Interplay between Sections 24 and 26 of the Benami Act: Scope of expansion of reference

One of the important, yet relatively, unexplored issues arising under the Prohibition of Benami Property Transactions Act, 1988 (‘Benami Act’) concerns the extent to which the Adjudicating Authority (‘AA’) can alter, expand or modify the reference made by the Initiating Officer (‘IO’), particularly in relation to addition of properties or persons during the pendency of adjudication proceedings before it. 

The issue assumes significance because the scheme of the Benami Act carefully distributes powers amongst different authorities. The IO is entrusted with investigative functions. The Approving Authority acts as a statutory check prior to provisional attachment. The AA is intended to perform adjudicatory function upon a valid reference being made by the IO basis the investigation conducted. 

The controversy, therefore, arises when the AA seeks to invoke powers under Sections 26(5) and 26(6) of the Benami Act during adjudication proceedings to include additional properties or parties beyond the original reference made under Section 24(5) of the Act.

This article examines the statutory framework governing such powers and analyses the extent to which the reference before the AA can be altered without violating the jurisdictional architecture embedded under the Benami Act.

Scheme of the Benami Act

Investigation and Provisional Attachment

The framework for attachment and adjudication under the Benami Act is structured through Sections 24 and 26 of the Benami Act. As per Section 24(1) of the Benami Act, the IO must record ‘reason to believe’ in writing and issue a show cause notice. 

If provisional attachment is considered necessary, then Section 24(3) of the Benami Act mandates IO to obtain prior approval of the Approving Authority. Thereafter, taking into consideration all material and submissions made by the parties, the IO may under Section 24(4) either continue or revoke the attachment. Alternatively, where the alleged benami property has not already been provisionally attached, the IO may order provisional attachment, which again is subject to the prior approval of the Approving Authority. Thus, as may be seen from the provisions, all such actions by the IO require prior approval of the Approving Authority.

Therefore, the reference under Section 24(5) is not merely administrative communication. Rather, it is the culmination of quasi-judicial process involving formation of reason to believe, recording of reasons in writing, issuance of statutory notices, prior approval from the Approving Authority and formation of satisfaction after inquiry. The reference, therefore, constitutes the jurisdictional foundation upon which adjudication proceedings before the AA are built. 

Once the matter reaches the AA, Section 26 of the Benami Act confers limited additional powers on the AA, i.e., power to provisionally attach benami properties and deem them part of the reference, or under Section 26(6) to add or delete parties for effective adjudication.

The question, however, is whether these provisions enable the AA to independently create a new proceeding divorced from the reference made by the IO. 

Addition of properties by Adjudicating Authority under Section 26(5) 

Case 1 – Where Original Reference Survives 

The first situation arises where the original reference made by the IO survives adjudication. For instance, assume that Property X is provisionally attached by the IO after following the statutory mechanism under Section 24 and the matter is referred to the AA.

During adjudication, the AA discovers another property, namely Property Y, also appears to be benami. In such circumstances, the AA may arguably invoke Section 26(5) to provisionally attach Property Y and treat it as part of the original reference. This conclusion very rightly flows from the structure of Section 26(5), which itself expressly incorporates a deeming fiction to the effect that even the subsequently added property is treated as having formed part of the original reference from the inception. The underlying rationale appears to be that once jurisdiction has validly assumed, the subsequent addition of connected benami properties operates merely as an extension of an already valid proceeding. 

This approach is analogous to reassessment proceedings under Sections 147 and 148 of the Income-tax Act, 1961 (‘IT Act’) as they existed prior to the Finance Act, 2021. Under the pre-amended reassessment framework, once the Assessing Officer validly assumed jurisdiction on the basis of recorded reasons, he could assess other escaped incomes discovered during reassessment proceedings, provided the original jurisdiction-conferring reasons survived. Applying the same principle to the Benami Act, where the original reference survives, the AA may exercise powers under Section 26(5) as an incidental extension of validly assumed jurisdiction. In such cases, insisting upon a fresh cycle of Section 24 proceedings for every subsequently discovered property may defeat the legislative objective.

Case 2 – Original Reference Fails to Survive

The second and more complex situation arises where the original reference itself fails to survive. Suppose the AA ultimately concludes that Property X, which formed the basis of the original reference, is not benami property. Can the AA nevertheless continue proceedings by proposing to add Property Y as benami property? 

One may, arguably say no because the jurisdiction of the AA is fundamentally derivative in nature. It originates from a valid reference made by the IO after compliance with Section 24. If the original reference itself collapses, the very jurisdictional foundation upon which adjudication proceedings were initiated disappears. In such circumstances, permitting the AA to continue proceedings in relation to Property Y would effectively transform the AA from an adjudicatory authority into an investigating authority a role consciously reserved for the IO under the statutory framework. 

Such an interpretation would also render redundant the safeguards embedded under Section 24 including formation of independent reason to believe, prior approval of the Approving Authority, issuance of notice to the alleged benamidar and beneficial owner, and independent inquiry by the IO. 

The deeming fiction under Section 26(5) also supports this interpretation as it only operates because there exists a valid and surviving original reference to which the subsequently added property can relate back. Where the original reference itself ceases to survive, there remains no jurisdictional basis to attach new Property Y. This principle finds support from reassessment jurisprudence under the Income-tax Act. 

The Punjab & Haryana High Court in Commissioner of Income-tax v. Atlas Cycle Industries [[1989] 46 Taxman 315] held that where the original jurisdiction-conferring ground fails, reassessment proceedings themselves cannot survive. A similar principle has recently been reiterated by the Delhi High Court in Banyan Real Estate Fund Mauritius v. ACIT [W.P.(C) 10485/2023, Order dated 5th August 2024], wherein the Court examined whether reassessment proceedings could survive on grounds completely different from those forming the basis of the original show cause notice under Section 148A(b) of the IT Act. In the said case, the original show cause notice proceeded on the allegation that the assessee was a non-filer and had made remittances to a foreign entity. However, during the course of proceedings, the Assessing Officer shifted the basis of reassessment and ultimately questioned the assessee’s entitlement to tax treaty benefits, an issue which did not form part of the original notice or the foundational material relied upon for reopening. In this context the High Court held that once the foundational basis contained in the original notice failed, the reassessment proceedings could not be sustained on altogether different grounds subsequently discovered during inquiry.

Addition of parties by Adjudicating Authority under Section 26(6) 

The above principle discussed in respect of property should hold good even in respect of addition of new person(s) to the adjudication proceedings in terms of Section 26(6). Section 26(6) empowers the AA, at any stage of the proceedings, either suo motu or on an application, to strike out improperly joined parties or add persons whose presence is necessary for effective adjudication. Therefore, it is only where the original reference survives, the AA may exercise powers under Section 26(6) to undertake correction action by way of addition of any other necessary parties or transposition or reclassification of parties already subjected to proceedings under Section 24, particularly where such exercise is necessary for effective adjudication of the existing reference. 

However, where the original reference itself does not survive, the AA cannot independently continue proceedings entirely against newly added persons. Interestingly, the legislature consciously incorporated a deeming provision in relation to properties under Section 26(5) but omitted any similar provision for persons under Section 26(6). This legislative distinction indicates that while the statute intended some flexibility regarding additional properties, it did not intend to dilute the natural justice safeguards applicable to persons. Therefore, even where the AA proposes to add any additional parties, such parties must also be granted meaningful and reasonable opportunity to make submissions in response to the proposals made against them. 

Inference in this regard may be drawn from the decision of the Appellate Tribunal SAFEMA, New Delhi in Sanjay M. Soni v. IO, DCIT (BPU-1) [[2025] 172 taxmann.com 701 (SAFEMA - New Delhi)]. In this case, notices under Section 24(1) were initially issued treating certain persons/entities as beneficial owners and others as abettors. Subsequently, after the reference had already been made to the AA for adjudication and the matter had even been reserved for pronouncement of orders, the IO allegedly came across additional material during further investigation. Pursuant thereto, and after obtaining approval from the Approving Authority, the IO moved an application under Sections 26(5) and 26(6) of the Benami Act seeking transposition of certain notified beneficial owners as abettors and certain abettors as beneficial owners. Thereafter, the AA issued notices under Section 26(6) proposing formal reclassification of such parties by changing their status from ‘beneficial owner’ to ‘abettor’ and vice versa. 

The Tribunal upheld such action and observed that Section 26(6) is an enabling provision intended to cure defects and facilitate effective adjudication. Importantly, the Tribunal noted that all such parties had already been issued notices under Section 24(1) and were, therefore, already subjected to the jurisdictional framework under the Benami Act. The subsequent transposition merely amounted to correction or reclassification of the status of existing parties on the basis of material emerging during investigation and did not amount to initiation of fresh proceedings against altogether new persons. 

Conclusion

The powers of the Adjudicating Authority under Sections 26(5) and 26(6) are undoubtedly wide. However, such powers cannot be viewed in isolation from the jurisdictional and procedural framework established under Section 24 of the Benami Act. A harmonious reading of the statutory scheme suggests that Sections 26(5) and 26(6) of the Benami Act merely expand the scope of jurisdiction validly assumed in terms of a reference under Section 24 and do not create an entirely new and independent jurisdiction of AA dehors that of the reference. The adjudicatory process under the Benami Act must, therefore, remain anchored to the validity and survival of the original reference made by the IO.

[The authors are Associate Partner, Senior Associate and Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]