Supreme Court upholds Demonetization: “Satisfies the test of proportionality”, says majority

The Supreme Court of India, in deciding the plea against demonetization argued by the four-time Finance Minister P Chidambaram, ruled that the demonetization of currency notes of denomination of Rs. 500 and Rs. 1000 was valid and satisfies the test of proportionality.

However, the Constitution Bench delivered a 4-1 verdict with Justice Nagarathna differing from the majority view.

“Powers of the Central Government, under Section 26(2) of the RBI Act can be used to demonetise whole series of bank notes and not any particular series. “Any” cannot be given restrictive meaning”, as observed in the majority view pronounced by Justice B R Gavai.

Justices S Abdul Nazeer, AS Bopanna and V Ramasubramanian concurred with the aforesaid view and Justice B V Nagarathna expressed a dissenting opinion.

“It is not relevant whether the objectives sought have been achieved or not. What is required is that there has to be an objective which is for proper purposes and there has to be reasonable nexus with the measure and the objectives”, Justice B R Gavai said, refusing to delve into the effect of demonetization.

However, the dissenting view was expressed as –

“It has also been brought on record that 98% of the value of the demonetised currency notes have been exchanged for banknotes which continue to be legal tender. Also a new series of bank notes for Rs 2000 was released by the bank. This suggests the measure itself was may not have been proven to be as effective as it was sought to be.”, acknowledging the Centre’s admission of ineffectiveness to the extent intended.

The test of proportionality carried out by the Apex Court comprised of the four elements as follows:

1. Proper purposes – curbing black money, terror funding and counterfeit currencies.
2. Reasonable nexus with the purposes – it was held that the act of demonetization was reasonably in connection with achieving the purposes.
3. Alternate measures – No alternate measures could have been taken to achieve the intended effects of demonetization.
4. Proper relation between importance of the intended purposes and constitutional vires – It was observed that the act of demonetization was within the powers vested.

However, in a slap on the wrist of the Central Government, the dissenting judgement opined that, “When the proposal for demonetisation originates from the Central Govt, it is not under Section 26(2) RBI Act. It is to be way of a legislation, and if secrecy is needed, then by way of an ordinance.”

It was also observed that, “Parliament is a miniature of the country. Parliament which is the centre of democracy cannot be left aloof in a matter of such critical importance.”, while observing lack of independent application of mind by the Reserve Bank of India.  The Supreme Court of India, thus upheld the notification declaring all currency notes of denominations Rs. 500 and Rs. 1000 as no longer legal tender, dated 08^th November 2016

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