A sham transaction is defined as an act or arrangement entered into by parties that does not reflect their true intentions, often designed to deceive, defraud, or circumvent legal obligations. Courts carefully scrutinise such transactions to determine their legitimacy, focusing on the intent behind the transaction, the evidence provided, and the surrounding circumstances.
Guidance for Plaintiffs
1. Establish Fraud or Misrepresentation Plaintiffs must demonstrate that the transaction in question was fraudulent, aimed at defeating their legal rights. The burden of proof often rests on the plaintiff to provide substantive evidence of the sham nature of the transaction.
Case Law: Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128)
The Supreme Court held that a father’s gift and subsequent sale of his property to avoid satisfying a maintenance decree were sham transactions. The court invalidated the gift and subsequent sale to ensure justice.
2. Prove Lack of Consideration One of the hallmarks of a sham transaction is the absence of genuine consideration. Plaintiffs should highlight the absence of financial transactions or evidence thereof.
Case Law: Ghulam Sarwar vs. Ghulam Sakina (2019 SCMR 567)
The Supreme Court invalidated sale mutations where no evidence of payment, witnesses, or genuine consideration was provided, ruling the transactions as sham.
3. Focus on Circumstantial Evidence Plaintiffs can rely on circumstantial evidence, such as unexplained delays in attestation or the absence of witnesses, to establish the dubious nature of the transaction.
Case Law: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
The court held that excluding a legal heir’s name from inheritance mutation without justification indicated fraudulent intent, rendering subsequent sales sham.
Guidance for Defendants
1. Prove Bona Fide Defendants must provide evidence of the legitimacy of their transaction, including:
- Proper documentation (sale deeds, agreements, etc.)
- Witness testimony corroborating the transaction
- Proof of financial transactions, such as bank records
Case Law: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
The defendant was unable to prove a bona fide purchase due to the absence of valid sale documentation and evidence of payment.
2. Avoid Delays and Procedural Irregularities Delays in registering or attesting documents without valid reasons can undermine the credibility of a transaction. Defendants should ensure compliance with legal formalities.
Case Law: Ghulam Sarwar vs. Ghulam Sakina (2019 SCMR 567)
The delayed attestation of sale mutations without explanation led the court to consider the transactions as sham.
3. Beware of Collusion Allegations If collusion is alleged, defendants must provide evidence refuting the claim. Courts view collusive transactions aimed at circumventing obligations unfavourably.
Case Law: Chenab Board, Faisalabad vs. Commissioner Inland Revenue (2014 PTD 558)
The court ruled invoices and transactions as sham when evidence showed collusion between parties to evade taxes.
Key Judicial Observations
- Intent and Purpose: Courts assess whether the transaction was entered into with the intent to deceive or defraud a rightful claimant. (Amjad Iqbal vs. Mst. Nida Sohail, 2015 SCMR 128).
- Absence of Genuine Consideration: Transactions lacking payment evidence or involving nominal sums often raise red flags. (2019 SCMR 567).
- Fraudulent Documentation: Courts scrutinise the authenticity of documents and corroborative evidence. (Muhammad Siddique vs. Mst. Kaniz Fatima, 2017 MLD 1567).
- Failure to Prove Bona Fide Purchase: Subsequent purchasers bear the burden of proving they acquired property in good faith and for value. (Nisar Ahmed Afzal vs. Muhammad Taj, 2013 SCMR 146).
- Impact on Third Parties: Courts invalidate sham transactions even if they involve third parties who fail to prove bona fide acquisition. (Amjad Iqbal vs. Mst. Nida Sohail, 2015 SCMR 128).
Both plaintiffs and defendants must provide compelling evidence when litigating cases involving allegations of sham transactions. For plaintiffs, the focus should be on exposing fraud and lack of consideration, while defendants must establish the genuineness of their transactions with robust documentation and corroboration. Courts, guided by principles of justice, remain vigilant in identifying and invalidating sham transactions designed to defeat legal rights.
The issue of sham transactions has arisen in various contexts in Pakistani case law, primarily involving disputes over property, inheritance, tax evasion, and fraudulent dealings. Below is an overview of the key situations in which courts have addressed the issue of sham transactions:
1. Property Disputes
a) Fraudulent Sale and Transfer of Property Sham transactions are often used to fraudulently transfer property to defeat the rights of a legitimate claimant, such as an heir or a decree-holder. These cases frequently involve manipulated sale deeds, fake mutations, or transfers lacking valid consideration.
Case: Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128)
A father gifted and sold his property to avoid a maintenance decree for his daughter. The court declared the transactions null and void, identifying them as sham.
Case: Ghulam Sarwar vs. Ghulam Sakina (2019 SCMR 567)
A sale mutation was challenged as fraudulent when the defendants could not produce credible evidence of payment or witnesses. The court invalidated the sale, terming it a sham.
b) Disinheritance Through Fraud Sham transactions are often used to deprive heirs, particularly women, of their rightful inheritance.
Case: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
Brothers attempted to deprive their sister of her inheritance by omitting her name from the inheritance mutation. The court deemed subsequent sales of the property fraudulent and invalid.
c) Collusive Transfers Collusion between parties to create a false transfer of ownership, often to evade obligations or encumber property, is a common feature of sham transactions.
Case: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
Collusive cancellation of a sale agreement was intended to defeat the rights of a third party. The court found the cancellation and subsequent sale to be fraudulent.
2. Tax Evasion and Financial Fraud
a) Fake Invoices and Fraudulent Tax Claims In tax-related matters, sham transactions often manifest as fake invoices, fraudulent claims for tax refunds, or underreported sale prices to avoid taxation.
Case: Chenab Board, Faisalabad vs. Commissioner Inland Revenue (2014 PTD 558)
Fake invoices were used to claim refunds, with evidence showing that no actual supply of goods occurred. The court declared the transactions sham and dismissed the refund claims.
b) Manipulated Sale Prices Undervaluing property in transactions to reduce tax liabilities has been identified as a sham practice.
Case: Oceanic Construction Co. vs. Commissioner of Income Tax (2009 PTD 1656)
The assessing officer discarded a verifiable sale price without evidence of collusion, emphasizing that only proven sham transactions could justify such action.
3. Corporate and Business Dealings
a) Misuse of Corporate Structures Sham transactions are sometimes used in corporate settings to manipulate shares, evade liabilities, or create false financial records.
Case: Sultan Muhammad Salah-ud-Din vs. Ghulam Rasool (1987 MLD 2511)
Transfer of shares between father and son was challenged as a sham, but the court validated it after confirming the board’s approval and compliance with corporate laws.
b) Fraudulent Partnerships The use of sham partnerships to evade business obligations or secure improper benefits has also been litigated.
Case: Javed-ur-Rehman vs. State (2011 PCrLJ 1868)
Allegations of fraud in an electronic transaction involving false agreements and payments were examined, and the court scrutinized whether the agreements were genuine or sham.
4. Family and Matrimonial Disputes
a) Attempts to Defeat Maintenance Claims In family law, sham transactions are often employed to shield assets from court orders, particularly in cases involving maintenance or alimony.
Case: Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128)
The father’s fraudulent gift and subsequent sale of his property were invalidated as attempts to defeat a maintenance decree.
b) Hiding Assets in Divorce Proceedings Sham transactions are sometimes used to conceal assets in divorce or separation cases, although this issue is more prominent in jurisdictions with strict matrimonial property regimes.
5. Inheritance and Customary Law
a) False Claims of Customary Exclusion Sham transactions may arise when parties rely on customary practices to exclude legal heirs from inheritance, often without genuine legal or cultural backing.
Case: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
The court rejected the argument that customary law excluded daughters from inheritance, deeming the transactions excluding the plaintiff as fraudulent.
6. Benami and Nominee Transactions
Benami transactions (those held in the name of another) can either be genuine arrangements or sham transactions designed to obscure true ownership.
Case: Jane Margrete William vs. Abdul Hamid Mian (1994 CLC 1437)
The court distinguished between genuine benami arrangements and sham transactions where the transferor retains ownership despite a false transfer deed.
7. Public Sector and Evacuee Property
Sham transactions have also arisen in cases involving evacuee property and public sector dealings, often linked to fraudulent claims or manipulated records.
Case: Mst. Zarina Amir vs. Mst. Naseem Begum (1987 MLD 3078)
Fraudulent dealings in evacuee property, including manipulated records, were scrutinized to ensure compliance with statutory provisions.
Judicial Principles in Identifying Sham Transactions
- Absence of Consideration: Courts look for evidence of payment or valid consideration. Without such evidence, the transaction may be deemed sham (2019 SCMR 567).
- Delayed Attestation or Registration: Unexplained delays in legal formalities raise doubts about the transaction’s genuineness (2015 SCMR 128).
- Lack of Witness Testimony: Failure to produce witnesses to the transaction undermines its legitimacy (2019 SCMR 567).
- Fraud or Collusion: Evidence of collusion between parties to defraud a third party is a key indicator of a sham transaction (2013 SCMR 146).
- Failure to Prove Bona Fides: Defendants must show they acted in good faith, especially when subsequent purchasers are involved (2017 MLD 1567).
- Deprivation of Legal Rights: Transactions that deprive heirs, creditors, or decree-holders of their legal entitlements are likely to be classified as sham (Amjad Iqbal vs. Mst. Nida Sohail, 2015 SCMR 128).
Sham transactions are frequently employed to evade legal responsibilities, deprive rightful claimants, or manipulate financial records. Pakistani courts, guided by principles of justice and fairness, have consistently invalidated such arrangements, prioritising substantive rights over formalistic adherence to fraudulent documentation. Plaintiffs and defendants alike must understand these principles to effectively litigate or defend cases involving sham transactions.
What does the law identify as sham transactions?
The law identifies sham transactions as arrangements or dealings that are entered into with the intention to deceive, defraud, or obscure the true nature of the transaction. These transactions are not genuine or bona fide but are designed to give the appearance of legitimacy while concealing their true intent or purpose. Below is an analysis of what the law considers as sham transactions, supported by principles derived from Pakistani jurisprudence and statutory provisions.
Key Features of Sham Transactions
- Lack of Genuine Intent
Sham transactions lack the genuine intention to transfer rights, obligations, or ownership. The parties involved do not intend for the agreement to have legal consequences, and the transaction exists only in form, not substance.- Case Law: Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128)
The court invalidated a gift and subsequent sale intended to defeat a maintenance decree, holding that the transactions lacked genuine intent.
- Case Law: Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128)
- Absence of Consideration
A hallmark of a sham transaction is the absence of valid consideration. If no payment or inadequate consideration is provided, it indicates that the transaction may not be bona fide.- Case Law: Ghulam Sarwar vs. Ghulam Sakina (2019 SCMR 567)
The court found no evidence of payment in a sale mutation, deeming it a sham transaction.
- Case Law: Ghulam Sarwar vs. Ghulam Sakina (2019 SCMR 567)
- Collusion to Defraud Third Parties
Sham transactions often involve collusion between parties to defraud creditors, heirs, or other legitimate claimants by transferring assets without a legitimate purpose.- Case Law: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
The court struck down a collusive cancellation of a sale agreement intended to defeat the rights of a third party.
- Case Law: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
- Fictitious or Nominal Parties
Transactions involving parties who are not genuinely interested or are used as proxies (benamidars) to conceal the true owner are often classified as sham.- Case Law: Jane Margrete William vs. Abdul Hamid Mian (1994 CLC 1437)
The court distinguished genuine benami arrangements from sham transactions, where the title was retained by the transferor despite a false transfer deed.
- Case Law: Jane Margrete William vs. Abdul Hamid Mian (1994 CLC 1437)
- Manipulation of Records
Transactions that involve the falsification of records, delayed attestation, or non-compliance with statutory requirements can indicate sham dealings.- Case Law: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
Deliberate exclusion of an heir’s name from inheritance mutations was held to be fraudulent and a sham.
- Case Law: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
- Intent to Evade Legal Obligations
Transactions made to avoid taxes, circumvent court orders, or defraud creditors are often deemed sham.- Statutory Basis:
- Section 53 of the Transfer of Property Act, 1882: A fraudulent transfer made with the intent to defeat creditors is voidable.
- Section 21(m) of the Income Tax Ordinance, 2001: Disallows deductions for transactions designed to evade taxes.
- Case Law: Chenab Board, Faisalabad vs. Commissioner Inland Revenue (2014 PTD 558)
Tax refunds claimed on fake invoices were deemed sham transactions by the court.
- Statutory Basis:
- Deprivation of Rights
Transactions designed to deprive heirs, beneficiaries, or decree-holders of their legitimate rights are classified as sham.- Case Law: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
Transactions depriving a woman of her inheritance under the guise of customary law were declared unlawful.
- Case Law: Muhammad Siddique vs. Mst. Kaniz Fatima (2017 MLD 1567)
- Lack of Bona Fides in Subsequent Purchasers
When a subsequent purchaser fails to prove good faith or due diligence in acquiring property, the transaction may be invalidated as sham.- Case Law: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
The court required subsequent purchasers to prove that they were bona fide and unaware of prior disputes.
- Case Law: Nisar Ahmed Afzal vs. Muhammad Taj (2013 SCMR 146)
- Statutory Framework Addressing Sham Transactions
- Transfer of Property Act, 1882
- Section 53: Transfers made with fraudulent intent to defeat creditors can be set aside.
- Section 54: A sale without actual payment or delivery of possession may lack validity, indicating a sham.
- Income Tax Ordinance, 2001
- Section 21(m): Disallows deductions for expenses incurred through transactions that are not genuine, such as salaries paid in cash exceeding specified limits.
- West Pakistan Family Courts Act, 1964
- Section 13(3): Authorises courts to enforce maintenance decrees by invalidating fraudulent transfers.
- Contract Act, 1872
- Section 202: Allows revocation of power of attorney unless it is coupled with an interest, preventing sham transactions under the guise of irrevocable authority.
Judicial Tests to Identify Sham Transactions
Courts use various criteria to determine whether a transaction is genuine or sham:
- Evidence of Payment
Proof of actual consideration through valid receipts or bank transactions is crucial. - Presence of Witnesses
Transactions lacking corroboration by credible witnesses are suspect. - Compliance with Legal Formalities
Proper registration, attestation, and adherence to statutory requirements strengthen the legitimacy of a transaction. - Circumstantial Evidence
Unexplained delays, suspicious timing, or patterns of conduct indicating fraud can lead to a finding of sham. - Intent and Purpose
Courts examine the transaction’s purpose to see if it aligns with lawful objectives or if it aims to deceive or defraud.
The law regards transactions as sham when they lack genuine intent, involve fraud or collusion, or are designed to evade obligations or defeat legitimate claims. Courts evaluate such cases with rigorous scrutiny, relying on evidence, intent, and the circumstances surrounding the transaction. Understanding these principles is vital for anyone challenging or defending against allegations of sham transactions.
An Important case on Sham Transactions is Amjad Iqbal vs. Mst. Nida Sohail (2015 SCMR 128), where the Supreme Court of Pakistan deliberated upon a crucial matter involving the execution of a decree for maintenance through the attachment of immovable property. This case serves as a significant precedent in understanding the judicial approach towards sham transactions aimed at defeating decrees and the robust powers vested in Family Courts under Pakistani law.
Case Background:
The facts of the case are straightforward yet profound in their implications. A daughter, Mst. Nida Sohail, filed a suit for maintenance against her father, Amjad Iqbal. The suit was decreed in her favour, yet the father failed to honour the decree. As a result, he was detained in civil prison. Subsequently, his second wife provided an undertaking to satisfy the decree, leading to his release. However, just four days after his release, the father gifted his property to his wife, who then sold it to the petitioner, Amjad Iqbal.
Legal Issues:
The primary legal issue revolved around the validity of the gift and subsequent sale of the attached property. The daughter moved an application before the Executing Court for the recovery of the decretal amount by selling the house in question. The court was tasked with determining whether the transactions were genuine or mere sham transactions designed to circumvent the satisfaction of the maintenance decree.
Court’s Analysis and Findings:
The Executing Court, upon examining the transactions, declared the gift/hiba made by the father to his wife to be unlawful. This decision was pivotal because, once the gift was declared unlawful, any further transaction based on it was also deemed null and void. The wife, as the donee, did not have the legal title to the house, rendering her sale of the property to the petitioner invalid.
The court found that both the gift and the subsequent sale were sham transactions orchestrated to ensure that the maintenance decree was not satisfied. This was viewed as a blatant disregard of the father’s parental obligations. The Supreme Court, upholding the Family Court’s decision, emphasized that it could not stand by as a mere spectator to such unholy and unlawful conduct.
Legal Principles and Precedents:
The Supreme Court referenced Section 13(3) of the West Pakistan Family Courts Act, 1964, which empowers the Family Court to execute its own decree for the payment of money by adopting modes provided for the recovery of arrears of land revenue. This includes selling the immovable property of the defaulter. The court highlighted that the Family Court’s order of attachment of the house was in accordance with the law, reinforcing its commitment to uphold decrees and ensure justice.
This decision aligns with prior judgments such as 1992 CLC 1323, 1992 CLC 1470, and 2005 SCMR 1395, where courts have consistently invalidated transactions aimed at defeating judicial decrees. The Supreme Court’s dismissal of the petition for leave to appeal and the refusal of leave underscored its stance on maintaining the sanctity of judicial decrees and preventing any attempts to thwart their execution through fraudulent means.
