2021 (3) TMI 92 - SC - FEMA

Transaction entered into by a foreign citizen of Indian origin to deal with real estate in India on certain conditions - transaction (specified in Section 31 of the 1973 Act) entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance - Mandation to get general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person who is not a citizen of India - HELD THAT - Foreigners should not be permitted/allowed to deal with real estate in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention the transfer of immovable property situated in India by a person who is not a citizen of India without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person who is directly or indirectly affected by such a transaction. He can set up challenge thereto by direct action or even by way of collateral or indirect challenge. Until permission is accorded by the RBI it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and thus unlawful. In this view of the matter the appellant must succeed and would be entitled for the reliefs claimed in O.S. No. 10079 of 1984 for declaration that the gift deed dated 11.03.1977 and supplementary deed dated 19.04.1980 in favour of respondent No.1 are invalid unenforceable and not binding on the plaintiff. A fortiori the plaintiff is entitled for possession of the suit property from respondent no.1 and persons claiming through him admeasuring 12, 306 square feet and also mesne profits for the relevant period for which a separate inquiry needs to be initiated under Order 20 Rule 12 of the Code of Civil Procedure 1908. In the present case the land was owned by a foreign citizen. For which reason the rigours of Section 31 must apply with full force. Additionally it must be kept in mind that the stated notification was issued in 1993 around which time a change in policy regarding the investment opportunities for non-resident Indians and foreigners had been crystallised by opening up of economy in India. In the present case we are dealing with the transaction effected close to the coming into force of the 1973 Act i.e. in the year 1977 when considerations were different and governed by different policy manifested in the form of enactment of Section 31 of the 1973 Act spoken to by the then Finance Minister in the Lok Sabha forbidding foreigners from dealing with real estate in India. The condition predicated in Section 31 of the 1973 Act of obtaining previous general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person who is not a citizen of India is mandatory. Until such permission is accorded in law the transfer cannot be given effect to; and for contravening with that requirement the concerned person may be visited with penalty under Section 50 and other consequences provided for in the 1973 Act. Hence the Trial Court as well as the High Court committed manifest error in dismissing the suit filed by the plaintiff for a declaration in respect of suit property admeasuring 12, 306 square feet and for consequential reliefs referred to therein. A priori we conclude that the decisions of concerned High Courts taking the view that Section 31 of the 1973 Act is not mandatory and the transaction in contravention thereof is not void or unenforceable is not a good law . However transactions which have already become final including by virtue of the decision of the court of competent jurisdiction need not be reopened or disturbed in any manner because of this pronouncement. This declaration/direction is being issued in exercise of our plenary power under Article 142 of the Constitution of India. For there has been a paradigm shift in the general policy of investment by foreigners in India and more particularly the 1973 Act itself stands repealed. Accordingly we deem it appropriate to overrule the decisions of the High Courts taking contrary view albeit prospectively. The appeal is allowed. The impugned judgment and decree of the Trial Court as confirmed by the High Court is set aside.

Summary

Issues Involved:
1. Validity of gift deed and supplementary deed under Section 31 of the Foreign Exchange Regulation Act, 1973 (FERA).
2. Consequences of non-compliance with Section 31 of FERA.
3. Interpretation of Section 31 of FERA in relation to other statutory provisions.
4. The enforceability of transactions made in contravention of Section 31 of FERA.

Detailed Analysis:

1. Validity of Gift Deed and Supplementary Deed:
The central issue pertains to whether the transaction specified in Section 31 of the Foreign Exchange Regulation Act, 1973 (FERA) is void or voidable and at whose instance it can be voided. The facts are undisputed that Mrs. F.L. Raitt, a foreigner, gifted property to respondent No.1 without obtaining prior permission from the Reserve Bank of India (RBI) as required under Section 31 of FERA. The appellant contended that such a gift deed is null and void due to non-compliance with Section 31.

2. Consequences of Non-Compliance with Section 31 of FERA:
Section 31 mandates that no person who is not a citizen of India shall transfer or dispose of any immovable property in India without previous permission from the RBI. The Court emphasized that the requirement of obtaining "previous" permission is mandatory. Failure to obtain such permission renders the transfer unenforceable in law. This is reinforced by Sections 47, 50, and 63 of FERA, which provide for penalties and consequences for contraventions.

3. Interpretation of Section 31 in Relation to Other Statutory Provisions:
The Court analyzed the legislative intent behind Section 31, which was to prevent foreign investment in real estate to avoid capital repatriation. Section 47 states that any agreement requiring RBI's permission shall not be invalid if it includes a term that the act shall not be done without such permission. Section 50 imposes penalties for contraventions, and Section 63 allows for confiscation of property involved in contraventions. The Court concluded that these provisions collectively underscore the mandatory nature of Section 31.

4. Enforceability of Transactions Made in Contravention of Section 31:
The Court held that any transaction in contravention of Section 31 is unenforceable unless permission is granted by the RBI. The Court distinguished between void and voidable transactions, stating that a transaction made without RBI's prior permission is not merely voidable but unenforceable until such permission is obtained. This interpretation aligns with the legislative intent to restrict foreign nationals from dealing in real estate in India without regulatory oversight.

Judgment:
The Court concluded that the gift deeds dated 11.03.1977 and 19.04.1980 in favor of respondent No.1 are unenforceable in law due to non-compliance with Section 31 of FERA. Consequently, the appellant is entitled to a declaration that these deeds are invalid and unenforceable, possession of the suit property, and mesne profits. The Court overruled contrary decisions of various High Courts, stating that Section 31 is mandatory and any transaction in violation thereof is unenforceable. The appeal was allowed, and the judgment and decree of the Trial Court and High Court were set aside. The appellant was granted possession of the suit property and mesne profits, with a separate inquiry to be conducted under Order 20 Rule 12 of the Code of Civil Procedure, 1908.