TaxTMI 
TaxTMI 
1996 (1) TMI 332
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....g on finance and investment business. It offers small savings schemes to the public at large wherein the subscribers are required to pay a fixed amount as subscription on yearly, half-yearly or quarterly basis for a fixed number of years and on the expiry of the said period, the subscriber is paid a sum of money called Endowment sum, which is the face value of the certificate, and certain additional amounts by way of bonus. The said schemes offered by Peerless are somewhat similar to Recurring Deposit schemes run by commercial banks. 3. The business transacted by the banking companies is regulated by the Banking Regulation Act, 1949. Since non-banking companies started receiving deposits from general public on a large scale, it became neces-sary to make suitable provisions for regulating the same. The Reserve Bank of India Act, 1934 ('the Act') was amended by Act No. 55 of 1963 and Chapter III-B [sections 45 (H) to 45 (Q)] which contains provisions relating to non-banking institutions receiving deposits and financial institutions was inserted in the Act. In section 45-1 of the Act various expressions, viz., 'Company', 'Corporation', 'Deposit', 'financialinstitution', 'firm' and ....
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....the Central Government. In Delhi Cloth & General Milb v. Union of India [1983] 3 SCR 43 8 this Court has upheld the validity of section 58A and has rejected the contention that it was violative of the rights guaranteed under articles 14 and 19(1)(g) of the Constitution. 4. After the issuance of the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973, 'Peerless sought exemption from complying with the said directions and such exemption was granted to it by the Bank from the provisions of Paragraph 4 of the said directions insofar as those provisions restricted the acceptance of subscriptions under the schemes up to 25 per cent of the paid-up capital and free reserve fund. While granting this exemption certain conditions were, however, imposed. In 1974, a study group headed by Dr. J.S. Raj was appointed by the Bank 'to examine the existing statutory provisions with a view to assessing their adequacy in regulating the conduct of business by non-banking companies in the context of the monetary and credit policy laid down by the Bank from time to time and to suggest measures for further tightening up the provisions as to ensure that the activities of such companies, i....
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....e not covered by the expression 'prize chits' as defined in section 2(e) of the said Act. While upholding the decision of the Calcutta High Court in that regard, it was, however, observed: "The appeals filed by the Reserve Bank of India, the Union of India and the State of West Bengal are accordingly dismissed. It is open to them to take such steps as are open to them in law to regulate schemes such as those run by the Peerless Company to prevent exploitation of ignorant subscribers. Care must also be taken to protect the thousands of employees." 5. In this context, Chinnappa Reddy J. (who delivered the main judgment) has referred to the mushroom growth of financial and investment companies offering staggeringly high rates of interest to depositors leading the Court to suspect whether these companies are not speculative ventures floated to attract unwary and credulous investors and capture their savings and has said : "It does not require much imagination to realise the adventurous and precarious character of these businesses. Urgent action appears to be called for to protect the public. While on the one hand these schemes encourage two vices affecting public economy, the ....
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....renew any deposit received by it whether before or after that date, unless such deposit, on renewal, is repayable not earlier than 12 months and not later than 120 months from the date of such renewal. Paragraph 5 prescribes that the minimum rate of return shall not be less than the amount calculated at the rate of 10 per cent per annum (to be compounded annually) on the amount deposited. By way of security for depositors, Paragraph 6 made provision regarding investment of the amounts which are received by a residuary non-banking company in the following terms : "6. On and from 15th May, 1987, (1) every residuary non-banking company shall deposit and keep deposited the fixed deposits with public sector banks or invest and keep invested in unencumbered approved securities (such securities being valued at their market value for the time being), or in other investments, which in the opinion of the company are safe, a sum which shall not, at the close of business on 31st December 1987 and thereafter at the end of each half year that is 30th June and 31 st December be less than the aggregate amounts of the liabilities to the depositors whether or not such amounts have become payab....
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....pt any company or class of companies, from all or any of the provisions of the Directions either generally or for any specified period subject to such conditions as the Bank may impose. Paragraph 20 lays down that nothing contained in Paragraph 19 of the Non-Banking Financial Companies (Reserve Bank) Directions, 1977 shall apply to the residuary non-banking companies. 9. After the issuance of the 1987 Directions, Timex General Finance & Investment Co. Ltd. filed a writ petition challenging the validity of the said directions before the Calcutta High Court. The said writ petition was disposed of by a Division Bench of the Calcutta High Court whereby certain directions were given to the Bank to modify the 1987 Directions and make them reasonable and workable to safeguard the interest of depositors and protect the employees. After the said decision, Peerless got itself impleaded as a party-respondent in the said writ petition and obtained further directions from the High Court. The said orders of the High Court were challenged by the Bank before this Court. Peerless also filed a writ petition under article 32 of the Constitution challenging the validity of the 1987 Directions. The ....
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....that it is inherent in the business carried on by Peerless and other residuary non-banking companies that the working capital is generated out of the subscriptions received from the certificate holders and such business comprises in collecting subscriptions from depositors either in lump sum or in instalments and such deposits are paid back with the guaranteed accretions, bonus, interest, etc., in terms of the contract at the end of the stipulated term and through this business such companies have rendered great and commendable service to the nation in mobilising small savings and giving a boost to the movement of capital formation in the country. It was submitted that though interest of depositors is an important consideration but the said interest is not impaired in any manner whatsoever by the method of accountancy that was being followed by Peerless and by all similar companies namely, appropriation of a part of the subscription to the profit and loss account and meeting the working capital requirements out of the same. Arguments were also advanced on behalf of All India Field Officers Association which claimed to represent 14 lakh field officers engaged by Peerless on the basi....
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....sits and net-worth of the company at the ratio of 3:1, ie., 25 per cent of the capital net-worth. No one would legitimately be expected to get immediate profits or dividend without capital investment. The concept of profit or interest pre-supposes capital investment." fp. 461] 12. The Court rejected the contention that in case the impugned directions are not struck down, Peerless will have to close down its business and several thousands of employees and their families and several lakhs of field agents would be thrown on the streets and left with no employment. It was observed by Kasliwal J.: "We are not impressed with the argument of Mr. Somnath Chatterjee, Learned Senior Advocate for the Peerless that after some years the Peerless will have to close down its business if directions contained in paragraphs 6 and 12 are to be followed. The working capital is not needed every year as it can be rotated after having invested once. If the entire amount of the subscribers is deposited or invested in the proportion of 10 per cent in public sector banks, 70 per cent in approved securities and 20 per cent in other investments, such amounts will also start earning interest which can be....
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....ssary for Peerless to comply with the directions contained in Paragraphs 6 and 12 of the 1987 Directions in respect of the said sums. In order to cover up this mode of avoiding compliance with the requirements of Paragraphs 6 and 12 of the 1987 Directions, the Bank, by notification dated 19-4-1993, amended the 1987 Directions and inserted Paragraph 4A which contains the following provision: "4A. No residuary non-banking company shall take from any depositor/ subscriber to any schemes run by the company, with or without his consent, any amounts towards processing or maintenance charges or any such charges, by whatever name called, for meeting its revenue expenditure. Provided that a company may charge to a new depositor a one time initial sum not exceeding Rs. 10 towards cost or expenses for issuing brochures/ application form, servicing the depositor's account, etc." By notification dated 10-4-1993, Paragraph 4 was also amended and on and from 12-4-1993 the maximum period for deposits was reduced from 120 months to 84 months. 14. Feeling aggrieved by the said amendments introduced in the 1987 Directions, Peerless filed a writ petition, being CO. No. 21038 (W) of 1993, i....
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....n section 45K(3) have to be construed in a restricted sense in view of the words "including the rates of interest payable on such deposits, and the periods for which deposits may be received". 17. Shri Salve has submitted that the object underlying the enactment of section 45K (which is part of Chapter III-B) is to regulate the conditions on which deposits may be accepted by non-banking companies or institutions and to prevent malpractices and with that end in view very wide powers have been conferred on the Bank to give directions under section 45K(3). The submission of Shri Salve is that in Peerless II this Court has upheld the directions contained in Paragraphs 6 and 12 of the 1987 Directions and that the directions that are contained in Paragraph 4A are designed to prevent the evasion of the directions contained in Paragraphs 6 and 12 and to make them effective and that the power to issue directions contained in Paragraphs 6 and 12 would necessarily encompass the power to issue directions to ensure that they are not avoided by contrivances or devices which essentially involve a change in nomenclature. Shri Salve has further submitted that the expression 'deposit' as defin....
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....it is desirable that the Reserve Bank should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions". In the Statement of Objects and Reasons, hope was expressed "that-the Reserve Bank will be able to prevent malpractices, if any, to stop unhealthy competition for deposits, and to prescribe and enforce reasonable conditions including realistic rates of interest, disclosure of any information or particulars in which the depositors may be interested, provision for returning of money to them in certain contingencies and other relevant matters". It would thus appear that section 45K(3) is an enabling provision enacted to empower the Bank to regulate the conditions on which deposits may be accepted by non-banking companies or institutions and to prevent malpractices in the matter of acceptance of such deposits. Such an enabling provision must be so construed as to subserve the purpose for which it has been enacted. It is a well accepted canon of statutory construction that it is the duty of the Court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the court shou....
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.... received. This latter power flows from sub-section (3) of section 45K of the Act. The Bank under this provision can give directions in respect of any matters relating to or connected with the receipt of deposits (Emphasis supplied). In our view a very wide power is given to the Reserve Bank of India to issue directions in respect of any matters relating to or connected with the receipt of deposits. It cannot be considered as a power restricted or limited to receipt of deposits as sought to be argued on behalf of the companies that under this power the Reserve Bank would only be competent to stipulate that deposits cannot be received beyond a certain limit or that the receipt of deposits may be linked with the capital of the company. Such interpretation would be violating the language of section 45K(3) which furnishes a wide power to the Reserve Bank to give any directions in respect of any matters relating to or connected with the receipt of deposits. The Reserve Bank under this provision is entitled to give directions with regard to the manner in which the deposits are to be invested and also the manner in which such deposits are to be disclosed in the balance-sheet or books of a....
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.... run by the company, with or without his consent, any amount by way of processing/maintenance charges or any such charge, by whatever name called, for meeting its revenue expenditure, is, therefore, a provision containing directions in respect of matters relating to or connected with the receipt of deposits by a non-banking company. 24. In this context, it would also be relevant to mention that in Peerless II this Court has upheld the directions contained in Paragraphs 6 and 12 of the 1987 Directions. The directions which are contained in Paragraph 4A, introduced by way of amendment by notification dated 19-4-1993, seek to plug the loopholes by which the directions contained in Paragraphs 6 and 12 were sought to be evaded and circumvented. Paragraph 4A thus seeks to prevent evasion of the directions contained in Paragraphs 6 and 12. If the Bank is competent to give the directions contained in Paragraphs 6 and 12 of the 1987 directions, it stands to reason that the Bank should be competent to give Directions which would prevent evasion of those directions and secure their effective implementation. Section 45 Kis in the nature of an enabling provision. In the matter of constructio....
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....s is not liable to be struck down as discriminatory unless there is simultaneously absence of a rational relation to the object intended to be achieved by the law. [See : Jalan Trading Co. (P.) Ltd v. Mill Mazdoor Union [1967] 1 SCR 15 at p. 36]. 28. The uniform amount of Rs. 10 that has been prescribed in Paragraph 4A is for the expenses for brochure / application form and for servicing the depositors' account which would be incurred by the residuary non- banking companies in respect of their schemes. The said charges would not vary from person to person and would normally be the same in all cases and therefore, the fixation of a uniform amount of Rs. 10 which can be charged by a company does not mean that Paragraph 4A inserted in the 1987 Directions suffers from the vice of discrimination on the ground that unequals are being treated equally. 29. The other ground of discrimination based on non-banking companies being treated differently from commercial banks in the matter of service charges, is also without substance. Shri Chatterjee has invited our attention to the documents filed as Annexure - E (colly.) to the supplementary affidavit of Shri Patit Pavan Roy filed on beha....
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.... way of processing charges and maintenance charges against the endowment sum of Rs. 1,400 was slightly more than 4 per cent of the whole amount. Shri Chatterjee has also stated that after the decision of the High Court and the interim order passed by this Court on 8-5-1995, Peerless has started a new scheme under Table 26 wherein endowment sum of Rs. 3,500 is payable on maturity after a period of 7 years and the yearly instalment is Rs. 500. Rs. 90 is received along with the first instalment as processing charges which is not refundable. On maturity the depositor/subscriber not only gets the aforesaid endowment sum of Rs. 3,500 but he also gets a guaranteed bonus of Rs. 1,717.94, maturity bonus of Rs. 200 and a special bonus of Rs. 175.40, ie., a total amount of Rs. 5,593.33. It is submitted that, on maturity, the depositor/ subscriber is paid the sum of Rs. 3,500 in full as well as sum of Rs. 90 paid by him as processing charges and he is also paid interest at the rate of 10 per cent on compound basis per annum on the total sum of Rs. 3,500 plus Rs. 90 paid by him and an additional amount of Rs. 200 is paid as bonus which shows that the depositor/subscriber is, in no way, a loser ....
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....tal requirements of the company, viz., payment of agents' commission, management expenses, staff salaries and other overheads. It was also urged that if Peerless was refrained from doing so, all the agents, officers and employees of Peerless would lose their jobs and their family members would be thrown on the streets. The said contention was, however, rejected by this Court. It was observed that working capital could not be mopped up out of depositors' money and that for the purpose of entering this field of business a company should make arrangements on its own resources for working capital and for meeting the expenses and it cannot insist on utilising the money of the depositors/subscribers for this purpose. In this context, the Court has mentioned that under Paragraph 5 of the 1987 Directions the minimum rate of interest that is fixed is 10 per cent per annum and that it is common knowledge that in present times even the public sector corporations and companies and other financial and non-financial companies pay interest at much higher rates ranging from 14 per cent to 18 per cent and that companies doing such business can easily earn a profit of 4 per cent to 5 per cent on the....
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....icing depositors, account, etc., and that servicing depositors' account means maintenance of the account of the depositor for a period of 7 years and taking the cost of the application form/brochure, at a low figure of Rs. 5 less than one rupee would be available per year for servicing the depositors' account which would be insufficient to cover the cost of postage and stationery, including the cost of reminder notices for renewal deposits, discharge vouchers, receipt, etc. 33. Shri Salve has, however, submitted that the said amount of Rs. 10 as prescribed in the proviso to Paragraph 4A is meant to cover the cost of brochure/application form, etc. and since the case of Peerless is that the same cost Rs. 5 only, the said amount cannot be said to be inadequate. According to Shri Salve, by prescribing the said amount, it is not the intention to allow the residuary non-banking companies to recover any sum for meeting the revenue expenditure of the residuary non-banking company including the payment of commission to its agents. Shri Salve has also urged that no material was placed by Peerless in their pleadings to show that the fixation of the said amount is unreasonable or arbitrary....