http://JUDIS.NIC.

IN SUPREME COURT OF INDIA Page 1 of 13

Vs.

RESPONDENT:
SECURED INVESTMENT COMPANY, LUCKNOW AND ANOTHER.

DATE OF JUDGMENT17/12/1987

BENCH:
SHETTY, K.J. (J)
BENCH:
SHETTY, K.J. (J)
RAY, B.C. (J)

CITATION:
1988 AIR 492 1988 SCR (2) 456
1988 SCC Supl. 248 1987 SCALE (2)1423

ACT:
Prize Chits-Prohibited category under section 2(e) of
the Prize Chits and Money Circulation Scheme (Banking) Act,
1978-Prohibition of Participation therein.

HEADNOTE:
%
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.
Allowing the appeal, the Court,
^
HELD: 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
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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., [1981] 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.

JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1988 of
1982.
From 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
Appellant.
L.M. Singhvi and C.L. Sahu for the Respondent.
The 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 the State.
Of Uttar Pradesh and directed against the judgment and order
passed by the high Court of Allahabad in writ petition No.
630 of 1982.
The 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.
In 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
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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.
’Conventional 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 as follows:
"Section 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 instalments 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’.
These 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.
The 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)
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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 win-
460
ning 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 capital.
During 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 interpreneurs. 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.
This became regular business in ever so many people.
Undoubtedly, this rapid growth of chit funds has
carried with it some unhealthy features of exploitation.
That has been graphically described by Krishna Iyer, J. in
Srinivasa Enterprises & ors. v. Union of India etc.,[1981]
1 SCR 80 1 at 804 as follows:
"The quintessential aspects of a prize chit
are that the organiser collects moneys in lump sum
or instalments, 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
agrestics and the proletarian urbani-
461
tes, pressured by dire poverty and doped by the
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hazy hope of a lucky draw, subscribe to the scheme
although they can ill afford to spare any money.
This 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.
What 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.
subserved the national interest
The Study Group went into the matter in some depth.
Chapter 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 informations and it reads as
follows:
"6.3 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 Ahemdabad, 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:
The company acts as the foreman or promoter
and
462
collects subscriptions in one lump sum or by
monthly instalments 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 instalments 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
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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:
"From 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
clamour 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.
They are prejudicial to the public interest. They adversely
affect the fiscal and monetary policies of the Government.
The 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.
The 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:
"Section 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;
section 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,
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moneys in one lump sum or in instalments 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:
(i) 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.
(ii) 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 informations
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.
The 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.
The Statement of objects and Reasons reads as follows:
"In June 1974, the Reserve Bank of India had
con stituted 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
thereunder 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
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stated that they are prejudicial to the public
interest and affect the afficacy of the fiscal and
monetary policies of the country.
2. 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 instalments 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.
Such 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.
3. 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.
1041):
"We 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.
The 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
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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):
"The 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).
We may cull out the following attributes:
There must be collection of moneys from persons. The
moneys may be collected in one lumpsum-or in instalments.
The 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.
The definition goes a step further. The amount collected as
such need not be utilised for any of the purposes under
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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 (ii).
Clauses (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.
468
Leaving aside the verbiage, if we rewrite the
definition which reeks of simplicity, it runs like this:
Prize 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.
From 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.
So 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:
"1. Secured Investment Company will be known
as COMPANY.
2. 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
3. No interest will be given to the member,
thus the maturity value of the Bank’s R.D.P. will
be Rs.220.
4. 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.
5. The duration of the scheme is for 66
months.
469
Therefore, the duration of the bank’s R.D.P.
Receipt is also for 66 month.
6. 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.
7. Every month, 21 1ucky prizes will be
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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, clocks, etc.
8. 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.
Cash in lieu of the articles will not be given.
1. One Vijay Super Scooter Rs.8000
2. One Kelvinator Fridge
(10 Its.) or one T.V.
Plus one Mixi Rs.3900
3. One cycle Rs.400
4. One table fan Rs.350
S. One Sewing Machine Rs.325
6. 2 Nos. Philips Transistors
(Rs. 230 each) Rs.460
7. 3 Nos. Pressure Cookers
(Rs.175 each) Rs.525
8. S Nos. Steel thali sets
(Rs. lOO each set) Rs.500
9. 6 Nos. Alarm Clocks (Rs.90 each) Rs.540
TOTAL Rs. 15,000
9. A winning member will be entitled to
participate in subsequent draws. Thus a member can
win prizes over and over again.
10. If a member withdraws during the duration
of the scheme, he can encash his Bank’s R.D.P.
directly 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.
This 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.
11 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’.
overheads 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.
12. 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.
13. The Company reserves the right to accept
or reject any membership without assigning any
reasons.
14. 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.
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15. 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.
All 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.
471
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 or subscription".
The 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.
In 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.
The 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 lumpsum 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
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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.
There 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
the Act.
We 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 subscribers.
This 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.
In the result, we allow the appeal with costs and set
aside the L judgment and order of the High Court.
Before 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.
474