Judicial Process Cannot Validate Benami Transactions Forbidden by Statute; Courts Must Pierce the Veil Of Clever Drafting & Illusionary Cause Of Action: Supreme Court
The Bench noted that a meaningful reading of pleadings is essential to detect statutory bars & prevent abuse of law at the threshold.
Justice J.B. Pardiwala, Justice R. Mahadevan, Supreme Court
The Supreme Court has held that courts must undertake a meaningful and holistic reading of a plaint while exercising powers under Order VII Rule 11 CPC to prevent frivolous or statutorily barred claims from proceeding to trial. The Bench observed that clever drafting cannot create an illusory cause of action to validate transactions prohibited by law.
The Court held that admission of a plaint is not automatic and courts must verify statutory compliance before issuing summons. It further clarified that prohibited benami transactions cannot be indirectly enforced through legal proceedings. Furthermore, the Court established that once a transaction is judicially declared benami and such determination attains finality, the properties are liable to immediate confiscation under Section 27 of the Prohibition of Benami Property Transactions Act (PBPT), 1988, bypassing the need for separate administrative adjudication.
Justice J.B. Pardiwala and Justice R. Mahadevan observed, “Courts, in the discharge of their adjudicatory function, must therefore remain vigilant against attempts to secure judicial recognition of what the law expressly prohibits. The judicial process cannot be employed as an instrument to enforce rights founded upon transactions forbidden by statute. Courts are dutybound to pierce the veil of form and ascertain the real nature of the transaction, for what cannot be done directly cannot be permitted to be achieved indirectly through the medium of legal proceedings. At the same time, the power to reject a plaint at the threshold under Order VII Rule 11 CPC is a serious jurisdiction to be exercised with due circumspection…”.
Senior Advocate Gagan Gupta appeared for the appellant and Mahesh Thakur, AOR appeared for the respondent.
The respondent (plaintiff) filed a suit for declaration of title and possession of properties based on a Will and MOUs. However, the pleadings admitted that the properties were purchased by the deceased using the Plaintiff’s funds to circumvent land reform laws.
The plaintiff sought to enforce beneficial ownership, while the appellants (legal heirs of the deceased) contended that the suit was barred by the Benami Transactions (Prohibition) Act.
The appellants filed an application under Order VII Rule 11 CPC for rejection of the plaint, however, the Trial Court dismissed the suit, finding it barred by the Benami Act.
The High Court, however, set aside this order and restored the suit for trial. The Appellants then approached the Supreme Court challenging the High Court’s refusal to nip the "illusory" litigation in the bud.
The Supreme Court noted that the Plaintiff's claim was "inseparably intertwined" with an assertion of beneficial ownership arising from a benami arrangement. It held that the 2016 amendments to the Benami Act are retrospective and declaratory, meaning the statutory bar applies even to earlier transactions.
The Bench summarised the detailed discussion of the 146-page judgment, as follows:
(i) Order VII Rule 11 applications may be decided along with preliminary objections.
(ii) Courts must verify compliance with Order VII Rule 11 CPC before issuing summons; defendants may still seek rejection later.
(iii) Disputed factual issues usually requiring evidence cannot ordinarily be decided preliminarily, though courts may test legal sustainability first.
(iv) No fiduciary relationship exists between a company director and employee; commercial contracts lie outside fiduciary exceptions.
(v) Section 25 HSA bars inheritance, intestate or testamentary, by a person accused of murdering the predecessor, based on civil standards of proof.
(vi) Contracts made to circumvent law are unenforceable.
(vii) Courts must reject frivolous or legally barred suits early by meaningfully reading the plaint and documents.
(viii) Curative/declaratory amendments operate retrospectively; the 2016 Benami Act amendments apply to past benami transactions.
(ix) Confiscation under the Benami Act is a civil consequence distinct from prosecution; Article 20(2) does not apply.
(x) Once a transaction is finally declared benami, confiscation may follow without fresh Sections 24–26 proceedings; prosecution can proceed separately.
(xi) Trial courts must decide benami issues at the earliest stage and transfer matters where a prima facie case exists.
“…where a claim ostensibly founded upon a testamentary instrument was, in substance, an attempt to secure judicial recognition of a transaction prohibited by law. Such an approach cannot be countenanced by this Court. 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. 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 146 statute, wherever warranted, alone would send a clear message that benami transactions shall neither receive judicial indulgence nor escape statutory consequences”, the Bench observed.
“…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. Courts, however, are concerned not with the façade, but with the substance that lies beneath it. The judicial process cannot be invoked to validate, protect, or perfect that which the law itself declares impermissible”, the Bench further observed.
Accordingly, the Court set aside the High Court’s judgment and restored the rejection of the plaint, and directed the Central Government to appoint an Administrator to take over the suit properties within eight weeks for confiscation. The Court ordered that no court shall henceforth entertain any claim founded upon this specific benami transaction.
Cause Title: Manjula and Others v. D.A. Srinivas (Neutral Citation: 2026 INSC 465)
Appearances:
Appellants: Mahesh Thakur, AOR,. Anuparna Bordoloi, Narveer Yadav, Dhanush M, Siddhartha Sati, Ajay Pal Singh, Ruchi Kumari, Akshay Kumar, Sai Tanishka K, Advocates.
Respondents: Gagan Gupta, Sr. Adv., T.M. Shivakumar, Deepak Goel, AOR, Sanjana, Advocates.