Transfer of Immovable by Foreigner: RBI Permission Mandatory: FERA

On 26/02/2021, a three judge bench of Hon’ble Supreme Court of India in Civil Appeal No. 9546 of 2010, titled Asha John Divianathan Vs. Vikram Malhotra & Ors., has settled an important question of law pertaining to transfer of immovable property situated in India by/to foreigners , wherein, one Mrs. F.L. Raitt, a foreigner and the owner of the property in question, gifted it to respondent no. 1 without obtaining previous permission of the Reserve Bank of India under Section 31 of the Foreign Exchange Regulation Act, 1973 Act. Further, before executing the gift deed, she had executed an agreement of sale in favour of one Mr. R.P. David, after obtaining previous permission of RBI. She then executed a supplementary gift deed in favour of respondent no. 1. Even this deed was executed by Mrs. F.L. Raitt without seeking previous permission of the RBI.

Before Hon’ble Supreme Court the said gift deed and subsequent supplementary gift deed was challenged. The challenge on the question of law was particularly limited to the non-compliance of Section 31 of the FERA, 1973, which reads as under:-

Section 31:- Restriction on acquisition, holding, etc., of immovable property in India.— (1) No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India or in which the non­resident interest is more than forty per cent shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any immovable property situate in India

Apart from the aforementioned Section 31, Section 47, sub­Section (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. 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 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.

In view of the clear and unambiguous mandate of the 1973 Act, The Hon’ble Court opined that: “It is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. Further, it is settled that prohibition and negative words can rarely be directory.” The court while placing reliance on Mannalal Khetan & Ors. v. Kedar Nath Khetan & Ors [(1977) 2 SCC 424] held that:- “When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void, even though the penalty if imposed is not enforceable”

The Apex Court held that: – “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.”

It was further laid down that: – “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, unlike in the case of Section 29 as noted in Life Insurance Corporation of India [(1986) 1 SCC 264]……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.”