Big boost for Modi govt as SC upholds demonetisation in 4-1 verdict

New Delhi: In a major boost for the Narendra Modi government, the Supreme Court on Monday, by a majority of 4-1, upheld the Centre’s November 8, 2016 decision to demonetise Rs 500 and Rs 1,000 denomination currency notes, ruling that the decision can’t be struck down as it did not suffer from any legal flaw or the test of proportionality.

A majority of the five-judge Constitution Bench, comprising Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna and V. Ramasubramanian, ruled that the November 2016 notification on demonetisation “does not suffer from any flaws in the decision-making process” and “satisfies the test of proportionality and, as such, cannot be struck down on the said ground”.

Justice B.V. Nagarathna, in a dissenting judgment, said that the decision to demonetise the Rs 500 and Rs 1,000 notes by taking recourse to sub-section (2) of Section 26 of the Reserve Bank of India Act was “unlawful” and “vitiated” and the “subsequent ordinance of 2016 and Act of 2017 incorporating the terms of the impugned notification are also unlawful”.

Pronouncing the judgment for the majority, Justice Gavai said the power available to the Central government under sub-section (2) of Section 26 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”, he ruled.

Having said this, Justice Gavai further said that merely because on two earlier occasions (1947 and 1978), the demonetisation exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central government under sub-section (2) of Section 26 of the RBI Act.

Justice Gavai said this while answering six questions that were framed for adjudicating 53 petitions that challenged the demonetisation decision, including the question “Whether the power available to the Central government under sub-section (2) of Section 26 of the RBI Act can be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not ‘all’ series in view of the word ‘any’ appearing before the word ‘series’ in the said subsection, specifically so, when on earlier two occasions, the demonetisation exercise was done through the plenary legislation?”

Rejecting the plea that more time, beyond 52 days, should have been given for exchanging the demonetised legal tender of Rs 500 and Rs 1,000, the top court said: “The period provided for exchange of notes vide the impugned notification dated 8th November 2016 cannot be said to unreasonable”.

The court contrasted it with three days that were extendable by another five days that were given to exchange demonetised notes in the 1978 demonetisation decision.

Having referred to 3+5 days given in 1978 to exchange demonetised currency notes, the majority judgment said: “We, therefore, hold that the period provided for exchange of notes vide the impugned notification dated 8th November 2016 cannot be said to be unreasonable.”

Not disputing the government's authority to demonetise currency notes of any denomination and insisting that it can be done only by enacting a law, Justice Nagarathna said that given the secrecy that accompanies demonetisation decision, the government could have taken the ordinance route.

“The Central Government… could have several compulsions for initiating demonetisation of the bank notes already in circulation in the economy, and it could do so even in the absence of a recommendation, as per sub-section (2) of Section 26 of the Act, of the Central Board of the Bank (RBI)”, but Justice Nagarathna said: “In either of the situations, the Central government may proceed to demonetise the bank notes but only through a legislative process, either through an ordinance followed by a legislation, if Parliament is not in session; or by a plenary legislation before Parliament …”

Justice Nagarathna said that issuing a gazette notification for effecting demonetisation cannot be a substitute to a well-crafted legislative mandate for taking such a decision.

“… when a statute contemplates a specific procedure to be adhered to in order to arrive at a desired end, such procedure cannot be substituted by an alternative procedure which is not contemplated under the statute. Further, if an action is to be carried out by way of issuance of a particular statutory instrument on the basis of certain requirements, such action cannot be validly carried out by way of issuance of an instrument when the same is not contemplated under the Act. This is particularly so when the instrument enacted stands on a different footing than the one meant to be enacted”, says the dissenting ruling by Justice Nagarathna.

However, Justice Nagarathna clarified that her terming of demonetisation decision as “Illegal” has no bearing on the objective of the decision to curb fake currency, black money, terror funding and drug trafficking, money laundering money, parallel economy, and national security.

It is beyond the pale of doubt that the said measure, which was aimed at eliminating these depraved practices, was “well-intentioned”, Justice Nagarathna said. “The measure (decision of demonetisation) has been regarded as unlawful only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation (that were sought to be achieved)”.

Referring to the November 7, 2016 communication addressed by the secretary, department of economic affairs, ministry of finance, to the Governor, RBI, , Justice Nagarathna said: “This demonstrates that there was no independent applications of mind by the Bank (RBI). Neither was there any time for the Bank to apply its mind to such a serious issue. This observation is being made, having regard to the fact that the entire exercise of demonetisation of all series of bank notes of Rs 500 and Rs 1,000 was carried out in twenty-four hours.”

Noting that the demonetisation decision was taken in 2016 and has already been acted upon, Justice Nagarathna said the law laid down in her dissenting judgment would apply prospectively and would not affect any action taken by the Central government or the Bank pursuant to the issuance of the notification dated 8th November 2016.