A Contract is void if prohibited by a statute without express declaration: SC

The Supreme Court observed that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void

The issue dealt with by the Court in the present case was whether the contract entered into, was in violation of Section 31 of the Foreign Exchange Regulation Act, 1973 (hereinafter referred to as the ‘Act’), is void or is only voidable and it can be voided in the instance spoken about. It is needful to mention that, Foreign Exchange Regulation Act was repealed in 1998 and replaced by Foreign Exchange Management Act.

From the analysis of Section 31 of the Act and a conjoint reading with Sections 47, 50, and 63 of the Act, it can be noted that the requirement of taking “previous” or “prior” permission of the RBI before executing the sale deed or gift deed is required; and failure to do so renders the transfer unenforceable in law. 

The observation was made in light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India. The pre-existing 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 infringement, the transfer of immovable property located in India by a person, who is not a citizen of India, without prior permission of the RBI must be regarded as unenforceable and therefore a prohibited act.  

It is also to be noted that 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 a violation 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.  

Resultantly, transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be reopened or disturbed in any manner because of this pronouncement. 

Conclusively, the judgment of the Trial Court, as confirmed by the High Court, was set aside. As in favour of the petitioner, the appellant was held to be entitled for possession of the suit property being the owner and also for mesne profits for the relevant period.

Case: Asha John Divianathan  vs. Vikram Malhotra [CA 9546 OF 2010]

Coram: Justices AM Khanwilkar, Indu Malhotra and Ajay Rastogi

Counsel: Adv Navkesh Batra, Sr. Adv C.A. Sundram

Citation: LL 2021 SC 119

Sneh Somani
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