Case against 2016 demonetisation in the Supreme Court: Petitioners convince Constitution bench on the merits of belated hearing

The Constitution bench agreed to hear the petitioners who had challenged the demonetisation exercise in 2016, in spite of the efforts of the Union Government to brush it off as infructuous and academic.


A five-judge Constitution bench of the Supreme Court, hearing petitions filed in 2016 challenging the Union Government’s demonetisation decision of November 2016, agreed to issue notices on all impleadment applications and fresh petitions filed in the matter. Further, it gave time to the Union Government and the Reserve Bank of India (‘RBI’) till November 9 to file comprehensive affidavits in the matter. This came in spite of strenuous efforts on the part of the counsel for the Union Government to convince the bench not to hear the matter as it would merely constitute an “academic exercise”.

The bench consisted of Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian and B.V. Nagarathna.

At the outset, Solicitor-General of India, Tushar Mehta suggested to the bench that individual problems and issues may be taken on the administrative side, to avoid wasting the time of the Constitution bench. Senior advocate Shyam Divan, for the petitioners, registered his disagreement, calling Mehta’s contention of the matter being a waste of time ‘shocking’. In retort, Attorney General of India, R Venkataramani called the matter “an academic exercise with political implications”.

The bench decided to take up the cases one by one, and discard the infructuous ones.

Senior advocate P. Chidambaram, for the petitioners, contended that it is a germane legal issue whether a demonetisation exercise of the sort carried out in 2016 requires a separate law. He gave the example of the demonetisation exercise carried out in 1978, pursuant to an ordinance followed by a legislation. He further contended that the court must examine the Union Government’s powers under Sections 24 (denomination of notes) and 26 (legal tender character of notes) of the RBI Act, 1934, lest they be misused again. He asserted that the case is fit for the declaration of the law by the court.

Mehta countered that the court should defer to the wisdom of the government in such a grey matter. Chidambaram responded that as per the Supreme Court, even the economic policy of the government may be tested on the doctrine of proportionality. He asked what would happen if the government, in the future, decided to demonetise 100 per cent of currency notes, and if the court would be powerless to intervene in unsound economic policy.

Despite Mehta’s objections, the bench agreed to let Divan and Chidambaram argue for an hour on admissibility of the issue. It also agreed to grant the respondents time to take stock of the petitioners’ arguments, and present their arguments on a later day.

Divan began by taking the bench through the court’s order dated December 16, 2016, in which a three-judge bench comprising then Chief Justice of India T.S. Thakur, and Justices A.M. Khanwilkar and Dr. D.Y. Chandrachud, had, in response to the petitions challenging the demonetisation exercise, framed the following nine issues for examination by the court:

(i)                 Whether the notification dated 8th November 2016 is ultra vires Section 26(2) and Sections 71723, 24, 29 and 42 of the Reserve Bank of India Act, 1934;

(ii)               Does the notification contravene the provisions of Article 300(A) of the Constitution;

(iii)             Assuming that the notification has been validly issued under the Reserve Bank of India Act, 1934 whether it is ultra vires Articles 14 and 19 of the Constitution;

(iv)             Whether the limit on withdrawal of cash from the funds deposited in bank accounts has no basis in law and violates Articles 14, 19 and 21;

(v)               Whether the implementation of the impugned notification(s) suffers from procedural and/or substantive unreasonableness and thereby violates Articles 14 and 19 and, if so, to what effect?

(vi)             In the event that Section 26(2) is held to permit demonetization, does it suffer from excessive delegation of legislative power thereby rendering it ultra vires the Constitution;

(vii)           What is the scope of judicial review in matters relating to fiscal and economic policy of the Government;

(viii)         Whether a petition by a political party on the issues raised is maintainable under Article 32; and

(ix)             Whether District Co-operative Banks have been discriminated against by excluding them from accepting deposits and exchanging demonetized notes.

Referring to earlier demonetisation exercises carried by the Union Government, Divan argued that the court had agreed to hear the petitioners, and could not now shut them out on the ground that the question has become academic.

Chidambaram added that in the earlier demonetisation exercises, relatively few notes were in circulation, and taken away; on the other hand, in 2016, the bulk of the currency was taken away. He also cited a judgment of the court from March 2020 by Justice Ramasubramanian to show that the court had gone into the domain of economic policy with regard to cryptocurrency.

Divan then gave the example of hard-earned money of the petitioners being rendered valueless because they were outside the country in November 2016.

When Venkataramani and Mehta again tried to convince the court to not intervene in the matter, citing the limits of judicial review, the bench addressed them by stating that it could decide whether the matter was academic or infructuous only after hearing both sides, and that it was open to it to examine the manner in which the demonetisation exercise was carried out.

Chidambaram then began his submissions by contending that the government is not empowered by section 26 of the RBI Act to make the notification of the demonetisation exercise. He then went over the procedure seemingly followed by the government to issue the notification, criticising it as a “perverse reversal of procedure”, and arguing that this was contrary to section 26, since the roles of the RBI and the government were reversed. He also stated that the Government’s letter to the RBI dated November 7, the RBI board meeting’s agenda and the actual resolution of the RBI, all leading up to demonetisation, were not placed on record by the government.

He contended that there was no application of mind in the decision-making, and then described the ‘horrendous ’suffering and inconvenience suffered by crores of citizens due to the exercise. He asked if this was the proportional way of securing the objectives of demonetisation. He further asked that if section 26 empowered the government to undertake such an exercise, then why had the Union Government enacted a law to carry out demonetisation in 1946 and 1978.

Next, he contended that the government set up false objectives to pass the demonetisation notification. He averred that the power to demonetise under the RBI Act by executive notification only relates to the demonetisation of a particular series of banknotes of any denomination, rather than all series of banknotes.

Chidambaram then went on to explain that the country and the government were unprepared to handle the ramification of the demonetisation exercise, and that there were not enough bank notes in the financial system. This caused undue hardship to citizens, which must have a bearing on the proportionality assessment of the exercise.

He concluded by summarising his arguments thus: section 26(2) doesn’t allow demonetisation of the sort done in November 2016; if not read down, it confers unguided power to the government, and is liable to be struck down under Articles 14 and 19 of the Constitution. Additionally, the RBI’s recommendation for the exercise was flawed, since relevant factors were not considered, and irrelevant factors not eschewed.

Chidambaram also pointed out that the government had not filed a comprehensive affidavit in the matter yet, and that relevant policy documents had not been produced before the court or put in public domain.

The bench directed the Union Government to file an affidavit covering all aspects of these documents, as well as the proposed reading down of section 26(2). It listed the matter for November 9.

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