Supreme Court: (i) A contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void (ii) The condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973, of obtaining ‘previous’ general or special permission of the Reserve Bank of India for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

The Hon’ble Supreme Court (“SC”) has in its judgment dated February 26, 2021 (“Judgement”), delivered by a three judge bench, in the matter of Asha John Divianathan v. Vikram Malhotra & Others [CIVIL APPEAL NO. 9546 OF 2010], held that a contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void. It was further held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 (“FERA”), of obtaining ‘previous’ general or special permission of the Reserve Bank of India (“RBI”) for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

Facts

Mrs. F.L. Raitt, a foreigner, was the owner (“Owner”) of an immovable property bearing No.12 (old No.10A), Magrath Road (“Property”). The Owner had executed an agreement of sale dated April 05, 1976, whereunder, the title deed of the Property was delivered in favour of Mr. R. P. David (“Mr. David”) who was the father of Asha John Divianathan (“Appellant”) and the husband of Mrs. R.P. David (“Respondent No.4”). Subsequently, the Owner gifted a portion of Property admeasuring 12,306 square feet, by a gift deed dated March 11, 1977, and a supplementary gift deed dated April 19, 1980, (“Gift Deeds”) in favour of Mr. Vikram Malhotra (“Respondent No.1”) without obtaining previous permission of the RBI under Section 31 of FERA.

Thereafter, the Owner executed a ratificatory agreement dated December 04, 1982 to transfer the Property, admeasuring 35,470 square feet in favour of Mr. David and a formal permission of RBI under Section 31 of FERA was sought. The RBI granted permission on April 02, 1983. Consequently, a registered sale deed dated April 09, 1983 (“Sale Deed”) was executed by the Owner in favour of Mr. David. However, subsequently, the Owner filed a suit, on July 30, 1983, for cancellation and setting aside of the Sale Deed. The Owner expired on January 08, 1984, and thereafter, Mrs. Ingrid Greenwood was substituted as her legal representative in the pending suit. The said suit was dismissed by the City Civil and Sessions Judge, Mayo, Bangalore (“Trial Court”).

Subsequently, Mr. David filed a suit on February 10, 1984, against Respondent No. 1 and sought relief for declaring the Gift Deeds executed as null, void and not binding and consequentially for relief of possession, permanent injunction and mesne profits. The said suit was dismissed by the Trial Court by a judgment and decree dated August 31, 2001. Thereafter, the Appellant along with Respondent No. 4, had filed first appeal before the High Court of Karnataka (“KHC”) against abovementioned judgement of the Trial Court.

The KHC examined the issue raised by the Appellant on the validity of the Gift Deeds being in violation of Section 31 of FERA. The KHC relied on Piara Singh v. Jagtar Singh and Another [AIR 1987 Punjab and Haryana 93], and held that lack of RBI’s permission under Section 31of FERA did not render the Gift Deeds as void, much less illegal and unenforceable. Accordingly, the first appeal was dismissed by impugned judgment dated October 01, 2009 of KHC.

Issues
1.  Whether Section 31 of FERA is mandatory or directory in nature.
2.  Whether the Gift Deeds executed in favour of Respondent No. 1, in contravention of Section 31 of FERA, are void or voidable. Further, whether it can be voided, if so, then at whose instance?

Arguments Contentions raised by the Appellant: The dispensation specified in Section 31 of FERA is mandatory. Therefore, the Gift Deeds being in violation of Section 31 of FERA, are null and void and unenforceable in law, consequently, not binding on the Appellant and Respondent No. 4. Further, the Appellant stated that this position of law is reinforced by Section 47 (Contracts in evasion of the Act) of FERA and that violation of Section 31 of FERA has also been made punishable under Section 50 (Penalty) of FERA, in support of this submission, reliance was placed on the ratio of a constitution bench judgment in Life Insurance Corporation of India v. Escorts Limited and Others [(1986) 1 SCC 264].

The Appellant contended that the reasons and judgement in Piara Singh (supra) are manifestly wrong since it failed to analyse the true scope and purport of Section 31 of FERA. The Appellant contended that, the entire Property stood validly transferred in favour of Mr. David based on the Sale Deed.

Contentions raised by Respondent No. 1:

The transfer through Gift Deeds in favour of Respondent No. 1 cannot be regarded as ineffective, unenforceable or invalid. Section 31 of FERA is a directory provision. Hence, not obtaining ‘previous’ permission of the RBI would not render the Gift Deeds invalid. No consequence has been provided in Section 31 or any other provision of FERA to treat the transaction in violation of Section 31 of FERA as void. It was further submitted that the stipulation under Section 31 of FERA is only a regulatory measure and not one prohibiting transfer. The consequence of such violation is provided for as penalty under Section 50 of FERA, for which the concerned parties can be proceeded against. However, no action had been taken by any party, including the RBI, in this regard.

The RBI is exclusively entrusted with the task of determining the permissibility of the transaction, being the repository of management of foreign exchange of the country. The Respondent No. 1 further relied on the provisions of the Indian Contract Act, 1872 (“1872 Act”) to state that there is a distinction between void and voidable transactions. Therefore, the transfer in favour of Respondent No. 1 would at best be voidable, that too, at the instance of the RBI only and no one else.

Respondent No. 1 relied on Waman Rao and Others v. Union of India and Others [(1981) 2 SCC 362] and contended that different high courts have consistently opined that transaction in contravention of Section 31 of FERA cannot be regarded as void and that view needs no interference. Therefore, following the principle of stare decisis and the fact that FERA had been repealed, the SC ought not to countermand the consistent view taken by the high courts prevailing since 1987.

Observations of the Supreme Court

The SC noted that, Mr. David had acquired clear title of the Property transferred to him by virtue of the Sale Deed as it was executed only after receipt of ‘previous’ permission from the RBI. However, Gift Deeds in favour of Respondent No. 1 were not backed by such previous permission of the RBI. Admittedly, no permission had been sought from the RBI in that regard.

Object and purpose of FERA:

The SC noted the object of FERA was to consolidate and amend the law relating to dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development.

The SC observed that while introducing the bill in the Lok Sabha, Mr. Y.B. Chavan, the then Minister of Finance, explained the object of Section 31 of FERA 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. …, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

Therefore, the SC noted that the avowed object of Section 31 of FERA 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.

Understanding the distinction between a void and a voidable transaction:

The SC analysed the purport of expression “void” and “voidable” and hence adverted to the exposition in the case of Dhurandhar Prasad Singh v. Jai Prakash University and Others [(2001) 6 SCC 534] wherein it was noted that, it is necessary to distinguish between two kinds of invalidity, the one kind is where the invalidity is so grave that the list is a nullity altogether, such that, there is no need for an order to quash it. It is automatically null and void. The other kind is when the invalidity does not make the list void altogether, but only voidable, such that, it stands valid unless and until it is set aside.

The SC noted that in the case of Union of India & Others. v. A.K. Pandey [(2009) 10 SCC 552], it was observed 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. The SC observed that it is settled that prohibition and negative words can rarely be directory. The SC noted that 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. In the case of Union of India v. Colonel L.S.N. Murthy and Another [(2012) 1 SCC 718] it was 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 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.

Understanding Section 31 of FERA:

The SC observed that the title of Section 31 of FERA restricts acquisition, holding and disposal of immovable property in India by foreigners/non citizens. It is crystal clear that a person, who is not an Indian citizen, 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, except as provided in the proviso, that is, by way of lease for a period not exceeding 5 years. Section 31(2) of FERA mandated a person, who is not an Indian citizen, to make an application to the RBI with necessary disclosures. The second proviso to Section 31(3) of FERA provided for a deemed permission, if no response was received within a period of 90 days from receipt of the application by the RBI. The SC noted that, as per Section 31(4) of FERA, every person, who was not an Indian citizen, holding immovable property situated in India at the time of commencement of FERA, was obliged to make disclosure and declaration within 90 days from the commencement of FERA or such further period as was allowed by the RBI. The SC observed that it is true that the consequences of failure to seek such ‘previous’ permission had not been explicitly specified in Section 31 of FERA or any other provision in FERA. The SC noted that, the purport of Section 31 of FERA must be understood in the context of legislative intent with which it was enacted, that is, basis the general policy to not allow foreign investment in landed property/buildings constructed by foreigners or enter into real estate business to eschew capital repatriation.

The SC, for harmonious interpretation of provisions, observed the purport of the other provisions of FERA. Section 47(1) of FERA clearly envisaged 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 FERA or of any rule, direction or order made thereunder and Section 47(2) of FERA declared that an agreement shall not be invalid if it provides, that thing shall not be done without the permission of the Central Government or the RBI.

The SC noted that, though ostensibly the agreement would be conditional 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 FERA applied to all the contracts or agreements covered under FERA, which required previous permission of the RBI.

Section 50 (Penalty) of FERA reinforced the position that transfer of land situated in India by a person, who is not an Indian citizen, would be penalized. The SC noted that indeed, inserting such a provision did not mean that FERA was a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of FERA. Further, Section 63 (Confiscation of currency, security, etc.) empowers the court trying a contravention, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place.

The SC noted that in the case of Mannalal Khetan and Others. v. Kedar Khetan and Others [(1977) 2 SCC 424] it was observed that, in the present dispensation provided under Section 31 of FERA read with Sections 47, 50 and 63 of FERA, 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.

The SC concluded that from the analysis of Section 31 of FERA and upon conjoint reading with Sections 47, 50 and 63 of FERA, 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 of FERA mandates ‘previous’ or ‘prior’ permission of the RBI before the transfer takes effect 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.

Validity of the Gift Deeds:

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 FERA to such transaction. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of FERA, as noted in the case of Life Insurance Corporation of India (supra).

In light of the general policy prevalent at that time, the SC observed 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 FERA 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. Therefore, 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 1872 Act.

The SC commended the decision of the Bombay High Court (“BHC”) in Joaquim Mascarenhas Fiuza v. Jaime Rebello and Another [1986 SCC OnLine Bom 234], 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 not a citizen of India, in absence of permission given by the RBI in that regard. The BHC took the view that the requirement of seeking ‘previous’ permission of the RBI in Section 31 of FERA is mandatory.

The SC observed that, the judgment of Piara Singh (supra) relied upon by KHC, erroneously assumed that there was no provision regarding confiscation of the immovable property referred to in Section 31 of FERA. The expression ‘property’ in Section 63 of FERA 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 Section 31(1) of FERA had taken place. The SC further noted that, the basis of that judgment is tenuous and is palpably wrong. Merely because no provision in the FERA made 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 of FERA, will be of no avail.

A priori, the SC concluded that the various decisions of concerned high courts taking the view that Section 31 of FERA is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law. Accordingly, the SC deemed it appropriate to overrule the decisions of the high courts, taking contrary view, albeit, prospectively. The SC however cautioned that transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be re-opened or disturbed in any manner because of this Judgement. This declaration/direction was issued in exercise of the SC’s plenary power under Article 142 of the Constitution of India.

Decision of the Supreme Court

The SC set aside the judgment and decree of the Trial Court as confirmed by the KHC and held that, the condition of seeking ‘previous’ general or special permission of the RBI for transfer or disposal of immovable property situated in India, by a person, who is not a citizen of India, under Section 31 of FERA is mandatory. Resultantly, the SC declared the Gift Deeds invalid, unenforceable and not binding on the Appellant. The SC observed that a fortiori, the Appellant was entitled for possession of the Property from Respondent No. 1 and also mesne profits for the relevant period for which a separate inquiry needs to be initiated under Order 20 (Judgment and Decree) Rule 12 (Decree for possession and mesne profits) of the Code of Civil Procedure, 1908.

With respect to the second part of issue 2, the SC stated that, the transaction can be voided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. A person affected by such a transaction could set up challenge thereto, by direct action or even by way of collateral or indirect challenge.

The SC correctly observed that this would nevertheless be a case of transaction opposed to public policy and, thus, the fact that a transaction can be taken forward after grant of permission by the RBI did not make the transaction any less forbidden at the time it was entered into.

VA View:

In the present case, the transaction was executed close to the coming into force of FERA, in the year 1977, when considerations were different and governed by different policy manifested in FERA. The SC relied on the objectives of FERA as stated at the time of introduction of the bill in the Lok Sabha, forbidding foreigners from dealing with real estate in India. This Judgment has on perusal of multiple precedents and resources, clearly interpreted the purpose of Section 31 of FERA in light of the legislative intent with which it had been enacted, that is, keeping in mind the then general policy to not allow foreigners to transact in or hold real estate in India. The SC observed that Section 31 of FERA was mandatory in nature.

The SC rightly observed that behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid), lurked terminological and complex conceptual conundrum, that if an act, order or decision is ultra vires, in the sense being beyond/outside the jurisdiction, it would be invalid, or null and void. However, if it is intra vires, it was, of course, valid. The SC further observed that, if it is flawed by an error perpetrated within the area of authority or jurisdiction, it was usually said to be voidable; that is, valid till set aside on appeal or in the past quashed by certiorari for error of law on the face of the record. The SC eventually concluded that the position of law is clear, that when the enforcement of the contract is against any provision of law, it will amount to enforcement of an illegal contract even though the contract per se may not be illegal. Such contracts, where enforcement requires compliance of statutory conditions, failure of such compliance of conditions will amount to statutory violation.

For more information please write to Mr. Bomi Daruwala at [email protected]

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