A five-judge bench of the Supreme Court, presided over by Justices S Abdul Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna dismissed a petition on January 2, 2023, challenging the Union Government’s 2016 exercise to demonetise currency notes of Rs 1,000 and Rs 500. This came in after the Court had reserved its decision on December 7, following Vivek Narayan Sharma v. Union of India and Ors. The Supreme Court had earlier directed the Union Government and the Reserve Bank of India (RBI) to place before it the pertinent records relating to the government’s 2016 decision to demonetise the said denominations.
When the Union Government made the announcement in 2016, it aimed at tracking counterfeit currency, eliminating Fake Indian Currency Notes (FICN), bringing tax evasion to a halt, cutting off the supply line money to terror-funding and curbing black money, among other goals. The Supreme Court heard a batch of 58 petitions challenging the demonetisation exercise declared by the Government.
A total of nine issues were framed in the matter initially, which were later reduced to a sum of six issues to be dealt by the Court. The core issues revolved around the power under Section 26(2) RBI Act and its interpretation, and the ground of proportionality as a satisfactory legal ground to strike down the 2016 notification.
The constitutional bench upheld the decision by a clear majority of 4:1. Justice BV Nagarathna provided a dissenting opinion in the matter, mentioning that the policy was indeed “well-intended and well thought of”, and was directed towards curbing issues of “black money, terror funding and counterfeiting” – The policy, however, was deemed unlawful solely on grounds of law and not on the “basis of its objects”. In her opinion, the demonetisation should have been exercised by an act of legislation. “It is to be way of a legislation, and if secrecy is needed, then by way of an ordinance”, she said. She also expressed her concern over the subject of demonetisation of entire series of currency notes. “Demonetisation of all series of notes at the instance of Central Govt is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation than through executive notification”, she mentioned. She further diverged from the majority judgment on the issue of powers of the Union Government under the contested Section 26(2) of the RBI Act. Since the notification had already been acted upon, she stated that no relief can be granted in the matter. “This declaration of law will act only prospectively and will not affect actions already taken,” she added.
She further stated that it was inappropriate on part of the Centre to keep the Parliament “aloof” on such a crucial issue. “Parliament is a miniature of the country. Parliament which is the centre of democracy cannot be left aloof in a matter of such critical importance,” she said.
The Court pronounced that power under Section 26(2) of RBI Act can be utilised to demonetise an entire series of currency notes and not any particular series. The provision cannot be considered unconstitutional as there are inbuilt safeguards in place. Moreover, the use of the term “any” cannot be comprehended in a restrictive manner. The Court also noted that the actual purpose of the Act should be kept in mind while interpreting its provisions. “Restrictive meaning cannot be given to word “any” in Section 26(2) of RBI Act. The modern trend is of pragmatic interpretation. Interpretation which leads to absurdity must be avoided. The purposes of the Act must be considered while interpretation”, the Court stated. On the issue of the object and purpose of the policy measure, Justice B.R. Gavai specified that “the three purposes are proper purposes and there was a reasonable nexus between the objects and the means to achieve the objects. Action cannot to be struck down on the basis of the doctrine of proportionality”, and that “It is not relevant whether the objective was achieved or not”.
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Justice B R Gavai emphasised that the decision-making process cannot be deemed erroneous simply because the measure was introduced by the Union Government. “Decision making process cannot be faulted merely because the proposal emanated from the Central Government”, he said.
