How The Supreme Court Dealt With 1978 Demonetisation Of High Value Currencies?

The five-judge Bench, comprising Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian, and B.V. Nagarathna has heard Senior Advocate P. Chidambaram make his preliminary submissions. In his scathing criticism of the policy of demonetisation, Chidambaram, inter alia, asserted that the power to demonetise all series of banknotes of any denomination by issuing a notification in the Official Gazette was not available under Section 26(2) of the Reserve Bank of India Act, 1934 and accordingly, the section must be read down. Otherwise, Chidambaram argued, the power conferred under this section would be "unguided and uncanalised", and subject to the discipline of Part III of the Constitution. In this connection, the senior counsel also referred to India's earlier trysts with note-bandi.

In India, there have been two prior episodes of demonetisation. The first instance in modern-day India was in 1946, when the British government pulled the Rs 1000 and Rs 10000 notes from circulation. Three decades later, the Janata Party-led government under the Prime Ministership of Morarji Desai demonetised Rs 1000, Rs 5000, and Rs 10000 in 1978, against the wishes of the then Governor of the Reserve Bank of India, I.G. Patel. In both cases, the notes withdrawn were extremely high-value notes, representing less than 1 per cent of the value of notes in circulation, noted Ghosh, Chandrasekhar and Patnaik in "Demonetisation Decoded: A Critique of India's Currency Experiment". Another common thread running through these episodes was the enactment of separate legislations to carry out the exercise of demonetisation. In 1946, the Viceroy and Governor General of India, Sir Archibald Wavell, promulgated the High Denomination Bank Notes (Demonetisation) Ordinance, while in 1978, the High Denomination Bank Notes (Demonetisation) Act was brought into effect by the Parliament, replacing an ordinance of the same name. In reference to these, Chidambaram asked the Constitution Bench hearing the challenge against the 2016 demonetisation –

"If Section 26 gave the Government this power, then why were separate acts enacted during the earlier demonetisations in 1946 and 1978? If the power was there, why did the 1946 and 1978 Acts start with the words 'notwithstanding anything contained in Section 26'? The Parliament felt that this kind of power was not there. Can the Government exercise this power without a parliamentary enactment or a debate?"

Interestingly, the 1978 note-bandi exercise had also resulted in a constitutional challenge. The validity of the 1978 Act was assailed as, inter alia, violative of the fundamental rights to trade under Article 19(1)(g) and to property under Article 19(1)(f), as it then stood. This contention was rejected as "wholly misconceived" by a Constitution Bench comprising Justices Kuldip Singh, M.M. Punchhi, N.P. Singh, M.K. Mukherjee, and Saiyed Saghir Ahmad(Jayantilal Ratanchand Shah v. Reserve Bank of India [(1996) 9 SCC 650]). The main thrust of the petitioners' argument was that the impugned Act had not been brought into force for "a public purpose", which was the only ground on which property could compulsorily be acquired under Article 31(2). The argument was summarised by the Court as follows –

"According to the petitioners, the impugned Act extinguished the debts due and owing from the Bank to the holders of the high denomination bank notes. The petitioners contended that such extinguishment of debts amounted to compulsory acquisition of property within the meaning of Article 31(2) of the Constitution and since the acquisition was not made for a public purpose nor adequate and appropriate provisions were incorporated in the impugned Act for payment of compensation in respect thereof the impugned Act was violative of the above Article."

Repelling this contention too, the Court, through the judgement authored by Justice Mukherjee, held –

"From the preamble, it is manifest that the Act was passed to avoid the grave menace of unaccounted money which had resulted not only in affecting seriously the economy of the country but had also deprived the State Exchanger of vast amounts of its revenue. Considering the evil the above Act sought to remedy, it cannot be said that it was not enacted for a public purpose."

It was also asserted that the petitioners had been deprived of the right under Article 31 to get compensation for such compulsory acquisition, and alternatively, even if it were assumed that the Article had not been violated, the time prescribed for the exchange of the high denomination bank notes under Sections 7 and 8 of the 1978 Act was "unreasonable and violative of their fundamental rights". The Court, however, did not find this line of argument persuasive. It held –

"Sections 7 and 8 of the Demonetization Act lay down an elaborate procedure to apply for and obtain an equal value of the high denomination bank notes in the manner prescribed thereunder…When the above provisions of the Act are considered in the context of the purpose the Demonetization Act sought to achieve, namely, to stop circulation of high denomination bank notes as early as possible, the above contention of the petitioners cannot be accepted. It was absolutely necessary to ensure that no opportunity was available to the holders of high denomination bank notes to transfer the same to the possession of others. At the same time, it was necessary to afford a reasonable opportunity to the holders of such notes to get the same exchanged. Obviously, to strike a balance between these competing and disparate considerations that Section 7(2) of the Demonetization Act limited the time to exchange the notes."

In the ultimate analysis, therefore, the Constitution Bench led by Justice Kuldip Singh decided that the 1978 Act was "a valid piece of legislation" which warranted no interference by the highest court of the land.

The petitioners challenging the 2016 demonetisation have sought to distinguish this judgment by highlighting the following aspects: (a)In 1978, the demonetised notes represented a negligible portion of currency in circulation, less than 1%, whereas, the 2016 decision led to withdrawal of nearly 86% of the currency, (b) the impact of 2016 decision was borne by common people, whereas the 1978 decision affected only a small fraction of the extremely rich elite, (c) the 2016 decision was on the basis of an executive circular whereas the 1978 decision was through a Parliamentary legislation.

Reports of the hearings of demonetisation case:

Centre Withholding Crucial Documents On Demonetisation; RBI Or Cabinet Had No Full Information : P Chidambaram Tells Supreme Court

Demonetisation Challenge: "What Can Be Done Now?", Asks Supreme Court; Lay Down Law To Prevent "Similar Misadventures" In Future, Says P Chidambaram

Decision To Withdraw 86% Currency Taken Within 24 Hours, Demonetisation Contrary To RBI Act : P Chidambaram To Supreme Court

Demonetisation Challenge : Supreme Court Wants To See RBI Board Meeting Documents, Centre's Recommendation; Seeks Comprehensive Affidavit