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Note ban: What Supreme Court said earlier

Prime Minister Modi’s demonetisation move faces scrutiny in the Supreme Court. In 1996, a Constitution Bench of the court had upheld the legality of an earlier note-scrap ordered by the government in 1978

Written by Maneesh Chhibber |
Updated: January 2, 2017 12:05:42 am
demonetisation, demonetisation crisis, demonetisation 1970s, demonetisation again, first demonetisation, note ban, supreme court, supreme court on demonetisation, india news This isn’t the first time the highest court will go into whether the government can scrap high-value currency notes.

Since the November 8, 2016 scrapping of Rs 1,000 and Rs 500 currency notes, various government agencies, including the Reserve Bank of India, have taken many steps to implement the Prime Minister’s announcement. At the same time, a clutch of petitions have been filed in the Supreme Court, challenging the constitutional validity of demonetisation. The court has now referred the matter to a five-judge Constitution Bench, in the process refusing to buy the government’s argument that the decision was within the exclusive domain of the executive, and beyond judicial scrutiny.

The court is also likely to go into the constitutionality of the ordinance issued by the government last week to end the legal tender status of the old high denomination notes, and to make the possession of a large number of the scrapped notes a penal offence.

This isn’t the first time the highest court will go into whether the government can scrap high-value currency notes. A similar move some 38 years ago also faced legal challenge, with a Constitution Bench adjudicating on the validity of the High Denomination Bank Notes (Demonetisation) Act, 1978. The court also went into the issue of banks refusing to exchange the high denomination notes of some petitioners on various grounds.

It took the five-judge Bench 18 years to deliver its judgment in Jayantilal Ratanchand Shah versus Reserve Bank of India and Others. The verdict, pronounced on August 9, 1996, upheld the legality of the law.

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It began with an Ordinance that came into force on January 16, 1978 — and was subsequently passed as law by Parliament — through which the government declared that on “expiry of January 16, 1978 all high denomination bank notes shall cease to be legal tender”. Persons or organisations who wanted to exchange notes were required to submit a detailed form, declaring that they were in possession of the notes before January 16, 1978. A window of just three days — until January 19 — was provided. However, depositors could exchange their notes until January 24, 1978, provided they could explain the reasons for the failure to do so before the deadline. Banks had the final say on accepting or rejecting the depositor’s claim.

Section 4 of this Act also prohibited the “transfer and receipt of high denomination bank notes”.

The petitioners contended that the Act violated their fundamental rights, including the now-deleted Article 31 (Right to Property), as it allowed the RBI and the government to escape their legal responsibility to honour these currency notes. They also argued that the move was illegal because the “acquisition” of old notes served no public purpose — under Article 31 no property could be compulsorily acquired except for public purposes.


Among those who approached the court was the chairman of a Society which ran a medical dispensary at Surat, which had deposited almost Rs 50 lakh in the bank. However, since the Society couldn’t “satisfactorily” explain the huge and sudden increase in the amount of money put in its donation boxes, the deposits were not treated as valid currency by the bank.

The Bench comprising Justices M M Mukherjee, Kuldip Singh, M M Punchhi, S Saghir Ahmed and N P Singh underlined the preamble of the Demonetisation Act, which said the move was aimed at checking “illicit transfer of money” for financing transactions “harmful to the national economy”.

“Whereas the availability of high denomination bank notes facilities the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes and it is therefore necessary in the public interest to demonetise (these) notes,” the preamble said.


The Bench also noted that the Act was “passed to avoid the grave menace of unaccounted money which had resulted not only in affecting seriously the economy of the country but had also deprived the State Exchanger of vast amounts of its revenue”.

On the issue of it not serving a public purpose, the Bench said that in view of the “evil” the Act was aimed at fighting, it couldn’t be said it was not enacted for a public purpose.

The Bench also dealt with the contention that window for exchange was “unreasonable and violative” of fundamental rights.

“When (this is) considered in the context of the purpose the Demonetisation Act sought to achieve, namely, to stop circulation of high denomination bank notes as early as possible, the… contention of the petitioners cannot be accepted,” the judgment said.

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First published on: 02-01-2017 at 12:05:41 am
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