Power Under Section 26 Of RBI Act Can Be Used To Demonetise Bank Notes: Supreme Court

A five-judge Constitution Bench of the SC has rejected the challenge by 58 petitions to Centre's 2016 decision to demonetise currency notes, saying the decision-making process is not flawed

Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.

Source : Getty

The Supreme Court (SC) on Monday in a verdict on pleas challenging the central government’s 2016 decision to demonetise bank notes of Rs 1,000 and Rs 500 holds that the power under Section 26(2) of the RBI Act can be used to demonetise whole series of currency notes.

A five-judge Constitution Bench of the SC has rejected the challenge by 58 petitions to Centre's 2016 decision to demonetise currency notes, saying the decision-making process is not flawed.

While upholding the Centre’s decision, justice Gavai said that there are power available to the government under Section 2(26) of the RBI Act can be exercised on all series of bank notes. He said that it appears from records that the there was a consultation between the Central government and the RBI on the matter of demonetisation. The decision-making process cannot be faulted because the proposal emanated from the government.

“We have held that there was a reasonable nexus with the objectives sought to be achieved,” Justice Gavai said, while adding, "We have emphasised on primary role of the RBI to regulate bank noted as an important role of economic structure of the country." 

A five-judge Constitution Bench headed by Justice SA Nazeer heard the arguments before its winter break and on December 7, suspended the verdict. The other members of the bench are Justices BR Gavai, BV Nagarathna, AS Bopanna, and V Ramasubramanian.

Justice BR Gavai and Justice BV Nagarathna have authored two separate judgments.

The apex court said it is not relevant whether the objective behind the decision was achieved or not. "The notification dated November 8, 2016 valid, satisfies test of proportionality," the bench, also comprising justices B R Gavai, A S Bopanna, V Ramasubramanian and B V Nagarathna, said.

Justice Nagarathna differed from the majority judgment on the point of the Centre's powers under Section 26(2) of the RBI Act. The proposal originated from the central government and the opinion of the RBI was sought. Such an opinion given by the RBI cannot be construed as a "recommendation" under Section 26(2) of the RBI Act".

What is Section 26 of RBI Act 1934

Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.

On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.

Justice Nagarathna said scrapping of Rs 500 and Rs 1,000 series notes had to be done through legislation, not through notification.

“The measure was well-intentioned and well thought of. It targeted evils such as blackmoney, terror funding and counterfeiting. The measure is declared unlawful purely on legal grounds and not on the basis of objects,” Justice Nagarathna said, while adding, “Demonetisation of all currency notes of Rs 500 and Rs 1,000 is unlawful and vitiated. However, having regard to the fact that the notification has been been acted upon, this declaration of law will act only prospectively and will not affect actions already taken. Hence, no relief is being given in the petitions.”

A total of 58 petitions were filed in the apex court challenging the note ban decision, arguing that it was not a considered decision of the government and should be struck down.

On the contrary, the government has argued that the court cannot decide a matter when no tangible relief can be granted. It would be like "putting the clock back" or "unscrambling a scrambled egg".

The government said the demonetisation was a "well-considered" decision and part of a larger strategy to combat the menace of fake money, terror financing, black money, and tax evasion.