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

While upholding the demonetisation of Rs 500 and Rs 1000 currency notes carried out by the Central Government in 2016, the Supreme Court observed that the question whether the measure has achieved its objects is not relevant while deciding its legality.

A Constitution Bench comprising 5 judges upheld the demonetisation exercise as valid by a 4:1 majority, with Justice BV Nagarathna dissenting from other four judges - Justices S Abdul Nazeer, BR Gavai, AS Bopanna and V Ramasubramanian- to hold otherwise.

"It is not relevant whether the objectives sought have been achieved or not. What is required is that there has to be an objective which is for proper purposes and there has to be reasonable nexus with the measure and the objectives", Justice BR Gavai said while reading out the majority judgment.

Justice Nagarathna, in her dissenting judgment, observed :"It has also been brought on record that around 98% of the value of the demonetised currency notes have been exchanged for bank notes which continues to be a legal tender. Also a new series of bank notes for Rs 2000 was released by the bank. This would suggest the measure itself was may not have been proved to be as effective as it was hoped to be. However, this court does not base its decision on the legality of a legislation qua the effectiveness in achieving the stated objectives. Therefore, it is clarified that any relief moulded in the present case is divorced from the consideration of the success of such measures".

The majority judgment held that there was no flaw in the decision making process relating to the November 8, 2016 decision. Also the decision satisfied the four-pronged tests of proportionality.

"We find that the three purposes (curbing blackmoney, terror-funding and counterfeit currencies) are proper purposes. We have held that there was a reasonable nexus with the purposes. In so far as the third test concerning alternate measures, we have held that there cannot be alternative measures for the actions which are sought to be done by demonetisation. Fourth one is that whether there was proper relation between the importance of these purposes and the limitations on the constitutional rights. Applying these four tests, we have held that the action cannot be hit by the doctrine of proportionality".

The majority answered the reference as follows :

1. The power available to the Central Govt under Section 26(2) 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 earlier two occasions, the demonetisation exercise was done through plenary legislations, it cannot be held that such a power is not available be to Central Govt under Section 26(2) of RBI Act .

2. Section 26(2) of the RBI Act does not provide for excessive delegation inasmuch as there is an inbuilt safeguard that such a power has to be exercised through a recommendation by the central board. As such, Section 26(2) is not liable to be struck down on the said ground.

3. Impugned notification dated 8 nov 2016 does not suffer from any flaws in the decision making process.

4. The impugned notification dated 8 nov 2016 satisfies the test of proportionality and cannot be struck down on the said ground

5. The period provided for the exchange of notes cannot be said to be unreasonable

6. The RBI does not possess independent power under Section 4(2) of the 2017 Act, in isolation of the provisions of Section 3 and 4(1) thereof to accept the demonetised notes beyond the period of notification issued under Section 4(1) of the 2017 Act. 

Justice Nagarathna, while holding that the decision was unlawful, held that the declaration will only operate prospectively and will not affect any actions already taken. Since the notification has been acted upon, the status quo ante cannot be restored and hence, Justice Nagarathna said that no relief can be granted in the petitions.

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