VIVEK NARAYAN SHARMA V UNION OF INDIA

(Demonetization Case)

COURT: The Supreme Court of India

Writ petition (Civil) No. 906 of 2016

PETITIONER: Vivek Narayan Sharma

RESPONDENT: Union of India

BENCH: BR Gavai, S.A. Nazeer, A.S. Bopanna, V. Ramasubramaniam, BV Nagarathna

DATE OF THE CASE: 2^nd January, 2023

LEGAL PROVISIONS: Section 26(2) of the RBI Act, 1934[1]

FACTS OF THE CASE: The Central Government of India issued the notification, declaring that the existing legal tenders of the then existing series of value of Rs. 500 and Rs. 1000 shall cease to be a valid tender from 9^th November, 2016. The Central Government of India had issued such orders by exercising the powers conferred to it by applying the provisions of Section 26(2) of the RBI Act, 1934. Thus, the notes of Rs. 500 and Rs. 1000 ceased as a legal and valid currency. This is essentially known as ‘demonetization’. There were other acts which were promulgated by the government to advance its policy of ‘demonetization’ among the people after the notification came to the purview, like the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 and followed by the Specified Bank Notes Ordinance (Cessation of Liabilities) Act, 2017 was enacted and received the assent of the Hon’ble President of India on 27^th February, 2017. [2]

After implementing the impugned notification, there were a lot of writ petitions which came before the Supreme Court and various High Courts. The writ petitions challenged the validity of the ‘policy of demonetization’ which was implemented by the Central Government. Advocate Vivek Narayan Sharma also filed a writ petition on 9^th November, 2016 challenging the validity and constitutionality of the demonetization scheme before the Supreme Court.

However, it was on 16^th December, 2016 that the Bench ordered a stay on all the appeals that were brought before the High Courts over the policy of demonetization. Finally, the case was transferred to the Hon’ble SC of India. The complexity of the problems lead to the transfer of the demonetization case before the 5 Judge Constitution Bench.[3]          

ISSUES RAISED:

1. Whether there is proper implementation of the Section 26(2) of the RBI Act by the Central government?

• Should the impugned notification of 8^th November, 2016 continue or it can be cancelled by drawing parallel to the test of proportionality?

CONTENTION:

Arguments from Petitioner’s side:

1. It was submitted by the petitioners that the Section 26(2) of the RBI Act, 1934 [4]especially the sub-section (2) needs to be properly interpreted as the provision does not allow the power of demonetization to be issued in respect of all series of currency notes to be enumerated denomination. It was contended that the term ‘any’ which has been specified in the provision denotes that the authority implemented by the Central Government pertaining to the demonetization of the notes was only in regards to a particular series of any denomination.

• The petitioners further argued that the authority exercised by the Government in regards to demonetization was held to be an absolute and arbitrary one as the Parliament had the right in regards to it. It was put forward before the Hon’ble Supreme Court that if the Government has the sole authority to deem all the series of currency notes as illegal tender as per the Section 26(2) of the RBI Act, then a situation may arise where the Central Government has the conclusive power to deem all the currency notes as invalid even if they were issued the previous day. Similar, was the situation on 8^th November, 2016 where the currency notes of Rs. 500 and Rs. 1000 had been declared an illegal tender.

• It was further submitted that if the Section 26(2)[5] is not read in the above stated manner, then a vulnerable situation arises where the Executive Government is exercising unrestrained powers. Hence, the executive is liable for arbitrary exercise of power. Since, the notes of Rs. 500 and Rs.1000 were mostly used by the people and suddenly declaring them as illegal ; they were hardly left with any money to fulfill their essential needs. 86.4% of the currency was declared as an illegal tender amounting to Rs. 15,44,000 crores.

• It was argued that the Section 26(2) of the RBI Act was misinterpreted and can be struck down on the basis of the Articles 14, 19, 21, and the 300A of the Constitution of India[6]. It further fails to stand on the test of proportionality.

• The act of demonetization also violates the Article 19(1)(g) of the Constitution as the interest of the general public was not established by the respondents in the present case. The landmark case of Jayantilal Ratanchand Shah v. Reserve Bank of India[7] and others it was adjudicated that the notes are essentially the property of an individual. Therefore, it was held by the court that if a person is denied the right to enjoy his property it violates the Article 300A of the Constitution of India[8]. Similarly, the present instance of demonetization has deprived the persons to enjoy their property.

Arguments from the Respondent’s side:

1. Central Government put forward its argument pertaining to the question of credibility of the Executive Governments exercise of power in the case of demonetization. It was stated that the policy was brought to the lame light with the validity of the Parliament.

• It was submitted that the authority of the Central Government in regards to Section 26(2) of the RBI Act, itself provides that if the Government has to exercise its authority basing upon the suggestions of the Central Board which is appointed by the RBI. The procedure which has been specified under Section 26(2)[9] at the very outset introduces us to two essentials, i.e., suggestions of the Central Board and the findings by the Central Government which has been fulfilled in this case.

• The contention pertaining to the test of proportionality was argued with the landmark case law of Modern Dental College and Research Centre and others v. State of Madhya Pradesh and others[10] where the four-pronged test was applied. Since, the demonetization was done to deal with the issue of fake currency, black money and terror funding it satisfies the first test. Secondly, the policy of demonetization has a reasonable nexus for the fulfillment of the above stated three objectives and thirdly there was no infringement of the rights of the citizens. The legitimate currency has been duly exchanged with the earlier ones and has not been taken away from the people, the option of non-cash transactions like online payment, credit cards, debit cards were permitted. Lastly, whether there was any alternative measure available and is applicable instead of demonetization which is to be decided by the experts of economic policy. Thus, the essential three elements of the test of proportionality are satisfied and the fourth test lies at the discretion of the economic experts.
•  It was further argued that a grace period was provided to the people either to exchange or deposit the notes in the banks or send an authorized representative for the same. The time period provided is found to be reasonable as per the case of Jayantilal Ratanchand Shah[11] which was previously provided under the 1978 Act.

RATIONALE AND JUDGEMENT:

It has been nearly six years that the country went through demonetization. The policy was severely criticized by the masses as an unlawful one. The Constitution Bench upheld the scheme of demonetization by 4:1 majority. Justice BR Gavai, Justice S.A. Nazeer, Justice A.S. Bopanna, and Justice V. Ramasubramaniam were of the opinion that the demonetization scheme was proportionate to the objectives which were stated by the Central Government and essentially proved to be reasonable in the four – pronged test of proportionality.

However, Justice B.V. Nagarathna gave an opposing view and stated that the policy of demonetization was well-intentioned but the manner in which it as carried out was not proper. The lack of implementation of the scheme on the part of the government lead to a chaotic situation among the masses. It was a hasty decision which led to hardship among the citizens.

 The Court held that as per the provision of Section 26(2) of the RBI Act[12] the word any series of denominations would mean all and cannot be restricted by giving the instances of 1946 and 1978 demonetization exercise. It was further noticed by the Hon’ble Court that the Central Board had taken all the factors into consideration and prepared a draft scheme to execute the policy in a convenient manner, which was even put forward before the Cabinet.

The majority opinion was of the view that measures like demonetization needs to be taken with confidentiality and speed. Otherwise, it would be very difficult to implement the same leading to unprecedent consequences. There is certainly no doubt that the citizens faced various hardships, however, if we draw a nexus with the goals to be achieved, then, it would not be valid to hold the Notification to be bad in law. Hence, the judgment was prospective in nature and did not affect the plan of action which was already executed by the Government. 

DEFECTS OF LAW:

It was very well pointed by Justice B.V. Nagarathna that there was an instance of Excessive delegation as per the provision of Section 26(2) and it cannot be conclusively used to mean all series of currency notes. On the contrary, if the Central Board is vested with the sole authority to recommend demonetization in regards to “all series” then excessive powers would be vested with the Bank as in the present issue. There was absence of free will on the part of the Central Board of the Bank and did not render a sustaining opinion on the issue of demonetization.

The act of demonetization should have been carried out by enacting a plenary legislation, therefore, it can be rightly stated that the impugned notification which was released on 8^th November, 2016 had incorporated Section 26(2)[13] which was to a certain extent defective as well as unlawful.

INFERENCE:

The policy of demonetization was enacted in the year 2016 by the Central Government, to eradicate the problems pertaining to fake currency, hoarding, terror funding, money laundering and plaguing the Nation’s Economy. It was a well-intentioned policy that lacked proper implementation. There were certain instances which clearly depicts the lack of lawful insight on the part of the Central Government.

Therefore, the Hon’ble Supreme Court adjudicated the matter by giving 4:1 ratio and put forward the constitutionality of the Demonetization policy. With this ruling in Vivek Narayan Sharma v. Union of India[14], the Supreme Court of India has widened the aspect of Section 26(2) of the Act. It has been made understandable that the Government also possesses the delegated power of Demonetization, however, with the prior approval of the Parliament and the Central Board of the RBI. Thus, the Executive does not have absolute power. It is to be noted that the Supreme Court gave a prospective judgement on this issue and the policy of Demonetization persistently continues.

URMILA BISWAS

1^st year, BA LLB

Department of Law, Calcutta University

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[1]The RBI Act, 1934

[2]Demonetisation, The Times of India (May 21, 2023, 7:20 AM) https://m.timesofindia.com/topic/Demonetisation/ampdefault (Last accessed on 21st May, 4:25PM)

[3] Dissenting but impactful observations of Justice B.V. Nagarathna (10^th March , 2023, 12:10 PM) https://www.barandbench.com/law-firms/view-point/demonetisation-a-dissenting-but-an-impactful-observations-of-justice-bv-nagarathna-which-opens-a-door-for-evolution-of-law(Last Accessed on 21^st May, 5:28 PM)

[4] Vivek Narayan Sharma v. Union of India on 2^nd January, 2023 https://indiankanoon.org/doc/164842744/ (Last Accessed on 21^st May, 2023, 5:42 PM)

[5] Supra note 1

[6] The Constitution of India, 1950

[7] Jayantilal Ratanchand Shah v. Reserve Bank of India, JT 1996 (7), 681 1996 Scale (5)741

[8] Supra note 6

[9] Supra note 1

[10] Modern Dental College and Research Centre and others v. State of Madhya Pradesh and others, Civil Appeal No. 4060 Of 2009

[11]Supra note 7

[12] Supra note 1

[13] Supra note 1

[14] Vivek Narayan Sharma v. Union of India, Writ Petition (Civil) No.906 of 2016