Contract Is Void If Prohibited By Statute Under A Penalty Even If It Does Not Expressly Declare It Void: Supreme Court

The Supreme Court observed that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void.

The bench comprising Justices AM Khanwilkar, Indu Malhotra and Ajay Rastogi observed that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973, of obtaining "previous" general or special permission of the Reserve Bank of India for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory. The bench clarified that the transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be reopened or disturbed in any manner because of this pronouncement.

The issue considered by the Court in this case was whether the transaction entered into in contravention of Section 31 of the Foreign Exchange Regulation Act, 1973, is void or is only voidable and it can be voided at whose instance? Foreign Exchange Regulation Act was repealed in 1998 and replaced by Foreign Exchange Management Act.

As per Section 31, a person, who is not a citizen of India, is not competent to dispose of by sale or gift, as in this case, any immovable property situated in India without previous general or special permission of the RBI? Violation of Section 31 is punishable under Section 50. In this context, the bench observed:

"It is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. Further, it is settled that prohibition and negative words can rarely be directory. In the present dispensation provided under Section 31 of the 1973 Act read with Sections 47, 50 and 63 of the same Act, although it may be a case of seeking previous permission it is in the nature of prohibition as observed by a three ­Judge Bench of this Court in Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors . In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, 18 (1977) 2 SCC 424 26 yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act. When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty if imposed is not enforceable."

Referring to Section 31 of the Act, the bench held that that the requirement of taking "previous" permission of the RBI before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law. The court observed:

"From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that the requirement of taking "previous" permission of the RBI before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law. The dispensation under Section 31 mandates "previous" or "prior" permission of the RBI before the transfer takes effect. For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act, unlike in the case of Section 29 as noted in Life Insurance Corporation of India (supra). Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of the 1973 Act to such transaction. 26. In light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction. He can set up challenge thereto by dire"

Case: Asha John Divianathan  vs. Vikram Malhotra [CA 9546 OF 2010]

Coram: Justices AM Khanwilkar, Indu Malhotra and Ajay Rastogi

Counsel: Adv Navkesh Batra, Sr. Adv C.A. Sundram

Citation: LL 2021 SC 119

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