Supreme Court Upholds Demonetisation Decision By A 4:1 Majority

A five-judge constitution bench of the Supreme Court upheld the demonetisation decision in its verdict pronounced on Monday.

The Supreme Court bench comprising Justices SA Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna upheld the decision by a 4:1 majority. Justice Nagarathna delivered the dissenting view.

In total, 58 petitions were filed and the petitioners had challenged the government's Nov. 8, 2016 circular, which had banned currency notes of Rs 500 and Rs 1000. The petitioners had argued that due process wasn't followed.

Reading the judgment on behalf of the majority, Justice Gavai ruled the demonetisation decision as valid and constitutional. In the oral pronouncement, Justice Gavai said-

• The government, under section 26(2) of the RBI Act, is empowered to cancel all currency notes of all denominations. Restrictive meaning cannot be given to word "any" in Section 26(2) of RBI Act. Interpretation that advances the purpose of the legislation must be followed, and one that leads to absurdity must be avoided. So, central government's power can be exercised for all series of bank notes.

• There has to be great restraint in matters of economic policy. The court cannot supplant the wisdom of executive with its own.

• There was reasonable nexus with objective sought to be achieved by the government. Decision cannot be set aside on the basis that objective was not achieved.

• Period provided to exchange notes cannot be said to be unreasonable

• RBI does not have independent power to accept notes beyond the period provided for exchange.

In her dissenting view, Justice BV Nagarathna differed with the views of the majority on all the issues. The minority ruling stated that demonetization, when it originates from the central government, has to be by way of legislation. When only a series of notes of a particular denomination is to be demonetised, then section 26(2) of RBI Act is applicable. And when all notes of a particular denomination are to be demonetised, then it has to be via a legislative process rather than executive action.

The Supreme Court had reserved its verdict on the matter on Dec 7, 2022.

Arguing for the petitioners, Senior Advocate P Chidambaram had said the court should establish precedent to ensure that "similar misadventures" are not undertaken by future governments. Chidambaram had argued that the government cannot initiate any proposal relating to legal tender on its own, calling the decision to scrap the 500 and 1,000 rupee notes "deeply flawed." This could only be done on the recommendation of the RBI's central board. The Centre had failed to achieve its goals because it took the most extreme action possible without first exploring alternative methods of combating counterfeit currency and black money, he had stated.

Further, the petitioners had cited Section 26(2) of the Reserve Bank of India Act to say the provision does not authorize the government to completely cancel currency notes of particular denominations. The section allows the government to only cancel any series of bank notes of any denomination, the petitioners had stated.

Attorney General for India R Venkataramani had defended the decision on behalf of the union government. The decision was made to combat the perils of counterfeit currency, black money, and terror financing. The court's ability to review matters of economic policy was severely limited, he had stated.

Assuming demonetization failed to produce the desired results is not a legal basis for invalidating the decision because it was made in good faith and in accordance with due process. He argued that the court should not be asked to rule on whether or not economic policy and legislation should be perfect. There is a larger public interest at stake in moving towards a wide range of economic and policy transformation, and the hardships people face cannot be the only relevant factor to be considered, Venkataramani had said.

Senior Advocate Jaideep Gupta, who was representing the RBI, argued that the procedures under the RBI Act to make a recommendation to the Centre was followed and the stipulated quorum was met, despite the petitioners' claims to the contrary.

On the question of whether or not there can be a judicial review of the centre's decision to demonetize, the bench had observed that even the petitioners agreed that, when using the power of judicial review, the court cannot look at the correctness of the decision, but only the correctness of how it was made.

The court in its verdict today, has held that there has to be great restraint in matters of economic policy. The court cannot supplant the wisdom of executive with its own. Further, the court states that demonetization cannot be struck down on the grounds of proportionality. There was a reasonable nexus with the objective sought to be achieved by the government.