Unraveling Electoral Bonds: Legal Implications of the Supreme Court’s Judgment - MMJC

Introduction:

The constitutional validity of Electoral Bond scheme and the amendments made by Finance Act, 2017 to relevant laws were challenged before the Hon’able Supreme Court of India. After hearing all the concerned parties including the Government of India and the State Bank of India who was authorized to issue electoral bonds, the Hon’able Supreme Court of India vide its judgment dated 15^th February 2024, declared the Electoral Bonds scheme as unconstitutional and held that the amendments made to relevant laws to give effect to this scheme as unconstitutional.  

Government of India had introduced the Electoral Bonds scheme in the Finance Act, 2017 and to give effect to this scheme, Finance Act, 2017 amended relevant sections of Representation of People Act, 1951, Income Tax Act, 1961 and the Companies Act 2013 (‘the Act’). Section 182(1) and section 182(3) of the Act were amended. Amended provisions of section 182(1) of the Act allowed political contribution by companies without any limits. Further amendment to section 182(3) removed the requirement of disclosure of name of political party to whom contribution was given.

This landmark judgment of Hon’able Supreme Court of India raises the critical questions as:

Whether contributions made by companies to political parties through Electoral Bonds scheme before the Electoral Bond scheme being held unconstitutional would be considered as valid?

Implication of part of law being declared unconstitutional.

To find answers to these questions, we must first understand the implications of any law or part thereof being declared unconstitutional. To understand the said implications, we shall refer to the Supreme Court judgment in the matter of The State of Manipur & Ors. v. Surajkumar Okram & Ors[1]. In this case Hon’able Supreme Court of India was hearing a petition regarding constitutional validity of the Manipur Parliamentary Secretary (Appointment, Salary and Allowances and Miscellaneous Provisions) Repealing Act 2018. In this judgment, while explaining implications of striking down a provision of law, the Hon’able Supreme Court of India, held that,

“18. Where a statute is adjudged to be unconstitutional, it is as if it had never been. Rights cannot be built up under it; contracts which depend upon it for their consideration are void; it constitutes a protection to no one who has acted under it, and no one can be punished for having refused obedience to it before the decision was made (Cooley on Constitutional Limitations, Volume I, page 382). Field, J. in Norton v. Shelby County, 118 US 425 (1886) observed that “an unconstitutional act is not law, it confers no rights, it imposes no duties, it affords no protection, it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed”.

19. An unconstitutional law, be it either due to lack of legislative competence or in violation of fundamental rights guaranteed under Part III of the Constitution of India, is void ab initio. 

23. The principles that can be deduced from the law laid down by this Court, as referred to above, are:

I. A statute which is made by a competent legislature is valid till it is declared unconstitutional by a court of law.

II. After declaration of a statute as unconstitutional by a court of law, it is non-Est for all purposes.

III. In declaration of the law, the doctrine of prospective overruling can be applied by this Court to save past transactions under earlier decisions superseded or statutes held unconstitutional.”

On perusing the above, it appears that the provision of the law that has been declared unconstitutional can neither enforce any duty on anyone nor can anyone be punished for any violation done under such law. It is non-Est (i.e., non in existence) for all purposes.

Validity of contributions made through Electoral Bonds scheme.

As the Electoral Bonds scheme and consequent amendments to relevant laws are declared unconstitutional question arises is, “What about the political contributions already made by companies under the Electoral Bonds scheme?” Will these contributions be considered as valid and would require compliance under the relevant provisions of the Act?

To find an answer to this question, we must first understand the nature of electoral bonds issued under the Electoral Bonds scheme.

The Electoral Bond is a bond issued in the nature of promissory note which is a bearer banking instrument and does not carry the name of the buyer[2]. Promissory note is a negotiable instrument as per Negotiable Instruments Act, 1881[3]. Further Hon’able Supreme Court of India stated that,” A party that takes a negotiable instrument makes his contract with all the parties who appear on its face to be bound for its payment”[4]. So, it is clear that maker of a promissory note (electoral bond) would be entering into a contract as soon as he makes a promissory note and signs it. The maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon – (a) ….., (b)………., (c) by payment – to all parties thereto if the instrument is payable to bearer or has been endorsed in bank, and such maker, acceptor or endorser makes payment in due course of the amount due thereon.[5] So it can be inferred that once payment on a negotiable instrument is made the parties to it are discharged from liability and the contract is discharge by performance.

On reading the above analysis it seems that the electoral bonds purchased under electoral bond scheme was in the nature of contracts as per Negotiable Instruments Act, 1881 and by making payment of same the parties who had entered into those contracts are discharged from the contracts. No liability can be fastened on the parties to the discharged contracts. Hence it seems that contribution made to political parties by companies through Electoral Bond scheme during FY 23-24 pursuant to provisions of section 182(1) of the Act prior to Hon’able Supreme Court of India judgment dt: 15^th February 2024, is valid.

With this we are now posed with following questions:

1. Whether contribution made through Electoral Bond scheme in accordance with section 182 of the Act before Hon’able Supreme Court of India holding it as unconstitutional will attract penalty for non-compliance under section 182?

No. Contribution made through Electoral Bond scheme in accordance with section 182 of the Act before Hon’able Supreme Court of India holding it as unconstitutional will not attract penalty as Hon’able Supreme Court of India has held that[6] a statute which is made by a competent legislature is valid till it is declared unconstitutional by a court of law. As the contribution made was valid under section 182 of the Act till it was declared unconstitutional, penalty would not be attracted.

2. Will non-disclosure of details of political contribution through Electoral Bond scheme in financial statements for financial years prior to the date of pronouncement of judgement by Hon’able Supreme Court of India (i.e., February 15, 2024) attract penalty?

No. penalty will not be attracted for non-disclosure of details of political contributions in financial statements for years prior to the pronouncement of judgment. As is held by Hon’able Supreme Court of India a statute which is made by a competent legislature is valid till it is declared unconstitutional by a court of law[7]. As the law, prior to being held as unconstitutional, did not mandate disclosure of details of political contribution through Electoral Bond scheme, non-disclosure of same would not attract penalty once it was declared unconstitutional.

3. Whether detailed disclosure for earlier contributions made to political parties through Electoral Bond scheme will be required in financial statement for FY 23-24?

No detailed disclosure would not be required for earlier contributions made to political parties through the Electoral Bond scheme. A statute which is declared unconstitutional is non-est (i.e. not in existence) for all purposes. Also, in declaration of the law as unconstitutional, the doctrine of prospective overruling can be applied by this Court to save past transactions under earlier decisions superseded or statutes held unconstitutional[8]. As the law providing for contributions and disclosures is not valid now, disclosures under same would not be required in FY 23-24.

4. Companies Act is not amended yet. Can company still carry on and do subscription to Electoral Bonds/ make political contribution without any limits?

No. Company cannot do further contribution through Electoral Bonds as after declaration of a statute as unconstitutional by a court of law, it is non-Est (i.e., not in existence) for all purposes.

5. What about contributions made to political parties through Electoral Bond scheme during FY 23-24 much before pronouncement by Hon’ble Supreme Court of India? Will it be considered invalid? Will it require disclosure?

Contribution made during FY 23-24 through Electoral Bond scheme before decision of Hon’ble Supreme Court of India holding Electoral Bond scheme as unconstitutional would be considered as valid and also it would not require disclosure in financial statement for FY 23-24. Contributions made would be valid as a statute which is made by a competent legislature is valid till it is declared unconstitutional by a court of law and also the doctrine of prospective overruling can be applied to save past transactions under earlier decisions superseded or statutes held unconstitutional. Disclosure would not be required as after declaration of law as unconstitutional it is non-Est for all purposes[9].

Conclusion

Declaring a law as unconstitutional leads to retrospective amendments to the law. This leads to crucial questions with respect to validity of acts done during that period and provisions of law. Hence it is necessary to understand ramifications of repealed law in detail.

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[1] state-of-Manipur and ors -v/s-Suraj Kumar-okram and ors dt: February 1, 2022

[2] Electoral Bond Scheme, Clause 2(a)

[3] Section 13

[4] American Express Bank Ltd. vs Calcutta Steel Co. And Ors. On 18 December 1992

[5] Section 82 of negotiable instruments act, 1881

[6] state-of-Manipur and ors -v/s-Suraj Kumar-okram and ors dt: February 1, 2022

[7] state-of-Manipur and ors -v/s-Suraj Kumar-okram and ors dt: February 1, 2022

[8] state-of-Manipur and ors -v/s-Suraj Kumar-okram and ors dt: February 1, 2022

[9] state-of-Manipur and ors -v/s-Suraj Kumar-okram and ors dt: February 1, 2022

The article is written by Mr. Makarand Joshi – Partner and Mr. Vallabh Joshi – Senior Manager!