#DEMONETIZATION_SCHEME
On 8th
of November, 2016 (herein after referred to as ‘specified date’) at
approximately 8pm, Hon’ble Prime Minister Mr. Narendra Modi has announced the
demonetization scheme (Herein after referred to as ‘the scheme’) for the high
denomination bank note of ` 500
and ` 1000 i.e. withdrawal of legal tender of
the 500 and 1000 bank note (Herein after referred to as ‘Specified Bank
Notes’).
We
are intentionally publishing this article after some days of the announcement of
the scheme because it would be pretty early to comment on the very next day
when the things were still not clear and it would be like ‘whistling in the
dark’.
Legality of this
demonetization scheme (withdrawal of legal tender for specified notes) –
Whether legal or not?:
Now,
the first and foremost question which arise to the mind of any common man is
that whether the Central Government (herein after referred to as C.G.) or the Reserve
Bank of India (Herein after referred to as ‘RBI’) has the powers for such
withdrawal of legal tender and if yes then from where it derives such power.
The
answer to the question is definitely yes because such big move cannot be
carried out in an unauthorized way. So the next question is which law empowers
the C.G. / RBI for withdrawal of the legal tender. For that reference is made
to Section 26 of the Reserve Bank of India Act, 1934 (Herein after referred to
as the ‘said act’) which reads out as below:’
Section 26 of the
Reserve Bank of India Act, 1934 which speaks about the Legal tender character
of notes,
(1) Subject
to the provisions of sub-section (2), every bank note shall be legal tender at
any place in [India] in payment or on
account for the amount expressed therein, and shall be guaranteed by the [Central Government].
(2) On
recommendation of the Central Board the [Central Government] may, by
notification in the Gazette of India, declare that, with effect from such date
as may be specified in the notification, any series of bank notes of any
denomination shall cease to be legal tender [save at such office or agency of
the Bank and to such extent as may be specified in the notification].
Therefore,
it can be said that Section 26(1) of the said act gives the legality of the
bank notes but the legality is limited to sub section 2 which empowers the CG
to declare any series of bank notes of any denomination as not having legal
tender.
Of
course the CG has power to withdraw it with immediate effect, there is also no
ban on it nor the law put responsibility on CG to provide specific time period
notice before its implementation.
The next question is
whether the CG has power to specify few places where the ceased specified notes
will be valid?
Answer
to the above question is again definitely in affirmative only. Sub Section 2 of
Section 26 of the said act prescribes the phrase ‘save at such office or
agency of the Bank and to such extent as may be specified in the notification’ at
the end of the section. So, the withdrawal of legal tender will not have any
impact at such office or agency of the bank and to the extent specified by the
CG.
So,
the CG is very well empowered for this demonetization scheme i.e. to say
withdrawal of legal tender of the specified notes.
Objectives of the
demonetization scheme:
The
objectives of the scheme are as below as stated by the C.G.
1. To counterfeit fake currency:
Apprx. 84-86% of our county’s currency is in ` 500 and `
1000 denomination. So, it is very easy to mix the fake currency with the legal
tender and the cost of making the fake currency in high denomination will be
low as compared to making of fake currency of smaller denominations. The CG has
directed to exchange / deposit the specified notes into the bank/post accounts
only. The banks have very well effective system to check the fake currency and
if the same is found, it will be cancelled immediately.
So, it will achieve the objective of counterfeiting the
fake currency. However, after a reasonable period of time when the new currency
will be sufficiently available in the market, RBI needs to check and update the
security measures from time to time else it will not take much time for the
devils to print the fake currency using the technology or to mix with the legal
tender.
2. To stop terror funding:
With immediate withdrawal of specified notes, it has
specifically achieved this objective and that can be analyzed from the present
situation of Jammu & Kashmir where peace is there today as compared to
immediate earlier days.
3. To stop black money:
When the CG has mandated to deposit the specified notes
in the bank/post account only, so the quantum of depositing the same is
required to be verified from the books of accounts. And the cash which is not
reflecting in the books of accounts (except the accumulated saving out of taxed
income) will be treated as black money and therefore, it will be difficult to
deposit the same into the bank.
And thereby it will stop the black money circulation into
the market.
4. To curb corruption
The Govt., spokespersons are informing this as one of the
objective, however the rationale behind the same is not known. Even in the
scope of scheme, RBI has specified only first three objectives and not the
fourth one.
How much to deposit in
the bank:
Up to ` 2.50 Lacs household savings
Dr. Hasmukh Adhia, Revenue Secretary, Ministry of
Finance has informed that we will not take the data of the deposits made up to ` 2.50 Lacs from the Banks.
The rationale of keeping the limit of ` 2.50 Lacs is very simple that there is basic
exemption limit under the Income Tax Act, 1961 up to income of ` 2.50 Lacs. So, ministry has considered this limit
for counting the household savings also.
And it will be very difficult for the Income Tax
Department to serve notices to all the persons who has deposited the specified
notes during the specified period with the possible answer that this is the
current year income or it is from accumulated savings. So, there was a need
from the Govt. side that a particular limit is being fixed because they do not
have enough staff to serve the notice and hear the case of the entire country.
Above ` 2.50 Lacs housing savings:
There can be savings above this threshold limit but
the same is required to be justified.
Up to ` 2.50 Lacs in a businessman’s account
As
per my view, the limit of `
2.50 Lacs is kept for household savings only (be it man or woman). It is not
like you can deposit your undisclosed cash up to ` 2.50 Lacs to your bank account and there will be no
inquiry or no tax.
Therefore,
one has to verify that it represents the household savings or income.
Can there be income
tax notice for cash deposit of specified notes:
Central
Board of Direct Taxes (CBDT) has amended Rule 114B of the Income Tax Rules,
1962 directing the banks to submit AIR (Annual Information Report) for deposit
of cash by a person above the threshold limit specified in it during the
specified period.
So,
high cash deposits during the specified period will be on radar of the Govt.
and there might be inquiry for the cases where the cash deposit is unusual
compared to previous comparable period.
Also,
the RBI has directed banks to give the status of dormant / inactive accounts
from much time and certainly being activated during the specified period.
And
I have also a doubt that the Income Tax officers may not ask for the
justification of even `
2.50 cash deposited in the specified notes at the time of assessment, if any
except for those who do not have any income and it is only accumulated
household savings.
How much specified
notes can be deposited?
There
is no bar prescribed by the Govt. or the RBI for depositing the quantum of
specified notes. Even, they have no power to prescribe any limit for depositing
the specified notes.
One
has to complete the books of accounts till 8th November, 2016
midnight and verify the cash balance reflecting in the books of accounts. That
cash balance can be deposited in the bank, be it be ` 2.50 Lacs or ` 25 Lacs.
Form how much times
cash can be deposited?
Mr.
Arjun Ram Meghwal, Union Minister of State for Finance and Corporate Affairs,
Govt. of India has specified on twitter that there is no restriction on number
of times a person can deposit specified notes in the bank.
However,
one has to take care that suppose a person has deposited ` 5 Lacs in bank and again depositing ` 10 Lacs after 10-20 days, then he might
be required to prove the source of the second time deposit of specified notes
because the specified notes become invalid from the specified date.
Even
a person cannot collect his outstanding dues in the specified notes after
midnight of specified date.
Therefore,
one has to take care for that.
What if a person wants
to deposit his unaccounted cash?
A
person can deposit his unaccounted cash by paying legitimate tax along with
interest on it and declare that income in his return of income.
However,
after that Income Tax, Sales Tax, Service Tax, Central Excise etc authorities
might be there behind him.
The
best thing in that is that the bureaucrats etc. cannot declare a single peny
over and above their income else along with above authorities, anti corruption
team will be behind them.
This
is the only reason why Income Disclosure Scheme (IDS) was advantageous as
compared to disclosing right now.
Depositing specified
notes in the accounts of other family members / children etc.
As
already specified above, the threshold limit is for depositing your savings and
not for depositing the unaccounted income.
Therefore,
only savings / earnings of children etc. can be deposited in bank account. A
person cannot divert his unaccounted income into others’ bank account.
What will be best
things to do during this period:
To
my view, the best thing to be done is to maintain your routine way of business
only. Don’t rush for unusual cash deposits or adjustment of cash balance of
other persons.
For
that just keep your books of accounts updated till 8th November,
2016 and ask your professional for the advice of how much cash can be
deposited.
Just
keep in mind that “The Benami Transactions (Prohibition) Amendment Bill,
2016” is already been passed and become effective from 1st
Day of November, 2016. So before doing any adjustment, just take in
mind that the Govt. is one step ahead from you.
Status of Public
Interest Litigations (PIL) filed in the court of law:
Against
the demonetization scheme, several PILs have been filed in various courts of
law including the Hon’ble Supreme Court.
A
PIL has been filed in the Madras High Court, Bombay High Court, Karnataka High
Court etc, the status of which is as below:
- Hon’ble Madras High Court dismissed the PIL on
the ground it cannot interfere in policies related to monetary system and
stating that the action of the government is fit for the country's security and
development.
- Similarly Hon’ble Karnataka High Court has
also dismissed the PIL.
- Hon’ble Bombay High Court has also dismissed
the PIL stating that the PIL for the same matter is pending in the apex court.
- A PIL has also been filed in the Hon’ble
Gujarat Court for extension of date of validity for exchanging the specified
notes.
- The PIL filed in the Hon’ble Supreme Court
has been admitted by it.
On
behalf of CG, Attorney General of India has already filed a caveat in the
Hon’ble Supreme Court that it should be heard before passing any order.
Therefore, there cannot be immediate stay on the demonetization scheme.
As
per my view, the apex court will not direct for abolition of demonetization
scheme because such scheme is within the powers of the Govt. as mentioned above
and the judiciary will not interfere into the powers vested with the Govt.
regarding the monetary or the fiscal policy.
Of
course, the judiciary will take a note from the Center that no much hardship is
being faced by the common public.
Briefs of the Effects
of the scheme in the economy:
In
the short term, there will be decline in the growth of economy, the business
will be slow down, people will have less money to spent due to exchange and
withdrawal limit, there will be fall in the FMCG sector etc. Real estate,
jewellary, liquor industry in major will have high fall in their business.
If
the scheme turns to be a successful then there will be boom in the economy in
the long run. Due to cash crunch in the market, real estate sector prices will
come down. There will be huge surplus in the banks and therefore, the lending
rates for home loans will come down and the demand for real estate sector will
increase. There will also be decrease in the commercial loans so the business
people can afford loans at lower rate and thereby they can grow.
A first step towards
cashless economy !!
There
has been a limit kept on cash withdrawal from the bank account. At present they
might have kept the limit due to non availability of adequate new notes.
However,
it seems that Govt. may continue to keep the threshold limit for cash
withdrawal (of course, subject to periodically review) after demonization
scheme also.
It
seems that Govt. may keep the threshold limit and other measures will also be
taken like restriction on cash transactions above a threshold limit as can be
analyzed by the speech of Hon’ble PM after returning from Japan.
In
case, the Govt. fails to keep the threshold limit for cash withdrawal then none
of the objective as specified above will be achieved in the long run. It will
have only short term durability. The above four objectives can be achieved
fully in cash less economy only.
So,
let’s move our economy towards a cashless economy …..
Disclaimer:
This article should not be construed as any legal opinion.
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