Years after demonetisation, the constitutional validity of the slapdash currency reform remains unsettled.
There's no way to undo the move now, yet a batch of 58 petitions are seeking that a five-judge constitutional bench at least hold the very demonetisation process as 'flawed' to avoid a repeat of such future 'misadventures'.
The petitioners raised several objections -- all of them questioning the legal and constitutional basis of demo. The two previous episodes (1946 and 1978) too couldn't escape the scrutiny of the Court, but in the end, the government's decisions were upheld. It'll be interesting to see the outcome of the ongoing proceedings given that the context and the enormity of the latest note ban is simply incomparable.
At the top of the heap lies the issue of legislative mandate.
It has been argued that the 2016 demo episode was carried out without the legislature passing a law unlike during 1946 and 1978, when the government invalidated currency notes issuing Ordinances.
Appearing on behalf of the petitioners, former finance minister P Chidambaram argued that the 2016 demo move was unlawful, lacking authorisation, either via an Act of Parliament or an Ordinance.
The second objection relates to the alleged misuse of the RBI Act, 1934. Although Section 26 of the RBI act allows central government to demonetize 'any' series of notes, it doesn't entitle the government to cease 'all' series of notes as legal tender. Chidambaram stressed that by inferring 'any' as 'all,' the demo 2016 notification was illegal, going beyond the scope of the RBI Act, 1934.
Next, demo was considered to have violated the doctrine of legitimate expectation, with the government frequently changing rules such as preponing the deadline of currency exchange. Then there were also prima facie the case of direct and indirect abridgement of fundamental rights like the violation of Article 300A (related to property rights), violation of Right to Equality discriminating holder and non-holders of bank accounts, violation of Right to Life by denying poor people of livelihood due to the cash crunch and violation of freedom of trade and occupation with several businesses affected due to currency shortage.
In their defence, the Centre maintained that the note ban was undertaken after extensive consultation with the RBI and after making advance preparations like printing Rs 2,000 notes. The government further noted that the court cannot decide a matter when no tangible relief can be granted by way of "putting the clock back" and "unscrambling a scrambled egg."
In its petition, the government submitted that 'pedestrian' considerations such as whether there was a recommendation or a consultation will reduce section 26 (2) of the RBI Act to a narrow area, stultifying the entire complexity of management of currency monetary policy.
"Demonetisation was not an isolated economic policy. This was a complex monetary policy. Entirely different considerations will follow. The degree of deference must also be higher... The role of the RBI has evolved. We are not looking at some black money here and there, some fake currency here and there. We are trying to look at the big picture,' it explained.
Looking back at earlier challenges
Demo, 1946 -- Act, I:
The country's first demonetisation exercise in 1946 was executed via two Ordinances -- one invalidating notes of Rs 100-10,000 held by government and treasuries and the other demonetising notes of Rs 500 and above in circulation within a day, leaving little time for exchange. As the high-value notes were only held by three per cent of the total population, it didn't affect normal life. It did not produce impressive results either.
The total value of the notes in circulation was Rs 1,235.93 crore, of which high-value currency notes accounted for Rs 143.97 crore. The government collected Rs 134 crore of the total Rs143 crore available in the market, and only Rs 9 crore didn't return to the system.
The 1946 demo Ordinance was challenged, but the Court held that once notes ceased to be legal tender, any restriction on their transfer to another person could not be said to be unreasonable. It also noted that the Ordinance provided for the exchange of the high denomination notes for notes of smaller denominations on certain conditions. Therefore, the restriction imposed by section 4 of the Ordinance was found to be a reasonable restriction, settling the question of constitutionality.
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Demo, 1978 -- Act, II:
On the night of January 16, 1978, the government yet again withdrew notes of Rs 1,000, Rs 5,000 and Rs 10,000 and persons holding them had to exchange them within a week. The value of these high-denomination notes in circulation was estimated at Rs 180 crore, of which notes worth Rs 20 crore were immobilized.
The constitutionality of the 1978 Act too was challenged, but this time there were multiple counts.
Chief among them was the validity of Section 4 of the 1978 Act, which the petitioners contended violated their fundamental rights, including the now-deleted Article 31 (Right to Property). But the Bench underlined the preamble of the Demonetisation Act, which aimed at checking 'illicit transfer of money' for financing transactions 'harmful to the national economy', and noted that the Act was 'passed to avoid the grave menace of unaccounted money...'
Separately, the Court also held that the one-week time limit for exchange was a reasonable restriction in view of the purpose of the law -- to clamp down on the circulation of high-denomination notes. 'If a person could at anytime in future go to RBI and ask for exchange value of such notes, the purpose of the Act would be frustrated,' it observed and upheld the constitutionality of the 1978, Act.
Demo, 2016 -- Act, III:
On November 8, 2016, the government's note ban move invalidated high-value currency comprising Rs 500 and Rs 1,000 notes that together accounted for 86% of the total currency in circulation.
The demo notification was challenged on several counts.
In 2017, a three-judge bench headed by then Chief Justice of India TS Thakur stayed all high court proceedings on pleas challenging the note ban decision, transferred to itself all these cases, and referred the matter to a five-judge constitutional bench. It framed nine questions going into the legality of the demonetisation decision (listed at the end of the article).
Interestingly, on more than one occasion, the Courts have held that the appropriate forum for testing the correctness of a public or economic policy, was the Parliament, not the judiciary. The Court cannot strike down a policy decision taken by the State merely because it feels that another policy decision would have been fairer or wiser or more scientific or logical. In fact, while considering the validity of bank nationalisation in 1969, which too was challenged, the Court held that, it wasn't for them to consider the relative merits of the different political theories or economic policies.
In several previous judgements, the Courts have maintained that they were not intended to and nor should they conduct the administration of the country. Courts will interfere only if there's a clear violation of Constitutional or statutory provisions or non-compliance by the State with its Constitutional or statutory duties, which is what the petitioners are insisting on.
In the absence of an ordinance providing the legal basis for demo, these petitioners argue that the 2016 note ban exercise must be held as illegal.
Moreover, the test of reasonableness has come under sharp focus given that the previous demo episodes impacted only 3% and 1% of currency held, while the 2016 episode extinguished a staggering 86% of the currency in circulation, causing untold damage to the economy.
But unlike the first two demo exercises, the 2016 note ban yielded relatively modest results.
According to one Ministry of Finance reply in Rajya Sabha, between November 9, 2016 and January 10, 2017, the I-T department conducted over 1,100 searches, apart from issuing more than 5,100 verification notices in the cases of suspicious high-value cash deposits or related activities and detected undisclosed income of over Rs 5,400 crore. These actions led to the seizure of valuables worth more than Rs 610 crore including cash of Rs 513 crore. Till February 2017, while 23,064 searches and surveys were conducted, more than Rs 1.37 lakh crore in undisclosed income/tax evasion was detected.
The nine questions the Supreme Court has asked about the 2016 demonetisation
1. Whether the RBI notification of November 8, 2016 is ultra vires Section 26 (2) and other relevant provisions of the RBI Act, 1954?
2. Whether the notification is violative of Article 300A (right to property) of the Constitution?
3. Whether the notification is ultra vires Articles 14 and 19 of the Constitution?
4. Whether limited withdrawal of one’s own money caused by demonetisation is a violation of
Articles 14, 19, 20 and 21 of the Constitution?
5. Whether the implementation of the notification is in substantive and procedural violation of the law of the land?
6. Whether Section 26(2) of the RBI Act is itself a piece of excessive delegation of legislative
powers?
7. What is the scope of judicial review into a fiscal and economic policy of the government?
8. Can political parties file writ petitions in the Supreme Court under Article 32 of the
Constitution?
9. Were DCCBs (District Central Cooperative Banks) subjected to discrimination when they were stopped from accepting deposits and allowing withdrawals?