Disclaimer: This has been reported after the availability of the order of the Court and not on media reports so as to give an accurate report to our readers.
Supreme Court: In an appeal against the order rejecting Order 7 Rule 11 application seeking rejection of plaint for being barred by law as benami transaction, the Division Bench of J.B. Pardiwala and R. Mahadevan*, JJ., noted that that although the suit was presented as one based on a will and inheritance, the actual claim was that the properties had been purchased by the deceased using the respondent-plaintiff’s money and thereafter kept it for his benefit; the Court held that the present matter attracted the provisions of the Prohibition of Benami Property Transactions Act, 1988 (Benami Act).
The conclusions of the Court on the Benami Act are summarised as follows:
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Though disputed questions of fact ordinarily require trial, courts may still examine whether the foundation of the claim is legally sustainable before directing parties to undergo trial.
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There is no fiduciary relationship between a company director and an employee of the company. Commercial and contractual arrangements supported by consideration do not fall within the fiduciary exception under the Benami law.
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Contracts entered into to circumvent the law are illegal and unenforceable.
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Courts must weed out frivolous and legally barred suits at the earliest stage by giving a meaningful reading to the plaint and accompanying documents instead of being guided by clever drafting.
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The 2016 amendments to the Benami Act are retrospective in operation and may apply to earlier benami transactions.
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Confiscation under the Benami Act is a civil consequence distinct from criminal prosecution, and therefore Article 20(2) Constitution is not attracted.
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Once a transaction is judicially declared benami and such finding attains finality, the property becomes liable to confiscation without requiring a fresh adjudicatory exercise under Sections 24 to 26 Benami Act.
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Trial Courts dealing with issues relating to benami transactions must decide such questions at the earliest stage and, where a prima facie case exists, transfer the matter to the competent Adjudicating Authority or Appellate Tribunal.
Background
The present civil appeal arises from the Karnataka High Court order, which reversed the trial court’s order. The trial court had allowed the application filed by Defendants 1 to 3 / appellants under Order 7 Rule 11 (a) and (d) CPC, and rejected the plaint for lack of any cause of action and the suit being barred under Sections 4 and 6 Prohibition of Benami Property Transactions Act, 1988 (Benami Act).
The respondent/plaintiff had instituted a suit seeking a declaration of ownership over the suit properties based on a Will allegedly executed by the husband of Defendant 1 and father of Defendants 2 and 3, namely, K. Raghunath, along with rectification of alleged mistakes in the schedule to the Will and consequential injunction reliefs.
The appellants/Defendants contended that the late K. Raghunath had earlier executed a registered Will in favour of Appellant 1, pursuant to which the revenue records had been mutated in their favour. They further alleged that FIRs had been registered against the respondent in connection with the murder of K. Raghunath.
During the pendency of the suit, the appellants had filed an application under Order 7 Rule 11 CPC seeking rejection of the plaint on the ground that it disclosed no cause of action and was barred under Sections 4 and 6 of the Benami Act. The Trial Court had allowed the application and rejected the plaint.
Aggrieved thereby, the respondent had preferred an appeal before the Karnataka High Court, which held that the plaint averments did not attract the provisions of the Benami Act and restored the suit for adjudication on merits.
Aggrieved by the said judgment, the appellants had preferred the present Civil Appeal.
Also Read: Benami Transactions: Meaning and Facets | SCC Times
Analysis
The Court observed that the appellants, in their application, had averred that the transaction between the plaintiff and K. Raghunath is a benami transaction barred under the provisions of the Benami Act. The respondent/plaintiff contended that the suit was founded solely on the Will and that, while considering an application for rejection of the plaint, the Court was confined to the plaint averments alone. It was further contended that a fiduciary relationship existed between the respondent and the late K. Raghunath, and therefore, the transaction could not be treated as benami. The respondent had also argued that no transfer of property takes place through a Will and that the objections raised by the appellants required adjudication at trial rather than summary rejection of the plaint.
The Court reiterated the settled position that disputed questions of fact are ordinarily adjudicated at trial. The Court highlighted that while considering an application for rejection of the plaint, the court must determine whether any real dispute of fact actually arises and whether the suit is barred by law, even if the plaint averments are accepted at face value. The Court noted that the plaint must disclose a genuine triable issue and not merely an illusory cause of action.
1. Retrospective Application of the Benami Transactions (Prohibition) Amendment Act, 2016
The Court observed that the matter at hand concerned transactions entered into after the Benami Act came into force in 1988 and before the amendments introduced in 2016.
The Court noted that the 2016 Amendment introduced sweeping and comprehensive changes, including a structured mechanism for the attachment, adjudication, and confiscation of benami property. The Court highlighted that the Benami Act provides two distinct deterrent measures to prohibit benami transactions, i.e., confiscation and punishment, where confiscatory proceedings may be commenced against legal representatives of a deceased person, whereas penal proceedings cannot.
The Court clarified that the adjudication undertaken for confiscation of benami property stands on a different footing from criminal proceedings initiated for prosecution of offences under the Benami Act. The Court further clarified that the substantive power to confiscate property involved in benami transactions existed even under the unamended law; what the 2016 amendment introduced was merely a detailed procedural framework which was earlier absent.
The Court examined whether the amended provisions operate prospectively or retrospectively. The Court highlighted that the amendments were introduced to cure the mischiefs and omissions in the original enactment, which had failed to curb benami transactions in the desired manner, and effective steps could not be taken for want of adequate procedural provisions.
The Court stated that generally every statute is presumed to be prospective unless the statute itself expressly or by necessary implication provides otherwise. The Court then pointed out that it is equally well settled that the mere fact that a law is brought into force from a particular date does not necessarily mean that it operates only prospectively. The Court stated that,
“To determine the true temporal operation of a statute, the object of the enactment must be considered. If the purpose of the amendment is to cure a defect, remove an omission, substitute appropriate provisions earlier lacking, effectively implement the original legislative intent, or if the amendment is clarificatory, declaratory or validating in nature, it may legitimately receive retrospective operation.”
The Court observed that protection against retrospectivity generally extends only to vested or accrued rights, and therefore, a person cannot claim a vested right to enter into transactions designed to defeat or circumvent the law. The Court stated that it is a settled principle that what cannot be done directly cannot be permitted to be done indirectly. Bengal Immunity Co. Ltd. v. State of Bihar, (1955) 1 SCC 763, was referred to, wherein the rule in Heydon’s case, 76 ER 637, was approved, namely, that the Court must adopt such a construction as suppresses the mischief and advances the remedy. The Court there referred to a catena of judgments to state that unless the amendment is given retroactive operation, the very object of making the legislation workable would be defeated.
The Court clarified that the 2016 amendments, insofar as they are declaratory, procedural, curative and machinery-oriented, operate retrospectively, while penal provisions creating new offences or enhancing punishment can operate only prospectively.
2. Exception of “Fiduciary Capacity” Under The Amended Act
The Court examined the scope of the exception relating to fiduciary capacity under Section 4(3) of the unamended Benami Act and Section 2(9) of the amended Act. The Court observed that the unamended provision exempted certain categories of transactions, including those involving persons standing in a “fiduciary capacity”, and that after amendment, the exclusions were incorporated into the definition of “benami transaction” under Section 2(9). Reiterating its earlier finding, the Court held that the omission and substitution operated retrospectively.
The Court further noted that while the expression “fiduciary capacity” had not been defined under the unamended law, the amended provision specifically referred to categories such as trustees, executors, partners, company directors, and depository participants. It also discussed the principles of statutory interpretation governing the expressions “includes”, “means”, and “means and includes”, observing that even an inclusive definition may, depending on the context, object, and structure of the statute, indicate a restrictive or exhaustive legislative intent.
The Court observed that, while explaining the category of persons standing in a fiduciary capacity, the legislature had specifically identified classes such as trustees, executors, partners, directors, and depository participants, and had expressly empowered the Central Government to notify additional categories. It held that the conferment of such delegated power indicated that any enlargement beyond the enumerated classes was intended to occur through statutory notification and not through unrestricted judicial expansion. The Court, thus, stated that the expression “fiduciary capacity” must receive a restricted and controlled construction. The Court clarified that the persons expressly enumerated would fall within the exception, and any additional category would ordinarily require notification by the Central Government. The Court further clarified that in the absence of such notification, the scope of the exception could not be expanded merely on equitable considerations.
3. What Amounts To A “Fiduciary Relationship”
The Court rejected the contention that a “fiduciary relationship” existed merely because late K. Raghunath had been a loyal employee in companies run by the plaintiff’s father. The Court stated that an employer-employee relationship does not, by itself, fall within the recognised categories of “fiduciary relationships” under the Benami law. The Court noted that,
“Firstly, an employer-employee relationship does not, by itself, fall within the recognised categories of fiduciary relationship for the purpose of exemption under the Benami legislation. Secondly, the law does not ordinarily recognise a fiduciary relationship between a company and its employee, or between a director and an employee of the company, in the sense sought to be projected here. Rather, the recognised fiduciary duty is that of a director towards the company since a director is bound to act in the interests of the company”
The Court noted that the plaintiff himself had pleaded that the deceased was an employee of companies run by his father and not of the plaintiff personally.
The Court referred its judgment in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314, which held that a fiduciary duty arises where one person is bound to protect the interests of another and is prohibited from deriving personal benefit from that position of trust. It was further held that a director stands in a fiduciary capacity towards the company, but not ordinarily towards individual shareholders except in special circumstances.
“A company is a distinct juristic entity, separate from its directors, though it necessarily acts through them. Likewise, directors are not ordinarily fiduciaries of individual shareholders, except in special circumstances where personal advice is tendered and relied upon in good faith. The limited fiduciary obligations that may arise in an employment relationship, such as duties relating to confidentiality, trade secrets, loyalty during service, or acts done in the course of employment, cannot be expanded so as to validate or transform an otherwise prohibited property arrangement into a fiduciary holding exempt from the statute.”
The Court observed that the pleadings and documents relied upon by the plaintiff disclosed a commercial arrangement founded on contractual MOUs, under which a fixed consideration per acre had allegedly been agreed upon. The Court stated that such a transaction involving reciprocal commercial obligations could not be treated as property held in a fiduciary capacity for the benefit of another. The Court clarified that a commercial arrangement does not become a “fiduciary relationship” merely because one party asserts confidence or trust, and accordingly rejected the plaintiff’s contention that the transaction was exempt from the rigour of the Benami law on that ground.
Accordingly, the Court held that no fiduciary relationship was made out and rejected the contention that the issue necessarily required trial.
Reliefs
The Court held that although the plaint was liable to be rejected, the appellants cannot, for that reason alone, claim entitlement to the suit schedule properties. The Court stated that the case of the appellant was that the said properties were the self-acquired properties of the deceased K. Raghunath, who had purportedly executed a registered Will bequeathing the same in favour of his wife, and pursuant to which the appellants claim to have secured mutation in the revenue records and to be in peaceful possession thereof.
The Court stated that the transactions in question were already found to be benami in nature, and thus, the properties became liable to confiscation in accordance with law. Accordingly, the Court held that the appellants had failed to establish that the suit properties were acquired from the independent funds of the deceased.
“The power of confiscation is not merely punitive in character, but serves a larger public purpose, namely to preserve the sanctity of lawful ownership, deter colourable devices, and ensure that no person derives advantage from transactions structured to defeat the mandate of law. Stern enforcement of the statute, wherever warranted, alone would send a clear message that benami transactions shall neither receive judicial indulgence nor escape statutory consequences.”
Decision
The Court held that the power to reject a plaint under Order 7 Rule 11 CPC is a serious jurisdiction which must be exercised with due circumspection. The Court highlighted that while genuine causes should not be shut out prematurely, courts are equally duty-bound to prevent abuse of process where the pleadings themselves disclose no enforceable right or reveal a claim barred by law.
The Court further held that, though the plaint was framed as one based on a Will and succession, a meaningful reading showed that the real foundation of the claim was the assertion that the suit properties had been purchased by the late K. Raghunath with funds allegedly provided by the plaintiff and held for his benefit. It therefore held that the claim was inextricably linked to a benami arrangement barred under the Benami Act.
Since the transactions were already held to be benami in nature, making the MOUs illegal and void, the Court held that neither the plaintiff nor the appellants, as legal heirs, could derive any benefit therefrom. Consequently, the Court held that the said properties were liable to confiscation under Section 27 Benami Act and observed that, once a competent judicial determination declaring the transaction benami had attained finality, there was no necessity to relegate the parties to the Adjudicating Authority for confiscation proceedings.
“It is not uncommon in legal history that whenever the law seeks to prohibit, human ingenuity seeks to disguise. From the use of proxies in earlier times to modern layered transactions, the separation of real ownership from ostensible title has long been employed as a device to evade legal restraints. Benami transactions are but a contemporary manifestation of that tendency, where legality is outwardly simulated though never truly intended.”
The Court held that where the statute not only prohibits such transactions but also provides for stringent consequences, the Court would be failing in its duty if it were to remain a silent spectator.
Accordingly, the Court directed the Central Government to appoint an Administrator and take over the suit properties in accordance with the law. The Court further clarified that, since the judicial determination declaring the transaction to be benami had attained finality, no court shall entertain any claim in respect of the subject properties arising out of or founded upon such benami transaction.
[Manjula v. D.A. Srinivas, 2026 SCC OnLine SC 831]
*Judgment authored by Justice R. Mahadevan.
Advocates who appeared in this case:
For the appellants: Mahesh Thakur, AOR with Anuparna Bordoloi, Narveer Yadav, Dhanush M, Siddhartha Sati, Ajay Pal Singh, Ruchi Kumari, Akshay Kumar and Sai Tanishka K, Advocates
For the respondent: Senior Advocate Gagan Gupta and AOR Deepak Goel with T.M. Shivakumar and Sanjana, Advocates
