Supreme Court Finds 2016 Demonetisation Right Step by Govt

Supreme Court Finds 2016 Demonetisation Right Step by Govt

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January 3, 2023 - 9:58 am

4:1 Majority Judgment Upheld Demonetisation After Considering Issues


The Supreme Court upheld the validity of Demonetisation of Rs. 500 and Rs. 1,000 notes with a majority of 4:1 announced by the Modi Government on November 8, 2016. The Constitutional Bench comprises S Abdul Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna out of which the sole woman judge BV Nagarathna went against the Demonetisation decision. The Court was hearing a batch of 58 petitions challenging the government’s 2016 Demonetisation. Individual petitioners were also allowed to file petitions if they couldn’t deposit their money within their stipulated time.


Why Was Demonetisation Challenged ?

Demonetisation is a process of writing off legal tender currency. On Nov 8, 2016, Rs. 500 and Rs. 1,000 notes – about 86% of the currency in circulation by value – were written off as legal tender from midnight by the Modi Government in order to fight against black money, terror funding, tax evasion and money laundering. ₹10 lakh crore was expunged out of circulation by the move. The majority of Indian people who are heavily cash reliant had to go through cumbersome hardships and even witness numerous deaths during the demonetisation process. After this, some 58 petitions were filed in the Supreme Court against the legality of the government's demonetisation decision as well as the government’s arrangements to allow people to withdraw money from banks and exchange demonetised notes. They argued that since note bans were implemented by nations dealing with hyperinflation or the necessity to get rid of useless currency notes, the aims had nothing to do with banning notes.


Crux of the Issue of Demonetisation

The petitioners' main argument was that the Centre lacks the authority to stop all circulation of notes of a certain denomination under Section 26(2) of the Reserve Bank of India Act, 1934, the law governing legal money. Section 26(2) which talks about “legal tender character of notes”. It can only withdraw a limited number of notes, and only on the Reserve Bank's impartial advice. Petitioners argued that this, however, issue was reversed in this case. The entire process was in haste. Right to equality (Article 14) and right to life and livelihood (Article 21) were compromised severely as argued by the petitioners.

The Reserve Bank and the Centre countered that demonetisation was carried out upon receipt of all legal permissions. They contended that because the Reserve Bank made the ultimate recommendation, the fact that the government made the proposal did not render it unlawful. They further contended that since this was a policy choice, the court should not get involved.


Majority Judges on Demonetisation

According to the Supreme Court, whether or not the decision's goal was attained is irrelevant, sufficient consultation between the Center and the Reserve Bank of India had taken place prior to the note ban decision.The court noticed that the Center and Reserve Bank submitted their documents under sealed covers. The records demonstrated that demonetization had been "under active discussion for a period of six months" prior to being put into effect. The court further stated that the action was not unreasonable because it was implemented to combat black money and other legal issues. Additionally, there was a "reasonable link" between the purpose of demonetisation and its implementation. The court stated that it is best left to specialists like the Reserve Bank to determine if such a step was essential or whether there were less detrimental alternatives. Demonetization couldn't be "disregarded on the grounds of  suffering."


Minority Judge on Demonetisation

Justice Nagarathna emphasised that the central government's decision to demonetize bank notes is not contemplated by the RBI Act. The central government could only carry out the demonetisation exercise through an ordinance or a parliamentary statute, which is why the proposal was not made by the RBI. The RBI can only begin a proposal for demonetisation under Section 26(2) for a "specific series of bank notes of any denomination" in order to prevent the clause from being ruled illegal. 


Final Verdict on Demonetisation 

At the outset the court didn’t consider the decision's effectiveness, it could look into the legality of the decision-making process. Since the decision on the legality of Demonetisation verdict has been upheld, the court needs to understand its demarcation as to which matter it can take into consideration as stated by the RBI. However, the judiciary also cannot sit back and merely watch as it concerns the economic policy which is beyond the jurisdiction of the judiciary. Judiciary held that demonetisation was not hit by the doctrine of proportionality as there was a reasonable nexus to bring such a measure.

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