Introduction
In property law, an ostensible owner appears to be the owner of a property but does not actually hold true ownership. The term “ostensible” means “apparent” or “seeming,” referring to a situation where the property title and possession appear to be under one person’s name, but the true ownership lies elsewhere. This concept, embedded in Section 41 of the Transfer of Property Act, 1882, protects the rights of third parties who enter into transactions with ostensible owners.
Who is an Ostensible Owner?
An ostensible owner has every indicator of ownership on record, including possession, but lacks actual ownership. For instance, someone may hold property in their name for convenience, yet the benefits and control of the property reside with another person (the real owner). Such arrangements can sometimes arise in benami transactions i.e any transaction in which property is transferred to one person for a consideration paid or provided by another person , often with the intention of concealing the actual owner.
The concept of ostensible ownership excludes individuals holding property in a fiduciary capacity, such as agents, trustees, and guardians, as they possess property rights solely for the benefit of others.
The principle of transfer by an ostensible owner was initially recognized in the case of Ramcoomar Koondoo vs. John McQueen. The court held that,
“It indeed is a principle of natural equity which should be applied that where one person allows another person to hold himself as an owner of property and a third person buys it, for consideration, from the ostensible owner under the belief that he is actually the real owner should not at all be permitted to recover under a secret title, unless and until he can overthrow that the notice, or something similar to which can amount to constructive notice which must have to put him upon under an enquiry, that, if it would have been prosecuted then it would have led to a discovery of it.”
This landmark case introduced the concept of protecting third-party rights when a property is transferred by an ostensible owner. The court held that if someone allows another to appear as the owner and a third party purchases the property in good faith, the true owner cannot later assert ownership unless they can prove that the third party had knowledge of the real title.
Legal Basis: Section 41 of the Transfer of Property Act, 1882
Section 41 of the Transfer of Property Act lays the foundation for the doctrine. It states:
“Where, with the consent, express or implied, of the persons interested in immoveable property, a person is the ostensible owner of such property and transfers the same for consideration, the transfer shall not be voidable on the ground that the transferor was not authorised to make it: provided that the transferee, after taking reasonable care to ascertain that the transferor had power to make the transfer, has acted in good faith.”
In essence, if a real owner allows an ostensible owner to hold themselves out as the owner and the ostensible owner transfers the property to a third party in good faith, the real owner cannot invalidate the transaction based on the ostensible owner’s lack of actual ownership rights.
Essentials for Transfer by Ostensible Owner
To benefit from Section 41, certain conditions must be met:
- Transfer by an Ostensible Owner: The property must be transferred by an individual acting as the ostensible owner.
- Consent of the Real Owner: The real owner must give express or implied consent for the ostensible owner to hold the property.
As ruled in Satyanarayana Murthi vs. Pydayya, this consent must be real consent as defined under Section 14 of the Indian Contract act, 1872, not obtained through fraud, coercion, force or undue influence practised by the ostensible owner on the real owner of the property.
- Transfer for Consideration: The transfer by ostensible owner must be supported by consideration. In instances where the transfer occurs without any consideration—i.e., a gratuitous transfer—this section will not be applicable.
- Good Faith and Due Diligence by the Transferee: The transferee must have acted in Good faith, taking reasonable care to verify that the ostensible owner has the authority to conduct the transfer. Reasonable care means such care as a man of ordinary prudence would take in his own case. This principle rests on the maxim, “he who seeks equity must do equity,” meaning that only a person whose own actions are fair and just may seek the protection of this section.
- This section applies solely to transfers involving immovable property.
Tests to Identify Ostensible Ownership
In Jayadayal Podder vs. Bibi Hazara (1974), the Supreme Court held that whether a particular sale is Benami or not, is largely one of fact, and for determining this question, no absolute formulae or acid test, uniformly applicable in all situations, can be laid down; yet in weighing the probabilities and for gathering the relevant indicia, the Courts are usually guided by these circumstances:
(1) the source from which the purchase money came;
(2) the nature and possession of the property, after the purchase;
(3) motive, if any, for giving the transaction a benami colour;
(4) the position of the parties and the relationship, it any, between the claimant and the alleged benamidar;
(5) the custody of the title-deeds after the sale and
(6) the conduct of the parties concerned in dealing with the property after the sale.
The above indicators are not comprehensive, and their relevance may differ based on the specifics of each case. However, the primary factor remains the source of the purchase money, which is the most significant criterion for determining whether a sale recorded in one person’s name is, in fact, for the benefit of another.
Estoppel and Section 41
Section 41 also incorporates principles of estoppel as outlined in Section 115 of the Indian Evidence Act, 1872. If a real owner presents someone as the owner and a third party relies on this representation, the real owner is estopped i.e. a legal bar from denying the ostensible owner’s authority. This rule prevents the real owner from overturning a transfer by arguing a lack of authority after allowing the ostensible owner to appear as the owner.
This principle was expressed in Cairncross v. Lorimer (1860), stating that if one party, through their words or actions, represents that they will either perform or refrain from a certain act, and the other party relies on that representation, the former is bound to adhere to their representation.
Burden of Proof
The burden of proof lies with the transferee to demonstrate that the transferor genuinely appeared as the ostensible owner with the consent of the actual owner. The transferee must prove that they acted in good faith, took reasonable care, and thoroughly investigated the transferor’s authority. This includes showing that they were not negligent and had no reason to doubt the transferor’s right to transfer the property. If these conditions are met, the burden of proof shifts to the real owner.
In Mahinder Singh v. Pardaman Singh (1992), the Delhi High Court held that in a benami transaction where the transferor is an ostensible owner, the burden of proof rests on the individual claiming to be the real owner.
Section 41: Making the Transfer “Not Voidable”
Section 41 of the Transfer of Property Act renders the transfer “not voidable” on the grounds that the transferor lacked the authority to make the transfer, provided the transferee acted with reasonable care and in good faith. Here, “not voidable” means that the transaction cannot be contested solely due to the transferor’s lack of authority; however, the transfer could still be voidable on other grounds. Thus, the real owner is prevented from invalidating the transaction based on the transferor’s incapacity if the transferee met the due diligence and good faith criteria specified in Section 41.
Exception to the Principle of “Nemo Dat Quod Non Habet”
The doctrine of ostensible ownership serves as an exception to the general principle of “nemo dat quod non habet”. According to this principle, an individual cannot transfer a higher right than they themselves possess. However, Section 41 provides an equitable exception by allowing an ostensible owner to convey legitimate rights to a bona fide transferee if the conditions of good faith, consent, and reasonable care are satisfied on the part of the transferee.
For instance, if a real owner entrusts another with title documents or otherwise enables them to present themselves as the property’s owner, a third party who, after conducting due diligence, purchases from this ostensible owner in good faith can acquire valid title to the property, even as against the real owner.
The Benami Transactions (Prohibition) Act, 1988
Section 41’s application has narrowed following the Benami Transactions (Prohibition) Act, 1988, (later Benami Transactions (Prohibition) Amendment Act, 2016), which defines benami transactions as:
Section 2(9) “Benami transaction” means —
A transaction or an arrangement—
- where a property is being transferred to, or is held by, a person, and the consideration for such property has been provided, or is paid by, another person; and
(b) the property is being held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration.
There is a total prohibition against the real owner affirming his ownership rights against the benami owner. Transfer by ostensible ownership under section 41 is subject to the provision of Benami Transaction under section 3 of Benami Transactions (Prohibition of the Right to Recover Property) Act, 1988. Which puts a Prohibition to enter into benami transactions.
The Benami Transactions (Prohibition) Amendment Act, 2016, aims to eliminate the practice of “benami” transactions, where one person buys property but registers it in another person’s name i.e the ostensible owner. This Act prohibits the real owner i.e the person who pays consideration for the property from claiming rights over the property, and any property identified as benami can be acquired by the government without compensation.
Exceptions to the Prohibition of Benami Transactions
While the Act generally prohibits benami transactions, there are specific situations where this prohibition does not apply. These are detailed in Section 2(9) and align with Section 41 of the Transfer of Property Act, 1882. The main exceptions as laid down in Thakur Krishna vs. Kanhayalal include:
Hindu Undivided Family (HUF): Property held by a Karta or family member for other family members, with funds from HUF sources, is allowed.
Trustees and Fiduciaries: Property held in a fiduciary capacity (like a trustee for a beneficiary) is not considered benami.
Spouse or Child: Property bought in the name of a spouse or child, using the purchaser’s known funds, is exempt.
Close Relatives: Jointly held property with siblings or direct family (using known funds) is also exempt.
These exceptions are carved out to allow certain relationships or familial settings where shared property arrangements are common and do not constitute fraudulent activity as intended to be curbed by the Act.
Conclusion
In conclusion, the application of Section 41 has been significantly narrowed by the Benami Transactions (Prohibition) Amendment Act, 2016, which restricts the effectiveness of ostensible ownership in cases involving benami transactions. Thus, while Section 41 aims to facilitate fairness in property dealings, its recent limitations highlight the evolving landscape of property law in India.