of Firms, Societies and Chits, Utiar Pradesh Vs. Secured Investment Company,
Lucknow & ANR  INSC 382 (17 December 1987)
K.J. (J) SHETTY, K.J. (J) RAY, B.C. (J)
1988 AIR 492 1988 SCR (2) 456 1988 SCC Supl. 248 1987 SCALE (2)1423
Chits-Prohibited category under section 2(e) of the Prize Chits and Money
Circulation Scheme (Banking) Act, 1978-Prohibition of Participation therein.
The respondent, a partnership firm, carried on business termed as a
"Scheme for Investment". The Registrar of Firms, Societies and Chits,
the appellant, holding the view that the investment scheme of the respondent
company fell within the prohibited category of prize chits as defined in
section 2(e) of the Prize Chits and Money Circulation Scheme (Banking) Act,
1978, seized all the documents of the company and directed the concerned banks
not to have accounts in relation thereto. The respondent challenged the action
of the appellant by a writ petition in the High Court. The High Court allowed
the Writ Petition, quashing the orders of the appellant. The appellant appealed
to this Court by special leave.
the appeal, the Court, ^
The prize chit, by a simple definition, includes a scheme by which a person in
whatever name collects moneys from individuals for the purpose of giving prizes
and refunding the balance with or without premium after the expiry of a
specified period. The reach and range of the definition of 'Prize Chit' is
sweeping. The participation of any person in such chit or scheme has been
prohibited, the object being that people should not be attracted to invest
their moneys in the hope of getting prizes or gifts. [468A- B, Cl There is no
doubt that the scheme of the company is primarily for the benefit of the
promoter or the company at the cost of the subscribers. Section 2(e) of the Act
was intended to cover all such arrangements or schemes. It is emphasized that
the Act was intended to ban all kinds of prize chits where people part with
their money and risk the chance of 457 getting prizes and gifts, and to protect
the people from exploitation. A Any scheme or arrangement in which a person
agrees to lose or is make to part with a portion of his payment against the
chance of getting any prize or gift, should be considered as prize chit:
falling within the inclusive definition under Section 2(e). The scheme of the
company is nothing but prize Chit as defined under Section 2(e) of the Act. The
conclusion of the High Court is patently erroneous and is unsustainable both on
facts and law. The action of the Registrar, appellant, upheld. [473E- H;;
473A-B] OBSERVATION: The Registrar of the firms will, while taking action
against the persons or firms under the Act, take care to see that the members
of the scheme are not denied, their contributions or prises which they are
legitimately entitled to, if the prize chit is allowed to be run for the full
term. [473B-C] Srinivasa Enterprises and others v. Union of India etc., 
1 SCR 801 at 804 and Reserve Bank of India v. Peerless General Insurance and
investment Co. Ltd., A.I.R. 1987 SC 1023. referred to.
APPELLATE JURISDICTION: Civil Appeal No. 1988 of 1982.
the Judgment and order dated 20.4.1982 of the High Court of Allahabad in Writ
Petition No. 630 of 1982. E Anil Dev Singh and Mrs. Shobha Dikshit for the
Singhvi and C.L. Sahu for the Respondent.
following Judgment of the Court was delivered by F JAGANNATHA SHETTY, J. This
appeal by special leave, is by the Registrar of Firms, societies and chits of
Uttar Pradesh and directed against the judgment and order passed by the high
Court of Allahabad in writ petition No. 630 of 1982.
said writ petition was filed by the respondent which is a partnership firm
called as "M/s. Secured Investment Company" ("The
Company"). The company mainly carries on business at Lucknow. It has
branch offices at Kanpur and Bareilly. The nature of business of the company is
termed as "a scheme for investment". The question raised in this
appeal is whether that scheme for investment falls within H 458 the category of
'prize chit' as defined under the Prize Chits and money circulation Scheme
(Banning) Act, 1978 (for short "The Act"). The Registrar of Firms, Societies
and Chits was of the opinion that the scheme of the company falls within the
prohibited category of prize chits as defined under the Act. So he seized all
the documents of the company and also directed the concerned banks not to have
accounts in relation thereto. Challenging the action of the Registrar, the
company moved the High Court with a writ petition under Art; 226 of the
Constitution. The High Court allowed the writ petition and quashed the orders
made by the Registrar.
order to correctly appreciate the question raised in this appeal, it is better
to have first the clear picture of the law governing the question. Section 3 of
the Act imposes a ban not merely on promoting or conducting any prize chit or
money circulation scheme, but also on participation in such chit or schemes.
Section 4 makes a contravention of the provisions of Section 3 punishable with
imprisonment which may extend to three years or with fine which may extend to
Rs.5,000 or with both. Section 5 provides penalty for other offences like
printing or publishing any ticket, coupon or other document for use in the
prize chit or money circulation scheme with a view to promote such scheme in
contravention of the Act. Section 6 deals with offences by companies. Section 7
confers power on the police officers not below the rank of an officer in charge
of a police station to enter, search and seize. Section 8 provides for the
forfeiture of newspapers or other publications containing prize chit or money
circulation scheme. Section 11 provides exemption to certain categories of
prize chits or money circulation schemes. The prize chits or money circulation
schemes promoted by the State Government or any officer or authority on its
behalf, or by a Company wholly owned by a State Government are exempted from
the provisions of the Act.
Chit' has been defined under Section 2(a), and "Prize Chit" has been
defined under Section 2(e) of the Act. Conventional Chit stands excluded from
the definition of prize chit, and so much so, the Conventional Chit remains
untouched by provisions of the Act. The definition of the conventional chit is
2(a). "Conventional Chit" means a transaction whether called chit,
chit fund, kuri or by any other name or under which a person responsible for
the conduct of the chit enters into an agreement with a specified number of
persons that every one of them shall subscribe a 459 certain sum of money (or
certain quantity of grain instead) by way of periodical installments for a
definite period and that each such subscriber shall, in his turn, as determined
by lot or by auction or by tender or in such other manner as may be provided
for in the chit agreement, be entitled to a prize chit." We may presently
refer to the definition of 'prize chit' and before that it is better to have a
little bit of history of chit transactions. The words 'Chitty' or 'kuri' Chit
or Chit Fund appear to be the common words but with regional variations.
Although there is no clear evidence to show the exact place of origin of chit
fund, the available text [(i) 'Chit Finance' by C.P. Somanath Nayar (1973);
(ii) Chit Funds and Finance Corporation by S. Radha Krishan an (1974)] indicate
that it has spread from the Southern most parts of India. In the Travancore
area of the State of Kerala it is generally called 'chitty'. Within the same
State, in Cochin and Malabar areas it is popularly called 'kuri'. In other
parts of the country it is ordinarily called 'chit' or 'chit fund'. In Tamil it
is termed as 'chit'. In Malayalam it is called as 'chitti' or 'kuri'.
terms appear to be synonymous, meaning thereby a written piece of paper. These
transactions were purely indigenous institution. They originated in village
life originated by a small group of people well know to each other. They agreed
to contribute periodically a certain amount of grain or money and to distribute
the entire collection which was termed as 'fund' to one of the subscribers. It
was carried on with some mutually agreed basis. In the nineteenth century, if
not earlier, it was very popular in central Travancore and Trichur areas
probably among Church congregations.
chit funds appear to have originated from two legitimate demands of the rural
people: (i) a necessity for a lump sum amount to meet some unusual expenditure
and (ii) to provide a form of accumulated saving when people had no banking
facilities. It was considered as a source of credit and mode of saving. It was
meant for mutual benefit in which some people joined to save and others to
borrow. What distinguishes the chit fund, however, from other financial
transactions is that it connects the borrowing class directly with the lending
class. The pooled saving is lent out to the same group of contributors. A chit
fund collects the savings of the members by periodical subscriptions for a
definite period. At the same time, it makes available the pooled savings to
each member by turn as agreed by them, The collected fund may be given either
by drawing lots or by bidding. Lots are drawn periodically and the member whose
name appears on the winning chit gets the collection without any deductions.
He, however, continues to pay his subscriptions but his name is removed from
subsequent lots. Thus every member gets a chance to receive the whole amount of
the chit. This is generally the features of a conventional chit. It is operated
without a professional promoter or manager and without any risk of loss of
the course of years, the chit funds became more and more popular and
attractive. In the usual process of social growth, the chitties crossed
boundaries of its birth place. It assumed new institutional forms with
emergence of new types of entrepreneurs. The partnership firms, private or
public limited companies took over the chit business in various forms. They
gave different names, such as price chit, lucky-draw, benefit scheme or money
circulation scheme. They offered prizes to attract subscribers. The basic
features, however, remained the same in all such schemes. Periodically the
names of the subscribers were put to draw and the lucky member was given a
prize either in cash or in kind like articles of utility. The subscribers were
also given refund of a portion of their contributions.
became regular business in ever so many people.
this rapid growth of chit funds has carried with it some unhealthy features of
has been graphically described by Krishna Iyer, J. in Srinivasa Enterprises
& ors. v. Union of India etc., 1 SCR 80 1 at 804 as follows:
quintessential aspects of a prize chit are that the organiser collects moneys
in lump sum or installments, pursuant to a scheme or arrangement, and he
utilises such moneys as he fancies primarily for his private appetite and for
(1) awarding periodically or otherwise to a specified number of subscribers,
prizes in cash or kind and (2) refunding to the subscribers the whole or part
of the money collected on the termination of the scheme or otherwise. The
apparent tenor may not fully bring out the exploitative import lurking beneath
the surface of the words which describe the scheme. Small sums are collected
from vast numbers of persons, ordinarily of slender means in urban and rural
areas. They are reduced to believe by the blare of glittering publicity and the
dangling of astronomical amounts that they stand a chance-in practice
negligible- of getting a huge fortune by making petty periodical payments. The
indigent agreestics and the proletarian urbanites, pressured by dire poverty
and doped by the hazy hope of a lucky draw, subscribe to the scheme although
they can ill afford to spare any money.
is not promotion of thrift or wholesome small savings because the poor who pay,
are bound to continue to pay for a whole period of a few years over peril of
losing what has been paid and, at the end of it, the fragile prospects of their
getting prizes are next to nil and even the hard earned money which they have
invested hardly carries any interest. They are eligible to get back the money
they have paid in driblets, virtually without interest, the expression 'bonus'
in s. 2(a) being an euphemism for a nominal sum.
is more, the repayable amount being small and the subscribers being scattered
all over the country, they find it difficult even to recover the money by
expensive, dilatory litigative process." In 1974, the Reserve Bank of
India intervened. The Reserve Bank constituted a Study Group headed by Dr. J.S.
Raj to examine the adequacy of existing statutory provisions in regulating the
conduct of business by non-banking companies. The Study Group was also asked to
suggest remedial measures so as to ensure that the activities of such
companies, in so for as they pertained to the acceptance of deposits,
investment, lending operations, etc. sub served the national interest The Study
Group went into the matter in some depth.
VI of their report was devoted to Miscellaneous Non- Banking Companies which
were conducting prize chits, benefit/savings scheme or lucky draws etc.
Paragraph 6.3 of the report contains interesting information and it reads as
Companies conducting the above types of schemes are comparatively of a recent
origin and of late, there has been a mushroom growth of such companies which
are doing brisk business in several parts of the country, especially in big
cities like Ahmadabad, Bangalore, Bombay, Calcutta and Delhi. They had also
established branches in various States. These companies float schemes for
collecting money from the public and the modus operandi of such schemes is
generally as described below:
company acts as the foreman or promoter and 462 collects subscriptions in one
lump sum or by monthly installments spread over a specified period from the
subscribers to the schemes. Periodically, the numbers allotted to members
holding the tickets or units are put to a draw and the number holding the lucky
ticket gets the prize either in cash or in the form of an article of utility,
such as, a motor car, scooter, etc. Once a person gets the prize he is very
often not required to pay further installments and his name is deleted from
further draws. The schemes usually provide for the return of subscriptions paid
by the members with or without an additional sum by way of bonus or premium at
the end of the stipulated period in case they do not get any prize. The
principal items of income of these companies are interests earned on loans
given to the subscribers against the security of the subscriptions paid or on
unsecured basis as also loans to other parties, service charges and member ship
fees collected from the subscribers at the time of admission to the membership
of the schemes. The major heads of expenditure are prizes given in accordance
with the rules and regulations of the schemes, advertisements and publicity
expenses and remuneration and other perquisites to the directors " The
Study Group recorded its conclusions in paragraph 6.11 as follows:
the foregoing discussion, it would be obvious that prize chits or benefit
schemes, benefit primarily the promoters and do not serve any social purpose.
On the contrary, they are prejudicial to the public interest and also adversely
affect the efficacy of fiscal and monetary policy. There has also been a public
glamour for banning of such schemes; this stems largely from the mal-practices
indulged in by the promoters and also the possible exploitation of such schemes
by unscrupulous elements to their own advantage. We are, therefore, of the view
that the conduct of prize chits or benefit schemes by whatever name called
should be totally banned in the larger interests of the public and that
suitable legislative measures should be taken for the purpose if the provisions
of the existing enactments are considered inadequate. Companies conducting
prize chits, benefit schemes, etc., may be allowed a period of three years
which may be extended by one more year to wind up 463 their business in respect
of such schemes and/or switch over to any other type of business permissible
under the law." It will be seen that the Study Group was of the opinion,
that prize chits or benefit schemes primarily benefit the promoters and do not
serve any social purpose.
are prejudicial to the public interest. They adversely affect the fiscal and
monetary policies of the Government.
Study Group was firmly of the view that the conduct of prize chits or benefit
schemes by whatever name called should be totally banned in the larger
interests of the public.
Government of India accepted that report, and decided to implement the above
recommendations of the Study Group. In 1978, the Act with which we are
concerned was passed in the Parliament. The Act provides for banning the
promotion or conduct of 'money circulation scheme' or 'prize chit' which have
been defined as follows:
2(c) 'money circulation scheme' means any scheme, by whatever name called, for
the making of quick or easy money, or for the receipt of any money or valuable
thing as the consideration for a promise to pay money, on any event or
contingency relative or applicable to the enrolment of members into the scheme,
whether or not such money or thing is derived from the entrance money of the
member of such scheme or periodical subscription;
2(e) 'prize chit' includes any transaction or arrangement by whatever name
called under which a person collects whether as a promoter, foreman, agent or
in any other capacity, moneys in one lump sum or in installments by way of
contributions or subscriptions or by sale of units, certificates or other
instruments or in any other manner or as membership fees or admission fees or
service charges to or in respect of any savings, mutual benefits, thrift, or
any other scheme or arrangement by whatever name called, and utilises the
moneys so collected or any part thereof or the income accruing from investment
or other use of such moneys for all or any of the following purposes, namely:
giving or awarding periodically or otherwise to a specified number of
subscribers as determined by lot, draw or in any other manner, prizes or gifts
in c 464 whether or not the recipient of the prize or gift is under a liability
to make any further payment in respect of such scheme or arrangement.
refunding to the subscribers or such of them as have not won any prize or gift,
the whole or part of the subscription, contributions or other moneys collected,
with or with out any bonus, premium interest or other advantage by whatever
name called, on the termination of the scheme or arrangement, or on or after
the expiry of the period stipulated therein, but does not include a
conventional chit. " The scheme for investment with which the company has
been carrying on its business is neither a conventional chit not a 'money
circulation scheme'. That is not disputed by the Registrar of Firms. According
to him, the scheme is a 'prize chit' as defined under Section 2(e) of the Act.
To understand the correct scope of the definition, we must first try to
ascertain the purpose of the legislation. The legal interpretation is not an
activity sui generis. Under the view, now widely held, the purpose of the
enactment is the touchstone of interpretation. The first step in interpretation,
therefore, is to gather all informationís about the purpose of the Act. If the
Act was meant for the public good, then every provision thereof must receive
fair and liberal construction. It must be construed with vision to ensure the
achievement of the object of the Act.
purpose of the Act could be gathered by having recourse to the Statement of
objects and Reasons accompanying the Bill and in long title of the enactment.
Statement of objects and Reasons reads as follows:
June 1974, the Reserve Bank of India had constituted a Study Group under the
Chairmanship of Shri James S. Raj, the then Chairman, Unit Trust of India, for
examining in depth the provisions of Chapter III-B of the Reserve Bank of India
Act, 1934, and the directions issued there under to non-banking companies in
order to assess their adequacy in the context of ensuring the efficacy of the
monetary and credit policies of the country and affording a degree of
protection to the interests of the depositors who place their savings with such
companies. In its report submitted to the Reserve Bank in July 1975, the Group
ob- 465 served that the prize chit/benefit/savings schemes benefit primarily
the promoters and do not serve any social purpose. On the contrary the Group
have stated that they are prejudicial to the public interest and affect the efficacy
of the fiscal and monetary policies of the country.
Prize chits would cover any kind of arrangement under which moneys are
collected by way of subscriptions, contributions etc. and prizes, gifts etc.
are awarded. The prize chit is really a form of lottery. Its basic feature is
that the foreman or promoter who ostensibly charges no commission collects
regular subscriptions from the members. once the member gets the prize, he is
very often not required to pay further installments and his name is dropped
from further lots. The institutions conducting prize chits are private limited
companies with a very low capital base contributed by the promoters, directors
or their close relatives.
schemes confer monetary benefit only on a few members and on the promoter
companies. The Group had, therefore, recommended that prize chits or money
circulation schemes by whatever name called should be totally banned in the
larger interests of the public and suitable legislative measures should be
undertaken for the purpose.
The Bill proposes to implement the above recommendations of the Group by
providing for the banning of the promotion or conduct of any prize chit, or
money circulation scheme by whatever name called, and of the participation of
any person in such chit or scheme. The Bill provides for a period of two years
within which the existing units carrying on the business of prize chits or
money circulation schemes may be wound up and provides for penalties and other
incidental matters. The repeal of the existing State Legislations on the
subject has also been provided for in the Bill." The long title of the Act
reads: "An Act to ban the promotion or conduct of prize chits and money
circulation scheme and for matters connected therewith or incidental
thereto." It will be clear from these recitals that the Parliament
intended to ban all prize chits and money circulation scheme. Some of the
aspects of the definition of prize chit has been considered by this Court. In
Reserve Bank of India v. Peerless 466 General Insurance and Investment. Co.
Ltd., AIR 1987 SC 1023 Chinnappa Reddy, J. speaking for this Court observed (p.
do not think that by using the word "includes", in the definition in
s. 2(e) of the Act the Parliament in tended to so expand the meaning of prize
chit as to take in every scheme involving subscribing and refunding of money.
The word "includes", the context shows, was intended not to expand the
meaning of "prize chit" but to cover all transactions or arrangements
of the nature of prize chits but under different names.
expression "Prize Chit" had no where been statutorily defined before.
The Bhabatosh Datta Study Group and the Raj Study Group had identified the
schemes popularly called "Prize Chits". The Study Group also
recognised that "Prize Chits" were also variously called
benefit/savings schemes and lucky draws and that the basic common features of
the schemes were the giving of a prize and the ultimate refund of the amount of
subscriptions (vide Para 6.3 of the report of the Raj Study Group). It was
recommended that prize chits and the like by whatever name called differently,
'prize chits', 'benefit/savings schemes', 'lucky draws', etc. It became
necessary for the Parliament to resort to an inclusive definitions so as to
bring in all transactions or arrangements containing these two elements. We do
not think that in defining the expression 'Prize Chit', the Parliament intended
to depart from the meaning which the expression had come to acquire in the
world of finance, the meaning which the Datta and the Raj Study Group had The
learned judge while examining the scope of two clauses (i) and (ii) of sec.
2(e) observed (p. 1042-43):
argument is that the two clauses (i) and (ii) are to be read disjunctively and
that they should not be read as if they are joined by the conjunction 'and'. We
do not agree. There is no need to introduce the word 'or' either. How clauses
(i) and (ii) of sec. 2(e) have to be read depends on the context. The context
requires the definition to be read as if both clauses have to be satisfied.
There is nothing in the text which makes it imperative that it be read
otherwise. The learned counsel urges that the expression 467 ''all or any of
the following purposes" indicates that the purpose may be either the one
mentioned in (i) or the one mentioned in (ii). We do not agree with this
submission. Each of the clauses (i) and (ii) contains a number of alternatives
and it is to those several alternatives that the expression "all or any of
the following purposes" refer and not to (i) or (ii) which are not
alternatives at all. In fact, a prize chit, by whatever name it may be called,
does not contemplate exhaustion of the entire fund by the giving of prizes; it
invariably provides for a refund of the amount of subscription, less the
deductions, to all the subscribers or to those who have not won prizes,
depending on the nature of the scheme. Clauses (i) and (ii) refer to the twin
attributes of a prize chit or like scheme and not to two alternative attributes
. " In the light of these principles, we may now have a close look at the
definition of prize chit' under sec. 2(e).
may cull out the following attributes:
must be collection of moneys from persons. The moneys may be collected in one
lump sum-or in installments.
moneys may be collected by way of contributions, subscriptions or as membership
fees, admission fees or service charges. It may be collected by sale of units,
certificates or other instruments. The collection may be in respect of any
savings, mutual benefits, thrift or any other scheme or arrangement, no matter
by what name. The Collection may be made by a promoter, foreman agent or in any
other capacity. The collection of moneys or any part thereof is utilised for
all or any of the purposes set out in clauses (i) and (ii). They are the two
distinct attributes of prize chit, each of which has to be satisfied.
definition goes a step further. The amount collected as such need not be
utilised for any of the purposes under clauses (i) and (ii). It may be
sufficient to attract the definition if the amount accrued from investment of
such collection is used for all or any of the purposes under clauses (i) and
(i) and (ii) provide for giving or awarding prize or gift to subscribers. It
may be periodical or otherwise. The prize or gift may be awarded by lot, draw
or in any other manner. Then there may be refund of the whole or part of the
collection. The refund may be made to all or such of them who have not won any
prize or gift. The refund may be made with or without any bonus, premium
interest or other advantage.
Leaving aside the verbiage, if we rewrite the definition which reeks of
simplicity, it runs like this:
chit includes a scheme by which a person in whatever name collects moneys from
individuals for the purpose of giving prizes and refunding the balance with or
with out premium after the expiry of a specified period.
the above analysis, it will be clear that the reach and range of the definition
of 'prize chit' is sweeping. The generality of the language appears to have
been deliberately used so that the transaction, arrangement or scheme in which
subscribers or contributors agree to forego a portion of their contributions in
the hope of getting any prize or gift should not escape from the net of the
definition. Even the participation of any person in such chit or scheme has
been prohibited. The object being that the people should not be attracted to
invest their moneys in the hope of getting prizes or gifts. The reason being
that it has been found by the Study Group of Dr. S. Raj that all such prize
chits or schemes are in the form of lottery and they do not serve any social
purpose. They are prejudicial to the public interest. They affect the monetary
policies of the country. They benefit only the promoters.
much is about the law. Let us now have the fact of the case. The terms and
conditions of the scheme offered by the company are as follows:
Secured Investment Company will be known as company.
Every member will deposit with the company Rs.220 only once in return he will
get a Reinvestment Deposit Plan Receipt/Bank Cash Certificate (a type of Fixed
Deposit receipt) of a Government Nationalised Bank
No interest will be given to the member, thus the maturity value of the Bank's
R.D.P. will be Rs.220.
After a member deposits Rs.220 he will get his Bank's R.D.P. within 7 days. For
members from Lucknow, Kanpur and Bareilly, every effort will be made to give
them the R.D.P. Receipt the very next day.
The duration of the scheme is for 66 months.
Therefore, the duration of the bank's R.D.P.
is also for 66 month.
Lucky draws for articles totalling Rs.15,000 per month will be given every
month for 60 months. Thus the total value of prizes for 60 months will be Rs.9
lakhs. Totally 60 lucky draws will be held, one every month, after the
recruitment of 19,999 members per group.
Every month, 21 1ucky prizes will be given. The Ist Prize will be a Vijay
Scooter, the 2nd Prize will be a Kelvinator refrigerator (lO Its.) or a T.V.
and 19 other consolidation prizes consisting of articles like transistor,
sewing machine, cycle, pressure cooker, stainless steel thali sets, alarm,
If there is any price increase, later in the period of the scheme of the value
of the prize articles which are detailed below the winning member shall pay for
the actual price increase.
in lieu of the articles will not be given.
One Vijay Super Scooter Rs.8000
One Kelvinator Fridge (10 Its.) or one T.V. Plus one Mixi Rs.3900
One cycle Rs.400
One table fan Rs.350 S. One Sewing Machine Rs.325
2 Nos. Philips Transistors (Rs. 230 each) Rs.460
3 Nos. Pressure Cookers (Rs.175 each) Rs.525
S Nos. Steel tail sets (Rs. lOO each set) Rs.500
6 Nos. Alarm Clocks (Rs.90 each) Rs.540 TOTAL Rs. 15,000
A winning member will be entitled to participate in subsequent draws. Thus a
member can win prizes over and over again.
If a member withdraws during the duration of the scheme, he can encash his
the H 470 entire amount of Rs.200 but will lose interest for the ba lance
months as per Reserve Bank of India rules governing from time to time. For
example, if a member withdraws immediately after he gets his R.D.P. Receipt, he
loses up to a maximum of Rs.92.
is the maximum amount a member can lose if he withdraws from the scheme
immediately after he becomes a member and after getting his Bank R.D.P. of
course, he will also not be entitled for the balance lucky draws.
The reason for deduction of interest is that the company gives these fantastic
prizes through the interest thus gained, also this interest gained has to cover
the company'. Over-Heads and profit. However, a customer's refund of his Rs.220
is 100 per cent secured, because at the end of the scheme he can go directly to
the Bank and encash the R.D.P. without any consent from the Company.
Out station members can encash the R.D.P. by presenting it to any Bank. The
procedure is the same as one normally encashes an outstation cheque.
The Company reserves the right to accept or reject any membership without
assigning any reasons.
In case, the total membership is not fully sub scribed to, members can still be
scruited after the start of the draws. However, the Company will at no stage
keep memberships reserved in its own name, thus winner of every draw will go to
an actual member.
The lucky draws will take place in rotation at Lucknow, Kanpur and Bareilly on
the Ist Sunday of every month. The lucky draws will be taken out by members
themselves to ensure fairness and honesty in the draw." There are as many
as 19,999 subscribers in each scheme.
of them do not get prizes and indeed they could not get, since there are only
60 draws with 2 1 prizes each. The members are not told that the company
deducts Rs.92 for its own use. They are only informed that they are assured of
the money deposited in the Bank, and in the event of premature withdrawal, they
will lose interest upto Rs.92 only.
In spite of all these glaring attributes of exploitive nature of the scheme,
the High Court appears to have been carried away with the Reinvestment Deposit
Plan Receipt for Rs.220. The High Court was of the view that the scheme could
not be considered as "prize chit". The High Court said:
It is thus clear from a reading of the document (annexure 1) that the so-called
'member' deposits the amount with the petitioners for the purpose of obtaining
a Reinvestment Deposit Plan Receipt, which is promised to him by the
petitioners. He may have been having an idea in the background that by
depositing the amount of Rs.220 with the petitioners and obtaining the
Reinvestment Deposit Plan Receipt, he would also be considered for the
distribution of 'Lucky Prizes'. But that is not enough inasmuch as the amount
which he had deposited with the petitioners was to be invested in a
nationalised bank and he was to get a Reinvestment Deposit Plan Receipt. If the
person from whom the money has been collected has not deposited it with the
petitioners as "contributions'' or "subscription", it is
difficult to hold that it is collected by the petitioners as his "contribution
High Court appears to have proceeded on the basis that the members of the
scheme do not pay subscription to the company. Nor do they pay the amount as
contribution. The High Court was also of the view that payment of money to the
company for the purpose of obtaining R.D.P. receipt with the hope of getting
any prize is not sufficient to attract the definition of prize chit.
our view, the conclusion of the High Court is patently erroneous. It is
unsustainable both on facts and law. The High Court has failed to consider that
the company undisputedly takes away Rs.92 out of Rs.220 paid by each member.
The High Court has further failed to note that the company utilises the
deducted amount of Rs.92 for the purpose of giving prizes to members. Dr. L.M.
Singhvi, learned counsel for the company, did not and indeed could not dispute
that the company is deducting Rs.92 out of the payment of Rs.220. The counsel
however, urged that since the member gets the full amount of Rs.220 from the
bank at the instance of the company, the scheme is an investment scheme and not
prize chit. We are unable to accept this submission.
fact that the member receives Rs.220 from the bank after the maturity period of
his deposit makes little difference in the nature of 472 the transaction of the
company. The fact remains that the company collects in one lump sum Rs.220 from
every member. It is only by payment of that amount, the individual becomes a
member of the scheme and eligible to get monthly prizes. The company instead of
returning the balance of Rs. 128 directly to the member takes him to a nearby
branch of the nationalised bank. There Rs. 128 would be deposited in the name
of the member who gets the same with interest after maturity. But it should not
be forgotten that the member does not get back Rs.92 deducted by the company.
Nor he gets any interest on this amount. He foregoes his amount of Rs.92 with
the hope of getting prizes offered by the company.
is no guarantee that he will get any prize. He, however, takes chance month
after month. If he is unlucky he waits in vain for 60 months. The apparent
tenor of the scheme may not bring out the exploitative nature of the scheme.
But it is there if anybody wants to know it. The company undisputedly collects
Rs.92 from every subscriber and utilises a portion of it for giving prizes and
to meet overhead charges. The company in all collects an amount of Rs.18,44,907.75
at the rate of Rs.92 per head from 19,999 subscribers. The company distributes
monthly prizes of the value of Rs. 15,000. The total value of all the prizes
for 60 months works out to Rs.9 Iakhs. The balance of about 9.5 Iakhs with
interest thereon would be utilised by the company. Is this a promotion of
thrift, investment or saving? At whose costs? and for whose benefit? We are,
however, glad to note that Madhya Pradesh High Court while considering a
similar scheme in Sahara India v. State of M.P. & others, [ 1983] M.P. 2
128 has held that it is prize chit falling within the scope of Section 2(e) of
have no doubt that the scheme of the company with which we are concerned is
primarily for the benefit of the promoter or the Company at the costs of the
is the kind of transactions or arrangements which Dr. J.S. Raj Study Group said
that it should be banned altogether. Section 2(e) was intended to cover all
such arrangements or schemes. The interpretation given by the Court should not
be stultifying the underlying principle in the definition which was meant to
protect people from exploitation. We would like to emphasise that the Act was
intended to ban all kinds of prize chits where persons part with their money
and risk the chance of getting prizes or gifts. Therefore, any scheme or
arrangement in which a person agrees to lose or made to part a portion of his
payment against the chance of getting any prize or gift, should be considered
as prize chit falling within the inclusive definition under Section 2(e). 473 From
the above discussion, and in the light of the principles to which we have
called attention the scheme of the company is nothing but prize chit as defined
under Section 2(e) of the Act and the action of the Registrar of firms deserves
to be upheld.
the result, we allow the appeal with costs and set aside the L judgment and
order of the High Court.
parting with the case we may, however, observe that the Registrar of the Firms
while taking action against the persons or firms under the Act will take care
to see that the members of the scheme are not denied of their contributions or
prizes which they are legitimately entitled to, if the prize chit is allowed to
run for the full term . S.L. Appeal allowed.