Asha John Divianathan vs Vikram Malhotra & Ors.

Interpretation of Statutes – Prohibition; negative words – Held: 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 impliesa prohibition – Prohibition and negative words can rarely be directory – Foreign Exchange Regulation Act, 1973 – ss.31, 47, 50, 63.

Words & Phrases – void, voidable – Purport of – Discussed. Allowing the appeal, the Court

HELD: 1.1 The object and purpose for which the Foreign Exchange Regulation Act, 1973 was brought into force 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. The avowed object of Section 31 of the 1973 Act was to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of disposal of property by a person, who is not a citizen of India. As is noticed from the title of Section 31, it is to put restriction on acquisition, holding and disposal of immovable property in India by foreigners-non citizens. 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 non-resident Indian citizen is not covered thereunder. Sub-Section

(2) mandated such person, who is not a citizen of India, to make an application to the RBI in the prescribed form making necessary disclosures. Sub- Section (3) postulates that on receipt of such an application, the RBI after due inquiry as it deems fit, either may grant or refuse to grant the permission applied for. The second proviso to sub- Section (3) provides for a default permission, if no response is received to the application within the specified period. What is significant to notice is that as per sub-Section (4), every person, who is not a citizen of India, holding immovable property situated in India at the time of commencement of the 1973 Act, is obliged to make declaration within ninety days from the commencement of the 1973 Act or such further period as may be allowed by the RBI. A person, who is not a citizen of India, holding immovable property situated in India was obliged to make disclosure and declaration in that behalf to the RBI; and in any case, if he/she intended to dispose of such property by sale, mortgage, lease, gift, settlement or otherwise, was expected to obtain previous general or special permission from the RBI. Only then, transfer so intended could be given effect to. It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section

31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63. [Paras 13- 15][969-E-F; 970-B-C; 971-D-H; 972-A-C]

1.2 Section 47, sub--Section (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 sub-Section

(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 obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement. In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of the 1973 Act applies to all the contracts or agreements covered under the 1973 Act, which require previous permission of the RBI. Section 50 reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty. Section 63 of the 1973 Act empowers the court trying a contravention under Section 56 which includes one under Section 51 of the 1973 Act, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression “property” in Section 63, takes within its sweep immovable property referred to in Section 31 of the 1973 Act. To put it differently, the requirement specified in Section 31 is mandatory and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law. [Paras 16-18][974-E-H; 975-B-C] Dhurandhar Prasad Singh v. Jai Prakash University & Ors. (2001) 6 SCC 534 : 2001 (3) SCR 1129 – relied on.

R. v. Paddington Valuation Officer, ex p Peachey Property Corpn. Ltd. (1965) 2 All ER 836 – referred to.

1.3 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. 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. [Para 20][977-D-G]

Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors. (1977) 2 SCC 424: 1977 (2) SCR 190 – relied on.

1.4 From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, it is held 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. 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. 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 direct action or even by way of collateral or indirect challenge. Thus, 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. [Paras 25-27][982-B-H; 983-A] Life Insurance Corporation of India v. Escorts Ltd. & Ors. (1986) 1 SCC 264 : 1985 (3) Suppl. SCR 909 – followed.

1.5 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. Further, Section 63 of the 1973 Act clearly refers to property in respect of which contravention has taken place for being confiscated to the Central Government. The expression “property” therein would certainly take within its sweep an immovable property referred to in Section 31 of the Act. The expression “property” in Section 63 is an inclusive term and, therefore, there is no reason to assume that consequence of confiscation may not apply to immovable property in respect of which contravention of the provisions of sub-Section (1) of Section

31 had taken place. The transaction of gift deed without previous permission of the RBI may not be nullity, but certainly not enforceable in law until such permission is granted. [Paras 29, 30][983-G-H; 984-C-E]

1.6 The requirement of seeking previous general or special permission of the RBI in respect of transaction covered by Section

31 of the 1973 Act is mandatory. Resultantly, any sale or gift of property situated in India by a foreigner in contravention thereof would be unenforceable in law. The stated gift deeds dated 11.03.1977 and 19.04.1980 in favour of respondent no.1 being unenforceable in law, respondent no.1 had no clear title to transfer the same to Dr. ‘TC’ vide purported sale deed dated 15.09.2005. 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 and other consequences provided for in the 1973 Act. [Paras 35, 36, 38][987-D-E; 988-A-C]

1.7 A priori, the decisions of concerned High Courts taking the view that Section 31 of the 1973 Act is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law. However, transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be reopened or disturbed in any manner because of this pronouncement. This declaration/direction is being issued in exercise of the plenary power under Article 142 of the Constitution of India. For, there has been a paradigm shift in the general policy of investment by foreigners in India and more particularly, the 1973 Act itself stands repealed. The decisions of the High Courts taking contrary view, are overruled, albeit, prospectively. The impugned judgment and decree of the Trial Court, as confirmed by the High Court, is set aside. O.S.No.10079 of 1984 filed by predecessor of the appellant and respondent no.4 stands decreed in toto in favour of the plaintiff. The appellant (being the legal representative of the plaintiff) is entitled for possession of the suit property being the owner thereof and also for mesne profits for the relevant period for which a separate inquiry be conducted under Order 20 Rule 12 of the Code of Civil Procedure, 1908. [Paras 39, 40] [988-D-G]

Piara Singh v. Jagtar Singh and Anr. AIR 1987 Punjab and Haryana 93; R. Sambasivam v. Thangavelu

Dhanabagyam 2001-1-L.W. 161; Ajit Prashad Jain v. N.K. Widhani & Ors. AIR 1990 Del 42; Tufanu

Chouhan & Ors. v. Md. Abdur Rahman & Ors. (1993)

1 Gau LR 306; Geeta Reinboth v. Mrs. J. Clairs Brohier through LRs. Mrs. Cheryl Brohier Gosens & Ors. (2005) 1 MP LJ 122; Sivaprakasam v. Ilangovan & Ors. (2010) 3 MWN (Civil) 525; Mathu Sree Akkabai Ammani Charitable Trust & Ors. v. Samikannu (2013)

1 LW 136 – overruled.

Renusagar Power Co. Ltd. v. General Electric Co. 1994 Supp (1) SCC 644: 1993 (3) Suppl. SCR 22; Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors. (2020) 11 SCC 1; Dhurandhar Prasad Singh v. Jai Prakash University & Ors. (2001) 6 SCC 534: 2001

(3) SCR 1129 – relied on.

Janki Bai v. Ratan Melu AIR 1962 MP 117

– distinguished.

Joaquim MascarenhasFiuza v. Jaime Rebello & Anr. 1986 SCC OnLine Bom 234; Mrs. Shoba Viswanatha v. D.P. Kingsley 1996 (I) CTC 620 – approved.

Union of India & Ors. v. A.K. Pandey (2009) 10 SCC 552: 2009 (14) SCR 528; Union of India v. Colonel L.S.N. Murthy & Anr. (2012) 1 SCC 718: 2011 (13) SCR 295; Shri Lachoo Mal v. Shri RadheyShyam (1971)

1 SCC 619; Waman Rao & Ors. v. Union of India & Ors. (1981) 2 SCC 362 : 1981 (2) SCR 1; Gherulal Parakh v. Mahadeodas Maiya & Ors. AIR 1959 SC

781 : 1959 Suppl. SCR 406; Rattan Chand Hira Chand v. Askar Nawaz (Dead) by L.Rs. & Ors. 1991 (3) SCC 67: 1991 (1) SCR 327 – referred to.

Sahruvan Nachair & Anr. v. V.S. Mohammed Hussain Maracair (2001) 1 Mad LJ 188; William Babu &Anr. v. Helma Roy Alias Emily Carmel (2018) 1 KLJ 525; Beharilal Maudgi v. The Secretary to Govt. of A.P. Home Department, Hyderabad & Ors. 1986 (2) ALT 241

– referred to.

Herbert Wagg & Co. Ltd., Re (1956) 1 Ch 323

– referred to.