The Supreme Court on 26th February, 2021, comprising of a bench of Justice AM Khanwilkar, Justice Indu Malhotra and Justice Ajay Rastogi held that, a contract, if prohibited by a statute under a penalty, will be void even without any declaration that the contract is void.
The bench were of the view that, the condition which have been stated under Section 31 of Foreign Exchange Regulation Act, 1973, for obtaining a special permission from Reserve Bank of India for transfer or disposal of any immovable property which is situated in India in the form of sale or mortgage by a person who is not a citizen of India, is compulsory.
The observation was made in light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India. The pre-existing condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of infringement, the transfer of immovable property located in India by a person, who is not a citizen of India, without prior permission of the RBI must be regarded as unenforceable and therefore a prohibited act.
Facts of the case
The fact being that a foreigner and the owner of the property in question, gifted it to respondent No.1 without obtaining previous permission of the Reserve Bank of India under Section 31 of the 1973 Act.
Three suits were filed by the parties to declare the power of attorney dated 26.01.1983 given to Mr. Peter J. Philip as null and void and for cancellation and setting aside of the registered sale deed, that were tried and decided by the City Civil & Sessions Judge, Mayo, Bangalore. The Trial Court vide judgment and decree dated 31.08.2001 proceeded to dismiss this suit.
The appellant along with respondent No.4, however, had filed first appeal before the High Court of Karnataka at Bangalore against the judgment passed by the trial court.
As regards the finding of fact recorded by the Trial Court in reference to the said challenge, the High Court concurred with the same, but proceeded to examine the solitary legal point raised by the appellant before the High Court regarding validity of the stated gift deeds being in violation of Section 31 of the 1973 Act and, therefore, void and unenforceable 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., 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 hence the present appeal was filed.
The issue before the court
Whether the contract entered into, was in violation of Section 31 of the Foreign Exchange Regulation Act, 1973, is void or is only voidable and it can be voided in the instance spoken about.
(Foreign Exchange Regulation Act was repealed in 1998 and replaced by Foreign Exchange Management Act.)
Contention of the parties
The appellant urged 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 the 1973 Act. In support of this submission, reliance was placed on the dictum of Constitution Bench of this Court in Life Insurance Corporation of India v. Escorts Ltd. & Ors. Reliance was also placed on the observations made by three Judge Bench of this Court in Renusagar Power Co. Ltd. v. General Electric Co. and Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.
According to the appellant, the reasons weighed with the Punjab & Haryana High Court in Piara Singh (supra) are manifestly wrong. That decision has not analysed the true scope and purport of Section 31 of the 1973 Act in correct perspective. Similar view taken by the Madras High Court in R. Sambasivam v. Thangavelu Dhanabagyam, following the decision in Piara Singh (supra), suffers from the same error. On the same lines different High Courts have construed Section 31 to mean that the transaction in contravention thereof is not void
The respondent No.1 urged 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 was 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.
Court's Observation and Judgment
As per Section 31, 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? Violation of Section 31 is punishable under Section 50. In this context, the bench observed:
"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 . In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, 18 (1977) 2 SCC 424 26 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."
Referring to Section 31 of the Act, the bench held that that the requirement of taking "previous" permission of the 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 court observed:
"From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that the requirement of taking "previous" permission of the 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 in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided 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 dire"
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