Demonetisation of high denomination notes in 1978 was upheld by Supreme Court

Demonetisation of high denomination notes in 1978 was upheld by Supreme Court

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Tomorrow, on 15 November 2016, four Public Interest Litigations (PILs) will be listed before the Supreme Court before the bench headed by the Chief Justice of India T.S. Thakur, challenging the demonetisation of ₹ 1000 and ₹ 500 currency notes. These cases are: (1) W.P.(C) No. 906/2016 [VIVEK NARAYAN SHARMA Vs UNION OF INDIA]; (2) W.P.(C) No. 908/2016 [SANGAM LAL PANDEY Vs UNION OF INDIA AND ORS.]; (3) W.P.(C) No. 913/2016 [S. MUTHUKUMAR Vs UNION OF INDIA AND ANR.]; and W.P.(C) No. 916/2016 [ADIL ALVI Vs UNION OF INDIA AND ANR.]. However, it is pertinent to note that a similar challenge in the Supreme Court to the demonetisation of the then existing currency notes of ₹ 1000, ₹ 5000 and ₹ 10000 in the year 1978, with effect from 16.01.1978, by the then Central Government headed by Prime Minister Morarji Desai, was rejected by a Constitution bench of the Supreme Court in the case of Jayantilal Ratanchand Shah v. Reserve Bank of India, (1996) 9 SCC 650 : AIR 1997 SC 370. In fact, at that time, the challenge was mainly under the fundamental rights enshrined in Articles 19(1)(f) and 31 of the Constitution (which now stand repealed), which related to the fundamental right to property. In spite of that, the said challenge was rejected by the Supreme Court. Since the above provisions of the Constitution, relating to the fundamental right to property, do not exist now, the challenge to the present demonetisation of the ₹ 1000 and ₹ 500 currency notes would be weaker to that extent.

It is pertinent to point out that in 1978, the High Denomination Bank Notes (Demonetisation) Act, 1978, was passed which demonetised the then existing currency notes of the denominations of ₹ 1000, ₹ 5000 and ₹ 10000 with effect from 16.01.1978. In fact, initially an Ordinance was issued in this regard, which was then replaced by the said Act.

Under the provisions of the said Act of 1978, the said notes were demonetised immediately on the expiry of 16.01.1978, i.e., the date with effect from which the said Ordinance / Act came into force. A facility was given to exchange the said demonetised notes within 3 days (up to 19.01.1978) in certain specified branches of the Reserve Bank of India, State Bank of India and other Public Sector Banks. A further opportunity was given to exchange the said notes in certain RBI branches up to 24.01.1978 only (which means a further period of 5 days).

In the present demonetisation exercise, the Central Government headed by Prime Minister Narendra Modi has given an initial period of 50 days (up to 30 December 2016) and a further period of 90 days (up to 31 March 2017).

Thus, the period for exchange / deposit given by the present Government is much more: 50 days vis-à-vis 3 days; and 90 days vis-à-vis 5 days. Thus, a total period of about 140 days is provided by the present Government which is much more than about 8 days provided in 1978 for exchange / deposit of the old demonetised notes.

In the above case of Jayantilal Ratanchand Shah, challenging the demonetisation of 1978, it was contended that the said 1978 Demonetisation Act violated their fundamental rights enshrined in Articles 19(1)(f) and 31 of the Constitution (which have now been repealed), which were available to them at the material time. It was submitted that Section 26 of the RBI Act cast an obligation upon the Bank to make payment of high denomination banknotes whenever tendered and the Central Government guaranteed such payment but on promulgation of the impugned Act those notes ceased to be legal tender, notwithstanding the above provision of the RBI Act, in view of Section 3 thereof; and; resultantly, the Bank and for that matter the Central Government stood discharged of their such obligations. In other words, according to the petitioners, the above Act extinguished the debts due and owing from the Bank to the holders of the high denomination banknotes. The petitioners further contended that such extinguishment of debts amounted to “compulsory acquisition of property” within the meaning of Article 31(2) of the Constitution and since the acquisition was not made for a public purpose nor adequate and appropriate provisions were incorporated in the impugned Act for payment of compensation in respect thereof the said Act was violative of the above article. Besides, the petitioners contended, they had a right to acquire and hold the high denomination banknotes and to carry on any trade or business by using the same in the course thereof and the Demonetisation Act insofar as it provided for non-payment of exchange value of high denomination banknotes except in those cases mentioned in Sections 7 and 8 thereof, it imposed unreasonable restriction on their fundamental rights under Articles 19(1)(f) and (g) of the Constitution.

In order to find out whether such acquisition of property was for a public purpose since under Article 31(2) of the Constitution, no property could be compulsorily acquired except for a public purpose, the Supreme Court referred to the preamble of the said 1978 Demonetisation Act which read as follows:

“Whereas the availability of high denomination banknotes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes and it is therefore necessary in the public interest to demonetise high denomination banknotes.”

The 5-judge Constitution bench of the Supreme Court in the above case (comprising of Justices Kuldip Singh, M M Punchhi, N P Singh, M K Mukherjee and S S Ahmad), held as under:

“From the above preamble it is manifest that the Act was passed to avoid the grave menace of unaccounted money which had resulted not only in affecting seriously the economy of the country but had also deprived the State Exchequer of vast amounts of its revenue. Considering the evil the above Act sought to remedy it cannot be said that it was not enacted for a public purpose. The petitioners’ other contention based on Articles 19(1)(f) and (g) of the Constitution is wholly misconceived for after compulsory acquisition of their property by the impugned Act the petitioners’ right thereto stood extinguished and consequently the question of reasonable restriction to the exercise or enjoyment of a right, which became non est, could not arise. Equally untenable is the petitioners’ contention that they were deprived of their right to get compensation for such acquisition, as Sections 7 and 8 of the Demonetisation Act lay down an elaborate procedure to apply for and obtain an equal value of the high denomination banknotes in the manner prescribed thereunder.”

It was further contended in the said case that even if it was assumed that Article 31 of the Constitution had not been violated, the time prescribed for exchange of the high denomination banknotes under Sections 7 and 8 of the Demonetisation Act was unreasonable and violative of their fundamental rights. However, this contention was also rejected by the Supreme Court by holding as under:

“When the above provisions of the Act are considered in the context of the purpose the Demonetisation Act sought to achieve, namely, to stop circulation of high denomination banknotes as early as possible, the above contention of the petitioners cannot be accepted. Consequent upon the high denomination banknotes ceasing to be legal tender on the expiry of 16-1-1978 and in view of the prohibition in the transfer of possession of such notes from one person to another thereafter as envisaged under Section 4, it was absolutely necessary to ensure that no opportunity was available to the holders of high denomination banknotes to transfer the same to the possession of others. At the same time it was necessary to afford a reasonable opportunity to the holders of such notes to get the same exchanged. However, if the time for such exchange was not limited the high denomination banknotes 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. In that case it would have been well-nigh impossible for the Bank to prove that such a person was not the owner or holder of the notes on 16-1-1978. Needless to say in such an eventuality the very object which the Demonetisation Act sought to achieve would have been defeated. Obviously, to strike a balance between these competing and disparate considerations Section 7(2) of the Demonetisation Act limited the time to exchange the notes till 19-1-1978. However, even thereafter, in view of Section 8, the high denomination banknotes could be exchanged from the Bank till 24-1-1978 provided the tenderer was able to explain the reasons for his failure to apply for such exchange within the time stipulated under Section 7(2) of the Demonetisation Act. Apart from the above provisions regarding exchange of high denomination banknotes by the Bank within the time stipulated therein, provision has been made in sub-section (7) of Section 7, permitting the Central Government, for reasons to be recorded in writing, to extend in any case or class of cases the period during which high denomination banknotes may be tendered for exchange. From a combined reading of Sections 7 and 8 it is evidently clear that on furnishing a declaration complete in all particulars in accordance with sub-section (2) of Section 7 by 19-1-1978, the holder was entitled to get the exchange value of his notes from the Bank without any let or hindrance; thereafter, till 24-1-1978, he was also entitled to such exchange from the Bank if he could satisfactorily explain the reasons for his inability to apply by 19-1-1978 and after that date the Central Government was empowered to extend the period of such exchange. Such being the scheme of the Act regarding exchange of high denomination banknotes it cannot be said that the time and the manner in which the high denomination banknotes could be exchanged were unreasonable, unjust and violative of the petitioners’ fundamental rights.

Thus, the challenge to the demonetisation of high denomination currency notes in 1978 was upheld by the Supreme Court even though it provided only for a maximum of 8 days for exchange of the old notes. In the present case, the demonetisation of 2016 provides for a total of 140 days for exchange / deposit of the old notes. Therefore, it cannot be said that this time period is unreasonable. Moreover, as mentioned above, in 1978, the main challenge to the demonetisation was under the fundamental rights enshrined in Articles 19(1)(f) and 31 of the Constitution (which now stand repealed), which related to the fundamental right to property, in spite of which, the said challenge was rejected by the Supreme Court. Since the above provisions of the Constitution, relating to the fundamental right to property, do not exist now, the challenge to the present demonetisation of the ₹ 1000 and ₹ 500 currency notes would not be tenable.

Another issue which may perhaps arise is that in 1978, the demonetisation was done through the legislative route (first by an Ordinance, which was then replaced by an Act of the Parliament), while the 2016 demonetisation has been done through an Order issued under the RBI Act. However, it is seen that Section 26(2) of the Reserve Bank of India Act, 1934, gives sufficient powers to the Central Government to demonetise any specific currency notes. Section 24(2) of the RBI Act is also relevant in this regard, to some extent. These provisions are reproduced below:

24. Denominations of notes.—(1) Subject to the provisions of sub-section (2) bank notes shall be of the denominational values of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify in this behalf.

(2) The Central Government may, on the recommendation of the Central Board, direct the non-issue or the discontinuance of issue of bank notes of such denominational values as it may specify in this behalf.”

26. Legal tender character of notes.—(1) Subject to the provisions of sub-section (2), 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.

(2) On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.”

Moreover, Notification No. S.O. 3407(E), dated 8 November 2016, issued by the Government of India, Ministry of Finance, Department of Economic Affairs, states the following reasons for demonetising the currency notes of the denominations of ₹ 500 and 1000:

“Whereas, the Central Board of Directors of the Reserve Bank of India (hereinafter referred to as the Board) has recommended that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) shall be ceased to be legal tender;

And whereas, it has been found that fake currency notes of the specified bank notes have been largely in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones and that the use of fake currency notes is causing adverse effect to the economy of the country;

And whereas, it has been found that high denomination bank notes are used for storage of unaccounted wealth as has been evident from the large cash recoveries made by law enforcement agencies;

And whereas, it has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country and the Central Government after due consideration has decided to implement the recommendations of the Board;

Now, therefore, in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934) (hereinafter referred to as the said Act), the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016 to the extent specified below, namely…”

These reasons are clearly “public purposes”, for the purposes of the reasoning given in the aforesaid Supreme Court, though now this condition may also not be required since Article 31 of the Constitution itself does not exist now.

In any case, in view of the aforesaid reasons, I am of the considered opinion that the demonetisation exercise carried out by the present Central Government for discontinuing the ₹ 500 and ₹ 1000 currency notes is fully lawful and valid. Thus, there is not much scope for success of the aforesaid four PILs that have been filed to challenge the present demonetisation.

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