ASHA JOHN DIVIANATHAN
Civil Appeal No. 9546 of 2010 decided on February 26, 2021
JUDGES: AM Khanwilkar, Indu Malhotra & Ajay Rastogi, JJ.
Whether a transaction entered in contravention of Section 31 of the Foreign Exchange Regulation Act, 1973 is void or is only voidable, and at whose instance?
[Section 31 states that no foreigner can acquire, hold etc any immovable property in India without previous permission of RBI]
The Court held that it is the mandatory condition under Section 31 of the Foreign Exchange Regulation Act, 1973(hereinafter referred as FERA,1973) to obtain a 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. Any transaction in the absence of such permission cannot be given effect to and would attract a penalty under Section 50 and other consequences provided for in the FERA, 1973.
The Court, tracing the avowed object of Section 31 of the Act, said that it was enacted 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.
The Supreme Court said 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, the Court said that 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. The Supreme Court, in this case, observed that in a dispensation under Section 31 of FERA 1973 read with Section 47, 50, and 63, the issue of seeking previous permission is like prohibition. It is assumed that any statute imposing penalty would not do so for a lawful act, and thus though nor expressly prohibited, the act is unlawful. When a penalty is set by statute to prevent something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty is imposed is not enforceable.
The dispensation under Section 31 mandates “previous” or “prior” permission of the RBI before the transfer takes effect. It indicates that the RBI is competent to refuse to grant consent in a given case, and a transaction could be effectuated after such permission is accorded. Under Section 31 of FERA, 1973, there is no possibility of ex post facto permission granted by the RBI.
Suppose the sale deed or gift deed is challenged by a person affected by the same directly or indirectly before the grant of such permission. The Court declares it to be invalid, despite the document being registered. In such a case, no clear title would pass to the recipient or beneficiary under such deed in the absence of permission accorded under Section 31 of FERA, 1973. The Court states that it is a general policy that foreigners should not be permitted/allowed to deal with real estate in India without seeking the RBI’s previous permission. The consequence of not seeking the requisite approval is the imposition of penalty, and the transaction is regarded as unenforceable.
View of Supreme Court on FERA
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.