2023 (1) TMI 337 - SC - Indian Laws

Demonetization - Validity of N/N. 3407(E) dated 8th November 2016, issued by the Central Government in exercise of the powers conferred by sub-section (2) of Section 26 of the Reserve Bank of India Act, 1934 - validity of declaration that the bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees shall cease to be legal tender with effect from 9th November 2016, to the extent specified in the impugned Notification - scope of judicial review - discrimination of District Co-operative Banks by excluding them from accepting deposits and exchanging demonetized notes.

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 sub-section, specifically so, when on earlier two occasions, the demonetization exercise was done through the plenary legislations? - HELD THAT:- While holding that the word “any” in the context would mean “all”, this Court observed that a right of appeal is always conferred by a statute. It has been held that, while conferring such right, a statute may impose restrictions, like limitation or pre-deposit of penalty or it may limit the area of appeal to questions of law or sometime to substantial questions of law. It has been held that whenever such limitations are imposed, they are to be strictly followed. It has been held that in a case where there is no limitation, the right of appeal cannot be curtailed by this Court on the basis of an interpretative exercise.

It is clear that it is a settled principle that the modern approach of interpretation is a pragmatic one, and not pedantic. An interpretation which advances the purpose of the Act and which ensures its smooth and harmonious working must be chosen and the other which leads to absurdity, or confusion, or friction, or contradiction and conflict between its various provisions, or undermines, or tends to defeat or destroy the basic scheme and purpose of the enactment must be eschewed. The primary and foremost task of the Court in interpreting a statute is to gather the intention of the legislature, actual or imputed - To avoid patent injustice, anomaly or absurdity or to avoid invalidation of a law, the court would be justified in departing from the so-called golden rule of construction so as to give effect to the object and purpose of the enactment. Ascertainment of legislative intent is the basic rule of statutory construction.

Construction of sub-section (2) of Section 26 of the RBI Act - HELD THAT:- The RBI Act is a special Act, vesting all the powers and functions with regard to monetary policy and all matters pertaining to management and regulation of currency with the RBI. The Central Government is required to take its decision on the basis of the recommendation of the Central Board - the power is vested with the Central Government and that power has to be exercised on the recommendation of the RBI. Both sides agree that RBI plays a unique role in the matter of monetary policy and issuance of currency. The Central Government is empowered under sub-section (2) of Section 26 of the RBI Act to notify any series of bank notes of any denomination to cease to be a legal tender. The effect of such a notification would be that the liabilities as provided under Section 34 of the RBI Act and the guarantee as provided under sub-section (1) of Section 26 of the RBI Act shall cease to have effect on such notification being issued thereby demonetizing the bank notes.

The policy underlining the provisions of Section 26 of the RBI Act is to enable the Central Government on the recommendation of the Central Board, to effect demonetization. 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 - An interpretation which, in effect, nullifies the purpose for which a power is to be exercised, in our view, would be opposed to the principle of purposive interpretation. Such an interpretation, in our view, rather than advancing the object of the enactment, would defeat the same.

Merely because on earlier two occasions the Government decided to take recourse to plenary power of legislation, this, by itself, cannot be a ground to give a restricted meaning to the word “any” in sub-section (2) of Section 26 of the RBI Act. As already discussed herein above, the legislative intent could not have been to give a restricted meaning to the word “any” in sub-section (2) of Section 26 of the RBI Act - we are unable to accept the contention that the word “any” has to be given a restricted meaning taking into consideration the overall scheme, purpose and the object of the RBI Act and also the context in which the power is to be exercised. We find that the word “any” would mean “all” under sub-section (2) of Section 26 of the RBI Act.

In the event it is held that the power under sub-section (2) of section 26 of the RBI Act is construed to mean that it can be exercised in respect of "all" series of Bank notes, whether the power vested with the Central Government under the said sub-section would amount to conferring excessive delegation and as such, liable to be struck down? - HELD THAT:- Though the Court found the power under Section 5(2)(b) of the Gold (Control) Act, 1968 suffered from excessive delegation and, therefore, constitutionally invalid; it, however, categorically rejected the contention insofar as Section 5(2)(a) of the Gold (Control) Act, 1968 is concerned, inasmuch as it provided a safeguard that the regulation of the price should be made by the Administrator after consultation with the RBI - though the Court found the power under Section 5(2)(b) of the Gold (Control) Act, 1968 to be invalid on the ground of excessive delegation, yet it found the power under Section 5(2)(a) of the Gold (Control) Act, 1968 to be valid since it provides an inbuilt safeguard that the Administrator has to act after consultation with the RBI.

The Court observed that the growth of the legislative powers of the Executive is a significant development of the twentieth century. The theory of laissez faire has been given a go-by and large and comprehensive powers are being assumed by the State with a view to improve social and economic well-being of the people. It has been held that most of the modern socio-economic legislations passed by the Legislature lay down the guiding principles and the legislative policy. It is not possible for the Legislatures to go into matters of detail. Therefore, a provision has been made for delegated legislation to obtain flexibility, elasticity, expedition and opportunity for experimentation - It has been observed that the role against excessive delegation of legislative authority flows from and is a necessary postulate of the sovereignty of the people. It has been held that the rule contemplates that it is not permissible to substitute in the matter of legislative policy the views of individual officers or other authorities, however competent they may be, for that of the popular will as expressed by the representatives of the people.

It can thus be seen that this Court has held that a mere possibility or eventuality of abuse of delegated powers in the absence of any evidence supporting such claim, cannot be a ground for striking down such a provision. It has been held that if a challenge is made to the delegated legislation framed by the executive, the same can be examined by the constitutional court. It has been held that applying the “policy and guideline” test, if it is found that the delegated legislation does not satisfy the said test, the legislation can be struck down without affecting the constitutionality of the rule-making power conferred under Section 186 of the Finance Act, 2017.

Status of the RBI - HELD THAT:- This Court has noted that the RBI, which is a bankers' bank, is a creature of statute. It has large contingent of expert advice relating to matters affecting the economy of the entire country. It has been held that the RBI plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country. It has been held that it is the duty of the RBI to safeguard the economy and financial stability of the country - It can thus be seen that this Court has held that the RBI is the sole repository of power for the management of currency. It is also vested with the sole right to issue bank notes and to issue currency notes supplied to it by the Government of India.

It has been held that the RBI has an important role to play in evolving the monetary policy of the country.

The RBI is an expert body entrusted with various functions with regard to monetary and economic policies. Perusal of the scheme of the RBI Act would reveal that it has a primary role in the matters pertaining to the management and regulation of currency. We, therefore, find that there is sufficient guidance to the delegatee when it exercises its powers under sub-section (2) of Section 26 of the RBI Act, from the subject matter of the statute, and the other provisions of the Act - there is sufficient guidance in the preamble as well as the scheme and the object of the RBI Act. As already discussed herein above, there cannot be a straitjacket formula, and the question whether excessive delegation has been conferred or not has to be decided on the basis of the scheme, the object and the purpose of the statute under consideration.

In the present case also, 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 - sub-section (2) of Section 26 of the RBI Act does not suffer from the vice of excessive delegation.

As to whether the impugned notification dated 8th November 2016 is liable to be struck down on the ground that the decision making process is flawed in law? - HELD THAT:- The Central Board had taken into consideration the relevant factors while recommending withdrawal of legal tender of bank notes in the denomination of Rs.500/- and Rs.1000/- of existing and any older series in circulation. Similarly, all the relevant factors were placed for consideration before the Cabinet when it took the decision to demonetize. It is to be noted that a draft scheme to implement the proposal for demonetization in a non-disruptive manner with as little inconvenience to the public and business entities as possible was also prepared by the RBI along with the recommendation for demonetization. The same was also taken into consideration by the Cabinet. As such, we are of the considered view that the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors, is without substance.

The contention that the Meeting of the Central Board dated 8th November 2016 is not validly held for want of quorum is concerned, is without substance.

The Court must defer to legislative judgment in matters relating to social and economic policies and must not interfere unless the exercise of executive power appears to be palpably arbitrary. The Court does not have necessary competence and expertise to adjudicate upon such economic issues. It is also not possible for the Court to assess or evaluate what would be the impact of a particular action and it is best left to the wisdom of the experts. In such matters, it will not be possible for the Court to assess or evaluate what would be the impact of the impugned action of demonetization - the 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 can thus be seen that confidentiality and secrecy in such sort of measures is of paramount importance. When demonetization was being done in the year 1978, R. Janakiraman, who had drafted the Ordinance, was not permitted to communicate with anyone including the Bank’s central office at Bombay. It would thus show as to what great degree of confidentiality was maintained. In any case, the material placed on record would show that the RBI and the Central Government were in consultation with each other for at least a period of six months preceding the action - the impugned notification dated 8th November 2016 does not suffer from any flaws in the decision-making process.

As to whether the impugned notification dated 8th November 2016 is liable to be struck down applying the test of proportionality? - HELD THAT:- There is a direct and proximate nexus between the restrictions imposed and the objectives sought to be achieved. As held by this Court in the case of M.R.F. LTD. VERSUS INSPECTOR KERALA GOVT. & ORS. [1998 (11) TMI 674 - SUPREME COURT], if there is a direct nexus between the restrictions and the object of the action, then a strong presumption in favour of the constitutionality of the action naturally arises.

The impugned notification dated 8th November 2016 does not violate the principle of proportionality and as such, is not liable to be struck down on the said ground.

As to whether the period provided for exchange of notes vide the impugned notification dated 8th November 2016 can be said to be unreasonable? - HELD THAT:- The Constitution Bench found that if the time for such exchange was not limited, the high denomination bank notes could be circulated and transferred without the knowledge of the authorities concerned, from one person to another and any such transferee could walk into the Bank on any day thereafter and demand exchange of his notes. It was held that, in such an eventuality, the very object which the Demonetization Act sought to achieve would have been defeated. The Court found that between 16th January 1978 and 19th January 1978, the holder was entitled to get the exchange value of his notes from the Bank without any limit or hindrance. The challenge that the period of three days was unreasonable, unjust and violative of the petitioners’ fundamental rights, stood specifically rejected.

As to whether the RBI has an independent power under sub-section (2) of section 4 of the 2017 Act in isolation of the provisions of section 3 and section 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of section 4 of the 2017 Act? - HELD THAT:- Though in view of the impugned Notification and in view of Section 3 of the 2017 Act, demonetized notes have ceased to be a legal tender and have ceased to be the liabilities of the RBI under Section 34 of the RBI Act and the guarantee of the Central Government under sub-section (1) of Section 26 of the RBI Act, a window is provided by Section 4 of the 2017 Act. Clause (i) of sub-section (1) of Section 4 of the 2017 Act deals with a citizen of India who makes a declaration that he was outside India between 9th November 2016 and 30th December, 2016, subject to such conditions as may be specified, by notification, by the Central Government. Accordingly, a notification is issued by the Central Government on 30th December 2016 - The provisions of sub-section (2) of Section 4 of the 2017 Act are somewhat analogous to the provisions in sub-sections (1) and (2) of Section 8 of the 1973 Act. Sub-section (3) of Section 4 of the 2017 Act provides that any person, aggrieved by the refusal of the RBI to credit the value of the notes under sub-section (2), can make a representation to the Central Board of the RBI within fourteen days of the communication of such refusal to him. This provision is somewhat analogous with sub-section (3) of Section 8 of the 1973 Act.

The RBI does not have independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of the provisions of Sections 3 and 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act.

As per Nagarathna, J;

The following conclusions are arrived at:

(i) According to subsection (1) of Section 26 of the Act, every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the Central Government. This provision is subject to subsection (2) of Section 26 of the Act.

(ii) Subsection (2) of Section 26 of the Act applies only when a proposal for demonetisation is initiated by the Central Board of the Bank by way of a recommendation being made to the Central Government. The said recommendation can be in respect of any series of bank notes of any denomination which is interpreted to mean any specified series of bank notes of any specified denomination.

(iii) The expression any series of bank notes of any denomination has been given its plain, grammatical meaning, having regard to the context of the provision and not a broad meaning. Thus, the word “any” will mean a specified series or a particular series of bank notes. Similarly, “any” denomination will mean any particular or specified denomination of bank notes.

(iv) If the word “any” is not given a plain grammatical meaning and interpreted to mean “all series of bank notes” of “all denominations”, it would vest with the Central Board of the Bank unguided and unlimited powers which would be exfacie arbitrary and suffer from the vice of unconstitutionality as this would amount to excessive vesting of powers with the Bank. In order to save the provision from being declared unconstitutional, the meaning of the provision is read down to the context of the Central Board of the Bank initiating a proposal for demonetisation by making a recommendation to the Central Government under subsection (2) of Section 26 of the Act of a particular series of bank note of any denomination.

(v) On receipt of the said recommendation made by the Central Board of the bank under subsection (2) of Section 26 of the Act, the Central Government may accept the said recommendation or may not do so. If the Central Government accepts the recommendation, it may issue a notification in the Gazette of India specifying the date w.e.f. which any specified series of bank notes of any specified denomination shall cease to be legal tender and shall cease to have the guarantee of the Central Government.

(vi) The provisions of the Act do not bar the Central Government from proposing or initiating demonetisation. It could do so having regard to its plenary powers under Entry 36 of List I of the Seventh Schedule of the Constitution of India. However, it has to be done only by an Ordinance being issued by the President of India followed by an Act of Parliament or by plenary legislation through the Parliament. The Central Government cannot demonetise bank notes by issuance of a gazette notification as if it is exercising power under subsection (2) of Section 26 of the Act. In such circumstances when the Central Government is initiating the process of demonetisation, it would not be acting under subsection (2) of Section 26 of the Act but notwithstanding the said provision through a legislative process.

(vii)When such power is exercised by the Central Government by means of a legislation, it is by virtue of Entry 36, List I of the Seventh Schedule of the Constitution of India which deals with currency, coinage and legal tender; foreign exchange which is a field of legislation. Hence, the power of the Central Government to demonetise any currency is notwithstanding anything contained in Section 26 of the Act.

(viii) When the Central Government proposes demonetisation of any bank note, it must seek the opinion of the Central Board of the Bank having regard to the fact that the Bank is the sole authority to regulate circulation of bank notes and secure monetary stability and generally to operate the currency and credit system of the country and to maintain price stability.

(ix) The opinion of the Central Board of the Bank ought to be an independent and frank opinion after a meaningful discussion by the Central Board of the Bank which ought to be given its due weightage having regard to the ramifications it may have on the Indian economy and the citizens of India although it may not be binding on the Central Government. On receipt of a negative opinion from the Central Board of the Bank, the Central Government which has initiated the demonetisation process may still intend to go ahead with the said process after weighing the pros and cons only by means of an Ordinance and/or Parliamentary legislation but not by issuance of a gazette notification. In other words, the Central Government in such circumstances cannot resort to exercise of power under subsection (2) of Section 26 of the Act by issuing a notification in the Gazette of India as if it were exercising executive powers. Even if the Central Board of the Bank concurs with the proposal of the Central Government, the Central Government would have to undertake a legislative process and not carry out the measure by simply issuing a gazette notification.

(x) In view of the aforesaid conclusions, I am of the considered view that the impugned notification dated 8th November, 2016 issued under subsection (2) of Section 26 of the Act is unlawful. In the circumstances, the action of demonetisation of all currency notes of Rs.500/and Rs.1,000/is vitiated.

(xi) Further, the subsequent Ordinance of 2016 and Act of 2017 incorporating the terms of the impugned notification are also unlawful.

(xii) However, having regard to the fact that the impugned notification dated 8th November, 2016 and the Act have been acted upon, the declaration of law made herein 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. This direction is being issued having regard to Article 142 of the Constitution of India. Hence, no relief is being granted in the individual matters.

SLP disposed off.