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TMI Blog2021 (3) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction. He can set up challenge thereto by direct action or even by way of collateral or indirect challenge. Until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful. In this view of the matter, the appellant must succeed and would be entitled for the reliefs claimed in O.S. No. 10079 of 1984 for declaration that the gift deed dated 11.03.1977 and supplementary deed dated 19.04.1980 in favour of respondent No.1 are invalid, unenforceable and not binding on the plaintiff. A fortiori , the plaintiff is entitled for possession of the suit property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy of investment by foreigners in India and more particularly, the 1973 Act itself stands repealed. Accordingly, we deem it appropriate to overrule the decisions of the High Courts, taking contrary view, albeit, prospectively. The appeal is allowed. The impugned judgment and decree of the Trial Court, as confirmed by the High Court, is set aside. - A.M. Khanwilkar, Indu Malhotra And Ajay Rastogi For the Appellant(s) : Mr. Navkesh Batra, Adv., Mr. Sandeep Narain, Adv., Ms. B.R. Dhanlaxmi, Adv And M/S. S. Narain Co., AOR For the Respondent(s) : Mr. E. C. Vidya Sagar, AOR JUDGMENT A. M. KHANWILKAR, J. 1. The central issue in this appeal is in reference to Section 31 of the Foreign Exchange Regulation Act, 1973 For short, the 1973 Act . To wit, transaction (specified in Section 31 of the 1973 Act) entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance? 2. The undisputed facts are that one Mrs. F.L. Raitt, widow of late Mr. Charles Raitt, a foreigner and the owner of the property in question, gifted it to respondent No.1 (Vikram Malhotra) without obtaining previous permission of the Reserve Bank of India For short, the RBI un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, Mrs. Ingrid L. Greenwood was substituted as her legal representative in the pending suit. Mr. R.P. David (predecessor of the appellant and respondent no.4) and others then filed O.S. No.10079 of 1984 on 10.02.1984 against respondent No.1 (Vikram Malhotra) praying that the gift deed and the supplementary deed allegedly executed in his favour in respect of portion of the larger property to the extent of 12,306 square feet bearing No.12 (Old No.10A) be declared as null and void and not binding and consequentially for relief of possession, permanent injunction and mesne profits. Mr. R.P. David (predecessor of the appellant and respondent no.4) also filed O.S. No.10155 of 1984 against Mrs. Ingrid L. Greenwood and Mr. Clive Greenwood, who were claiming to be successor in title of Mrs. F.L. Raitt, for declaration and possession of entire property No.12 (Old No.10) admeasuring 35,470 square feet. All the three suits were tried and decided by the City Civil Sessions Judge, Mayo, Bangalore For short, the Trial Court . 3. As regards the suit filed by Mrs. F.L. Raitt and Mrs. Ingrid L. Greenwood bearing suit No.10328 of 1983, the Trial Court had framed as many as 11 issues, which read thus: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1973, as alleged? 4. Does defendant prove that the said documents and transactions are not hit by the Foreign Exchange Regulation Act, 1973 and they are valid in law? 5. Does defendant prove the General Power of Attorney executed by Florence L. Raitt in favour of Mr. Peter Philip is not true and genuine? 6. Do plaintiffs prove that deceased David purchased the entire suit property as contended and the same is binding on the defendant? 7. Do plaintiffs prove that they are entitled to recover past mesne profits at the rate of ₹ 200/per month? 8. Are plaintiffs entitled to declaration, possession and injunction? 9. What relief or decree? After analysing the pleadings and evidence on record, the Trial Court vide separate judgment and decree dated 31.08.2001 was pleased to dismiss even this suit. 5. While dealing with the third suit filed by Mr. R.P. David (predecessor of the appellant and respondent no.4), the Trial Court framed 10 issues, which read thus: 1) Whether the plaintiff proves that they are the owner of the suit schedule property under the terms of the sale deed dated 9.4.83? 2) Whether the plaintiff further proves that Mrs. Florence L. Raitt executed the General Power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nenforceable in law. The learned Single Judge of the High Court essentially relying on the decision of the Punjab Haryana High Court in the case of Piara Singh v. Jagtar Singh and Anr. AIR 1987 Punjab and Haryana 93 , proceeded to negative the said challenge and held that lack of permission under Section 31 of the 1973 Act does not render the subject gift deeds as void much less illegal and unenforceable. Accordingly, the first appeal jointly filed by the appellant and respondent No.4 herein came to be dismissed vide impugned judgment and decree dated 01.10.2009. 7. In the present appeal, the sole point urged by the appellant is that the stated gift deeds dated 11.03.1977 and 19.04.1980 in favour of respondent No.1 are null and void and not binding on the appellant and respondent no.4; and in any case are unenforceable in law, in light of the mandate of Section 31 of the 1973 Act. According to the appellant, the dispensation specified in the said provision is mandatory and no transaction in contravention thereof would be enforceable in law. That position is reinforced by Section 47 of the same Act. Further, violation of Section 31 has also been made punishable under Section 50 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 07.04.2005. Hence, this transaction in any case is nullity. 8. Per contra, respondent No.1 would urge that Section 31 is a directory provision; and not obtaining previous permission of the RBI would not render the gift deeds in question invalid. It is urged that since no consequence is provided in Section 31 or any other provision in the 1973 Act to treat the transaction in violation of Section 31 as void, the transfer in favour of respondent No.1 cannot be regarded as ineffective or invalid. Such a transfer would at best be voidable that too only at the instance of the RBI and none else. The stipulation under Section 31 is only a regulatory measure and not one of prohibiting transfer by way of gift as such. The consequence of such violation is provided for as penalty under Section 50, for which the concerned parties can be proceeded against. However, no action has been taken in that regard including by the RBI. The decision of the RBI to grant or refuse permission for transfer is made final. The RBI is exclusively entrusted with the task of determining the permissibility of the transaction, being repository of management of foreign exchange of the country. 9. Our attention wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him vide registered sale deed dated 09.04.1983 being backed by previous permission by the RBI in that regard. 13. Before we analyse Section 31 of the 1973 Act, it is essential to understand the object and purpose for which the 1973 Act was brought into force. It was to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country. While introducing the Bill in the Lok Sabha and explaining the object of Section 31 of the 1973 Act, Mr. Y.B. Chavan, the then Minister of Finance rose to state as follows: As a matter of general policy it has been felt that we should not allow foreign investment in landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. While we may still require foreign investments in certain sophisticated branches of industry, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n computing the period of ninety days for the purposes of the second proviso, the period, if any, taken by the Reserve Bank for giving an opportunity to the applicant for making a representation under the first proviso shall be excluded. (4) Every person and company referred to in subsection (1) holding at the commencement of this Act any immovable property situate in India shall, before the expiry of a period of ninety days from such commencement or such further period as the Reserve Bank may allow in this behalf, make a declaration in such form as may be specified by the Reserve Bank regarding the immovable property or properties held by such person or company. On a bare reading of sub-Section (1), it is crystal clear that a person, who is not a citizen of India, is not competent to dispose of by sale or gift, as in this case, any immovable property situated in India without previous general or special permission of the RBI. The only exception provided in the proviso is that of acquisition or transfer of immovable property by way of lease for a period not exceeding five years. This provision applies to foreign citizens and foreign and FERA companies only. A nonresident Indian cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son to do that thing, if it is a term of the agreement that that thing shall not be done unless permission is granted by the Central Government or the Reserve Bank, as the case may be; and it shall be an implied term of every contract governed by the law of any part of India that anything agreed to be done by any term of that contract which is prohibited to be done by or under any of the provisions of this Act except with the permission of the Central Government or the Reserve Bank, shall not be done unless such permission is granted. (3) Neither the provisions of this Act nor any term (whether express or implied) contained in any contract that anything for which the permission of the Central Government or the Reserve Bank is required by the said provisions shall not be done without that permission, shall prevent legal proceedings being brought in India to recover any sum which, apart from the said provisions and any such term, would be due, whether as debt, damages or otherwise, but- (a) the said provisions shall apply to sums required to be paid by any judgment or order of any court as they apply in relation to other sums; (b) no steps shall be taken for the purpose of enforcing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of this section, property in respect of which contravention has taken place shall include- (a) deposits in a bank, where the said property is converted into such deposits; (b) Indian currency, where the said property is converted into that currency; (c) any other property which has resulted out of the conversion of that property. 16. Reverting to Section 47, subSection (1) clearly envisages that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the 1973 Act or of any rule, direction or order made thereunder. What is significant to notice is that subSection (2) declares that the agreement shall not be invalid if it provides that thing shall not be done without the permission of the Central Government or the RBI. That would be the implied requirement of the agreement in terms of this provision. In other words, though ostensibly the agreement would be a conditional one made subject to permission of the Central Government or the RBI, as the case may be and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law - of obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther. In which case there is no need for an order to quash it. It is automatically null and void without more ado. The other kind is when the invalidity does not make the list void altogether, but only voidable. In that case it stands unless and until it is set aside. In the present case the valuation list is not, and never has been, a nullity. At most the first respondent - acting within his jurisdiction - exercised that jurisdiction erroneously. That makes the list voidable and not void. It remains good until it is set aside. 20. de Smith, Woolf and Jowell in their treatise Judicial Review of Administrative Action , 5th Edn., para 5044, have summarised the concept of void and voidable as follows: Behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid) lurk terminological and conceptual problems of excruciating complexity. The problems arose from the premise that if an act, order or decision is ultra vires in the sense of outside jurisdiction, it was said to be invalid, or null and void. If it is intra vires it was, of course, valid. If it is flawed by an error perpetrated within the area of authority or jurisdiction, it was usually s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g aside the same, it cannot be treated to be void but would be obviously voidable. 20. It is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. Further, it is settled that prohibition and negative words can rarely be directory. In the present dispensation provided under Section 31 of the 1973 Act read with Sections 47, 50 and 63 of the same Act, although it may be a case of seeking previous permission it is in the nature of prohibition as observed by a three Judge Bench of this Court in Mannalal Khetan Ors. v. Kedar Nath Khetan Ors. (1977) 2 SCC 424 . In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act. When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty if imposed is not enforceable. We may usefully reproduce paragraphs 18 to 22 of the said re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivatorum publico juri non derogatur means that private agreements cannot alter the general law. Where a contract, express or implied, is expressly or by implication forbidden by statute, no court can lend its assistance to give it effect. (See Mellis v. Shirley L.B. ) What is done in contravention of the provisions of an Act of the legislature cannot be made the subject of an action . 21. If anything is against law though it is not prohibited in the statute but only a penalty is annexed the agreement is void . In every case where a statute inflicts a penalty for doing an act, though the act be not prohibited, yet the thing is unlawful, because it is not intended that a statute would inflict a penalty for a lawful act. 22. Penalties are imposed by statute for two distinct purposes: ( 1 ) for the protection of the public against fraud, or for some other object of public policy; ( 2 ) for the purpose of securing certain sources of revenue either to the State or to certain public bodies. If it is clear that a penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t consequences. As regards Section 29, this Court opined that the permission can be sought from the RBI at some stage for the purchase of shares by nonresident companies and not necessarily prior permission. The Court, therefore, opined that even ex post facto permission can be accorded by the RBI in reference to transaction covered by Section 29 of the Act. 23. Significantly, the consequence of contravention of Section 31 of the Act as being rendering the transfer void, is also taken notice of in the recent decision of a three-Judge Bench of this Court in Vijay Karia (supra). It has been so noted in paragraph 88 while distinguishing the dispensation provided in the Foreign Exchange Management Act, 1999 (FEMA). The Court has noted that FEMA unlike FERA - refers to the nation s policy of managing foreign exchange instead of policing foreign exchange, the policeman being RBI under FERA. Indeed, it is not a decision dealing directly with the question involved in the present appeal. Nevertheless, it does take notice of the strict dispensation under Section 31, as it obtained under the 1973 Act, particularly requiring previous general or special permission of the RBI. 24. Another threeJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e RBI before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law. The dispensation under Section 31 mandates previous or prior permission of the RBI before the transfer takes effect. For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act, unlike in the case of Section 29 as noted in Life Insurance Corporation of India (supra). Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of the 1973 Act to such transaction. 26. In light of the general policy that foreigners should not be permitted/allowed to deal with real estate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalized under S.50 and can also be prosecuted under S.56. However, there is no provision in the Act which makes transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of sub-sec.(1) of S.31. Section 63 contains a provision regarding confiscation of certain properties but it does not contain any provision for confiscation if there is breach of the provisions of subsec.( 1) of S.31. Therefore, the property purchased in contravention of subsec.( 1) of S.31 is also not liable to confiscation. In the circumstances, it cannot be held that the plaintiffs are not entitled to obtain possession of the property or recover damages for its use and occupation. 29. In the first place, provision for penalty under Section 50 for contravention referred to in Section 31, does not mean that the requirement of previous permission of RBI is directory or a mere formality. It is open to the legislature to provide two different consequences for the violation. As already noted hitherto, despite the absence of express provision declaring the transfer void, the intent behind enacting Section 31 and its purport renders the transfer in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this judgment will be of no avail to the respondent. Even the Madhya Pradesh High Court in Geeta Reinboth (supra) relied upon Piara Singh (supra) as well as on the dictum in the book titled Principles of Statutory Interpretation, 8 th Edition by Justice G.P. Singh and upon the decision of the same High Court in Janki Bai v. Ratan Melu 1962 MPLJ 78 : AIR 1962 MP 117 , Ajit Prashad Jain (supra) and notification No. GSR 456 (E) dated 26.05.1993 of the RBI (Exchange Control Department) published in 1993 MPLT 242 (109). As regards the dictum in the book Principles of Statutory Interpretation, that is a general observation, not specifically dealing with the purport and interpretation of Section 31 of the 1973 Act. As aforesaid, Section 31 needs to be interpreted in light of the intent with which the same has been enacted keeping in mind the general policy not to allow foreigners to transact in or hold real estate in India. The case of Janki Bai (supra) had dealt with the provisions of C.P. Berar Money Lenders Act, 1934. The observations made therein are, therefore, in the context of provisions of that Act. We have already analysed the dictum in Ajit Prashad Jain (supra) and noted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal could hold the property in India, only if so permitted by the RBI. The view so taken commends to us. Notably, the Single Judge of the Madras High Court had followed this dictum in Sahruvan Nachair Anr. v. V.S. Mohammed Hussain Maracair (2001) 1 Mad LJ 188 : 2000 SCC OnLine Mad 737 . 34. It has been brought to our notice that the Kerala High Court in William Babu Anr. v. Helma Roy Alias Emily Carmel (2018) 1 KLJ 525 : 2017 SCC OnLine Ker 25269 , opined that contract in contravention of Section 31 is void, as previous general or special permission of the RBI had not been obtained, which in its view was mandatory. This decision had become final consequent to dismissal of SLP (Civil) No.11591 of 2018 on 23.04.2018. Even a Division Bench of the Madras High Court in Mrs. Shoba Viswanatha v. D.P. Kingsley 1996 (I) CTC 620 : 1996 SCC Online Mad 319 , while considering the purport of Section 31 of the 1973 Act, vide its erudite judgment considered the scope of Section 23 of the Contract Act and the principles delineated in that regard in Pollock and Mulla Indian Contract Act, VII Edition, page 158 including the decisions in Joaquim Mascarenhas Fiuza (supra), Beharilal Maudgi v. The Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slative intent and the spirit of enactment of Section 31, as is manifest from the statement of the then Finance Minister while tabling the Bill in the Lok Sabha that as a general policy foreign national cannot be allowed to deal with real estate in India. Besides that clear indication, the legislative scheme impels us to take a view which is reinforced from conjoint reading of Section 31 along with Sections 47, 50 and 63. There is little doubt that the requirement of previous permission of the RBI, to be taken by a foreign national before transacting in real estate, is mandatory. In other words, without previous permission of the RBI, such a transaction is forbidden and if entered into, would be unenforceable in law. 38. We hold that the condition predicated in Section 31 of the 1973 Act of obtaining previous general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory. Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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