  • The company claimed ownership of about 37,972 sq.ft. undivided share in the mall.
  • This share was mortgaged first with Indian Overseas Bank and later with State Bank of India to secure various credit facilities.

Alleged Sale to VKS and Demonetization Angle

  • Around 2015, the company stated it was pressured to sell Spectrum Mall to VKS.
  • Despite initial reluctance, business and operational difficulties allegedly compelled them to commence negotiations.
  • A sale price of Rs.192.50 crores was apparently agreed.
  • After the announcement of demonetization on 08.11.2016, negotiations continued. The assessees claim they were forced to sign an MoU with several fields left blank and without receiving any consideration at that time.
  • On 16.12.2016, they alleged that a middleman delivered Rs.130 crores in demonetized notes, out of which:
    • Rs.8 crores was allegedly retained by the middleman as commission.
    • Rs.119.82 crores remained, from which co-owners were paid and the balance kept by the company.
  • No further amounts were paid. According to the assessees, the sale was intended to be completed later through regular banking channels, but did not materialise.

Benami Action and Assessee’s Objections

A search in the premises of VKS and thereafter in the company’s premises brought this transaction to light. The authorities concluded that Spectrum Mall was held as benami property for VKS under the PBPT Act, and that the company and co-owners were benamidars.

The assessees challenged this conclusion, arguing that:

  • The mall was developed entirely through their own resources and business efforts.
  • Any proposed sale to VKS was a purely commercial transaction, not a benami arrangement.
  • The consideration was only partially paid and that too in demonetized Rs.500 and Rs.1000 notes which had ceased to be legal tender after 08.11.2016.
  • Under the PBPT Act, they contended that a benami transaction presupposes a lawful, complete consideration and that payments in invalid currency cannot qualify as “consideration”.
  • As the sale had not gone through and full valid consideration was not received, the PBPT Act should not apply.
  • The Initiating Officer did not have adequate material to form “reason to believe” under Section 24, rendering the very assumption of jurisdiction invalid.

Non-availability of MoU and Supply of Documents

  • The assessees highlighted that the entire benami allegation was based on a supposed MoU, yet no such MoU was found or produced by the Department.
  • The Department admitted that no MoU was seized during the search.
  • Other seized materials and sworn statements were also not furnished at this preliminary stage; the Department’s stand was that such materials would be supplied at the adjudication stage.

Challenge to Show Cause Notices under Section 24(1)

The assessees contended that:

  • The Section 24(1) notices merely replicated the contents of the forwarding letter of the Deputy Commissioner (Benami Prohibition) dated 14.05.2019.
  • There was no independent application of mind by the Initiating Officer as to whether the transactions satisfied the definition of a benami transaction.
  • The forwarding letter referred to cash, documents, and evidence found in VKS’s premises, including data from a mobile phone, suggesting large unexplained cash used to finance acquisitions. These were simply reproduced in the Section 24(1) notices.

Demonetization and RBI Circulars

The assessees also cited:

  • Circulars of the Reserve Bank of India on demonetization;
  • The Specified Bank Notes (Cessation of Liability) Act, 2017 and the 2016 Ordinance preceding it;

to argue that demonetized notes could not legally constitute “consideration” under the PBPT Act, thereby undercutting the Department’s case.

Alleged Denial of Opportunity

One of the petitioners in this batch initially claimed non-receipt of certain communications, but during hearing admitted both receipt and response to a communication dated 03.12.2020.

The Court noted that where a notice is admittedly received and no substantive reply is filed, a plea based on violation of natural justice is difficult to sustain at the preliminary stage.

The assessees also relied on, inter alia:

  • Andaman Timber Industries V. Commissioner of Central Excise, Kolkata – II (62 Taxmann.com 3)
  • Thilagarathinam Match Works Vs. Commissioner of Central Excise, Tirunelveli (46 taxmann.com 382)
  • Automotive Tyre Manufacturers Association V. Designated Authority and others (2011 (2) SCC 258)
  • *Sri Meenakshi Mills Ltd. V.