This article has been written by Viraj Vinod Arewar pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Smriti Katiyar (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
The recent verdict of Hon’ble Supreme Court of India, headed by the three-judge bench, in the case of Asha John Divianathan versus Vikram Malhotra and others (Civil Appeal No. 9546 of 2010) has generated significant attention in the legal community as it has finally addressed the issue concerning matters relating to the transfer of Immovable Property in India by foreigners. In a brief, Hon’ble Supreme Court of India declared that the transfer or disposal of Immovable Property in India by a foreign citizen, mandatorily and not merely directive, requires the prior permission of Reserve Bank of India under Section 31 of Foreign Exchange Regulation Act, 1973. In this article, we are going to analyze this case. But as this case mainly revolves around Section 31 of the Foreign Exchange Regulation Act, 1973 (“FERA”) it becomes important to understand the legal principles behind this law which the Apex Court has analyzed in depth. But, before that, let us have a brief look at the facts of the case. It should be noted that even though the FERA was replaced by Foreign Exchange Management Act, 1999 the Hon’ble Supreme Court of India delivered this judgment by exercising its plenary power under Article 142 of the Constitution of India.
Facts of the case
Mrs. F.L. Raitt (“Owner”), a foreigner and widow of the late Mr. Charles Raitt, was the owner of the immovable property in question (“Property”). The Owner executed an Agreement of Sale in favour of Mr. R.P David (“Buyer”). The Buyer was the father of Asha Deviantahan (“Appellant”) and the husband of Mrs. R.P David (Respondent no. 4). It was executed on 5th April 1976 and the Owner delivered the title deed of the Property to the Buyer. However, the Owner gifted the portion of the Property admeasuring 12,306 square feet, vide gift deed dated 11th March 1977, in favour of Mr. Vikram Malhotra (“Respondent No.1”) without taking the prior permission of the RBI under Section 31 of FERA. The Owner then executed the supplementary gift deed again in favour of Respondent no. 1 on 19th April 1980. Here also the Owner didn’t seek prior permission from RBI. On 4th December 1982, the Owner executed a ratification agreement to transfer the property admeasuring 35,470 square feet in favour of Mr. David. In this case, the Owner sought the prior permission of RBI under Section 31 of FERA. The permission was granted to the Owner on 2nd April 1983 by RBI. On 9th April 1983, the Owner executed a registered sale deed in favour of the Buyer. However, on 30th July 1983, the Owner filed a suit for cancellation and setting aside a Sale Deed executed in favour of the Buyer. On 8th January 1984 the Owner expired and Mrs. Ingrid Greenwood “Successor”) was substituted as her legal representative.
Thereafter, the Buyer filed a suit on 10th February 1984 against Respondent no. 1, for declaring the Gift Deed dated 11th March 1977 as void and for relief of possession, permanent injunction, and mesne profits. The Buyer also filed a suit against the Successor for declaration and possession of the entire property. On 31st August 2001, the Trial Court (City Civil and Sessions Judge, Mayo, Bangalore) decided all these three suits. Subsequently, the Appellant along with Respondent no. 4, had filed the first appeal before the High Court of Karnataka against the above-mentioned judgment and decree dated 31st August 2001 of the Trial Court. The High Court of Karnataka, relying on the case-law of Piara Singh v. Jagtar Singh and Another [AIR 1987 Punjab and Haryana 93] held the Gift deed dated 11th March 1977 as valid and dismissed the first appeal on 1st October 2009.
|5th April 1976||The owner transfers the property to the Buyer.|
|11th March 1977||Owner gifts the portion of the Property in favour of Respondent no. 1 without prior permission of RBI u/s 31 of FERA.|
|19th April 1980||The owner executes the supplementary gift deed again in favour of Respondent no. 1 without prior approval of RBI u/s 31 of FERA.|
|4th December 1982||The owner executes a ratification agreement to sell the Property to the Buyer.|
|2nd April 1983||RBI grants permission to the Owner to sell the Property to the Buyer.|
|9th April 1983||The owner executes a registered sale deed in favour of the Buyer|
|30th July 1983||Owner files a suit for setting aside a Sale Deed executed in favour of the Buyer.|
|8th January 1984||Death of Owner.|
|10th February 1984||1. Buyer files a suit against Respondent no. 1 for declaring gift deed (dated 11th March 1977) as void. 2. Owner files a suit against the Successor for possession of Property.|
|31st August 2001||The decision by the Trial Court on all three suits.|
|1st October 2009||High Court of Karnataka dismisses the first appeal filed by Appellant and Respondent no. 4.|
Understanding Section 31 and its object
Section 31 has four Sub-sections. The main purpose of Section 31 of FERA restricts the Foreigners and foreign corporations (excluding banks) (“Foreigners”) from acquiring, holding, and disposing of Immovable Property situated in India, without the prior permission (general or special permission) of Reserve Bank of India (“RBI”), except as provided in the proviso, that is, by way of lease for a period not exceeding 5 years.
Section 31(2) of the same act requires Foreigners to make an application to the Reserve Bank of India (“RBI”) with necessary documents, specified by RBI.
In Sub-section 3 it is given that; on receiving such an application the RBI may grant or refuse to permit a foreigner after making due inquiry as RBI seems fit. This Sub-section further has two provisions. As per the first proviso, the RBI cannot directly refuse such an application. RBI has to give a reasonable opportunity to the Foreigner or Applicant to make a representation in the matter. Its second provision provides for default permission. If RBI gives no response to such application then within ninety days from receipt of such application then it shall be presumed that the RBI has granted permission to such application.
Sub-section 4 makes the Foreigners, holding Immovable Property in India, obliged to make disclosures and declaration to RBI within 90 days from the commencement of FERA or such further period as may be allowed by the RBI.
However, the main problem was that no expressed condition was mentioned in Section 31 of FERA, that such permission is mandatory. On this basis, the Respondent, in this case, submitted that Section 31 is a directory and hence not obtaining the prior permission of RBI, would not make the transfer by way of gift deed invalid. They further submitted that there is no consequence provided in FERA for noncompliance with Section 31 and hence such transfer at best should be considered as voidable that too at the instance of RBI.
Apart from this, the Apex Court also observed and relied on the legislative intent of enactment of Section 31 of FERA. For this, the Apex Court relied on the statement of Mr. Y.B Chavan (when he was finance minister of India), which explained the object of Section 31 of FERA. He stated that it has been felt that the investment in the real estate business of India by foreigners should not be allowed, as no reason can be seen. Hence the Apex court observed the avowed object of Section 31 of FERA was to minimize the foreign investment in real estate business in India. The Apex Court for bringing out the harmonious interpretation of FERA further observed the purport of other provisions of the same Act, such as Sections 47, 50, and 63.
Arguments raised by parties
The following contentions were raised by the Appellant:-
1. The prior permission of RBI under Section 31 of FERA is mandatory. Hence, the Gift Deeds in favour of Respondent no. 1 are void and not binding on the Appellant and Respondent no. 4.
2. Section 47 of FERA reinforces the position of law provided under Section 31 of the same act. Section 50 of FERA also makes violation of Section 31 of FERA punishable.
3. Relied on case laws of Life Insurance Corporation of India v. Escorts Limited and Others and Union Of India & Ors vs A.K. Pandey.
4. Judgment in Piara Singh vs Jagtar Singh and Another are manifestly wrong as it has not analyzed the true scope and purport of Section 31 of FERA in the correct perspective.
5. The Property shall be validly transferred in favour of Buyer as per the Sale Deed.
Respondent no. 1
The following contentions were raised by Respondent No. 1:-
1. Section 31 of FERA is merely a directory and regulatory measure. It does not prohibit transfer by way of a gift as such.
2. Section 31 and any other provisions in FERA do not provide that transaction in violation of Section 31 of FERA as void.
3. Hence, not obtaining prior permission of RBI would not make the Gift Deeds in question invalid.
4. A transfer of this sort would at most be voidable, and even then only at the RBI’s discretion
5. Penalties for such violations are provided in Section 50 of FERA but no action has been taken in this regard by any party, including RBI.
6. As the repository for the management of foreign exchange in the country, the RBI is exclusively responsible for determining the permissibility of the transaction.
7. There is a distinction between void and voidable transactions as per the provisions of the Indian Contract Act, 1872 (“ICA”).
8. Relied on Waman Rao and Others v. Union of India and Others and argued that different high courts have consistently held that a transaction in violation of Section 31 of FERA cannot be considered void and that this view does not require interference.
9. As FERA has been repealed it would be fit to not disturb the consistent view taken by different High Courts in that regard.
Decision of the court
The Hon’ble Supreme Court set aside the impugned judgment and decree of the Trial Court (City Civil and Sessions Judge, Mayo, Bangalore) and passed the decision in favour of the Appellant. The Supreme Court held the condition under Section 31 of FERA as mandatory. Hence, the Apex Court declared the Gift Deeds in question invalid, unenforceable, and not binding on the Appellant. The Apex court further held that the Appellant is entitled to possession of the Property and also for the mesne profits under Order 20 Rule 12 of Civil Procedure Code, 1908.
Analysis & conclusion
The Supreme Court, for delivering judgment in this case, relied on the objective of FERA. For the purpose of finding out the objective of FERA, the Supreme Court cited the statement of the Finance Minister which was given in Lok Sabha while introducing the bill, containing FERA. The main objective of FERA was to forbid foreigners from dealing with the real estate sector in India. This judgment interprets the main purpose of Section 31 of FERA in light of its legislative intent. Vide paragraph 29 of the judgment of this case, the Supreme Court held that the implication of penalty (Section 50 of FERA) for violation of statutory requirement does not make the stipulation mere directory. Thus, contraveners cannot claim that they would just pay a penalty and thereby be forgiven or let off the hook. Resultantly, the Supreme Court held prior approval of RBI under Section 31 of FERA as mandatory and not merely directive. The most significant to note is that this case established the rule, that the Contracts which are prohibited by statute and attract a penalty at the same time will be void, even if there is the absence of express declaration that such contracts are void.
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