SC upholds legality of 2016 note ban decision

The Supreme Court on Monday closed at least the legal chapter of the debate on the 2016 demonetisation policy by ruling 4-1 that the Union government was empowered to take the decision, and that due process was followed.

The Supreme Court on Monday closed at least the legal chapter of the debate on the 2016 demonetisation policy by ruling 4-1 that the Union government was empowered to take the decision, and that due process was followed. The court also refused to be drawn into ruling on the economic merits of the policy, citing its lack of expertise, and said that enough time was given to people to exchange the currency, and that there was no room to allow anyone to exchange the demonetised notes now. “Individual interests must yield to the larger public interest,” it added.

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The Bharatiya Janata Party (BJP) hailed the verdict as an endorsement of its policy, which came under severe criticism at the time. The Congress pointed out that the ruling was restricted to the issue of the executive’s powers and the procedure followed, and not about the merits of demonetisation. It also hailed the dissenting judgment that said the move should have been ratified by parliament.

Six years after the decision by the Narendra Modi government took the country by surprise, justices SA Nazeer, BR Gavai, AS Bopanna and V Ramasubramanian held that the Centre was empowered under the pertinent laws to demonetise all series of bank notes of ₹500 and ₹1,000 denominations by issuing an executive order on November 8, 2016.

Justice Gavai, writing the judgment on behalf of himself and the three other judges in majority, affirmed the government’s argument that demonetisation has reasonable nexus with curbing fake currency, black money, drug trafficking and terror financing, and that the government is the “best judge” to decide appropriate methods of addressing the issue, in consultation with the Reserve Bank of India (RBI).

Penning down a dissenting judgment, justice BV Nagarathna, however, termed the demonetisation decision “unlawful” on the ground that “the procedure followed for the same was not in accordance with law”, even as the judge lauded the move as a “well-intentioned” step for the “betterment of the nation”.

The majority judgment held that “unless the said discretion has been exercised in a palpably arbitrary and unreasonable manner, it will not be possible for the court to interfere with the same...We have not found any flaw in the decision-making process as required under the RBI Act...the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors, is without substance.”

According to justice Nagarathna, the central government was obligated to bring in a parliamentary legislation for demonetisation, or alternatively, the proposal must have had initiated from the central board of RBI for taking some particular series of bank notes out of circulation.

In 2016, initial expectations that not all money in circulation would return to the banking system (because some of this could not be accounted for) were belied. However, the government has consistently maintained that the process of the money returning to the system provided it with enough intelligence to track down on defaulters, including shell firms. Over time, the government has also emphasised on how demonetisation gave digital transactions a boost.

Critics have said the exercise has not met any of its objectives, and spoken of the distress it caused, to individuals queueing up to deposit their money before the deadline, and businesses, especially small ones from the so-called informal sector.

A clutch of over three dozen petitions had accused the government of violating the fundamental rights of people, and carrying out a move contrary to the law laid down under the RBI Act, 1934.

On Monday, the majority judgment said that the records adduced before the court showed there was adequate consultation between the Centre and RBI before the decision was taken and that therefore, the move cannot be held to be bad in law just because the proposal emanated from the government and not from the central board of RBI.

“The record itself reveals that RBI and the Central government were in consultation with each other for a period of six months before the impugned notification was issued. The record would also reveal that all the relevant information was shared by both the central board as well as the central government with each other. As such, it cannot be said that there was no conscious, effective, meaningful and purposeful consultation,” it said.

Ruling on the power of the Centre to demonetise the entire series of a currency, the majority view stressed on the principle of purposive interpretation to explain the import of subsection (2) of Section 26 of the RBI Act. The provision authorises the central government to notify that “any” series of bank notes of any denomination shall cease to be legal tender upon a recommendation by the central board of RBI.

Highlighting that the policy underlining the provisions of Section 26 of the RBI Act is to enable the central government to effect demonetisation, the court said that the law cannot be interpreted to arrive at an absurd meaning where the Centre can demonetise all but one series of bank notes since Section 26(2) uses the term “any” series of bank notes.

“The same can be done in respect of any series of bank notes of any denomination. The legislative policy is with regard to management and regulation of currency. Demonetization of notes would certainly be a part of management and regulation of currency. The legislature has empowered the central government to exercise such a power. The central government may take recourse to such a power when it finds necessary to do so taking into consideration myriad factors,” justice Gavai wrote for the majority.

He added that vesting the central government with the authority to demonetise bank notes cannot be construed as an instance of excessive delegation since the government needs to act on the expert advice of RBI that acts as an “inbuilt safeguard”.

“The delegation is to the central government, i.e. the highest executive body of the country. We have a parliamentary system in which the government is responsible to the Parliament. In case the Executive does not act reasonably while exercising its power of delegated legislation, it is responsible to Parliament who are elected representatives of the citizens for whom there exists a democratic method of bringing to book the elected representatives who act unreasonably in such matters,” said justice Gavai.

Underlining that the scope of judicial review in matters of economic policy is narrow and is limited to scrutinising the decision-making process, the majority judgment said the top court must steer clear of the question as to whether demonetisation served its stated purposes or not because the courts lack the expertise to do so and this is best left to the wisdom of the experts.

“In such matters, legislative and quasi-legislative authorities are entitled to a free play, and unless the action suffers from patent illegality, manifest or palpable arbitrariness, the court should be slow in interfering with the same,” it held.

Justice Gavai added: “It is not the function of this court or of any other court to sit in judgment over such matters of economic policy and they must necessarily be left to the government of the day to decide since in such matters with regard to the prediction of ultimate results, even the experts can seriously err and doubtlessly differ. The courts can certainly not be expected to decide them without even the aid of experts.”

Some economists have flagged demonetisation and Goods and Services Tax (GST) as the reasons behind a slowdown of the growth rate. Former RBI governor Raghuram Rajan, at a public event in November 2018, said: “The two successive shocks of demonetisation and the GST had a serious impact on growth in India.”

The majority judgment further dismissed a plea that an unreasonably short period was provided to exchange the bank notes, noting that only eight days were given when demonetisation took place in 1978 and a Constitution bench had upheld this decision in a 1996 judgment.

“In the present case, the period for exchanging any amount of SBNs and depositing the same in the KYC compliant bank account without any limit or hindrance was 52 days...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,” it said.

If the impugned notification had a nexus with the objectives to be achieved, then, merely because some citizens have suffered through hardships would not be a ground to hold the impugned notification to be bad in law, said the majority judgment, adding “the individual interests must yield to the larger public interest”.

“In any case now, the action which was taken by the central government by the impugned notification, has been validated by the 2016 Ordinance and which has fructified in the 2017 Act. The central government is answerable to the Parliament and the Parliament, in turn, represents the will of the citizens of the country. The Parliament has therefore put its imprimatur on the executive action,” said justice Gavai.

The majority judgment further refused to issue any order on a plea to frame a scheme for letting people with genuine reasons exchange the demonetised notes, holding neither the court nor RBI can do so when the 2017 Act occupies the field.

A three-judge bench had in December 2016 referred the matter to the larger 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 anvils of the 1934 Act, besides examining whether the procedure adopted was fair. The Constitution bench had reserved its verdict on the bunch of pleas on December 7 last year after hearing arguments from both sides.

“The Supreme Court has quite rightly focused on the legal and procedural aspects of demonetisation and not on the merits of the decision. Both tests of proportionality and reasonableness were satisfied. With this judgement, this controversy will hopefully be finally laid to rest,” said Akshay Chudasama, managing partner, Shardul Amarchand Mangaldas Co.

Advocate Kirat Nagra opined that the Supreme Court’s decision was founded more on legal principles rather than the brief period of public hardship faced immediately after the demonetisation. “The court has taken a balanced and nuanced approach while being guided by the doctrine of separation of power. The judgment also sends out a strong message to the public and business communities about the need to undertake financial transactions by legitimate means while clarifying that the courts are not guided by populist agenda in matters of critical economic policies,” Nagra, partner at DSK Legal, added.