Foreign Exchange Regulation Act 1973. Contract or agreement pertaining to transfer of immovable property of a foreign national without previous permission of the RBI would be unenforceable in law. Supreme Court.

Asha John Divianathan vs Vikram Malhotra & Ors.

Civil Appeal 9546 of 2010 decided on 26 February 2021.

Justice A.M. Khanwilkar, Justice Indu Malhotra and Justice Ajay Rastogi.

1. The central issue in this appeal is in reference to Section 31 of   the   Foreign   Exchange   Regulation   Act, 1973 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?

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.  14. The avowed object of Section 31 of the 1973 Act was thus 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. 

17. 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. Indeed, inserting such a provision does not mean that the 1973 Act is a penal statute, but is to provide for penal consequence for contravention of  provisions, such as Section 31 of the 1973 Act. 
18. 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.

19. At this stage, it may be useful to keep in mind the purport of expression “void” and “voidable”.  For that, we may advert to the exposition   in   the   case   of  Dhurandhar Prasad Singh v. Jai Prakash  University  &   Ors.,  which had noted the dictum of Lord Denning   in  R. v. Paddington   Valuation  Officer, ex p Peachey Property Corpn. Ltd.17 and also in Judicial Review of Administrative   Action  by de Smith, Woolf and Jowell and in Judicial Remedies in Public Law by Clive Lewis.  

20. It is well established that a contract which involves in its fulfilment the doing of an act prohibited by statute is void. The legal maxim A pactis privatorum 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.

25. 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 direct action or even by way of collateral or indirect challenge.

27. In other words, 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.