Legality of Demonetization

Demonetization is not a new experiment by the current government since it has been implemented in India twice, in 1946 and 1978 by different government but never ended as per expectations so the idea was scrapped in mid-way. But this time it was done by issuance of notifications, Nos. 3407(E) and 3408(E) under section 26 sub-section 2 of RBI Act, 1934. Discussed section facilitates power to central government to declare “any series” of notes of any denomination to no longer be a legal tender in consultation with the RBI. But, from the beginning of the said act by the government there has been contention arising that the said power cannot be exercised against the scraping of legal tender of currency completely.

In the case of LDA vs. MK Gupta[1] and SK Mohammed Omer vs. Collector of Customs[2], Supreme Court said that the term “any” includes “all” in par with section 13 of the General Clauses Act, 1897. In section 26 of RBI Act “any series” in all circumstances includes “all series” of a given denomination.

Right to Property and Legitimate Expectation

Arguments has been against the Notification no. 3407 that, due to issuance of this notification right to property extinguishes without any authority of law. The limits on withdrawal from accounts and exchange of the notes are directly contradictory to the mandate of article 300-A. Therefore denying people to let them withdraw their own money in cash is against the right to property and by executing limits on exchange the right extinguished in its entirety.[3]

In the case of Bishamber Dayal Chandra Mohan vs. State of UP[4], Supreme Court observed that executive order is not law for the purpose of article 300-A, which means until unless the legislature imposes limits under a specific provision or passes a new law, any such act will be unconstitutional. But it can be argued on two points first that RBI Act itself provides ancillary powers to government to carry such acts smoothly because act of limitation is also act in furtherance of demonetization.

Second argument is based on the powers of executive which is traceable to article 73 of the Constitution.[5] Instant provision enables the union to make laws on, as listed in schedule VII and only exception is, it shall be exercised in accordance with law made by parliament. In current circumstances there are no provisions in any law which prohibits union from imposing such limits. Considering all these provisions and exceptions union has issued aforesaid notification partly under article 73.

According to arguments advanced if it is assumed the imposition of limitation is violation of right to property but it is not so in reality. In the case of KT Plantation Ltd. vs. State of Karnataka[6], Supreme Court said that regulating the use of property is not an infringement on the right itself when it is done by executive with the authority of law. In the case of Gulf Goans Hotel Company Pvt. Ltd. vs. UOI[7], Supreme Court observed that a statutory order that has the force of law, that is, lays down norms, is “law” for the purposes of Article 300-A. Similarly in par with the aforesaid judgment Notification No. 1307 and 1308 are not directions to any particular authorities but lays down norms which binds all banks and account holders since there is absence of any law to contrary therefore it is valid and enforceable.

As per the first announcement made by the PM on 8th November cash exchange was allowed till 30th December but suddenly a four hour notice was made on 2th November which stopped the exchange after 25th November. This came after the restriction on amount of withdrawal, i.e. Rs. 4,500 to Rs. 2,000 that too till 30th December. And now the exchanges are allowed only at RBI branches located in state capitals. Can government promise one thing to their citizens, legally and repudiate it in less than three weeks?[8] This can be challenged as violation of ‘doctrine of legitimate expectation’. The said doctrine evolved in UK Courts[9] and being followed by Indian Courts also in the case of Navjyoti Cooperative Group Housing Society v Union of India.[10] Doctrine says that where a citizen has taken certain benefit on the basis of the government’s promise, the government cannot later deny the benefit to the citizen where as the said doctrine is not applicable to the laws made by parliament but only to executive acts. Therefore on the basis of the doctrine individuals who are still unable to exchange their notes and does not have bank accounts, can pray for restoration of original time limit.

Rule of Law

After above discussion one can say apparently that the move of government is legally sound but the way government has managed the aftermath after issuance of notice is very pathetic and full of chaos. The frequent changes in rules and new prohibitions made through notifications resulted in not only complete disorder but also undermine the rule of law in the country. As per Fuller[11], the cornerstones of what constitutes rule of law are stability and certainty in norms. It not affected every sector of economy but also resulted in breakdown of rule of law. Due to this failure in managing the disorder and chaos citizens started to lose hope in government’s ability to govern in accordance with rule of law.


[1] (1994): SCC, SC, 1, p 243.

[2] (1970): SCC, SC, 2, p 728.

[3] See also, Prashant Reddy, Is the Modi Government’s Restriction on Bank Withdrawals Supported by Law?,, 14 November, 2016.

[4] (1982): SCC, SC, 1, p 39.

[5] The Constitution of India, 1950.

[6] (2011): SCC, SC, 9, p 1.

[7] (2014): SCC, SC, 10, p 673.

[8] See, Alok Prasanna Kumar, Legality of Demonetization, EPW Journal, Vol. 51, Issue No. 50, 10 Dec, 2016.

[9] (1968): EWCA Civ 1, [1969] 2 Ch 149 at 170–171.

[10] (1992): SCC, SC, 4, p 477.

[11] See, Lon Fuller, The Morality of Law, New Haven, Yale University Press, 1964.


Authored By:-

Rohit Sharma,

Student Ambassador


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