Supreme Court Reserves Judgment On Plea Challenging the Validity of Certain Provisions of the Foreign Contribution (Regulation) Amendment Act, 2020-Full Courtroom Exchange

The Supreme Court on Tuesday took up the part-heard matter in the plea challenging the validity of certain provisions of the Foreign Contribution (Regulation) Amendment Act, 2020 to regulate foreign funds received by NGOs for further hearing.

A bench comprising Justices AM Khanwilkar, Dinesh Maheshwari, and CT Ravikumar heard the contentions put forth by the Senior Advocate Mr. Tushar Mehta, Solicitor General of India, Senior Advocate Mr. Sanjay Jain, ASG, and Senior Advocate Gopal Shanakaranarayanan appearing for the petitioner challenging the provisions of the Amendment Act, at length.

At the outset Mr. Tushar Mehta pointed out that wherever a statute is challenged it has to be on the basis of a. Legislative incompetence; b. Violation of Fundamental Rights, including arbitrariness envisaged in Article 14; c. The amendment is beyond the scope and object of the act.

He insisted that the Court ought to be taken through the legislative policy of India before going into the challenges mounted in the petition. Pointing out that the right to receive foreign contributions cannot be a fundamental right, he narrated the legislative policy -

"Foreign contribution can, if unregulated, result in devastating consequences to the sovereignty of the nation...Please have my affidavit… 'Common preliminary affidavit for Petitioner No. 1 and 2'… As a nation we have always been very very conscious of foreign contributions...What I would ultimately submit is that it is a regulation with an object and has been very clear from day one of the legislation. This I have quoted, if your Lordship sees at the foot of para 31, this was the original Act Foreign Contribution (Regulation) Act, 1976, the predecessor Act. "An Act to regulate the acceptance and utilisation, contribution or foreign hospitality by certain persons or associations with a view to ensuring that parliamentary institutions, academic and other voluntary organisations" mark this "as well as individuals working in the important areas of national life may function in a manner consistent with the values of a sovereign, democratic, republic" - This is the intent, purpose, very foundation of bringing in bringing in a legislative enactment in 1976. Thereafter, came to be amended in 1985, statement of objects of the ordinance at pg 20. Kindly see a few paragraphs...Earlier if the Govt. of China was contributing to any NGO in India, then was regulated. The govt, various govt.,maybe genuine NGOs in other countries were also infusing funds in India, therefore the definition was enlarged to include such contributions also for the purpose of tracing the utilisation of foreign contribution down the line. In one line I say, they (amendment) were made to strengthen the original object. Then a bill came in 2006 in page 21".

The Bench enquired if the ordinance was made into an Act later on. To which Mr. Mehta responded:

"Could not get the statement of objects and reasons of the Act, therefore Milord I have placed this. But it matured into an Act...Kindly see page 21, These are the Statement of object and reasons of the bill itself, my mistake. It matured into an Amending Act. Now para 33 [Reads on]... Para 2 of Statement of objects - 'Significant developments have taken place since 1984 such as change in internal security scenario, increased influence of voluntary organisation, spread of use of communication and information technology, quantum jump in the foreign contribution being received and large scale growth in the number of registered organisations , this has necessitated large scale changes to replace the present act by new legislation and accounting of foreign contribution and acceptance of foreign hospitality of a person or association.' As and when the country got the experience of a new development the country has responded. This is not the first time this has happened. Right from 76, 85 now we are in 2006 - this is what has happened. Now see the existing Act...I am reading the existing Act ...of 2010, para 35 pg 23 . This was 2010, so the policy has remained consistent, de hors. The consistent policy of the country has been to guard against foreign contributions being abused, misused or utilized in a manner which is not in sync with the security, integrity etc."

The Bench interjected to correct the Solicitor General to clarify, "The expression used is sovereignty not integrity. So much wider than security."

Apologising for his loose use of the term, Mr. Tushar Mehta continued elucidating the legislative policy -

"It is submitted that thereafter, the Foreign Contribution (Regulation) Act, 2010 was enacted bringing about a new regime in order to match the pace of times. It is submitted that the objects and reasons behind the same are as under :

It has been noticed that some of the foreign countries were funding individuals, associations, political parties, candidates for elections, correspondents, columnists, editors, owners, printers or publishers of newspapers. They were also extending hospitality. The effects of such funding and hospitality were noticeable and to have some control over such funding and hospitality and to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain persons or associations, with a view to ensuring that Parliamentary institutions, political associations and academic and other voluntary organisations as well as individuals working in the important areas of national life may function in a manner consistent with the values of a sovereign democratic republic the Foreign Contribution (Regulation) Act, 1976 (49 of 1976) was enacted."

Before taking the Court to the provisions under challenge, Mr. Mehta intended to apprise the court of the statement of object and reasons of the present Amendment Act. He stated -

"Your lordships are dealing with the Amended provisions, so there is no question of Parliament not being competent etc. If they (amendment) travel beyond the scope and object of the original Act, then it causes a different situation for the Govt. to deal with."

"In the Writ Petition, the Act is not challenged as a whole, only the amendment. Thus if it is within the framework of original Act, you say that challenge cannot be taken forward", the Bench asked Mr. Mehta.

Responding in affirmation, Mr. Mehta added -

"Your Lordships would consider whether this is in furtherance of the object scope of the Act or something totally alien. We had the Act of 2010, we gained experience from 2010 to 2020. Refer to Para 37 -

It is submitted that thereafter, the amendments made in 2020 were brought about in order to ensure that the necessary object of the Act is achieved efficiently. It is submitted that the objects and reasons of the amendment in 2020 are quoted as under :

"The Foreign Contribution (Regulation) Act, 2010 was enacted to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto.

2. The said Act has come into force on the 1st day of May, 2011 and has been amended twice. The first amendment was made by section 236 of the Finance Act, 2016 and the second amendment was made by section 220 of the Finance Act, 2018.

Now 3 is relevant.

3. The annual inflow of foreign contribution has almost doubled between the years 2010 and 2019, but many recipients of foreign contribution have not utilised the same for the purpose for which they were registered or granted prior permission under the said Act. Many of them were also found wanting in ensuring basic statutory compliances such as submission of annual returns and maintenance of proper accounts.

We did not have any mechanism to examine on our own unless they produce it before us. Now, there is a way forward in this amendment

This has led to a situation where the Central Government had to cancel certificates of registration of more than 19,000 recipient organisations, including non-Governmental organisations, during the period between 2011 and 2019.

So 2011 onwards they started.

The criminal investigations also had to be initiated against dozens of such non-Governmental organisations which indulged in outright misappropriation or mis-utilisation of foreign contribution."

At this juncture the Bench enquired if year-wise breakup is available, cancellation of recipient organisation registration. Mr. Mehta informed the Bench that if such data is available he shall place it before the Bench. He further read from the affidavit -

"4. Therefore, there is a need to streamline the provisions of the said Act by strengthening the compliance mechanism, enhancing transparency and accountability in the receipt and utilisation of foreign contributions worth thousands of crores of rupees every year and facilitating genuine non-Governmental organisations or associations who are working for the welfare of the society.

Then these amendments came into force. Your lordships would kindly see. I have given a comparative chart of what the provision was and how it stood amended. That is at page 4 to 9. That is for Your lordships' easy reference.

Please come to Section 11 which is not under challenge. You must have definite programmes in your AOA or whatever is your constitution. If an NGO wants to accept foreign contributions it has to get registered. The registration would be granted if Central Govt. is satisfied that once you get foreign contribution of say 100 crores, you are accountable that you are using for either of these purposes or all of these purposes, depending upon your constitution."

After discussing the intent of unchallenged Section 11, Mr. Mehta assisted the Court to the provisions under challenge -

"Please see what is under challenge. Section 18 I'll take first. What we have done is...Earlier FC was accepted in any city, town, taluka, anywhere. It would come from the USA, China, in some village. The Govt. would never come to know what amount has come and it would be impossible to trace whether that amount is received for the object of the act and is utilized for the object of the Act. Now what has been done Milords... every foreign contribution will be received in a designated account in SBI Main Branch. Every NGO will have a designated account only for the purpose of receipt. No NGO, individual or any person is supposed to travel all the way to Delhi. He can get that open from his own bank. Suppose I am situated in Varoda or a village in Varoda, then my bank, I can go and say these are my documents, I want to open an account in SBI Main Branch. It would be opened by that Bank. Money comes to SBI Main bench, would be transferred to my bank. Then I will use that account only. Opening of Account in SBI Main branch is a one time Act. No service charge required for transfer from the main branch to his bank account."

The Bench noted that in such a situation the local banks would work as a backup office of the SBI Main Branch.

Agreeing with the understanding of the Bench, Mr. Mehta stated -

"Thereafter once that is over you can have an account in any bank of your choice, whichever no. of accounts you want to operate. But, it will come in one designated account so that the Central Govt can know."

The Bench enquired if the NGOs' accounts can be in any bank of their convenience. Mr. Mehta clarified that the operational account can be any bank which is a scheduled bank.

"Can be other than SBI?", further enquired the Bench.

Mr. Mehta apprised the Court that it can be any bank other than SBI as well. The account at SBI Main Branch would be solely for the receipt of the foreign contributions and its subsequent transmission to the preferred bank of the NGO. It can also be transferred to more than one bank or more than one account, if the NGO has several accounts in separate banks.

"Without any further liability?" ,asked the Bench.

Responding to the question posed by the Bench, Mr. Mehta stated -

"Yes, without any further financial or other liability. The banks are under obligation to intimate the Central Government that this particular NGO with the designated FCRA Number has received this amount from this country and from the organisation. This is the regulation."

The Bench observed that, "Practicability and compulsion imposed on you that you have to travel to Delhi - all these arguments are unable here."

Mr. Mehta explaining the difficulty faced earlier illustrated -

"Money may come from China, it might go to a cooperative bank, maybe a scheduled bank in one small taluka in Gujarat or Maharashtra, useless they provide us with details the central govt does not have a mechanism to know what amount has come for what purpose it had come for what purpose it was utilised. In this context please come to pg 86. May I read Section 17 first."

To strengthen regulation, the Bench suggested imposing restrictions on the banks as well, in a manner that, while issuing the banking licenses that they would not allow any banking licences until the restriction is adhered to.

Mr. Mehta accepted that the suggestion would be an effective way to regulate.

The Bench reminded that the underlying purpose is to regulate the account so that the amount is used for the purpose it has been received.

Demarcating the purview of regulation, Mr. Mehta stated -

"What is received, from where it is received, for which purpose it is utilised."

Mr. Mehta further stated that considering the strength of the NGOs in the country at present, it is indeed difficult to regulate activities. Thus, without disclosure of the foreign contribution from the NGOs regulation would be challenging.

Coming back to the discussing of the designated Bank account Mr. Mehta stated that -

" Out of 23000, 19000 have already opened these accounts by the time the Petition was filed. There is no difficulty. No requirement to travel. [Read Section 17]. …If I am regularly receiving then S.11 certificate is required, otherwise special permission is required. …[Read proviso] Can have as many accounts where money would travel from SBI Main Branch. [Reads second proviso] Complete freedom other than having an account in SBI Main Branch."

The Bench enquired, "Does this last proviso mean that you can open multiple accounts in different branches, it cannot be used for any other activity but only to deal with foreign exchange?".

Mr Mehta responded, "For your NGO activities you have a designated account or accounts in the Bank of your choice."

The Bench noted, "So it is not mixed up with other activities for effective regulation."

Mr Mehta further stated, "I am Managing Trustee of an NGO. I receive 50 lakhs and I also add 30 lakh from my business, I might be a businessman or builder, whatever. Then it would be difficult to trace out what amount was spent."

The Bench made a suggestion, "It must maintain at least two accounts. One is exclusively for foreign funds and the other is for general funds." Thereafter, the Bench posed a question to the Solicitor General - "From Foreign funds it can be transferred to the general fund account also. We want to understand further, the activities for which the amount is received can be transferred to the general fund account of the trust. No, the answer should be no, in terms of this proviso. It is to be utilised only for the purpose it is received. It cannot be mingled with other activities."

Adding to the reasoning of the Bench, Mr. Mehta stated -

"The reason is this, a trust can be registered for four or five reasons. Cannot go beyond it because license is restricted to those four five categories. And this provision was there even in the previous regime. Kindly look at page 8."

Seeking clarification, the Bench noted that if the NGO was registered under all the categories, the funds are received to only further the cause of one category. However, it is actually being used for another purpose, then would the same be permissible.

Mr. Mehta responded, "Certainly it can be."

The Bench further enquired, "There is no restriction to that? Check on that, because then your argument gets weakened. Your first argument is that it cannot be used for any other purpose other than which the amount is received. If the amount is received for a particular purpose then it has to be spent for that."

With his intention to clarify Mr. Mehta interjected -

"If an organisation is registered under Section 11 and 12 for all five purposes it can be utilised for all five purposes irrespective of the purpose for which it was received."

Noting the scheme of the Act, the Bench observed -

"The purpose for which it is received is cultural...some amount received is for cultural purpose and some amount received generally, not for any purpose. Whether you will permit that. The answer is No. Going by the scheme of the Act, if it is received for culture it has been used for cultural."

Mr. Mehta apprised the Court that it was not the intention, to which the Bench emphasised that it be made clear by the Solicitor General. Accordingly, Mr. Mehta clarified that utilisation can be irrespective of the purpose for which the foreign contributions are made, but within the scope of the categories of registration of the NGOs.

The Bench pointing out that the issue can be of some bearing in the present matter asked the Solicitor General to get clear instructions for the same. It also observed that if the funds can be used for any of the activities, then the argument of the Centre is weakened.

Explaining the workings of the foreign contributions, Mr Mehta informed the Court that money is not sent under any specific heads. To this, the Bench suggested that contemplation has to be made to declare heads while receiving money.

Assisting the court on the interpretation Mr. Gopal Shankaranarayanan pointed out -

"Section 11 has two clause, 11(1) and 11(2). 11(1) requires registration . If you register as Solicitor correctly said, if you are registered for multiple purposes then if it comes for purpose A, it can be used for purpose But 11(2) is important - When you are not registered you get the money for a specified purpose, you have to get permission from Central Government and then you can use it only for that purpose."

Going to the purpose of the Amendment, the Bench stated, "The whole purpose of the amendment is to strengthen the regulatory mechanism, then of the NGO is registered for cultural and religious, received amount for cultural, unless you say you dont require declaration of purpose for which amount is sent, we understand that, but that is not the correct way of handling the foreign exchange flow."

Mr. Mehta requested the Bench to give permission to seek instructions and explain after lunch hours. Thereafter he read out sub-section 2 of Section 17.

"Under Section 18 he is obliged to intimate regarding specific purpose", noted the Bench.

Informing that he has himself marked the provision, Mr. Mehta went on to read Section 18:

"Your Lordships are right. Otherwise it would come for cultural purposes and education will be imparted, that is possible. That the mischief that the amendment seeks to".

"Have to Get over the mischief", remarked the Court.

Assuring the Bench that he would place an affidavit before the Court addressing the queries, Mr Mehta proceeded to read Para 92 in page 83 of the affidavit filed by him:

"Merely because there are some onerous conditions is no ground to challenge the validity of the Section, but I am ponting out there is no onerous responsibility under section 17. Please see there is no difficulty. Para 92 - 'The concern of the petitioner about the physical access to the local bank account of its choice is unfounded and misleading. It may be submitted that for outstation FCRA organizations located in remote areas or and for operational ease of any FCRA organization, MHA and State Bank of India have put in place a system to enable the NGOs to open the main designated FCRA Account in SBI, New Delhi Main Branch without any need to physically come to Delhi. See Para 94 - 'It is submitted that in addition, the amended section 17 provides the petitioners and NGOs/persons an option to open and operate another FC account in any bank branch of their choice anywhere in the country. They can link these two accounts and transfer the foreign contribution received in the NDMB of SBI into their "other FCRA bank account" of their choice anywhere in India. Location of (second) "another FCRA account" depends on the choice of the recipient organisations. In addition, if petitioners or NGO want they can also use the NDMB account for operational purposes besides being its account of first entry point for the foreign contribution. Even further petitioners and FCRA NGOs can maintain as many FCRA utilization Accounts as they wish in any bank branch of their choice. In other words, as long as the foreign contribution first lands in the main designated FCRA Account in the NDMB of SBI, the petitioners and NGOs have absolute freedom about opening & operating any additional FCRA Bank Accounts in bank branches of their choice.Further, transfer of Foreign Contribution from the designated FCRA account in the specified NDMB of SBI to the (second) another FCRA account in the bank branch of their choice would be allowed on free/gratis basis without any bank charge on real time basis by the SBI on the instructions of the recipient organisations through digital or internet banking."

Mr. Mehta emphasised that foriegn funds are generally received digitally. However, in order to explore possibilities, the Bench posed a question regarding the operation of the banking facility in cases of cheques and drafts received by the NGOs.

"Now suppose instead of digital transfer, it is by some draft or cheque. It has to be deposited where? In the local branch. Is that facility available at the local branch?"

Taking information from concerned officer, Mr. Mehta responded, "Such instances are rare, they are all digitally transferred, But suppose somebody receives a cheque then they can deposit it at the local branch."

The Bench added that it would be so because the local branch is indeed working as a backup office of SBI main branch in the context of the act.

"See the overall scenario now, there are several modes of banking transaction available. Not only cheque and draft, it can be e-transfer also. Your idea is that the initial credit has to be in the main FCRA account to be maintained in Delhi, thereafter it can go to any other account. That is the landing ground. Please make sure.", observed the Court, asking the Solicitor General to put the clarification sought in an affidavit.

Mr. Mehta continued reading para 97 of his affidavit -

"The concern of the petitioners regarding organisation located in remote areas of the country lacking access to digital infrastructure such as internet/computer facilities, regular electric supply and as such being unable to make transactions via net-banking is misconceived for the reason because the transfer of foreign contribution in most FCRA accounts from a "foreign source" happens only through net-banking/digital media including the receipt of foreign contributions from foreign donors located abroad. Besides, all FCRA services including registration, renewal, prior permission, change of details, uploading of returns annually, etc. are available mandatorily in the online mode only through FCRA website fcraonline@nic.in since December, 2015 and all FCRA organisations have been consistently complying with all their statutory obligations through the online mode only without any difficulty."

Seeking written instruction on the procedure to operate the account, the Bench pointed out -

"Section does not say funds are to be received through net-banking and digital media.The Section does not say that and therefore there must be some regulation or rule or operating instructions of RBI."

Bowing down to the observation of the Bench, Mr. Mehta proceeded with reading Para 98 of his affidavit -

"Further, petitioners' contentions regarding Rule 16 of the Foreign Contribution (Regulation) Rules (FCRR), 2011 relating to reporting of information by the banks within 48 hours and other mechanisms in the earlier FCRA regime, it is submitted that there is a difference between obtaining information for receipt of foreign contribution from one bank location and information gathered from hundreds of bank branches located all over the country as was the case in the erstwhile provision of the Act. In addition, even at the inspection and audit stages, it entailed huge operational difficulties while collecting, collating and consolidating the information from hundreds of bank branches. From enforcement and operational angle, flow of information from one centralized location is necessary and has a reasonable and proximate relationship with the object sought to be achieved by the Act. It is submitted that the same further leads to transparency in receipt of foreign contribution and ensures compliance. From petitioners' point of view or for that matter from NGO's point of view it is immaterial and inconsequential as the availability of all information to the Respondent at one point in bank branch entails no additional compliance burden on the petitioners or the NGO. Easier availability of details of inflows & outflows of foreign contribution from the main FCRA account would help Government in implementing the mandate of the Act more effectively. It would make the working of FCRA NGOs more transparent and bring in positive incentives for higher accountability in utilisation of the foreign contribution. Therefore, while ensuring proper monitoring of the inflow and outflow of Foreign Contribution from FCRA Account in the NDMB of SBI as mandated by the amended provision, it has been duly ensured that the NGOs/associations are not put to any undue hardships or extra financial costs/compliance burden. The efforts made are explained at preceding paras. The amended provision only aims to facilitate monitoring of all inflows of foreign contribution more coherently and effectively towards making the fund flow transparent. It is submitted that averments made by some petitioners regarding their frequent visit to Delhi during change of details of office bearers, key functionaries and other members for KYC etc. are misconceived and wrong. It is submitted that State Bank of India, New Delhi Main Branch has ensured KYC verification through their branches across the country and based on this remote processing, over 19000 Accounts have already been opened at SBI, New Delhi Main Branch. Further, applications for change of details such as change in name, address, aims, objectives, or key members of the association under Rule 17-A of the Foreign Contribution Regulation Rules, 2011 are processed only online through the FCRA web portal at fcraonline@nic.in. There are no physical application since December, 2015. The averments made by some Petitioners stating that there are close to 50,000 persons registered under FCRA is false and misleading and amounts to twisting of facts. If fact, a closer scrutiny of the documents attached from the FCRA website would reveal that out of close to 50000 persons registered under FCRA, registration certificate of less than 23000 persons are active, whereas registration of over 20,600 non-compliant persons have been cancelled already. Based on the existing procedure over 19000 Accounts have already been opened at SBI, New Delhi Main Branch."

"Mr. Solicitor General, can you just explain us the reason why this whole activity is brought under Home Affairs, which is supposed to be doing vigilance other security measures, not finance department", asked the Court

Stating that there are two reasons were provided, Mr. Mehta responded -

"There is an element of internal security; sovereignty of the nation, but what is the object. Why should someone pay my organization sitting in a foreign country? It is not just an accounting act. It falls under the purview of the Home Ministry. From the beginning this is with the Home Ministry. Because there can be Milord a possibility of money coming in to destabilize peace, tranquility. Several factors which would directly have a bearing with law and order. Money coming for Naxalite activities and other activities which are not permissible under FCRA. I have with me, it's not placed on record advisably, there are IB inputs most of the time. For placing a legislation, the legislature does not need material, it is for administrative decisions that material is required."

On the question of transferring funds to other agencies, Mr. Mehta sought permission to take the Bench to Section 8:

"I cannot have registration if my sole purpose is to receive foreign funds and distribute them amongst other NGOs. I can have registration only under Section 11 and my activities are restricted to the five activities referred to and programmes relating to this. There is a purpose for amending the provision in the way it has been amended and Your lordships would be satisfied that there is a very reasonable and rational purpose so far as distribution is concerned. See Section 8 first." What used to happen was. Just visualize the situation. I have an NGO, I receive say 50 lakhs contribution. I can provide that I as Managing Trustee would get 30 lakhs by way of salary, staff would get 10 lakhs and 10 lakhs I use for some purposes. That was happening and it is what was in contemplation. Therefore, section 8 existing, not amended and it existed from 2010, kind see Section 8."

Referring to the fact that Section 8 requires utilisation of contribution has to be for the specific purpose for which it was received, the Bench reiterated the question asked earlier -

"If it is a multi-activity trust, it is receiving contribution for one activity and spending for another, whether that is permissible. It is hit by Section 8. That is why the question was posed to you, it cannot be generalised. 5 ledger account is to be maintained for 5 activities of the trust. Is this the understanding of the department or not."

Mr. Mehta said that he would place an affidavit in this regard.

The Bench added, "Otherwise the Section would have read can be utilized for any permissible activity of the trust for which it is registered."

Mr. Mehta continued reading Section 8. Highlighting Section 18(b) which states that more than 20% of the contribution cannot be defrayed for administrative expenses, he stated -

"Therefore if I receive one crore, administrative expenses cannot be more than 20 lakhs because money is received for a purpose which is defined under Section 11. To defy this mandate what will I do, I will receive one crore, and 20 lakhs I will keep as administrative expenses, thereafter I will give 20 lakhs to my learned friend's NGO. For him it is a foreign contribution received through me. So out of 20 lakhs he will be able to retain 20% of 20 lakhs. I will distribute this amount of 1 crore amongst 4, 5, 6 people. So, eventually the one crore amount received as foreign contribution only few lakhs is for the purpose for which it is received. Therefore Section 7 is amended to ensure that this mischief is prevented."

Mr. Mehta pointed out that under unamended Section 7 transfer was permissible between registered to registered organisations, but only 10% could be transferred that too with permission from Govt to unregistered organisations. He noted -

"Now you cannot distribute. Cannot act as a middleman. If you are so benevolent then ask the contributor that there are other NGOs. You can outsource it. If you receive blankets you cannot transfer it, but you can outsource help from other organisations to see that the real beneficiary gets the benefit."

Coming further to the other provisions under challenge Mr. Mehta stated -

"Another Section under challenge is Section 12A. This is to have Aadhar No. Even the Aadhar Judgment says it can be used for legitimate state interest. And this is legitimate state interest."

Out of curiosity, the Bench wanted to know what does economic activity denote -

"You know what is the sphere of cultural, religious, social, educational activities but what is economic activity? It can be for distribution with similar organisations, which was permissible under the old regime. All these activities are one activity or separate activities."

Giving an example Mr. Mehta stated that, "If some NGO is doing a Skill development project".

The Bench clarified that it would be a social or education programme and therefore sought explanation with little elaboration on the term economic programme, after lunch break.

Emphasising on the importance of Aadhar Mr. Mehta referred to Section 12A and informed the Court -

"Why Section 12 A was introduced. This was because there were so many Benami transactions. Please See Section 1 and 4. Those who run NGO should also be identifiable persons. This is also possibly a reason why MHA is the nodal agency. To ensure such Benami things are stopped, provision of Aadhar is introduced by statute and not delegated legislation and therefore, permissible."

After the lunch break, Mr. Mehta came back with instructions to address the Bench -

"Some of the pertinent questions were put to me. First question was suppose some NGO gets a contribution by cheque or cash what would be the position.. SBI is a party respondent. There is an affidavit filed by them in WP 751. Kindly turn to heading in pg 39, there is a chart "Roles and Responsibilities of Facilitating Branches". Now come to Pg 47. Please see the first 1st column. - What Facilitating branches/local branches are to do. If FCRA funds are received from foreign donors, state branch to send the same to New Delhi Main Branch for arranging collection through nodal offices and onwards credit to the FCRA account. The foreign currency draft to be accompanied by passport of donor".

The Bench remarked that, "Regulation in place to deposit money at the grassroots level. Inflow has been centralised at one place."

Addressing the Second query about the meaning of 'economic activity' Mr. Mehta stated that:

"The word economic takes colour from religious, social, cultural, educational, etc. Suppose one NGO asks artisans from nearby villages to weave something and that is sold - that is economic. Economic activity would be which is not commercial, which is not like an agent to distribute money but which has some philanthropic nature of some cultural, some social, educational or social programmes. There would be some overlap. So the dominant purpose has to be seen. For eg - Some NGO teaching Sanskrit would fall within the ambit of religious programmes. In registration, they have to disclose their purpose and dominant object. I shall refer to RC Cooper (1970) 1 SCC 248 Para 63 and 70".

Closing his argument, Mr . Mehta submitted that-

"It is my respectful submission that only for the purpose of distributing as a middle man, one cannot have an NGO. Therefore Section 7 is intended to restrict abuse. Now in one of the matters, the National Commission for Protection of Child Rights was joined as a party and in WP 634 they have filed an affidavit. We'll not paint everyone with the same brush, but let's see how NGOs operate. They have given instances of how money is being misutilised, diverted. [ Reads pg 3 para 6 of the Affidavit.] If the legislature is competent, there is clear legislative policy, if amendment seeks to achieve the main object of act, your lordships may hold this not to be ultra vires."

ASG, Sanjay Jain addressing the Court referred to the Forms in the FCR Act -

"There is Clause 6 of Form which has details of Aadhar, Pan and at para 4, Nature of person or association. It has 5 options contained in the act - Religious, cultural, eduational, social, economic. As a society when I get registered I have broader objectives, but under FCRA, I have to be very specific. My application would be guided by two expressions: one is 'definite' and other is 'programme' which is in Section 11."

The Bench noted that programme can be synonymous with activity.

Mr. Jain further explained - "A person who is applying should have a definite programme vis a vis one of the five or more. This would be read with Section 12(4)(b). Kindly have 12(4)(b). He has to declare intention."

The Bench observed that the economic activity is an individual activity as per the form itself -

"Whether it is the understanding of the Department that the inflow can be permitted to disclose purpose for inflow of foreign exchange for cultural supposed in a given case, but when amount comes in the common account of the trust doing more than one activities, it is used for education.The Act does not permit if. But you are permitting it without disclosure."

Mr. Jain, attempting to clarify states ,"Every NGO is required to upload its accounts on a website."

"That regime is not followed strictly. The amount sent is without indication of cause... You said it can be used for whatever purpose. We wanted clarity." observed the Bench.

Upon deliberation with officials it is understood that Mr. Jain informed the Bench that-

"Where a particular applicant has ticked more than one column - cultural and educational. And donations have come. There can be two scenarios - donation comes without specifying purpose."

The Bench reminded that S. 8 does not permit it unless we interpret it differently. Asking the counsel to read Read 7 and 8 together, the Bench notes that Section 8a is very specific:

"Then you are diluting the intent and purpose of the Act. Purpose of contribution has to be disclosed at the outset. Only then contributions can be allowed. Now, the department is to give us the correct position. Otherwise, this would fall foul of Section 18 and Section 8 as well. Perhaps your officer is not correctly informed. Collectively read it has to be receipt purpose specific and utilization is cause specific."

Mr. Jain stated that after reconsideration the stand being taken by the department is that the purpose is non compromisable. He further added -

"As Your Lordship Mr. Ravi Kumar has pointed out that in section 8 the language is 'The contribution has been received' which presupposes that it has been received for a specific purpose."

The Bench put forth another scenario before Mr. Jain -

"Suppose contribution received without purpose. If an NGO has one or two objects, money received, then what the Govt proposes to do, without specification of purpose."

Noting that this would be relevant for an NGO with multiple activities, Mr. Jain responded -

"If the NGO has more than one purpose then a check and balance mechanism has to be introduced."

Thereafter the Bench specifically asked if the department intended to allow such inflow, "Whether you will permit the inflow of such funds."

"Once money lands there would be some regulation, I am sure", responded Mr. Jain.

Seeking clarity the Bench asked -

"How are you perceiving and enforcing the provision till now? Money sent without declaring can it be received at all, so they have to disclose utilization for a specific purpose and they have to keep a separate account for specific purposes. Whether that is the perception of the Department or liber approach is applied that you have to tell us. Declaration has to be at the outset, not later on. What stage the declaration comes. Give us the steps. Form and sections are very specific."

Mr. Jain bowed down to the Court's observation.

The Bench noted -

"Your idea from 1976 is to plug all the loopholes. If there are still grey areas, then again how purpose is being received. You have to have a purpose attached to contribute that is being received and then you have to utilize it for that purpose. Both the things go together in this clause. Can doner send straight to account without intimation. Start from there. The donor has to disclose why they are giving this amount and are you aware that the amount is to be used for only these 5 activities, one of the five activities. Otherwise the act is not working as it should. If at all you are really so serious about regulatory measures to be ensured. The disclosure of such remittance has to be there while remitting the amount along with the purpose of remittance."

Mr. Mehta informed the Court that Section 13 and 14 has to be invoked:

"Under 14 one ground for cancellation is any provision of act is violated. Under Section 13 he can utilize only with permission. Section 15 says what to do with the sum that has been cancelled."

The Bench noticed that provisions deal with after cancellation of certificate -

"Even Prior to that, Section 9 says the Central Govt can prohibit FC in certain cases."

Mr. Mehta stated that this section would come into play in a case where there is criminal activity.

That Bench reminded that, "Donor who donates does not have to disclose purpose."

Mr. Mehta added-

"It has to come from an identifiable entity. Section 2(j) 'foreign source' [Reads]. ...Rule 16 is also under challenge. Kindly refer see Section 17(2). Bank has to indicate the source."

Discussing the definition of foreign source, the Bench indicated a situation -

"Where the account number of the NGO is known and who is not a foreign source as defined and who does it in the account, how are you going to stop entry. What is the procedure that you are following?"

Mr. Mehta referred to Section 13 as the only answer.

The Bench pointed out that Form FC 4 also has columns for donors details. The Bench further enquired that if the NGO is unable to trace source and discloses the same, what would be the consequence.

Mr. Mehta hesitantly responded -

"Then it has to be forfeited. One of a kind situation."

The Bench reckoned that if a regulatory regime is to be set up then all such possibilities have to be thought through.

Referring to Section 13(2)(b) Mr. Mehta said that such NGOs can be allowed to receive funds but cannot use the one without proper source.

The Bench again clarified that the provision is related to cancellation only.

Mr. Mehta candidly accepted that then there might not be a provision for the same.

Mr. Gopal Shankaranarayanan appearing for the Petitioner apprised the Court that in this regard Section 24, 25 and 28 are to be referred.

Reading the provisions, the Bench again asked the Solicitor that, "The NGO itself says that it is an unknown source, and might not be foreign. How do you deal with that?"

Referring to SBI's affidavit, Mr. Shankaranarayanan informed the Court that the amount is not credited without disclosure.

However, the Bench sought mechanism within the Act and not in affidavits.

Indicating at Rule 17, Mr. Mehta stated that the provision deals with disclosure of the organisation.

"But, that is after spending." noted the Bench. "How do you confiscate an amount received from an unknown source or source other than foreign source? We have to analyse the entire Act."

Gopal Shankaranarayanan appearing on behalf of the Petitioner challenging provisions of the Act submitted that -

"The fact that in their objects itself of the 2020 Amendment nearly they 19000 organizations have to cancel registration is clear solid proof of the fact that the systems were working. I also want to make clear that the objects that were read we are completely in accordance with that. We have not challenged any of the old acts. All of those that they provided for a very rigorous form of registration, reporting by bank. In section 8 has been reduced from 50 to 20% we are not challenging that. If there are bad eggs the Govt. has to go after them."

Contextualizing the Union of India's affidavit that Bench stated -

"Perhaps what he meant in his submissions is that you are not challenging the principal act, you are challenging the amendment. If that amendment is to effectuate the principles of the main Act itself, then what can be the extent of challenge."

Referring the Union of India's submission Mr. Shankaranarayanan stated -

"The primary charge as far as 7 has not been dealt with and Section 12A in reference to Aadhar had been skipped across and most of the arguments have been on 17. Now there was a faint argument which was taken with reference to Section 7. The argument as I understand is that Section 7 uses the word 'transfer' and Section 8 uses the word 'utilization'. So, the only thing that Section 7 attempts to bar is a transfer of the foreign contribution. The argument was that so far there has been in their experience from 2010 -20 a doubling of the freign contributions. For which it has become imperative for them that they have found that the amounts that have been received, they are not utilising it themselves, they are passing it on to others.The two objects for them are as follows: i. Foreign contribution has doubled, we have to track everyone. The fact that they were tracking everyone is that 19000 registrations have been cancelled. But what they have done is transfer the entire onus to us. Previously banks had to report within 30 days; now I have to report within 48 hours, not challenging; we have to submit in Rule 17 every single donation. Now the change they have made is - and this is where there seems to be a huge gap between what is the avowed objective and how they have attempted to meet it - and it is entirely disproportionate, which is what my argument was the last time. They say that as long as all the money from Timbuktu to Libya, as long as it comes to one single branch in New Delhi we have met the objective. I don't see how that objective is met by ensuring that it comes through the SBI branch. The minute it comes through the SBI branch, the proviso of Section 17, if allow it to be moved to any number of accounts they might have, from there it can move further, if we take a different reasoning as far as Section 7 is concerned. I can move it to a cultural, religious, a terrorist, an arms and armaments organisation. How have they met their avowed purpose? They have not met the avowed purpose by having a Branch in Delhi, The problem according to them is how the money is being utilised. And the question that your lordships had put to the Government last time has still not been answered. The large organisations like Pratham etc. have done fantastic work...I am taking Pratham as an illustration. What does Pratham do? It conducts the Annual Survey of Education Report every year. They go to every single district in the country, they verify whether the children are able to meet the needs of learning and education. They don't do it themselves. They have to hire small organisations on the ground. Now Section 7 says sorry you can't because the Govt. believes you are a middleman. If we bar the largest bringers of foreign exchange which are going to be utilised for a good purpose, the presumption cannot be that everybody is a criminal. As I mentioned last time, there is a way of reading this down because foreign contributions can be any article, securities, currency. If I receive 1 million blankets then the situation is that I cannot move it unless you say its utilisation. I ask myself what is the difference between transfer and utilization for blankets. I completely agree… you have good legislative policy, but when you implement it you cannot create this kind of a hiccup. If you read transfer as utilization then what's the meaning of section 8. The answer has to be either Section 7 goes out fully and the rest of the Act remains and is capable of being utilised. Section 7 creates the problem which brings this to a halt. And I keep saying that because Section 35 sends me to jail for 5 years on contravention. Unless your lordship interprets this transfer as something much less, maybe utilization."

The Bench observed that -

"When it comes to articles you can pass it on to some other organisation with utilization. When it comes to currency you cannot become the kingpin of the distribution mechanism."

Mr. Shankaranarayanan clarified that people abroad tend to send money to known organisations, once they receive it adhering to the regulations and compliance, he argues that there is no illegality in distributing the amount to organisations.

He further added that -

"The previous regime allowed and limited it to registered organisation. The present either provides a hard interpretation which is that it cannot go further, or a soft interpretation that is is utilisation is to be read into transfer that would mean I can give it to anybody - registered or not. Leaves us with only the option of reading down 7."

The Bench posed a query -

"What is there ultra vires in it or unconstitutional in it?"

Mr. Sankaranarayanan responded stating that it would be hit by A14 for being manifestly arbitrary.

The Bench pointed out -

"Ultimately, who will take policy decisions - NGO or Govt. The very fact that they found 19000 organisations shows to you that the mechanism has been working. Doesn't it come as necessary corollary that there were certain loopholes that were to be plugged. How much measure is to be taken who decides that? Isn't it the Parliament. Assuming Section 7 could have been framed differently, but what is wrong in it constitutionally. That is what we are asking."

Explaining the futility of the Act if the present Section 7 is to stay, Mr. Sankaranarayanan argued -

"Section7 effectively means I get foreign contributions and I keep it. Apart from the patent absurdity of getting foreign contribution and keeping it without being allowed to utilise , use, move it forward, you do not need the rest of the Act. 'person' defined, 'foreign contribution' defined, 'Transfer' undefined."

"You have it and utilise it for the purpose for which it is received for Section 8 which has not been touched by anybody. So, according to you the blockade on transfer is effectively prohibiting utilisation. That is your understanding and argument. So, every utilisation has to be by means of transfer alone", observed the Bench.

Replying in affirmation, Mr. Shankaranarayanan added -

"'Also' by means of transfer."

Thereafter, the Bench enquired that, "A particular doner identifies you and sends money. Now amendment ensures that only you utilise the money. What is wrong with that?"

Mr. Shankaranaraynanan responded,"The problem is that if Section 7 and 8 is to be read together. 7 says I cannot transfer, 8 says I can utilise for specific purpose. If I cannot transfer how do I utilise - this is question no 1."

Seeking Mr. Shankaranarayanan's assistance in the definition and application of 'economic activities that Bench reflected -

"One of the activities being economic activity under Section 11, if you declare that at the outset, you can act as a banker, receive funds from foreign contributors and those funds who can disburse amongst other NGOs unless it is prohibited by any other provision."

Agreeing to the observation of the Bench, Mr. Shankaranarayanan admitted that it concurs with his argument.

"Under the Banking Regulation Act can they act as banks?", enquired the Court.

"That is why BR Act allows only RBI to take that call, can Central Government make such changed" , Mr. Shankaranarayanan stated the argument in the Petition.

Thereafter, the Annual Report of the MHA 2004-2005 was referred to in order to understand the meaning of 'economic activity'. Economic activity includes at the end any other activity related to the above not being commercial activity."

The Bench clarifies, "You have to get your registered under Section 11, as doing exclusively economic activity. Then where is the question of validity?"

As per Mr. Shankaranarayanan, "Section 7 comes in from the side. You have revived this, can you transfer it. If transfer is read as utilisation, the Lord perhaps attempt a reading down and says transfer could be 'utilisation', which then becomes more of a problem because it is a bar. Because if transfer is read to be utilised then it is a complete bar. I cannot do it."

Trying to find a way out the Bench suggested that -

"You can utilise but not transfer. What you are doing - suppose you provide tools to artisan it is utilization not transfer."

Mr. Shankaranarayanan argued that -

"for the equipment, implements, the person who does the income generating activity the very minute money is posed to him it is transfer."

In order to place the argument, the Bench reiterate the same -

"Your argument is that since transfer has been used in Section 7, the entire enactment is reduced to non-functional - you receive the money and cannot do anything."

Mr. Shankaranarayanan added that previously the act had provided for transfer , "Now it is a dead end for me."

"A donor makes a contribution to you and you transfer. You can use 20% for administration, then transfer to Y who will do the same - they will transfer further. The very purpose of the donation goes away. You are inviting money laundering",  cautioned the Bench.

Acknowledging the illustration, Mr. Shankaranarayanan clarified that -

"This concern is not there in the Act or the affidavit and it is not the purpose of the enactment. With Rule 24 the illustration cannot stand. Rule 24 states that the next organization could get only 10% of the contribution and the 90% remains."

The bench pointed out this was with respect to unregistered organisations. It further enquired -

"If you are an NGO only for economic activities then it is open to invoke Section 7 against you. It is utilisation of the amount."

Mr. Shankaranarayanan argues that this would bring Section 7 into the picture because of the interpretation of the word 'transfer'.

The Bench however, reiterates that if the purpose is only economic then distribution would not attract Section 7. There is no question of transfer in that regard. It is utilisation of funds in the manner of declared activity.

Pointing towards the practical problems, Mr. Shankaranarayanan submitted -

"If the NGO is registered for multiple categories and the money comes in for social activities, I transfer it to the hospital for social purposes. It would be hit by 7."

The Bench suggested that apportionment of the funds for specific categories might be useful in this regard, "There are 2 ways for you to register. One for multiple purposes, one for only economic activities. Now if you have declared economic activity then you will receive funds and utilize it."

"The strict reading of the categories might be of concern," stated Mr. Shankaranarayanan

"Section 8 makes it very clear that the purpose has to be declared and money ought to be used for the activity",observed the Bench.

"Suppose I receive the funds and use it for social purpose", submitted Mr. Shankaranarayanan.

The Bench noted that, "You cannot do it, that is the law."

Arguing that the ambit of economic activities being limited it would be difficult to transfer in the manner suggested by the Court, Mr Shankaranarayanan submitted -

"If I am registered under economic activities, I cannot directly give it to hospital or school. The economic purpose is broadly defined and is distinct from social and educational purposes."

In reference to the annual report the Bench asked the ASG, Mr. Jain, if MHA has any latest data since the Annual Report before the Court was for the years 2004-2005:

"This is even before the 2010 Act. Is there any new report for subsequent years?"

Mr. Jain informed the Bench that, " I will seek instructions on that, particularly with definition of 'economic activities.'"

"Come with a comprehensive note",directed the Court.

Mr. Jain pointed out that, "if economic activity were to include banking activity, then it is governed entirely by a different set of regulatory mechanisms. NGO does not have to be NGO, it is a commercial establishment. To that extent we will produce a note".

Assuring that there is no question of getting into the ambit of banking activities, Mr. Shankaranarayanan stated that -

"None of these organisations can do banking activities. You are just forwarding the money."

"That is barred under Section 12(4)(b) - you have to be doing it yourself you cannot outsource" - argued Mr. Jain

The Bench observed that, "That is the condition for registration."

Referring to pg 47 and 49 in the Petition of Jeevan Jyothi Mr. Shankaranarayanan took the Bench through the Registration Certificates as a sample.

The Bench astutely observed that none of the two NGOs have added economic activities.

A report of 2020 by Ashoka University and NITI Ayog pg 55 was read out by Mr. Shankaranarayanan -

"The small portion 19% are organisations which say that they have received contributions from other FCRAorganisation for which Section 7 had to be introduced."

Mr. Shankaranarayanan provided the citation and read out the relevant portion of the case laws :

a. Modern Dental (2016) 7 SCC 353, para 60, Relying on point no. 2 - the measures are undertaken are rationally connected to the fulfillment of the purpose and 3 - the measures are necessary and no alternative measure can be taken;

b. Internet and Mobile dealing with crypto currency (2020) 10 SCC 274 para 207 and 215. - Doctrine of proportionality and nexus;

c. (2005) 8 SCC 534 para 75, the slaughter of cows matter

The Bench acknowledged that it would be a question before it if the amendment to Section 7 is a complete prohibition in respect of the 19% projected above.

Mr. Shankaranarayanan made an alternate argument in Section 17 -

"In case your Lordships feel that 17 - this single branch. Could your Lordship consider a direction which says that all branches of SBI can be considered instead of one branch in Delhi. In rejoinder we have shown that they had sent people to go to SBI, Delhi in person. 41 people for 22000 organisations are earmarked for this purpose in that one branch."

Advocate appealing on behalf of Petitioner in 634 referred to Page 20 seeking issuance of mandamus to restrict Centre from extending the deadline for compliance. In the context of the interpretation of Section 7 and 8 he stated that the legislature's intention cannot be that you get the money and not use it. The only purpose is to prevent sub-delegation. From the perspective of a donor, it is to be used for the purpose it is received.

Mr. Mehta summed up his submission stating that -

"The word 'economic' is used to refer to an NGO whose only purpose is to take money and distribute it. You are reducing yourself to a commission agent where you will deduct 20% by way of administrative expenses. That my receiving money would not amount to economic activity if I transfer it to him. It would be a donation. He would not be bound by Section 8 also. I will take money and distribute and they will have 60%, 70%. So, if you are that powerful, then encourage people to directly send money to accounts."

The Bench asked the Solicitor General when the note could be filed. He responded that he would provide the same by next Monday. Order was reserved by the Court.

[Cause Title: Noel Harper and Ors v. Union of India, W.P.(C) No. 566/2021;

Vinay Vinayak Joshi v. Union of India W.P.(C) No. 634/202;

Jeevan Jyothi Charitable Trust and others v. Union of India W.P.(C) No. 751/2021]

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