Can the State Legally Deprive People of Their Own Money?

By first limiting and now disallowing the exchanging of old notes for new ones, the state is violating the right to property of those without bank accounts.

People standing in queue to exchange their old notes at a bank in Chennai. Credit: PTI

People standing in queue to exchange their old notes at a bank in Chennai. Credit: PTI


With the end of the year closing in, people without bank accounts stand to lose their cash if they are unable to open accounts by the end of this month. When the Centre announced the demonetisation of old Rs 500 and Rs 1000 notes last month, it brought the monetary fate of people without bank accounts into question. At the end of the year, all the old notes will stand cancelled as the RBI’s liabilities, and so, people still in possession of these notes will be deprived of their money’s worth. And in a country where only a little over half the population have bank accounts, this poses a real risk; and therefore, demands immediate scrutiny from a legal perspective.

Article 300A of the constitution declares that no person shall be “deprived” of his property except by the “authority of law”. There is little doubt that money is a form of property, and is to that extent, protected under Article 300A. While legal analyses of the demonetisation have so far focused on whether the RBI has the power to extinguish an entire denomination of notes, or in other words, whether the demonetisation is supported by the authority of law, a more fundamental question that can be posed here is whether a person can ever validly be deprived of his own money.

Eminent domain

Initially, focusing on the RBI’s power was understandable because there was an assumption that holders of old notes, particularly those holding them legally, would be able to exchange them for new notes. However, with the exchange facility being discontinued, we must re-examine the legality of the move. There is now reason to argue that by discontinuing the exchange option (or even the limits that were enforced earlier) the state is depriving citizens of money, a form of property that is outside the reach of eminent domain and is thus, in violation of Article 300A.

Eminent domain is understood to be the inherent power of the state to compulsorily acquire private property for public purpose. However, in 1952, the Supreme Court in the State of Bihar v. Maharaja Sir Kameshwar Singh held that money and ‘choses in action’ (debts or similar rights to claim money) could not be compulsorily acquired by the state through exercising this power. Mahajan J., speaking for the majority, said that an acquisition of money or choses in action would amount to nothing more than a forced loan; and Aiyar J. added a layer of nuance, suggesting that there could be no public purpose that accompanies the compulsory acquisition of money or choses in action.

This was reaffirmed by a five-judge bench of Supreme Court in 1968, in the State of Madhya Pradesh v. Ranojirao Shinde. However, in 1978 in Madan Mohan Pathak v. Union of India, the Supreme Court bench, comprising seven judges, re-examined and set aside the court’s reasoning in Ranojirao Shinde – but it is important to note, that the court limited its examination and disagreement to the “reasoning qua chose in action”. It would appear, that on the limited question of whether money can be compulsorily acquired, the majority opinions in Singh and Shinde continue to hold sway. It is worth noting here, that when the Supreme Court examined the constitutionality of the High Denomination Bank Notes (Demonetisation) Act, 1978 in Jayantilal Ratanchand Shah v. Reserve Bank Of India, it did not consider whether money could at all be the subject matter of such compulsory acquisition, in light of the Shinde ruling. This, however, could be explained by the fact that the act in question laid out an elaborate procedure for exchange; as a result of which, perhaps, it did not amount to the deprivation of citizens to begin with.

The state’s power to police

That said, it is necessary here to understand that ordinarily when the state takes money from its citizens, it does so to exercise either its taxation powers or its policing powers – as a penalty or on the grounds that some funds were used for unlawful purposes. The state’s policing power, however, is distinct from the concept of eminent domain. While the state may exercise its policing power to to restrain or regulate citizens’ liberty and property for the sake of public interest (health, sanitation, morality, convenience and the like) without paying compensation for doing so, exercising eminent domain is only permissible if the compulsory acquisition of a person’s property is accompanied by a public purpose and compensation from the state. And, it is this latter power of eminent domain that cannot be exercised in respect of, at the very least, money – for that could only be to enrich the coffers of the state.

When it comes to money, the assumption is that there isn’t any public purpose that cannot be funded by the state by exercising its power to police or one which would require the state to compulsorily acquire money from its citizens. This seems almost intuitive; for it would be most absurd if the state could demand any amount of its citizens’ money without any regulatory or taxation purposes to back the demand.

However, the current demonetisation resembles a compulsory acquisition rather than simple regulation. If a valid law were introduced to penalise, or tax, only hoarders of black money, it would serve the legitimate regulatory interests of the state, and therefore, be a valid exercise of its power. However, in this case, everyone in possession of old notes and without a bank account is deprived of their money – regardless of whether it is black or white, and if black, regardless of whether they are willing to pay the penalty or not – suggesting, therefore, an exercise of eminent domain by the state. Further, it would disingenuous to argue that the demonetisation is motivated by a need to ensure greater financial inclusion since there is no law that obligates a person to open a bank account or authorises the state to deprive people of their property to achieve inclusion.

The state’s authority to acquire citizens’ property

While there is no bright-line rule to differentiate between an exercise of eminent domain and the state’s power to police, ordinarily, the latter only imposes fetters on property rights, while the former results in the appropriation or taking away of such rights. In certain cases, the exercise of police power may also result in the destruction of property; therefore, at the heart of the distinction between the said powers, is whether the property in question is acquired or appropriated for the benefit of the state. When notes are demonetised, the state’s liability towards the holder of the notes is extinguished, resulting in an increase in the RBI’s net worth. The value that was represented by the old note will, at the end of the year, stand appropriated by the state. It therefore, seems to fall squarely within the meaning of the term ‘acquisition’. I hasten to add here that it is not my suggestion that ‘demonetisation’ itself is illegal, or that it always result in the compulsory acquisition of property, but the manner of its implementation, as stated above, with particular respect to those without bank accounts, effectively amounts to an acquisition.

One could argue that people still have the option of simply opening bank accounts in the time that remains, depositing their old notes and so avoid losing the monetary value represented by those notes. On this basis, one can also argue that disallowing exchange does not in itself, result in acquisition by the state. However, Mahajan J. speaking on behalf of the Supreme Court, in Dwarkadas Srinivas v. the Sholapur Spinning & Weaving Co. Ltd., cites Holmes J. to say that “if a regulation goes too far, it will be recognised as a taking”. Rejecting a narrow reading of the word ‘acquisition’, Mahajan J. extended the meaning of the term beyond the ‘mere acquisition of title’ and found that the title of the owners had practically been reduced to ‘paper ownership’. Much like that, we must consider that practically, there will be many who will not be able to open bank accounts before the deadline – bearing in mind the numbers that fall outside the banking system, the numbers without identification documents and the uneven distribution of banking facilities in the country – and that there is now a frightening possibility that their money will be reduced to mere paper. Therefore, there is good reason to argue that this amounts to a compulsory acquisition.

It would thus seem that the state, by first limiting and now disallowing the exchanging of old notes, is violating the right to property of those without bank accounts. The state is making an attempt to compulsorily acquire their money even though this does not fall within the ambit of its powers. While many have used the rhetoric of achieving the ‘greater good’ to gloss over the sheer class disparity in how the demonetisation has impacted people, if we understand that the state’s power of eminent domain does not extend to the acquisition of money, then it follows that the question of whether the move serves a public purpose is entirely irrelevant.

Krithika Ashok is an Assistant Professor at Jindal Global Law School. She can be reached at [email protected].

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