Demonetisation Decision Making Process Lawful, Supreme Court Holds By 4:1 Majority; Justice Nagarathna Dissents

The majority held that Centre’s notification dated November 8, 2016 is valid and satisfies the test of proportionality. Justice BV Nagarathna in her dissenting view held that though demonetization was well-intentioned and well thought of, it has to be declared unlawful on legal grounds (and not on the basis of objects).

The 5-judge comprising Justices S Abdul Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna was answering a division bench reference. It had reserved the judgment on December 7, 2022. The matter is now sent back to the division bench.

Reading out the majority judgment, Justice BR Gavai said demonetisation had a reasonable nexus with the objectives (eradicating black marketing, terror funding, etc.) sought to be achieved. It is not relevant whether the objective was achieved or not, he added.

The bench further held that the prescribed period of 52 days for currency exchange cannot be said to be unreasonable.

It added that the decision-making process cannot be faulted merely because the proposal emanated from the Central Govt. “There has to be great restraint in matters of economic policy. Court cannot supplant the wisdom of executive with its wisdom.”

The bench further held that Section 26(2) RBI Act, which empowers Centre to demonetize any series of bank notes of any denomination, can be used to demonetize the whole series of currency. It observed,

“Restrictive meaning cannot be given to word "any" in Section 26(2) of RBI Act. The modern trend is of pragmatic interpretation. Interpretation which leads to absurdity must be avoided. The purposes of the Act must be considered while interpretation.”

The bench added that Section 26(2) cannot be struck down as unconstitutional on the ground of excessive delegation, adding that there are inbuilt safeguards.

“Delegation is made to Central Govt which is answerable to Parliament which in turn is answerable to the citizen of the country. The Central Govt is required to take the action after the consultation with the Central Board and there is an inbuilt safeguard.”

However, Justice BV Nagarathna in her dissenting view held that demonetisation of the whole series of Rs 500 and Rs 1000 currency notes is a serious matter and it could not be done by the Centre by merely issuing a gazette notification. She said that though the measure was well-intentioned, it has to be declared unlawful on legal grounds (and not on the basis of objects).

"Demonetisation of all series of notes at the instance of Central Govt is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation."

The judge further expressed that the RBI did not show independent application of mind and merely approved Centre's desire for demonetization. "On looking at the records submitted by RBI, there are words "as desired by the Central Govt"...this demonstrates there was no independent application by the RBI. The entire exercise was carried out in 24 hours."

She also differed from the majority judgment on the point of powers of Central Govt under Section 26(2) RBI Act.

Firstly, she held that "Any series" under Section 26(2) RBI Act cannot mean "all series". "Section 26(2) can be only for a particular series of currency notes & not for the whole series of currency notes of a denomination."

Next, the judge held that RBI Act does not envisage initiation of demonetisation by the central govt. As per Section 26(2), the proposal for demonetisation to emanate from the central board of the RBI, she held. Justice Nagarathna further held that if demonetisation is to be initiated by the central govt, such power is to be through a legislation or an ordinance derived from Entry 36 of List I which speaks of currency, coinage, legal tender, and foreign exchange.

The judge further explained, “The proposal originated from the Central Government and the opinion of the RBI was sought. Such an opinion given by the RBI cannot be construed as a "recommendation" under Section 26(2) of the RBI Act...When the proposal for demonetisation originates from the Central Govt, it is not under Section 26(2) RBI Act. It is to be way of a legislation, and if secrecy is needed, then by way of an Ordinance."

However, looking at the fact that the notification had already been acted upon and six years had elapsed since, the Judge said that no relief can be granted in the matter. "This declaration of law will act only prospectively and will not affect actions already taken," she said.

The Constitution Bench was answering the issues referred to it in 2016 regarding demonetisation.

"Having answered the reference, we direct the registry to place the petitions before the hon'ble Chief Justice of India to post them before the appropriate bench. Needless to say that all other contentions are left open to be considered by the benches before which the matter would be placed", Justice Gavai stated after reading out the operative portion.

Background

While reserving the judgment, the Court had asked the Union Government and the Reserve Bank of India to produce the relevant records. Attorney General for India R Venkataramani said that the documents will be produce in a sealed cover.

The bench had initially expressed the view that the issue was "academic", considering the fact that six years have gone by since the decision and wondered if it can undo the actions. However, on October 12, the bench agreed to hear the matter on merits, after the persuasive arguments made by Senior Advocate P Chidambaram. The bench required the Union Government and the Reserve Bank of India to produce before it the relevant documents and files relating to the decision.

From the petitioners' side, Senior Advocate P Chidambaram opened the arguments. Although the effects of the decision cannot be undone, the Court should lay down the law for the future, so that "similar misadventures" are not repeated by the future governments, he argued. Senior Advocate Shyam Divan, Advocate Prashant Bhushan etc also made arguments for some petitioners. Among the batch were certain petitions filed by persons seeking extension of the deadline for exchanging the notes.

 'Any' Means 'All' : Supreme Court Says Centre Can Demonetise All Series Of Bank Notes Invoking Section 26(2) Of RBI Act

Whether Demonetisation Achieved Its Objects Is Not Relevant To Decide Its Legality : Supreme Court

RBI Didn't Independently Apply Its Mind In Recommending Demonetisation, Entire Exercise Carried Out In 24 Hours : Justice BV Nagarathna