SC Constitution bench holds demonetisation valid, Justice BV Nagarathna dissents

Justice BV Nagarathna, while differing with Justice Gavai’s judgement, said demonetisation was “unlawful and vitiated.”
Supreme Court
Supreme Court
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A Constitution bench of the Supreme Court, on Monday, January 2, dismissed the challenge to demonetisation brought about by the Union government in 2016 and upheld its validity by 4:1 majority. The bench held that demonetisation cannot be struck down on the grounds of proportionality. The verdict was delivered by a five-judge bench comprising Justices S Abdul Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna, who dissented. The judgement was pronounced by Justice Gavai. The court was hearing a batch of 58 petitions challenging the legality of the November 8 circular announcing the demonetisation of Rs 500 and Rs 1,000 currency notes.

The Supreme Court held that the power under Section 26(2) of RBI Act can be used to demonetise whole series of bank notes and not any particular series, saying that "any" cannot be given restrictive meaning. The court also held that the section cannot be struck down as unconstitutional on the ground of excessive delegation. Earlier, senior advocate P Chidambaram questioned the scope of section 26(2) of the RBI Act by saying that the section only gave limited powers to demonetise any particular series of denominations and that special legislation should be passed, if all series are to be demonetised.

However, Justice BV Nagarathna differed from Justice Gavai's judgement and held that there was no independent application of mind by the Reserve Bank of India in implementing demonetisation policy. She also said that demonetisation of all currency notes of Rs 500 and Rs 1000 was “unlawful and vitiated.” Justice Nagarathna also noted that the entire exercise was carried out within 24 hours. The judge also held that the parliament was at the centre of democracy and cannot be left aloof in a matter of such critical importance. As per Section 26(2), the proposal for demonetisation had to emanate from the central board of the RBI and if it was through legislation and secrecy was needed, then through an ordinance, the judge added.

The apex court had initially taken the view that the matter was academic since demonetisation took place six years ago and wondered if the court could undo the same. On September 28, the bench said that it would examine if the petitions were academic. Attorney General for India (AG) R Venkataramani and Solicitor General of India (SG) Tushar Mehta repeatedly contended that it was academic as six years had passed. Senior advocates P Chidambaram and Shyam Divan argued that its validity could be challenged.

On October 12, the constitutional bench decided to take up the case after being persuaded by the petitioners. At the end of the day’s legal hearing, the bench directed the Union government and the Reserve Bank of India (RBI) to file an affidavit responding to the arguments of the petitioners.

On November 9, Attorney-General R Venkataramani sought an extension of one week for filing a response. Adjourning the case to November 24, the court said, “It is embarrassing that a Constitution bench has to adjourn like this.” The Union government filed an affidavit stating that the demonetisation exercise was a “well-considered one that led to benefits.”

On November 24, senior advocate P Chidambaram opened the arguments for the petitioners’ side and contended that the demonetisation was unconstitutional. He questioned the scope of section 26(2) of the RBI Act by saying that the section only gave limited powers to demonetise any particular series of denominations and that special legislation should be passed, if all series are to be demonetised. The Act also stated that this should be done from a particular date based on the recommendation of the central board of the RBI. Chidambaram argued that the decision-making process ahead of and during demonetisation was deeply flawed and was subject to judicial review.

On December 8, Chidambaram argued that the court must critically examine the decision-making process that went into the demonetisation policy. “Even if this court cannot strike down demonetisation now that it has started hearing this case six years later, this court can pronounce on the decision-making process and the decision,” he said. He contended that the court could look into the ideal decision-making process, and on the fairness of the process employed by the government and the proportionality of the outcome.

Senior advocate Shyam Divan and advocate Prashant Bhushan also appeared for petitioners. Some of the petitioners had sought a time extension for exchanging the demonetised currency notes.

AG Venkataramani defended the arguments of the petitioners by saying that there was barely any scope for scrutinising demonetisation as it cannot be said that demonetisation failed. “No well-meaning person will say that just because you have failed, your intention was also flawed. This does not make logical sense,” he argued. The AG also said that the objectives of the policy — tackling counterfeit currency, stopping the circulation of black money, and handling terror financing — should be tackled by dealing with them in a sudden manner.

Appearing for RBI, senior advocate Jaideep Gupta asserted that the decision of demonetisation was taken by the Union government based on a recommendation given by the Central Bank of India. He also said that contemplations for the policy began as early as February 2016 but was completed in a fragmented manner to maintain confidentiality. “Secrecy and speed were of paramount importance in this process, without which the demonetisation exercise would be 'stillborn' from the beginning,” he argued and contended that all due procedures were followed ahead of demonetisation.

Gupta also attempted to set the limits within which the top court could exercise its power of judicial review, especially in the domain of economic policymaking. However, Justice BV Nagarathna responded to it by saying that the court would always examine the manner in which a decision was taken. "Just because it is an economic decision, does not mean we will fold our hands and sit," she said.

Before reserving the verdict on December 7, the apex court directed the Union government and RBI to produce relevant records relating to the government's 2016 decision to demonetise currency notes of Rs 1,000 and Rs 500 denomination by December 10. AG Venkataramani submitted before the bench that he would submit relevant records in a sealed cover.

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