S RAJENDRAN VS THE DEPUTY COMMISSIONER OF INCOME TAX (BENAMI PROHIBITION) & ORS

The Supreme Court in S Rajendran Vs. The Deputy Commissioner of Income Tax (Benami Prohibition) & Ors (Civil Appeal 7140 of 2022) held that the jurisdiction of authorities under IBC cannot be expansively construed so as to trench upon fields that are founded in public law domain. Where the subject matter of the dispute pertains to the exercise of sovereign statutory power, particularly in relation to determination of legality of title, attachment, or confiscation and vesting thereof, the adjudicatory fora under the IBC must necessarily yield to the specialised mechanism created by such statute.

FACTS OF THE CASE

The promotors of the Corporate Debtor M/s Padmaadevi Sugar Ltd. transferred their 100% shareholding to the beneficial owner, V.K. Sasikala, through an intermediary, an advocate named Mr. S. Senthil, for a consideration of approximately Rs. 450 Crores, paid in demonetised high-value currency notes. As investigation concluded into commission of offence under Benami Act, authorities invoked Section 24 of Benami Act.

In the meantime CIRP was initiated against the M/s Padmaadevi Sugar Mills vide order dated 15.10.2018. Subsequently, order of Liquidation was passed on 20.04.2021.

The authorities under Benami Act issued showcause notice dated 01.11.2019 under Section 24(1) of the Benami Act to the RP as representative of Corporate Debtor characterizing the Corporate Debtor  as the benamidar and the transaction as a “benami transaction”. This was followed up by a provisional attachment order on 01.11.2019 under Section 24(3) of the Benami Act, attaching the immovable properties of the corporate debtor, including the factory land and plant machinery, which was confirmed by Adjudicating Authority under Benami Act.

The RP and subsequently, the  Liquidator challenged the attachment order before NCLT, which said that it was not maintainable before NCLT as it lacked jurisdiction to sit in appeal over decisions of Benami Authorities. Appeals were filed before NCLAT which was also dismissed.

FINDINGS OF THE SUPREME COURT

The Supreme Court observed that  the Benami Act and the IBC, are special legislations operating within distinct yet potentially intersecting fields. The Benami Act is concerned with identifying and extinguishing benami holdings through a confiscatory mechanism, while the IBC is directed at resolution and liquidation of assets belonging to a Corporate Debtor within a time-bound framework. The present controversy arises at the point where property subjected to proceedings under the Benami Act is asserted to form part of the liquidation estate under the IBC. The issue, therefore, is not one of abstract supremacy, but of determining whether the two enactments can be harmoniously construed, and, if not, which statutory regime must prevail in the limited sphere of conflict. It is in this backdrop that the apparent inconsistency between the two statutory regimes requires examination.

The Supreme Court analysed judgments in State Bank India Vs Union of India 2026 INSC 153, Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209, Embassy Property Developments (P) Ltd. State of Karnatka (2020) 13 SCC 308  and observed that the jurisdiction of authorities under IBC cannot be expansively construed so as to trench upon fields that are founded in public law domain. Where the subject matter of the dispute pertains to the exercise of sovereign statutory power, particularly in relation to determination of legality of title, attachment, or confiscation and vesting thereof, the adjudicatory fora under the IBC must necessarily yield to the specialised mechanism created by such statute. Proceedings under Benami Act squarely fall within the public law domain. They are not in the nature of inter se disputes between private parties concerning proprietary rights, nor are they recovery proceedings capable of being subsumed within insolvency resolution. The Benami Act represents a sovereign exercise aimed at identifying and extinguishing benami transactions. The attachment and eventual confiscation of property thereunder operate in rem and culminate in vesting of the property in the Central Government free from encumbrances. Such consequences are penal and deterrent, rooted in statutory illegality, and are enforced through a distinct adjudicatory hierarchy whose jurisdiction is expressly insulated from ordinary civil for a.

The Supreme Court further observed that the liquidation estate comprises only assets beneficially owned by the corporate debtor. Property held benami is, by definition, held in a fiduciary or representative capacity for the real owner. Section 36(4)(a)(i) excludes assets held in trust for third parties from the liquidation estate. In Controller of Estate Duty, Lucknow v. Aloke Mitra (1981) 2 SCC 121 it was held that a benamidar possesses no beneficial interest and that title vests in the person who provided consideration. Where the corporate debtor is merely an ostensible holder, the property never forms part of its estate and cannot be administered in liquidation.

The Supreme Court observed that Section 32A is event-based and triggered only upon approval of a resolution plan or completion of a liquidation sale to an unconnected third party. Absent such approval, the immunity does not arise. The provision does not validate defective title nor retrospectively convert benami property into assets of the corporate debtor. Likewise, the moratorium under Section 14 is intended to preserve the debtor’s estate for orderly resolution; it does not interdict sovereign proceedings in rem for attachment or confiscation under penal statutes. Such proceedings are distinct from creditor enforcement and proceed on an independent statutory footing. The contention of the appellants that the attachment order is impermissible as the moratorium under Section 14 of the Act commenced on 15.10.2018 is not acceptable because the mandate of moratorium must be understood in the context of the applicability of the Act. The moratorium is intended to protect the corporate debtor from “creditor actions” aimed at debt recovery, not to shield “tainted assets” from sovereign actions against crime. In any event of the matter, the liquidator would have power and jurisdiction to deal with the property only when the corporate debtor has a beneficial interest in the said property.

The Supreme Court dismissed appeals with exemplary costs of 5 lakh each on the appellants.

__________________________________________________________