A larger bench comprising of Justices S. Abdul Nazeer, B.R. Gavai, AS Bopanna, V. Ramasubramanian and BV Nagarathna (“Larger Bench”), on 02 January 2023, delivered a landmark and much awaited judgment on legality and validity of demonetisation, wherein the majority of Judges (comprising of S. Abdul Nazeer, B.R. Gavai, AS Bopanna and V Ramasubramanian i.e. “majority judgment”) have found no flaw in the government’s process to demonetise Rs.500/- and Rs.1000/- currency notes (“said Currency”) through a gazette notification issued on 8 November 2016 (“Impugned Notification”). Justice Gavai’s in his majority judgment inter-alia held that an action of demonetisation was “within the process”. According to the majority of judges, in the present case, purposive interpretation of word “any” would mean “all” under sub-section (2) of Section 26 of the RBI Act, as legislative intent could not have been to give a restricted meaning to the word ‘any’ under sub-section (2) of Section 26 of the RBI Act. Therefore, decision of government to demonetise all series of the said Currency, was legal and within the process.
On the contrary, however, J. Nagarathna, has taken dissenting view (“dissenting judgment”) and held that the action of demonetisation initiated by the Central Government by issuance of the Impugned Notification issued under Section 26(2) of the Reserve Bank of India Act 1934 (“RBI Act”) was an exercise of power contrary to law and unlawful. Consequently, the 2016 Ordinance and 2017 Act are also held to be unlawful. As such, the action of demonetisation of all said currency was vitiated.
Controversy in the present case primarily related to the true meaning and interpretation of sub-section (2) of Section 26 of the RBI Act. Section 26 of the RBI Act is reproduced as under:
“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]”.
On 8 November 2016, vide the Impugned Notification, the Central Government, in exercise of the powers conferred by sub-section (2) of Section 26 of the RBI Act, notified that the specified bank notes (“SBNs”) i.e. bank notes of denominations of the then existing series of the value of Rs.500/- and Rs.1000/- shall cease to be legal tender with effect from 9 November 2016. On 30 December 2016, the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 (“the 2016 Ordinance”) was promulgated by the Hon’ble President of India. Subsequently, Specified Bank Notes (Cessation of Liabilities) Act, 2017 (“the 2017 Act”), was enacted which received the assent of the then Hon’ble President of India on 27 February 2017.
Immediately, after the Impugned Notification was issued, several writ petitions challenging the policy of demonetization came to be filed before the Supreme Court as also before various High Courts. Accordingly, all connected matters were transferred, and reference was made to the aforesaid Larger Bench.
Though nine important questions were initially framed by the Bench of learned three Judges vide order dated 16 December 2016 in Writ Petition (Civil) No.906 of 2016, upon hearing the submissions advanced before the Larger Bench on behalf of the Petitioners as well as the Respondents, the Bench reframed the following issues/questions for consideration:
(i) 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 subsection, specifically so, when on earlier two occasions, the demonetization exercise was done through the plenary legislations?
(ii) In the event it is held that the power under subsection (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?
(iii) 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?
(iv) As to whether the impugned notification dated 8th November 2016 is liable to be struck down applying the test of proportionality?
(v) As to whether the period provided for exchange of notes vide the impugned notification dated 8th November 2016 can be said to be unreasonable?
(vi) As to whether the RBI has an independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of provisions of Section 3 and Section 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under subsection (1) of Section 4?
(i) Applying the test of purposive interpretation and its applicability and expansion over a period of time, Justice B.R. Gavai, in his majority judgment held that the word “any” would mean “all” under sub-section (2) of Section 26 of the RBI Act. It was opined that word “any” / “anything” is of the widest import and is equivalent to “one or some or all or everything”. In this regard, a reliance was placed on the Supreme Court Judgment in the matter of Lucknow Development Authority v. M.K. Gupta [(1994) 1 SCC 243], amongst others, wherein the Apex Court has held that the word [“any” is of wide amplitude. It means “one or some or all”]. Referring to Black’s Law Dictionary, the Court observed that the word “any” has a diversity of meaning and may be employed to indicate “all” or “every” as well as “some” or “one”. However, the meaning which is to be given to it would depend upon the context and the subject-matter of the statute. The majority of judges agreed with the proposition of Mr. Chidambaram that “what is the meaning which the legislature intended to give to a particular statutory provision has to be decided by the Court on a consideration of the context in which the word(s) appear(s) and in particular, the scheme and object of the legislation”.
(ii) While distinguishing the powers of Bank and Central Government, J. Gavai opined that “When the legislature itself has provided that the Central Government would take a decision after considering the recommendation of the Central Board of the RBI, which has been assigned a primary role in matters with regard to monetary policy and management and regulation of currency, we are of the view that the legislature could not have intended to give a restricted power under sub-section (2) of Section 26 of the RBI Act”. It was also observed that if the argument that the provisions of sub-section (2) of Section 26 of the RBI Act have to be interpreted in a restricted manner, is to be accepted, it may, at times, lead to an anomalous situation. In this regard, the majority of judges, in para 150 of the Judgment has cited an example:
“For example, if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetize 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation”.
(iii) Based on the principles of purposive interpretation, judicial pronouncements, the majority judges were unable to accept the contention that the word “any” has to be given a restricted meaning (as sought to be canvassed by P. Chidambaram appearing for some of the Petitioners) 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. Accordingly, the majority judgment held that “The power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes. Merely because on two earlier occasions, the demonetization exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under sub-section (2) of Section 26 of the RBI Act”. [Emphasis Added].
Dissenting views of J. Nagarathna:
(iv) On the contrary, while dissenting with the views taken by J. Gavai in majority judgment, J. Nagarathna distinguished the views taken by J. Gavai primarily on the ground that “the majority judgment does not recognise the essential fact that the Act does not envisage initiation of demonetisation of bank notes by the Central Government”. She further opined that the measure of demonetisation ought to have been carried out by the Central Government by way of enacting an Act or plenary legislation. According to J. Nagarathna, in the instant case, since the proposal for demonetisation had been initiated by the Central Government by writing to the RBI, the entire process was vitiated, as it was not within the ambit of Section 26(2) of the RBI Act. J. Nagarathna further clarifies that Sections 24, 25 and 26 of the RBI Act makes it abundantly clear that only on the recommendation of the Central Board, the Central Government can proceed with non-issuance or discontinuation of bank notes. Accordingly, J. Nagarathna was of the view that sub-section (2) of Section 26 of the Act applies only when a proposal for demonetisation is initiated by the Central Board of Bank by way of a recommendation being made to the Central Government, which was absent in the instant case.
(v) Interpretation of sub-section 2 of Section 26 of the RBI Act: Applying the test of plain and golden rule of interpretation, J. Nagarathna was of the view that language contain the said Section is plain and unambiguous which makes it clear that “only a particular series of bank notes of a particular denomination can be recommended for demonetisation under section 26(2) of the RBI Act. The word ‘any’ in subsection (2) does not mean ‘all’. Doing otherwise could lead to the placement of unguided discretion in the hands of the Central Board of the RBI”. In this regard J. Nagarathna relied on various authorities to conclude that “when the words of a statute are clear, plain or unambiguous, i.e., they are reasonably susceptible to only one meaning, the court is bound to give effect to that meaning and admit only one meaning and no question of construction of a statute arises, for, the provision/Act would speak for itself”.
(vi) Power vested with Central Government to demonetise the currency dehors section 26(2) of the RBI Act: Dissenting judgment further clarifies that the power of demonetisation is de hors section 26(2) of the RBI Act, as the Central Government has the power to demonetise all series of bank notes of all denominations, unlike the narrower powers vested with the Central Board of the RBI under section 26(2). The dissenting judgment of J. Nagarathna clarifies that the RBI Act does not bar the Central Government from proposing or initiating demonetisation. However, the Central Government could do so only through its plenary powers under Entry 36 of List I of the Seventh Schedule of the Constitution. This could only be done by an Ordinance followed by an Act of Parliament, or by plenary legislation through the Parliament.
(vii) An action filled with noble objects but lacks legal applicability: J. Nagarathna noted that the Central Board of the Bank passed a resolution in a hurried manner. No adequate care and consideration were bestowed on such a crucial matter by the Central Board of the Bank having regard to the severe ramifications that the proposed demonetisation would have on almost every citizen of the country. Applying the said principle to the facts of the present case, it was observed that what ought to have been done through a Parliamentary enactment or plenary legislation, could not have been carried out by simply issuing a notification under sub section (2) of Section 26 of the Act by the Central Government.
(viii) Contradiction as to subject and object of demonetisation: One of the important observations of J. Nagarathna while dissenting with the majority judgment was with respect to subject and object of demonetisation. As observed, the objects guiding the Board’s opinion were twofold: first, pertaining to financial inclusion, and second, being to incentivise the use of electronic modes of payment. However, on the contrary, the object guiding the Government’s proposal to withdraw currency of the specified denominations, was to tackle black money, counterfeiting and illegal financing.
(ix) In response to the contention placed by Respondents with respect to demonetisations on last two occasions, J. Nagarathna observed that the proposal for demonetisation initiated by the Central Government on last two occasions was de hors sub-section (2) of Section 26 of the RBI Act. It was noted that the previous demonetisations were not carried out on the strength of sub-section (2) of Section 26 of the RBI Act inasmuch as both the legislations categorically stated that the demonetisation was “notwithstanding anything contained in Section 26 of the Act”. The proposal for demonetisation arose from or was initiated by the Central Government which sought the opinion of the Central Board of the Bank. On the contrary, the demonetisation carried out in the year 2016 on the strength of Impugned Notification, was carried out without Central Board’s opinion.
Upon perusal of the said Judgment, it appears that the majority judgment has failed to consider certain important facts and appreciate true position of law. The dissenting judgment of J. Nagarathna appears to be much sounder and more legal. The plausible interpretation to Section 26(2) of the RBI Act and the manner in which the Central Board and/or Central Government should proceed with matters such as demonetisation or discontinuation of currency as clarified by J. Nagrathna makes it more prudent and legal. The Judgment further makes it clear that the proposal for demonetisation can emanate either from the Central Government or from the Central Board of the Bank. It also clarifies that when the Central Board of the Bank recommends demonetisation, according to J. Nagarathna, it is only for a particular series of bank notes of a particular denomination as specified in the recommendation made under subsection (2) of Section 26 of the RBI Act. As held by J. Nagarathna, the word “any” in subsection (2) of Section 26 cannot be read to mean “all”. The dissenting Judgment also clarifies that the Central Government has the power to demonetise all series of bank notes of all denominations, if the need for such a measure arises. As per the dissenting judgment, powers of the Central Government being vast, the same have to be exercised only through a plenary legislation or a legislative process rather than by an executive act by the issuance of a notification in the Gazette of India. It also makes it clear that Central Government cannot unilaterally issue a gazette notification but has to resort to a legislation when it initiates the proposal for demonetisation. It further makes it abundantly clear that irrespective of the opinion of the Central Board of the Bank to the Central Government’s proposal, the legislative route would have to be taken by the Central Government for furthering its objective/s of demonetisation of bank notes. This itself is a protection and safeguard given to ensure that no injustice and undue hardship is caused to citizens of this country. In the sum and substance, the dissenting judgment has made the judiciary and legislature to think and consider if the views rendered by J. Nagrathna can be considered and implemented going forward, as the law laid down by J. Nagarathna in her dissenting judgment has been made applicable prospectively. Dissenting Judgment of J. Nagarathna opens a door for evolution of law, which certainly may have huge impact on Indian Law and Jurisprudence.
Vivek Dwivedi is a Senior Associate at Naik Naik and Co.
Note: This article seeks to create awareness and shall not in any way be construed as legal advice.