The 3-judge bench of SUPREME COURT of India, consisting AM Khanwilkar, Indi Malhotra and Ajay Rastogi has held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 of obtaining “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, is mandatory.

Order says “Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 and other consequences provided for in the 1973 Act.”

Object of the Statute

1973 Act was brought into force 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.

Object of Section 31

While introducing the Bill in the Lok Sabha and explaining the object of Section 31 of the 1973 Act,  Mr. Y.B. Chavan, the then Minister of Finance stated:

“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. While we may still require foreign investments in certain sophisticated branches of industry, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

The object of Section 31 of the 1973 Act was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of 16 disposal of property by a person, who is not a citizen of India.  Section 31, hence, puts restriction on acquisition, holding and disposal of immovable property in India by foreigners – non citizens.

Absence of explicit mention of failure to seek previous permission

It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section 31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63.

Section 47

Sub-Section (1) clearly envisages 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 the 1973 Act or of any rule, direction or order made thereunder.  What is significant to notice is that sub¬Section (2) declares that the agreement shall not be invalid if it provides that thing shall not be done without the permission of the Central Government or the RBI.  That would be the implied requirement of the agreement in terms of this provision.

In other words, though ostensibly the agreement would be a conditional one made 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 the 1973 Act applies to all the contracts or agreements covered under the 1973 Act, which require previous permission of the RBI.

Section 50

Section 50 reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty. Indeed, inserting such a provision does not mean that the 1973 Act is a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of the 1973 Act.

Section 63

Section 63 of the 1973 Act empowers the court trying a contravention under Section 56 which includes one under Section 51 of the 1973 Act, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression “property” in Section 63, takes within its sweep immovable property referred to in Section 31 of the 1973 Act.

Effect of reading Section 31 with Sections 47, 50 and 63

 

“The requirement specified in Section 31 is mandatory 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.”

From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that 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 mandates “previous” or “prior” permission of the RBI before the transfer takes effect.  For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act.”

Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. 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 the 1973 Act to such transaction.

“Merely because no provision in the Act makes 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, will be of no avail. That does not validate the transfer referred to in Section 31, which is not backed by “previous” permission of the RBI.”

In light of the general policy 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 the 1973 Act 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. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction.  He can set up challenge thereto by direct action or even by way of collateral or indirect challenge.

“In other words, 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 Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful.”

Source -RBI & www.scconline.com