SUPREME COURT UPHOLDS DEMONETISATION ACT OF THE CENTRAL GOVERNMENT PASSED IN 2016

In a very interesting case, regarding powers of the Central Government, that was exercised during the demonetization on 08.11.2016 was decided by Bench of Five Judges on 02.01.2023 in Vivek Narayan Sharma v. Union of India, Writ Petition (civil) no.906 of 2016 . The said case arose out of the writ petitions that were filed challenging the Notification No. 3407(E) dated 8th November 2016 (Click here to read full notification) (hereinafter referred to as “the Notification“), issued by the Central Government in the exercise of the powers conferred by sub-section (2) of Section 26[1] of the Reserve Bank of India Act, 1934 (hereinafter referred to as “the RBI Act“), vide which the Central Government declared that the bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees shall cease to be legal tender with effect from 9th November 2016 to the extent specified in the impugned Notification. This is popularly known as an act/policy of ‘demonetization’.

The Notification of 08.11.2016 resulted in a spate of the Writ Petitions filed in the Supreme Court and also before various High Courts. The Petitioners in the miscellaneous writ petitions that were decided submitted that the Supreme Court has the power to grant declaratory relief including the interpretation, sub-section (2) of Section 26 of the RBI Act. The Petitioners also challenged the impugned Notification as violative of Article 19(1)(g) and Article 300A (depriving a person of his property by demonetization) of the Constitution of India.

A Bench of three Judges of the Supreme Court passed an Order dated 16th December 2016 in Writ Petition (Civil) No.906 of 2016 and other connected petitions, observing therein that, in their opinion, the following important questions fall for consideration:

(i) Whether the Notification dated 8th November 2016 is ultra vires Section 26(2) (Legal tender character of notes) and Sections 7 (Management), 17 (Business which the Bank may transact), 23 (Issue Department), 24 (Denominations of notes), 29 (Bank exempt from stamp duty on bank notes) and 42 (Cash reserves of scheduled banks to be kept with the Bank) of the Reserve Bank of India Act, 1934;

(ii) Does the notification contravene the provisions of Article 300A (Persons not to be deprived of property save by authority of law) of the Constitution of India (“Constitution”);

(iii) Assuming that the notification has been validly issued under the Reserve Bank of India Act, 1934 whether it is ultra-vires Articles 14 (Equality before law) and 19 (Right to Freedom) of the Constitution;

(iv) Whether the limit on withdrawal of cash from the funds deposited in bank accounts has no basis in law and violates Articles 14, 19, and 21 (Right to Life and Personal Liberty);

(v) Whether the implementation of the Notification(s) suffers from procedural and/or substantive unreasonableness and thereby violates Articles 14 and 19 and, if so, to what effect?

(vi) If Section 26(2) is held to permit demonetization, does it suffer from an excessive delegation of legislative power thereby rendering it ultra vires the Constitution;

(vii) What is the scope of judicial review in matters relating to the fiscal and economic policy of the Government;

(viii) Whether a petition by a political party on the issues raised is maintainable under Article 32 (Remedies for enforcement of rights conferred by this Part); and

(ix) Whether District Co-operative Banks have been discriminated against by excluding them from accepting deposits and exchanging demonetized notes.

The Apex Court further directed that no other Court should entertain, hear or decide any writ petition/proceeding on the issue of or in relation to or arising from the decision of the Government of India to demonetize the notes of Rs.500/- and Rs.1,000/-, since the entire issue in relation thereto was pending consideration before the said Court.

Facts

On 8th November 2016, vide the Notification, the Central Government, in the exercise of the powers conferred by sub-section (2) of Section 26 of the RBI Act, notified that the specified bank notes (hereinafter referred to as “SBNs”) shall cease to be legal tender with effect from 9th November 2016.

The SBNs were bank notes of denominations of the existing series of the value of Rs.500/- and Rs.1000/-. Under Clause 1 (To read Clause 1 kindly click here) of the said Notification, every banking company and every Government Treasury was required to complete and forward a return along with the details of SBNs held by it at the close of business as on the 8th November 2016, not later than 13:00 hours on the 10th November 2016 to the designated Regional Office of the Reserve Bank of India (“RBI”).

The matter came up for hearing before Supreme Court initially on 12th October 2022 and, thereafter, on various dates. The Apex Court finally decided and disposed of the miscellaneous writ petitions that included interalia the following issues:

Issues

Issue No. (I) : Whether the power available to the Central Government under Sub-Section (2) of Section 26 of the RBI Act can be restricted to mean that it can be exercised only for “One” or “Some” series of banknotes and not “All” series in view of the word “Any” appearing before the word “Series” In the said Sub-Section, specifically so, when on earlier two occasions, the demonetization exercise was done through the plenary legislations?

Issue No. (II): In the event, it is held that the power under Sub-Section (2) of Section 26 of the RBI Act is construed to mean that it can be exercised in respect of “ALL” series of bank notes, whether the power vested with the Central Government under the said Sub-Section would amount to conferring excessive delegation and as such, liable to be struck down?

Issue No. (III): As to whether the notification dated 8th November 2016 is liable to be struck down on the ground that the decision-making process is flawed in law?

Issue No. (IV): As to whether the notification dated 8th November 2016 is liable to be struck down applying the test of proportionality?

Issue No. (V): As to whether the period provided for the exchange of notes vide the notification dated 8th November 2016 can be said to be unreasonable?

Issue No. (VI): As to whether the RBI has an independent power under Sub-Section (2) of Section 4 of the 2017 Act in isolation of the provisions of Section 3 and Section 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under Sub-Section (1) of Section 4 of the 2017 Act?

 Judgment

The Judgment was given by majority of four Judges who held as follows:

(i). The power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes. Merely because on two earlier occasions, the demonetization exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under sub-section (2) of Section 26 of the RBI Act;

(ii). Sub-section (2) of Section 26 of the RBI Act does not provide for excessive delegation since there is an inbuilt safeguard that such a power has to be exercised on the recommendation of the Central Board. As such, sub-section (2) of Section 26 of the RBI Act is not liable to be struck down on the said ground;

(iii). The Notification dated 8th November 2016 does not suffer from any flaws in the decision-making process;

(iv).The Notification dated 8th November 2016 satisfies the test of proportionality and, as such, cannot be struck down on the said ground;

(v).The period provided for the exchange of notes vide the Notification dated 8th November 2016 cannot be said to be unreasonable; and

(vi).The RBI does not possess independent power under sub-section (2) of Section 4 of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 (hereinafter referred to as “the 2017 Act”), in isolation of the provisions of Sections 3 and 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act.

The set Judgment was dissented by J. Nagarathna who while dissenting held as follows :

1. According to subsection (1) of Section 26 of the Act, every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the Central Government. This provision is subject to subsection (2) of Section 26 of the Act.
2. Subsection (2) of Section 26 of the Act applies only when a proposal for demonetization is initiated by the Central Board of the Bank by way of a recommendation being made to the Central Government. The said recommendation can be in respect of any series of bank notes of any denomination which is interpreted to mean any specified series of bank notes of any specified denomination.
3. The expression any series of bank notes of any denomination has been given its plain, grammatical meaning, having regard to the context of the provision and not a broad meaning. Thus, the word “any” will mean a specified series or a particular series of bank notes. Similarly, “any” denomination will mean any particular or specified denomination of bank notes.
4. If the word “any” is not given a plain grammatical meaning and interpreted to mean “all series of bank notes” of “all denominations”, it would vest with the Central Board of the Bank unguided and unlimited powers which would be exfacie arbitrary and suffer from the vice of unconstitutionality as this would amount to excessive vesting of powers with the Bank. To save the provision from being declared unconstitutional, the meaning of the provision is read down to the context of the Central Board of the Bank initiating a proposal for demonetization by making a recommendation to the Central Government under subsection (2) of Section 26 of the Act of a particular series of bank note of any denomination.
5. On receipt of the said recommendation made by the Central Board of the bank under subsection (2) of Section 26 of the Act, the Central Government may accept the said recommendation or may not do so. If the Central Government accepts the recommendation, it may issue a notification in the Gazette of India specifying the date w.e.f. which any specified series of bank notes of any specified denomination shall cease to be legal tender and shall cease to have the guarantee of the Central Government.
6. The provisions of the Act do not bar the Central Government from proposing or initiating demonetization. It could do so having regard to its plenary powers under Entry 36 of List I of the Seventh Schedule of the Constitution of India. However, it has to be done only by an Ordinance being issued by the President of India followed by an Act of Parliament or by plenary legislation through the Parliament. The Central Government cannot demonetize bank notes by issuance of a gazette notification as if it is exercising power under subsection (2) of Section 26 of the Act. In such circumstances when the Central Government is initiating the process of demonetization, it would not be acting under subsection (2) of Section 26 of the Act but notwithstanding the said provision through a legislative process.
7. When such power is exercised by the Central Government through legislation, it is by Entry 36, List I of the Seventh Schedule of the Constitution of India which deals with currency, coinage, and legal tender; foreign exchange which is a field of legislation. Hence, the power of the Central Government to demonetize any currency notwithstanding anything contained in Section 26 of the Act.
8. When the Central Government proposes demonetization of any bank note, it must seek the opinion of the Central Board of the Bank having regard to the fact that the Bank is the sole authority to regulate the circulation of bank notes and secure monetary stability and generally to operate the currency and credit system of the country and to maintain price stability.
9. The opinion of the Central Board of the Bank ought to be an independent and frank opinion after a meaningful discussion by the Central Board of the Bank which ought to be given its due weightage having regard to the ramifications it may have on the Indian economy and the citizens of India although it may not be binding on the Central Government. On receipt of a negative opinion from the Central Board of the Bank, the Central Government which has initiated the demonetization process may still intend to go ahead with the said process after weighing the pros and cons only through an Ordinance and/or Parliamentary legislation but not by issuance of a gazette notification. In other words, the Central Government in such circumstances cannot resort to the exercise of power under subsection (2) of Section 26 of the Act by issuing a notification in the Gazette of India as if it were exercising executive powers. Even if the Central Board of the Bank concurs with the proposal of the Central Government, the Central Government would have to undertake a legislative process and not carry out the measure by simply issuing a gazette notification.
10. In view of the aforesaid conclusions, I am of the considered view that the impugned notification dated 8th November 2016 issued under subsection (2) of Section 26 of the Act is unlawful. In the circumstances, the action of demonetization of all currency notes of Rs.500/and Rs.1,000/is vitiated.
11. Further, the subsequent Ordinance of 2016 and Act of 201 incorporating the terms of the impugned notification are also unlawful.
12. However, having regard to the fact that the impugned notification dated 8th November 2016 and the Act has been acted upon, the declaration of law made herein would apply prospectively and would not affect any action taken by the Central Government or the Bank according to the issuance of the Notification dated 8^th November 2016. This direction is being issued having regard to Article 142 of the Constitution of India. Hence, no relief is being granted in individual matters

Editor’s Comments

After much waiting the apex Court has upheld the act of the Central Government in demonetizing the currency notes which had caused the major crisis amongst the Public. However, balancing equities is what the Supreme Court must have considered and therefore accepted the act of the Central Government has been intra vires to the Constitution of India.

Sushila Ram Varma

Chief Consultant

The Indian Lawyer & Allied Services.

 

[1] Sec 26(2) Of RBI Act, 1934

On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.