ASHA JOHN DIVIANATHAN versus VIKRAM MALHOTRA & ORS.

21. The appellant has invited our attention to the dictum in Union of India & Ors. v. A.K. Pandey19, that where a contract, express or implied, is expressly or by implication forbidden by statute, no court will lend its assistance to give it effect. Further, 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. Similarly, in the case of Union of India v. Colonel L.S.N. Murthy & Anr.20, the Court opined that the contract would be lawful, unless the consideration and object thereof is of such a nature that, if permitted, it would defeat the provisions of law and in such a case the consideration or object is unlawful and would become void and that unless the effect of an agreement results in performance of an unlawful act, an agreement which 19 (2009) 10 SCC 552 (paras 14 and 15) 20 (2012) 1 SCC 718 (paras 16 to 19 and 21) ASHA JOHN DIVIANATHAN v. VIKRAM MALHOTRA & ORS. [A. M. KHANWILKAR, J.] is otherwise legal cannot be held to be void and if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered into by the parties and the solemn promises made thereunder. The Court adverted to the exposition in the earlier decision in Shri Lachoo Mal v. Shri Radhey Shyam21 as to what makes an agreement, which is otherwise legal, void is that its performance is impossible except by disobedience of law.

22. Notably, the Constitution Bench of this Court in Life Insurance Corporation of India (supra) had an occasion to examine the objects and reasons for enacting the 1973 Act. The Court was called upon to consider the purport of Section 29 of the 1973 Act, which does not qualify the words “general or special permission of the Reserve Bank of India” with word “previous” or “prior” unlike in the case of Section 31 of the same Act. In paragraph 63, this distinction has been noticed and reference has been specifically made to Section 31 of the 1973 Act. That makes it amply clear that the dispensations provided in Sections 29 and 31, must be regarded as distinct and violation whereof would visit with different 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 non-resident 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. 21 (1971) 1 SCC 619

24. Another three-Judge Bench in the case Renusagar Power Co. Ltd. (supra) while dealing with the question of enforceability of an arbitral award, adverted to violation of FERA in reference to Section 47 of the 1973 Act as can be discerned from paragraphs 68 to 84. We need not dilate on this judgment except to notice the dictum in Herbert Wagg & Co. Ltd., Re22 reproduced in paragraph 68, which reads thus: “68. … In Herbert Wagg & Co. Ltd., Re [(1956) 1 Ch 323], Upjohn J., has said: “It cannot be doubted that legislation intended to protect the economy of the nation and the general welfare of its inhabitants regardless of their nationality by various measures of foreign exchange control or by altering the value of its currency, is recognised by foreign courts although its effect is usually partially confiscatory. Probably there is no civilized country in the world which has not at some stage in its history altered its currency or restricted the rights of its inhabitants to purchase the currency of another country. (p. 349) In my judgment these courts must recognize the right of every foreign State to protect its economy by measures of foreign exchange control and by altering the value of its currency. Effect must be given to those measures where the law of the foreign State is the proper law of the contract or where the movable is situate within the territorial jurisdiction of the State.” (p. 351)” It may be useful to also reproduce paragraph 69 of the judgment, which reads thus: “69. The following principle of Private International Law is applicable in relation to such legislation: “212. (1) A contractual obligation may be invalidated or discharged by exchange control legislation if— (a) such legislation is part of the proper law of the contract; or (b) it is part of the law of the place of performance; or (c) it is part of English law and the relevant statute or statutory instrument is applicable to the contract: 22 (1956) 1 Ch 323 ASHA JOHN DIVIANATHAN v. VIKRAM MALHOTRA & ORS. [A. M. KHANWILKAR, J.] Provided that foreign exchange legislation will not be applied if it is used not with the object of protecting the economy of the foreign State, but as an instrument of oppression or discrimination.” (See : Dicey & Morris, The Conflict of Laws, 11th Edn., Vol. II, 1466.)”

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. 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 from respondent no.1 and persons claiming through him, admeasuring 12,306 square feet and also mesne profits for the relevant period for which a separate inquiry needs to be initiated under Order 20 Rule 12 of the Code of Civil Procedure, 1908.

28. Reverting to the judgment of Punjab & Haryana High Court in Piara Singh (supra) relied upon in the impugned judgment, it was held as follows: “11. It is true that the section provides that without the previous permission of the Reserve Bank, a person who is not a citizen of India, cannot acquire property, but it does not provide that if someone purchases any property the title therein does not pass to him. What the Act provides is that if a person contravenes S.31 and some other sections, he can be penalized 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 sub-sec.(1) of S.31. Therefore, the property purchased in contravention of sub-sec.(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. ASHA JOHN DIVIANATHAN v. VIKRAM MALHOTRA & ORS. [A. M. KHANWILKAR, J.] 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 contravention thereof unenforceable until permission for such transaction is granted by the RBI.

30. Suffice it to observe that merely because no provision in the Act makes the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31, will be of no avail. That does not validate the transfer referred to in Section 31, which is not backed by “previous” permission of the RBI. Further, the Punjab & Haryana High Court erroneously assumed that there was no provision regarding confiscation of the immovable property referred to in Section 31. 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 basis of that judgment is tenuous and is palpably wrong. For the same reason, the decision in R. Sambasivam (supra) of the Madras High Court is erroneous as it has merely followed the dictum of the Punjab & Haryana High Court. Suffice it to observe that 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.

31. In the case of Ajit Prashad Jain (supra) discussion regarding consequences of contravention of Section 31 of the 1973 Act is found in paragraph 26 of the reported decision. Although, this decision is independent of the view expressed in Piara Singh (supra) by the Punjab & Haryana High Court, there is no clear analysis of the aspects which are germane for giving correct interpretation to Section 31 of the 1973 Act and the effect of consequences for its contravention. For the view taken by us hitherto, it is unnecessary to dilate on this judgment any further. Similarly, the Gauhati High Court in the case of Tufanu Chouhan (supra) essentially relied upon the decision in Piara Singh (supra) of the Punjab & Haryana High Court. For the reasons already stated while dealing with Piara Singh (supra), even 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, 8th Edition by Justice G.P. Singh and upon the decision of the same High Court in Janki Bai v. Ratan Melu23, 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 the same is of no avail to the respondent. Reverting to the stated notification dated 26.05.1993 issued by the RBI, that indeed is to clarify the scope of Section 31 of the 1973 Act. However, it is limited to transaction entered into by a foreign citizen of “Indian origin”, to deal with real estate in India on certain conditions. This notification has no application to foreigners or so to say the person who is not a citizen of India, namely, foreign citizens. In the present case, the land was owned by a foreign citizen. For which reason, the rigours of Section 31 must apply with full force. Additionally, it must be kept in mind that the stated notification was issued in 1993, around which time a change in policy regarding the investment opportunities for non-resident Indians and foreigners had been crystallised, by opening up of economy in India. In the present case, we are dealing with the transaction effected close to the coming into force of the 1973 Act i.e., in the year 1977 when considerations were different and governed by different policy manifested in the form of enactment of Section 31 of the 1973 Act, spoken to by the then Finance Minister in the Lok Sabha, forbidding foreigners from dealing with real estate in India.

32. The two other decisions of the Madras High Court, namely, Sivaprakasam (supra) and Mathu Sree Akkabai Ammani Charitable Trust (supra), were pressed into service. These came to be decided on similar reasoning adopted in the earlier decision of the same High Court 23 1962 MPLJ 78 : AIR 1962 MP 117 ASHA JOHN DIVIANATHAN v. VIKRAM MALHOTRA & ORS. [A. M. KHANWILKAR, J.] in R. Sambasivam (supra) and Piara Singh (supra) of the Punjab & Haryana High Court. Those decisions will be of no avail to the respondent in light of the view taken by us on the interpretation of Section 31 of the 1973 Act.

33. We may now usefully advert to the decision of the Bombay High Court (Goa Bench) in Joaquim Mascarenhas Fiuza v. Jaime Rebello & Anr.24, which has taken a different view to interpret Section 31 of the 1973 Act. That dealt with the case of transfer of property which according to the respondent therein could not be held by the plaintiff/petitioner, who was a foreign national and not a citizen of India, in absence of permission given by the RBI in that regard. The Bombay High Court took the view that the requirement of seeking previous permission of the RBI in Section 31 of the 1973 Act is mandatory and a foreign national 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 Maracair25.

34. It has been brought to our notice that the Kerala High Court in William Babu & Anr. v. Helma Roy Alias Emily Carmel26, 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. Kingsley27, 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 Secretary to Govt. of A.P. Home Department, Hyderabad & Ors.28 and the considerations governing public policy as delineated in Gherulal Parakh v. Mahadeodas Maiya & Ors.29, Rattan Chand Hira Chand v. Askar Nawaz (Dead) by L.Rs. & Ors.30 and other treaties, to 24 1986 SCC OnLine Bom 234 : 1986 Mah LJ 1031 25 (2001) 1 Mad LJ 188 : 2000 SCC OnLine Mad 737 26 (2018) 1 KLJ 525 : 2017 SCC OnLine Ker 25269 27 1996 (I) CTC 620 : 1996 SCC Online Mad 319 28 1986 (2) ALT 241 29 AIR 1959 SC 781 30 1991 (3) SCC 67 eventually conclude that the position of law is clear that when the enforcement of the contract is against any provision of law, that will amount to enforcement of an illegal contract. The contract per se may not be illegal. But its enforcement requires compliance of statutory conditions, failure of which will amount to statutory violation. A court which is expected to enforce the law, cannot be a party to such a decree. The view so taken in this judgment commends to us. As a matter of fact, this judgment has become final in view of dismissal of SLP (Civil) No.15024 of 1996 by this Court vide order dated 14.08.1996.

35. For the view that we have taken, it is not possible to countenance the argument not to disturb the consistent view of different High Courts on the principle of stare decisis by invoking the dictum in Waman Rao (supra), in reference to Section 31 of the 1973 Act. For, there is conflict of opinion and is not a case of consistent view of all High Courts, having occasion to deal with interpretation of Section 31 of the 1973 Act. Resultantly, we had to undertake the exercise of analysing all the decisions so as to give proper meaning to Section 31 of the 1973 Act. In our opinion, 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.

36. As 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. Thomas Chandy vide purported sale deed dated 15.09.2005. It is not necessary for us to dilate on the argument of the appellant that such a sale deed in any case could not have been executed by respondent No.1 in favour of Dr. Thomas Chandy in contravention of interim order passed by the High Court on 07.04.2005 and the effect thereof.

37. As noticed above, the contrary decisions of High Courts have completely missed the legislative 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 ASHA JOHN DIVIANATHAN v. VIKRAM MALHOTRA & ORS. [A. M. KHANWILKAR, J.] 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 and other consequences provided for in the 1973 Act. Hence, the Trial Court as well as the High Court committed manifest error in dismissing the suit filed by the plaintiff for a declaration in respect of suit property admeasuring 12,306 square feet and for consequential reliefs referred to therein.

39. A priori, we conclude that 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 our 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. Accordingly, we deem it appropriate to overrule the decisions of the High Courts, taking contrary view, albeit,prospectively.

40. In view of the above, the appeal is allowed. The impugned judgment and decree of the Trial Court, as confirmed by the High Court, is set aside. Instead, O.S. No.10079 of 1984 filed by Mr. R.P. David (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. Ordered accordingly. No order as to costs. All pending applications stand disposed of. Divya Pandey Appeal allowed.