Mindful of ‘Lakshman Rekha’ but will examine demonetisation: Supreme Court

Published on Oct 12, 2022 11:29 PM IST

The Supreme Court bench, headed by justice SA Nazeer, also asked the government to keep ready the confidential files relating to the exercise that was conducted before Prime Minister Narendra Modi announced his government’s demonetisation drive on November 8, 2016.

Supreme Court on Wednesday set about to examine the decision-making process behind the 2016 demonetisation decision. (HT File)
Supreme Court on Wednesday set about to examine the decision-making process behind the 2016 demonetisation decision. (HT File)

New Delhi Stressing that it is completely mindful of the “Lakshman Rekha”, or boundaries, in matters of economic policy, the Supreme Court on Wednesday set about to examine the decision-making process behind the 2016 demonetisation decision, and directed the Union government and the Reserve Bank of India (RBI) to submit comprehensive affidavits to explain procedural and legal aspects of the move.

A five-judge Constitution bench turned down the government’s plea to shut the proceedings by declaring them infructuous and an academic exercise, saying it was a “serious matter”, and will require detailed replies from the Centre and the Reserve Bank of India (RBI) on the legality of the procedure adopted by them in declaring bank notes of 500 and 1,000 denominations invalid tender.

The bench, headed by justice SA Nazeer, also asked the government to keep ready the confidential files relating to the exercise that was conducted before Prime Minister Narendra Modi announced his government’s demonetisation drive on November 8, 2016. Fixing the next hearing on November 9, the court asked attorney general (AG) R Venkataramani to keep the agenda documents and decision papers handy to show the correspondence between the government and RBI in the day leading to the announcement.

“You should keep them (files) ready. You can’t keep them away from us if we want to see... Where is the recommendation from the government? What was the view of RBI and how did you take the decision? These are three issues on facts. And on law, you should address the language of Section 26 of the RBI Act as to whether only a series of notes could be demonetised or all series could be demonetised. The Union of India and RBI should file comprehensive affidavits,” the bench told Venkataramani and senior counsel Jaideep Gupta, who represented RBI.

“The wisdom of the government in matters of economic policies is something that this court is always mindful about. We always know where the Lakshman Rekha is when it comes to judicial reviews. But the manner and the procedure of an action can certainly be examined,” remarked the bench, which included justices BR Gavai, AS Bopanna, V Ramasubramanian, and BV Nagarathna.

On November 8, the government declared invalid existing 500 and 1000 currency notes, which, at the time, accounted for a little over 86% of the currency in circulation. The move was initially aimed at fighting black money -- the assumption was that those in possession would not be able to deposit their demonetised notes with banks, which was the mandated process -- but the Reserve Bank of India later declared that almost all high value notes in circulation at the time were returned to bank accounts.

While the government argued that the top court should not involve itself into an exercise that could end up as an academic one, the bench emphasised that one of the pivotal duties of a constitution bench is to declare the law for all times to come.

“Any declaration by a Constitution bench, one way or the other, is for posterity. It is the duty of a Constitution bench to answer when issues are referred to it,” it told Venkataramani, who represented the Centre in the batch of over three dozen petitions which challenged the Centre’s November 8, 2016 decision as being violative of fundamental rights and contrary to the law laid down under the Reserve Bank of India Act, 1934.

The AG, on his part, tried to persuade the bench that the notification, by which demonetisation was carried out, has been replaced by an Act, and there is thus no need to embark on a judicial exercise which at best will only be “advisory” in the end.

But the bench retorted: “Strictly speaking, it may not be advisory. We will be laying down the law. Many of the landmark judgments of this court, including SR Bommai (on anti-defection law), was advisory but it laid down the law for all times.”

After Venkataramani contended that nothing can be undone after almost six years have passed since the notification, the court replied: “The argument of the other side is that you can do it under the RBI Act. If we hold so, at least this will stop in future. We may not undo something that has already happened but we can make sure it does not happen in the same manner in future.”

The bench became inclined to hear the matter after senior counsel P Chidambaram, representing one of the petitioners, flagged the issue of exercise of power under the RBI Act by the government to demonetise the banknotes of 500 and 1,000 instead of passing a parliamentary legislation.

“Previous demonetisations in 1946 and 1978 were done through separate Acts of Parliament and not just by invoking provisions of the RBI Act. They can use Sections 24 and 26 of the Act today to say all notes will cease to become legal tenders. Please, examine the scope of the power under the RBI Act -- bypassing the requirement to have a parliamentary law following a discussion in the House and have application of mind,” Chidambaram said.

He argued that there is no power under the RBI Act to demonetise an entire denomination of banknotes, besides the fact that the decision-making process was “deeply flawed” since the role of RBI and government was reversed. Chidambaram pointed out that the proposal has to move from RBI to government, but in this case, the government sent the proposal to RBI.

“Applying the test of proportionality, the recommendation by RBI and decision of the government must set aside also because lives of hundreds were lost and livelihoods of millions were affected...The power of this court is declaratory. We need to know the law. The parliament needs to know the law. The declaratory power of this court doesn’t depend on what relief this court can give,” he added.

The petitioners in the case have claimed their constitutional rights to life and trade were infringed by the government due to an unreasonable and arbitrary manner of implementing the scheme. Besides the validity of the scheme, several individual petitioners who were unable to deposit the demonetised notes within the stipulated time frame also approached the top court.

In December 2016, all the petitions were referred to a Constitution bench by three-judge bench after framing nine questions. The questions included whether the demonetisation violated fundamental rights relating to equality, life and liberty, property and the freedom to carry out profession and trade. It also sought to scrutinise the legality of the demonetisation notification on the anvil of the 1934 Act, besides examining whether the procedure adopted was fair.

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