Justice Nagarathna’s dissent in demonetisation case — ‘well-intentioned but unlawful’

The government's order was being declared unlawful “only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation”, she says.

File photo of Justice B.V. Nagarathna | ANI

New Delhi: Delivering the lone dissenting verdict in the case challenging the Modi government’s November 2016 decision to ban Rs 500 and Rs 1,000 currency notes, Justice B. V. Nagarathna held that while the demonetisation exercise was “well-intentioned”, it was “contrary to law and therefore, unlawful”.

The judge differed from the majority opinion with regard to the exercise of power by the central government under Section 26(2) of the Reserve Bank of India (RBI) Act 1934, which allows it to declare that “any series of bank notes of any denomination shall cease to be legal tender” after a recommendation from the RBI central board.

The demonetisation exercise could have been undertaken by the central government only through an ordinance or a parliamentary law, since the process was not initiated by the RBI, she asserted.

“On a matter as critical as demonetisation, having a bearing on nearly 86 per cent of the total currency in circulation, the same could not have been carried out by way of issuance of an executive notification. A meaningful discussion and debate in Parliament on the proposed measure, would have lent legitimacy to the exercise,” the judge said.

However, she said that since the notification was acted upon, the declaration of law made by her would apply prospectively and would not affect any action already taken by the central government or the bank. Therefore, her conclusion also did not grant any relief in the individual matters.

Justice Nagarathna clarified that the move was “well-intentioned”, and said that the demonetisation exercise was “an initiative of the Central Government, targeted to address disparate evils, plaguing the Nation’s economy, including, practices of hoarding ‘black’ money, counterfeiting, which in turn enable even greater evils, including terror funding, drug trafficking, emergence of a parallel economy, money laundering including Havala transactions”.

She, however, asserted that it was being declared unlawful “only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation”.

Justice Nagarathna was the only woman judge on the SC Constitution bench — whose other members were Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian — which heard a batch of 58 petitions challenging the central government’s 2016 notification to ban Rs 500 and Rs 1,000 currency notes.

These petitions, including those of individual petitioners challenging the 2016 notification are those who could not deposit their old currency by 30 December (the window period), were referred to the Constitution bench in December 2016.

While Justice Gavai authored the majority judgment, Justice Nagarathna was the only dissenting voice in the five-judge bench of the Supreme Court.

‘Demonetisation cannot be initiated by Centre’

Justice Nagarathna began by observing that the majority verdict authored by Justice Gavai does not recognise the fact that the RBI Act does not envisage initiation of demonetisation of bank notes by the central government. She asserted that Section 26(2) contemplates demonetisation of bank notes at the instance of the RBI Central Board.

She then said that if demonetisation is to be initiated by the central government, then such a power is derived from Entry 36 of List I of the Seventh Schedule to the Constitution which speaks of “currency, coinage and legal tender; foreign exchange”.

The judge noted that when demonetisation was carried out in 1946 and 1978, it was done through an ordinance and a law respectively. She noted that in both these cases, the central government did not demonetise the high denomination bank notes on the recommendation made by the Central Board of the Bank under Section 26(2) of the RBI Act.

“In other words, when the proposal to demonetise any currency note is initiated by the Central Government with or without the concurrence of the Central Board of the Bank, it is not an exercise of the executive power of the Central Government under sub-section (2) of Section 26 of the Act,” she asserted, ruling that in such a situation, the central government would have to resort to the legislative process by bringing in an ordinance or a law in Parliament.

She further said that the “recommendation” under Section 26(2) in this case did not originate from the RBI but was “obtained” from the bank and therefore, it “could not be considered to be a recommendation as required by the Central Government in order to proceed under sub-section (2) of Section 26 of the Act.” Such a concurrence to a proposal originating from the government is not akin to an original recommendation from the RBI under Section 26(2), the judge observed.

‘RBI didn’t apply its mind independently’

Justice Nagarathna noted that the proposal for demonetisation originated from the central government through a letter dated 7 November 2016, addressed by the Finance Secretary to the RBI Governor. The next day, on 8 November 2016, a meeting of the central board of the RBI was held in New Delhi, and the same day, a gazette notification was issued.

“The use of the words/phrases such as, ‘as desired’ by the Central Government; Government had ‘recommended’ the withdrawal of the legal tender of existing Rs.500/- and Rs.1,000/- notes; recommendation has been ‘obtained’; etc., are self-explanatory. This demonstrates that there was no independent application of mind by the Bank. Neither was there any time for the Bank to apply its mind to such a serious issue,” the judge asserted.

“The objective of the Central Government may have been sound, just and proper, but the manner in which the said objectives were achieved and the procedure followed for the same, in my view, was not in accordance with law having regard to the interpretation given above,” she concluded.

‘Any’ does not mean ‘all’

Interpreting Section 26(2) of the RBI Act, Justice Nagarathna opined that when the RBI recommends demonetisation, it is only for a particular series of bank notes of a particular denomination.

This contention was considered because the petitioners argued that all series of bank notes of Rs 500 and Rs 1,000 could not have been demonetised by a stroke of a pen. They had said that the expression “any” in Section 26(2) of the Act means, “a particular” series of “a particular denomination” of a bank note, and not “all” series of “all” denominations.

“The word ‘any’ in sub- section (2) of Section 26 cannot be read to mean ‘all’. If read as ‘specified’ or ‘particular’ as against all, in my view, it would not suffer from arbitrariness or suffer from unguided discretion being given to the Central Board of the Bank,” the judge explained.

The judge favored giving the provision plain, grammatical meaning, and not “a broad meaning”. She said that if the word “any” is not given a plain grammatical meaning and interpreted to mean “all series of bank notes” of “all denominations”, it would vest the Central Board with unguided and unlimited powers.

This, she said, would be arbitrary and unconstitutional as this would amount to excessive vesting of powers with the Bank. Therefore, in order to save the provision from being declared unconstitutional, she read down the meaning of the provision, to say that the RBI can initiate a proposal for demonetisation under Section 26(2) only for a “particular series of bank notes of any denomination.”

She further explained that the government does have the power to demonetise all series of bank notes of all denominations. However, she asserted that since “demonetisation of bank notes at the behest of the Central Government is a far more serious issue having wider ramifications on the economy and on the citizens,” it should be done through a law, rather than a notification.

“It is necessary that Parliament, which consists of the representatives of the People of this country, discusses the matter and thereafter approves and supports the implementation of the scheme of demonetisation,” she observed.

(Edited by Tony Rai)