1987 (12) TMI 334 - SC - Companies Law

Supreme Court Rules Investment Scheme as 'Prize Chit' under 1978 Act

The Supreme Court held that the investment scheme in question constituted a 'prize chit' under the Prize Chits and Money Circulation Scheme (Banning) Act, ... - Issues Involved:1. Whether the scheme for investment falls under the category of 'prize chit' as defined under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978.2. Whether the High Court was correct in quashing the orders made by the Registrar of Firms, Societies, and Chits.Issue-wise Detailed Analysis:1. Whether the scheme for investment falls under the category of 'prize chit' as defined under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978:The primary question in this appeal is whether the scheme of the company, which involves collecting money from members and awarding prizes through a draw, constitutes a 'prize chit' under Section 2(e) of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978. The Act's purpose, as elucidated in its Statement of Objects and Reasons, is to ban schemes that are prejudicial to public interest and adversely affect fiscal and monetary policies. The definition of 'prize chit' under Section 2(e) includes any scheme where money is collected from individuals and used to award prizes and refund the balance with or without premium after a specified period.The Court emphasized that the definition of 'prize chit' is broad and includes schemes where individuals forego a portion of their contributions in the hope of winning prizes. The scheme in question involves members depositing Rs. 220, out of which Rs. 92 is deducted by the company for prizes and overheads. The remaining amount is deposited in a bank, and members receive a Reinvestment Deposit Plan Receipt (RDP) for Rs. 220, which they can encash after 66 months. The scheme also includes monthly draws for prizes.The Court noted that the scheme's apparent tenor might not reveal its exploitative nature, but it indeed involves members parting with Rs. 92 in the hope of winning prizes. This aligns with the definition of 'prize chit' under the Act. The Court concluded that the scheme is primarily for the benefit of the promoter at the cost of the subscribers, and thus, falls within the scope of Section 2(e) of the Act.2. Whether the High Court was correct in quashing the orders made by the Registrar of Firms, Societies, and Chits:The High Court had quashed the Registrar's orders, holding that the scheme could not be considered a 'prize chit' as the members were not paying contributions or subscriptions to the company but were depositing money to obtain an RDP from a nationalized bank. The High Court believed that the payment for the RDP with the hope of winning prizes was insufficient to attract the definition of 'prize chit.'The Supreme Court found the High Court's conclusion erroneous both in fact and law. It noted that the company undisputedly deducts Rs. 92 from each member's payment of Rs. 220, which is used for giving prizes and meeting overhead charges. The fact that members receive Rs. 220 from the bank after the maturity period does not change the nature of the transaction. The company collects Rs. 220 from each member, deducts Rs. 92, and uses it for prizes, making the scheme a 'prize chit' as defined under the Act.The Supreme Court emphasized that the Act aims to protect people from exploitation and bans schemes where individuals part with their money in the hope of winning prizes. The Court concluded that the scheme in question is a 'prize chit' and upheld the Registrar's action.Conclusion:The Supreme Court allowed the appeal, set aside the High Court's judgment, and upheld the Registrar's action. It emphasized that the Act was intended to ban all kinds of prize chits where individuals risk their money for the chance of winning prizes. The Court also directed the Registrar to ensure that members are not denied their contributions or prizes if the prize chit is allowed to run for the full term.