Black money can be a ground to implement demonetisation, says SC
India is not the only country that resorted to demonetization to rein in black money, the Supreme Court said on Tuesday
India is not the only country that resorted to demonetization to rein in black money, the Supreme Court said on Tuesday. Dealing with a bunch of petitions challenging the November 2016 decision to outlaw currency notes of ₹500 and ₹1,000 in circulation, a five-judge constitution bench said the US in 1969 resorted to demonetization to curb unaccounted for money.

The government had submitted to the court that the demonetization exercise was undertaken on November 8, 2016, with three objectives — to crack down on fake currency, black money and terror funding. The petitions that opposed this decision claimed that these objectives had nothing to do with demonetization as customarily, such an exercise was undertaken by economies in the face of hyperinflation or to do away with unusable currency notes.
A five-judge bench headed by justice S Abdul Nazeer said that based on their own research, this was not true. The bench, also comprising justices BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna, said: “The objective of demonetization is not necessarily limited to the two grounds (inflation, discarding unusable currency). Black money is also one.” It pointed out that in 1969, the US demonetized high-value currency notes above $100. “To resist black money, they demonetized the currency,” justice Ramasubramanian said.
Sharing part of their research, the bench further stated: “We have taken out a list of countries that experimented demonetization from 1873 till 2016. In 1873, the US undertook demonetization as silver was no longer valid. Then in 1923, Germany undertook this exercise to curb inflation.” The court did not share any more details.
Senior advocate P Chidambaram, who is leading the arguments on part of the petitioners, told the court that if the central government was confident of why it introduced demonetization, it should not shy away from producing the relevant files or material that went into the decision-making process. The demonetization exercise was “completely flawed,” he said, as the process had to emanate from the Reserve Bank of India (RBI) under Section 26(2) of the RBI Act, which deals with the power to demonetize currency notes of any denomination.
The demonetization exercise happened in the reverse, as it was the central government that asked the RBI central board on November 7 to meet and decide on the proposed demonetization, Chidambaram said. “We know that the decision can’t be reversed, but we want the law to be laid down. Suppose 24 hours given to RBI board was reduced to 24 minutes. If you allow them this leeway, they may even demonetize almost 100% of the currency,” Chidambaram said.
It was his case that the decision to withdraw the ₹500 and ₹1000 notes in 2016 resulted in 86.4% of the currency being taken out of circulation.
“Is it not possible for the Centre to initiate a proposal for demonetization,” the bench said. “Why should it be only from the RBI?”
The court referred to the arguments made by attorney general R Venkatramani, who pointed out that the country was faced with the issues of black money, fake currency and terror funding, and the use of the demonetized denominations was seen to aid these activities.
Chidambaram argued that the previous two demonetization exercises carried out in the country in 1946 and 1978 should be the reference for the court to decide the validity of the 2016 exercise. “In 1946, the RBI governor said that black money and fake currency cannot be removed with demonetization. Fake currency and black money will always be there and it is still there.” On both occasions, he added that demonetization was achieved by a law passed by Parliament and not resorting to RBI’s power under Section 26(2).
The RBI, represented by advocates Jaideep Gupta and Kuldeep Parihar, told the court that judicial review cannot be countenanced in matters involving economic policy, as these are issues best left to experts. While accepting there were hardships faced by people to deposit old currency notes by December 30, Gupta said, “It was always known that December 30 would be the last day....some hardships may not have been anticipated.”
Venkatramani made the last leg of arguments for the Centre on Tuesday, pointing out that the hardships faced by individuals should not lead the court to further extend the grace period or window period for depositing the demonetized currency notes. “The court may not prescribe a norm based on hardships of individuals to push the grace period. It will essentially alter the character of the law,” he added.
The court will continue hearing the matter on Wednesday.