Madras High Court Upholds Benami Notice, Dismisses Writ Against Adjudication Proceedings

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Case Name

M. Sivasamy v. The Adjudicating Authority, Office of the Competent Authority (SAFEM(FOP)A & NDPSA) & Others (High Court of Madras)

W.P.(MD) No. 2828 of 2025 and W.M.P.(MD)No.1974 of 2025

Date: 30th January 2025

Key Takeaways

• Procedural Compliance: The court held that the notice under Section 26(1) of the PBPTA was valid, even if not all alleged beneficial owners were initially served, as Section 26(6) (of Income Tax Act, 1961) allows the Adjudicating Authority to add parties at any stage.
• No Prejudice Shown: Since the petitioner had already participated in the proceedings and responded to the notice, he could not later object to the process on technical grounds.
• Adjudication Continues: The authorities are free to continue the adjudication and issue further notices as needed.
• Legal Principle: The judgment clarifies the flexible approach under Section 26(6) (of Income Tax Act, 1961) of the PBPTA for adding necessary parties during adjudication.

Issue

Was the notice issued under Section 26(1) of the Prohibition of Benami Property Transactions Act, 1988, invalid because it was not served on all alleged beneficial owners, specifically the company, at the outset?

Facts

• Background: The Income Tax authorities conducted a search on M. Sivasamy’s company under Section 132 (of Income Tax Act, 1961), in November 2019. An appraisal report alleged that shares allotted to 18 job workers were benami transactions, with the company as the beneficial owner.
• Initial Proceedings: Notices were issued under Section 24 (of Income Tax Act, 1961) of the PBPTA. Sivasamy challenged these in earlier writ petitions, arguing the transactions weren’t covered by the Act. Those petitions were withdrawn, and he participated in the ongoing proceedings.
• Attachment and Notice: The shares were provisionally attached under Section 24(4)(b)(i) (of Income Tax Act, 1961) of the PBPTA. The Adjudicating Authority then issued a notice under Section 26(1) (of Income Tax Act, 1961) on 26.06.2024, asking Sivasamy to respond and appear for a hearing.
• Current Challenge: Sivasamy argued that the proceedings were invalid because the company (alleged beneficial owner) was not served notice under Section 26(1) (of Income Tax Act, 1961), and that no proper preliminary enquiry was conducted under Sections 19 (of Income Tax Act, 1961) and 23.

Arguments

Petitioner (M. Sivasamy)

• The company, as a beneficial owner, should have been served notice under Section 26(1) (of Income Tax Act, 1961) of the PBPTA.
• No preliminary enquiry was conducted as required by Sections 19 and 23, making the proceedings invalid.
• The entire process is vitiated due to these procedural lapses.

Respondents (Income Tax Authorities)

• Section 26(6) (of Income Tax Act, 1961) of the PBPTA allows the Adjudicating Authority to add or remove parties at any stage, so notice can be served to the company during the proceedings.
• The petitioner has already responded to the notice and is participating in the adjudication, so the process has been acted upon.
• The petitioner did not raise the issue of notice to the company in his reply to the notice, and had previously withdrawn similar challenges.

Key Legal Precedents & Statutory References

• Section 26(1) (of Income Tax Act, 1961) of PBPTA, 1988: Requires the Adjudicating Authority to issue notice to the benamidar, beneficial owner, interested parties, and claimants within 30 days of receiving a reference.
• Section 26(6) (of Income Tax Act, 1961) of PBPTA, 1988: Allows the Adjudicating Authority to add or remove parties at any stage, either on application or suo motu, to ensure all necessary parties are present for adjudication.
• Section 24(4)(b)(i) (of Income Tax Act, 1961) of PBPTA, 1988: Relates to provisional attachment of property during investigation.

The court did not cite any specific case law by name, but relied heavily on the statutory interpretation of the PBPTA sections.

Judgement

• Decision: The writ petition was dismissed. The court found no illegality or procedural infirmity in the notice issued under Section 26(1) (of Income Tax Act, 1961) of the PBPTA.
• Reasoning: The court emphasized that Section 26(6) (of Income Tax Act, 1961) allows the Adjudicating Authority to add necessary parties at any stage, so the absence of initial notice to the company was not fatal. The petitioner had already participated in the proceedings and could not object mid-way on this ground.
• Order: The authorities are free to continue the adjudication and issue further notices as needed. No costs were awarded.

FAQs

Q1: Does the Adjudicating Authority have to serve notice to all beneficial owners at the start?

A: No. Under Section 26(6) (of Income Tax Act, 1961) of the PBPTA, the Authority can add parties at any stage of the proceedings, so initial omission is not fatal.

Q2: Can a party object to the process after participating in the proceedings?

A: Generally, no. If a party has already responded and participated, they cannot later object on technical grounds that could have been raised earlier.

Q3: What happens next in this case?

A: The authorities can continue with the adjudication and issue further notices, including to the company if necessary.

Q4: Did the court find any procedural error in the authorities’ actions?

A: No. The court found the process was in line with the PBPTA and dismissed the petition.

Q5: What is the significance of Section 26(6) (of Income Tax Act, 1961) of the PBPTA?

A: It gives flexibility to the Adjudicating Authority to ensure all necessary parties are present, even if not initially named.