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January 3, 2023

SC upholds Centre’s demonetisation move in Nov 2016 with 4-1 verdict

by CA Shivam Jaiswal in Legal Court Judgement

SC upholds Centre’s demonetisation move in Nov 2016 with 4-1 verdict

Background of the case

The Union Government and the Reserve Bank of India were requested by the Court to provide the pertinent records while reserving the verdict. R Venkataramani, India’s attorney general, stated that the papers would be presented under a sealed cover. The bench had emphasised throughout the hearing that it may look into how the judgement was made and that it would not fold its hands only because it was an economic policy decision.

Given that the decision had been made six years prior, the bench had first deemed the matter to be “academic” and questioned whether it could reverse the proceedings. On October 12, however, the court decided to hear the case on the merits following the strong arguments made on behalf of several petitioners by Senior Advocate Shyam Divan, Advocate Prashant Bhushan, and others. Several petitions filed by individuals asking for an extension of the note-exchange deadline were included in the batch.

R Venkataramani, India’s attorney general, appeared on behalf of the Union Government to support the choice. According to the AG, the decision was made to stop the horrors of counterfeit money, illegal investments, and financing for terrorism. He stated that the judicial review of judgements regarding economic policy is quite limited. Demonetization may not have had the desired results, but that is not a grounds to reject the decision legally, he maintained, since it was made in good faith and in accordance with the law. Senior Attorney Jaideep Gupta argued on behalf of the Reserve Bank of India that the Union Government’s decision was based on the Central bank’s recommendation.

Observation and Decision by the Court

The Union Government’s decision to demonetize the Rs. 500 and Rs. 1000 notes six years ago was maintained by the Supreme Court Constitution Bench with a 4:1 majority. According to the majority, the Centre’s notification from November 8, 2016 is lawful and passes the proportionality test. Although demonetization was well-intentioned and well-thought out, Justice BV Nagarathna argued in her dissenting opinion that it must be ruled illegal for legal reasons (and not on the basis of objects)

The division bench reference was being addressed by the five-judge panel, which included Justices S. Abdul Nazeer, BR Gavai, AS. Bopanna, V. Ramasubramanian, and BV. Nagarathna. On December 7, 2022, the ruling had been put on hold. The division bench will now review the case once again.

Demonetization had a plausible connection to the goals (eliminating black marketing, terror funding, etc.), according to Justice BR Gavai, who read out the majority ruling. Whether or not the goal was accomplished is irrelevant, he said.

The bench additionally declared that it was impossible to call the 52-day waiting period for currency exchanges excessive. It further stated that just because the suggestion came from the Central Government, the decision-making process could not be criticised. In terms of economic policy, tremendous caution is required. The executive’s wisdom cannot be replaced by the court’s wisdom. The bench further ruled that the entire series of money can be demonetized under Section 26(2) of the RBI Act, which gives the government the authority to do so for any series of bank notes of any denomination. It noticed, In Section 26(2) of the RBI Act, the word “any” cannot have a restrictive interpretation. The current fashion is one of practical interpretation. It is important to avoid ludicrous interpretations. When interpreting the Act, the purposes must be taken into account. The bench continued, noting that there are built-in safeguards, that Section 26(2) cannot be declared unconstitutional due to excessive delegation. “Delegation is given to the central government, which is accountable to the parliament, which is accountable to the nation’s citizens. There is a built-in safeguard, and the Central Government is compelled to act after consulting with the Central Board.

In her dissenting opinion, Justice BV Nagarathna stated that the Centre could not just demonetize the entire series of Rs. 500 and Rs. 1000 currency notes because it was a serious concern. Despite the measure’s good intentions, she argued, it needs to be ruled illegal on legal grounds (and not on the basis of objects).

“A much more serious issue than the demonetization of certain series by the bank is the central government’s decision to demonetize all series of notes. So, legislation is required to implement it.” The judge added that the RBI had just given its approval to the Centre’s wish for demonetization rather than demonstrating independent thought. “Looking at the documents provided by the RBI reveals the phrase “as desired by the Central Govt.” This indicates that the RBI did not submit an independent application. In under 24 hours, the entire exercise was completed.”

On the issue of the authority of the Central Government under Section 26(2) of the RBI Act, she also dissented from the majority opinion. She first ruled that “Any series” under Section 26(2) of the RBI Act cannot be interpreted as “all series.” Section 26(2) states that it can only apply to a certain series of currency notes and not to all series of a given denomination. The judge then ruled that the RBI Act does not let the national government to start the demonetisation process. She claimed that Section 26(2) required the central board of the RBI to make the proposal for demonetization. Justice Nagarathna also ruled that the federal government must use a law or an ordinance derived from Entry 36 of List I, which refers to money, coins, legal tender, and foreign exchange, in order to start the demonetisation process.

The idea came from the Central Government, and the RBI’s opinion was requested, the judge continued. Under Section 26(2) of the RBI Act, the RBI cannot interpret a given view as a “recommendation.” Demonetization proposals from the Central Government are not covered by Section 26(2) of the RBI Act. If confidentiality is required, it will be done so by legislation and an ordinance.

The judge ruled, however, that no relief could be given in the case due to the fact that the notification had previously been followed and six years had passed afterwards. This pronouncement of law, she noted, “will only be effective going forward and will not have any bearing on activities already performed.” In 2016, the Constitution Bench received questions on demonetisation, which it was responding to.

“After responding to the reference, we order the registry to present the petitions to the Hon. Chief Justice of India so that they can be posted before the proper bench. Naturally, all additional arguments are left up for consideration by the benches before whom the matter would be brought After reading the operative part, Justice Gavai said.

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