Demonetization - the legal aspect

Since 8 November 2016, for the third time in modern Indian history, the central government has declared notes of certain denominations to no longer be valid legal tender. When announced by the Prime Minister on 8 November, it was pitched as a measure, inter alia, to tackle the “black money” problem in India. Since then, the justification has changed; it is now supposed to make India a “cashless society.”

The larger effects of demonetisation on the Indian economy are debatable. There are, however, questions that have been raised about the manner in which demonetisation has been carried out by the government. Several petitions have been filed in the high courts and in the Supreme Court as well, challenging the demonetisation or its specific aspects.

Unlike in the past two instances in 1946 and 1978, on this occasion, demonetisation has been done through the issuance of notifications (Notification Nos SO 3407[E] and 3408[E]) under subsection (2) of Section 26 of the Reserve Bank of India Act, 1934. Under this section, the central government has the power, in consultation with the Reserve Bank of India (RBI), to declare “any series” of notes of any denomination to no longer be legal tender. It has been contended by some petitioners that the said power cannot be exercised to declare all series of a note to no longer be legal tender. They point to the fact that the previous demonetisation exercises were carried out through ordinances which later became laws passed by the competent legislature, to contend that the present exercise cannot be carried out merely by the central government issuing notifications for this purpose.

While there is some merit in this line of thinking, it is not legally tenable. The interpretational argument—that “any” cannot mean “all”—finds no support in the principles of interpretation or in well-established Supreme Court precedents. Section 13 of the General Clauses Act, 1897 states that unless the context otherwise requires, in a statute, the singular includes the plural. Moreover, contrary to the assertions of the petitioners, in L D A v M K Gupta (1994) and in Sk Mohammed Omer v Collector of Customs (1970), the Supreme Court has held that the term “any” includes “all.” “Any series” in Section 26 of the RBI Act should, in all circumstances, include “all series” of a given denomination and there is no other provision in the RBI Act or any other law which requires it to be given a more restricted meaning.

What of the constitutional argument that demonetisation necessarily requires a law to be passed by Parliament?

For context, the Janata Party government enacted the High Denomination Bank Notes (Demonetisation) Act, 1978 after promulgating an ordinance to this effect first. Like the notifications in the context of ?500 and ?1,000 notes, the demonetisation act declares ?1,000, ?5,000 and ?10,000 notes as no longer being legal tender. It also provides for a mechanism for deposit and exchange of these notes within a specified time. Crucially, however, the demonetisation act prohibits persons from accepting or tendering the demonetised notes in any context, though it does not make it a criminal offence to do so.

Under the present demonetisation exercise, there is no legal prohibition against accepting or tendering ?500 and ?1,000 notes. It only means that it is not against the law to refuse to accept such notes. The matter has however been confused by the “exemption” clauses in Notification No 3408 (as amended, repeatedly since the announcement). It does not make clear if the places where the note is required to be accepted are obligated under law to do so, and, if they do not, whether they are liable for any penalty.

Under the Constitution, certain things can only be done by a law made by Parliament. The fixing of Supreme Court and high court judges’ salaries for instance, appropriations from the public exchequer, and limitations on the right to life and liberty, among other things, can only be done by a law enacted by the legislature. This does not imply that everything that the government does automatically requires a law made by legislature, and certainly not demonetisation.

Right to Property and Legitimate Expectation

Another plausible argument that could be made against the demonetisation exercise is that it is a violation of the right to property protected under Article 300-A of the Constitution (Reddy 2016). Unlike in the Constitution as it was originally brought into force, the right to property now is merely a right against expropriation of property without the authority of law. Even though the words of Article 300-A are analogous to those in Article 21, the protections against the deprivation of property are not in the nature of substantive due process as Article 21 has been interpreted to mean.

In the context of demonetisation, it has been argued that Notification No 3407 extinguishes the right to property without any authority of law. Specifically, it is contended that limits on withdrawal of cash from bank accounts and exchange of the notes are contrary to the mandate of Article 300-A. Therefore, it has been said, by refusing to let people withdraw their money in cash, the government has restricted the right to property, and, by placing limits on exchange, extinguished the right entirely.

At the moment, there is no provision in any law that prohibits the central government from imposing limits on cash withdrawals from banks or exchange of cash. There is also no provision that vests this power with another agency such as the RBI. There is, therefore, no limitation on this power and when the central government has issued Notification No 3407, it has done so partly in exercise of the executive power under Article 73.

However, leglities apart, the practicality of demonetisation and the way it will be handeled further by the government and the banking infrastructure remains to be seen.
 

By: Abhishek Sharma