TaxTMI 
TaxTMI 
1987 (1) TMI 452
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....s of easy money and decide to pay the first installment by the encouraging words of the agents, who forget them thereafter, because of the disincentive commission they get after the first installment is paid, who, therefore, do not pursue these depositors to make subsequent deposits promptly. It is some consolation that the Peerless is trying to bring in reforms to reduce some of the vicious aspects of its scheme. While referring to the plight of the depositors I do not at the same time ignore the large number of employees employed by the company. 3. The only reason why the appeals are being dismissed is on the wording of Section 2(e) of the Act. A close study of the definition makes the conclusion inescapable that the Peerless scheme does not come within it. Any attempt to bring the activities of the Peerless within the definition has only to fail. This position gets support from two Judgments rendered by benches of three Judges of this Court viz., Srinivasa Enterprises and others v. Union of India etc., [1981] 1 SCR 80 1 and State of West Bengal v. Swapan Kumar Guha., [1982] 1 SCC 561. Any attempt to distinguish the ratio of these two cases for the purpose of these appeals can....
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....y for the authorities to evolve fool-proof schemes to see that fraud is not allowed to be played upon persons who are not conversant with the practice of such financial enterprises who pose themselves as benefactors of people. CHINNAPPA REDDY J. 6. The question is "Is a prize-less chit a prize chit?" So posed the answer appears to be self evident. That is what it is in the ultimate analysis. 7. 'The Peerless General Insurance & Investment Co. Ltd.' was incorporated in 1932. After the nationalisation of the business of life insurance the name of the company was changed to 'the Peerless General Finance & Investments Co. Ltd.' For over a quarter of a century now, the business of the company has been that of 'finance & investment'. The company offers three schemes, the principal of which is the Endowment Certificate Scheme. Under this scheme, a subscriber is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years. On the expiry of the period, the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate. The....
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....be with the company, earning interest for the company but nothing for the subscriber himself. The subscriber who commits default after payment of two annual subscriptions is entitled to have the surrender value paid to him after the expiry of three years from the date of commencement. The surrender value is 90% of the subscriptions paid by him excluding the first year's subscription. In other words, if a subscriber who commits default after payment of two subscriptions opts for immediate payment after three years he forfeits his first year's subscription and 10% of the subsequent years' subscription. On the other hand, if he opts for payment at the end of endowment period he will get a refund of the subscriptions paid by him but without interest and without bonus. If he commits default after paying three years' subscription but opts for payment at the end of the Endowment period he will get back a proportionate part of the Endowment Amount and this without bonus. The yield will be very much lower than the 6% compound interest or 7% simple interest that we mentioned earlier. The subscriber is always at the losing end. It is a perfect case of 'Heads I win, tails y....
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....eady seen, default after the payment of the first subscription results in forfeiture of the first year's subscription. The first subscription is literally shared between the company and its agents and one need not wonder that under the method of accountancy adopted by the Company it is treated as income and not as a liability of the company. We are told that the company has adopted the 'actuarial' system of accountancy followed by the Life Insurance Corporation. Though we note here that the business of the Life Insurance Corporation is insurance business and therefore different from the business of the company, we will have more to say about the policies of the Life Insurance Corporation a little later. For the present we note that the company does not and cannot carry on any insurance business and that it accepts no risk. 11. Let us now take a brief look at the result of the attractive incentive given to the agents to collect the first year's subscription. A compilation prepared by the Reserve Bank of India which is found at page 457 of the paper book shows that the first year's subscription credited to the profit and loss account during the years 1978, 1979....
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....iptions to the total neglect of subsequent years' subscriptions. 14. At this point we may refer to one of the schemes marketed by the Life Insurance Corporation of India which appears to be familiarly known in circles connected with deposit schemes as 'Table No. 21 Policy'. We are referring to this policy as it was argued before us that the endowment scheme of the Peerless Company is better conceived in the interests of the investors than the 'Table No. 21 Policy' of the Life Insurance Corporation and yet no one has thought of stopping the Life Insurance Corporation of India from marketing the Policy. For a better appreciation of the submissions which we will consider at a later stage, we desire to set out the details of the Policy at this juncture itself in order to compare it with the Endowment Scheme of the Peerless Company. Two things have to be straightaway noticed, first, the 'Table No. 21 Policy' offered by the Life Insurance Corporation is not a life Insurance policy, as we generally know it, second, it is a policy without profits. Under this policy no one need undergo medical examination and no one would be unacceptable for reasons of health ....
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.... same proportion to the sum assured as the number of premiums actually paid bears to the total number stipulated in the Policy, will be automatically secured. The amount, of course, will be payable at the end of the Endowment period only. What is important is that if the Policy-holder commits default and does not pay any one of the first three premiums the premiums already paid automatically stand forfeited to the Life Insurance Corporation, entitling the Policyholders to no benefit. Since it is the poorer class of Policy-holders that may ordinarily be expected to commit default in payment of premiums, the forfeiture clause, in practice, operates harshly, specially against that class, the very class which requires greater security and protection. A perusal of the 'Report and Accounts', of the Life Insurance Corporation for the years ending March 31, 1983 and March 31, 1985 which have been placed before us shows that while 22,31,385 and 26,99,654 new policies were issued respectively during the two years the number of policies which lapsed or were forfeited were respectively 74,44,22 and 82,71, 19. Thus the number of policies which lapse or are forfeited are roughly thirty p....
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....and with some incentive such as a reduced premium for continuing to pay premiums regularly. We are sure that with the management expertise at its command the Life Insurance Corporation of India can devise a myriad ways of serving the poorer sections of the people of our country, as also to tap the huge untapped Savings resources, the existence of which has been brought home by Companies like the Peerless however wrong headed their business methods might be. It is a matter of common knowledge that the return is a policy-holder who survives the period of the policy is very poor. We are now told daily that the Life Insurance Corporation is paying higher bonus year after year. But the learned counsel for Peerless charges that the bonus comes out of the amounts of the ferfeited policies and that it is really the poorer class of defaulting policy-holders whose policies are forfeited that are paying bonus to the class of Policy-holders who are better of. One wonders if this is not so This surely is not what is contemplated by Art. 38(2) of the Constitution which talks of minimising the inequalities in income, not only amongst individuals but also amongst groups of people and Art. 39(c) wh....
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....les of immovable property by other persons; (d) "firm" means a firm as defined in the Indian Partnership Act, 1932; (e) "non-banking institution" means a company, corporation, (or co-operative society)" 17. Section 451(e) defines 'Non-Banking Institution' as meaning 'a company, corporation, or co-operative society'. Section 45K empowers the Reserve Bank to collect information from Non-Banking Institutions as to deposits and to give directions in the public interest,in particular 'in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received.' Section 45L empowers the Reserve Bank to call for information from financial institutions and to give directions, in particular directions relating to the conduct of business by them, etc. 18. In 1970 the Banking Commission constituted a Study Group headed by Dr. Bhabatosh Dutta to review the role of various nonbanking financial intermediaries. The Study Group confined their study to five classes of Finance Institutions which they considered were important Non-Banking Fi....
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....n agreement. Every subscriber has to pay his subscription in regular installments. The foreman charges, for his service, a commission on which there is a ceiling fixed by law in some States. He also reserves the right to take the entire chit amount at the first or second installment as prize. Depending on the terms of agreement, a fixed amount is also some times set aside for distribution among the non-prized members. After making provision for the above deductions the balance is put to auction (except at the last installment) and given as prize to the member who is prepared to forgo the highest discount. The amount of discount is distributed as dividend either among all the members or only among the non-prized members. In some States a ceiling has been fixed on the discount that a member can offer. In case more than one person is prepared to offer the same discount or when there are no bidders, lots are drawn to choose the prize winning member. The number of subscribers in a chit series equals the number of installments so that every member is assured of the opportunity of getting the prize. Sometimes with a view to catering to as many subscribers as possible a chitty comprises a ....
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....ermined by lot, draw or in any other manner, prizes or gifts in cash or in kind, whether or not the recipients of the prize or gift is under a liability to make any further payment in respect of such scheme or arrangement; (b) refunding to the subscribers or such of them as have not won any prize or gift,, the whole or part of the subscriptions, contributions, or other monies collected, with or without any bonus, premium, interest or other advantage, howsoever called, on the termination of the scheme or arrangement, or, on or after the expiry of the period stipulated therein; (2) managing, conducting or supervising as a promoter, foreman or agent of any transaction or arrangement by which the company enters into an agreement with a specified number of subscribers that every one of them shall subscribe a certain sum in installments over a definite period and that every one of 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 agreement, be entitled to the prize amount; Explanation: For the purposes of this sub-paragraph, the expression "prize amount" shall mean t....
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....thousands of subscribers that 20,000 persons would lose employment and that the potential for future employment would be destroyed. It was further pointed out that over 90% of the concerned Public Fund was invested in Government securities and in Nationalised Banks. The Balance-sheet of the company, its brochure and a copy of its advertisement were enclosed. The Reserve Bank of India by their order dated December 3, 1973 exempted the company from the provisions of paragraph 4 of the notification in so far as those provisions restricted the acceptance of subscriptions under the schemes up to 25% of the paid-up capital and free reserve fund. Certain conditions were however, imposed. The company was directed to transfer every year to the reserve fund a sum not less than 50% of the profit after taxes. The company was directed not to declare any dividend at rates higher than 6% and 7% on ordinary and preferential shares till the free reserve became equal to the paid capital. The company was also required to maintain not less than 75% of its total assets in the form of investments and Government Trustee-securities, etc. The Company was directed to submit every year a certificate from the....
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....ta. It was granted exemption from the provisions of paragraph 4 of the 1973 Directions subject to its compliance with the following conditions." After setting out the conditions it was stated that Peerless had been complying with the conditions and that its financial position continued to be satisfactory. We should mention here that whatever vices there may be in the Peerless Scheme and the business methods of Peerless, the financial position of Peerless, on the basis of the criteria mentioned in the affidavit of the Reserve Bank in the Favourire Bank, is far sounder now than then. 24. In 1974, a Study Group headed by Dr. J .S. Raj was appointed by the Reserve 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 Reserve Bank of India from time to time and to suggest measures for further tightening up the provisions so as to ensure that the activities of such companies, in so far as they pertained to the acceptance of deposits, investments, lending operations, etc. subserved the national interest and served more effe....
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....oreman or promoter and 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 price 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 interest earned on loans given to the subscribers against the security of the subscriptions paid or on an unsecured basis as also loans to other parties, service charges and membership 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....
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....ch schemes and/or switch over to any other type of business permissible under the law." 29. Finally, in paragraph 6.21 the study Group made its recommendation for a total ban on the conduct of prize chits. If paragraph 6.21 is read along with paragraph 6.3 ofthe Report we must take it that the recommendation of the Committee was that prize chits of the kind described by them in paragraph 6.3 should be banned, respective of the name under which they were conducted. Simple Recurring Deposit Schemes were not contemplated. 30. Thereafter, as a follow-up of the recommendations of the Raj Committee, in 1977 two sets of directions were issued by the Reserve Bank, called the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions, 1977. Paragraph 2 of Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 was more or less the same as paragraph 2 of the 1973 directions. As in the 1973 directions, so also in the 1977 directions a Miscellaneous Non-Banking Company was defined to mean a company carrying on all or any of the types of business referred to in paragraph 2 of the directions. Paragraph 5....
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....ing in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lump sum or Otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person." 32. It was suggested by the learned Counsel for the Reserve Bank that whether Peerless Company was a miscellaneous Non-Banking Company within the meaning of the expression as defined in the Miscellaneous Non-Banking Companies (Reserve Bank Directions, 1973) or a 'financial institution' which was not such a miscellaneous banking company, undoubtedly, there was a ceiling or the maximum period for which the company could accept deposits and that was thirty six months. We will refer to the argument in due course. 33. Thereafter in 1978 the Prize Chits and Money Circulation Schemes (Banning) Act 1978 was enacted to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or ....
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.... is whether the Endowment Scheme piloted by the Company falls within the definition of prize chit? Section 3 bans prize chit and money circulation schemes and is in the following terms: "No person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme" 36. It is important to notice here that the ban is not merely on promoting or conducting any prize chit or money circulation scheme but also on participation in the scheme. Section 4 makes a contravention of the provisions of Section 3 punishable with imprisonment for a term which may extend to three years or with fine which may extend to five thousand rupees, or with both. Section 5 makes printing, publishing of any ticket, coupon or other document for use in the prize chit or money circulation scheme with a view to promotion of such scheme in contravention of the Act punishable with imprisonment etc. So also the printing, publication or distribution of any advertisement of the prize chit or money circulation scheme. The use of any premises for purposes connected....
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....West Bengal has made the Prize Chits and Money Circulation Schemes (Banning) (West Bengal) Rules, 1979 in exercise of its powers under Section 13 of the Act. 37. The Miscellaneous Non-Banking Companies (Reserve Bank) Directions 1977 and the Non-Banking Financial Companies (Reserve Bank) Directions came into force on July 1, 1977. On March 3, 1978 the Reserve Bank informed the Peerless Company that under the Miscellaneous Non-Banking Companies Directions which applied to the Company, the Company was prohibited from accepting deposits for more than 36 months and since the deposits accepted by the Company were for periods exceeding 36 months, the Reserve Bank wanted to know what action the Company proposed to take to comply with the requirement stipulating the maximum period for which deposits might be accepted. In reply, the Company, by its letter dated 31st March, 1978 pointed out the special features of the Company which persuade the Reserve Bank to grant exemption to the Company from the 1973 directions. The Company invited the attention of the Reserve Bank to the various elements of the scheme which made it impracticable to comply with the stipulation regarding the maximum per....
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....culation Schemes (Banning) Act, 1978 which had come into force with effect from December 12, 1978. As the Company was banned from doing fresh business and was required to wind up its existing business under the Act, there was no question of granting any exemption to the company. Nevertheless the Reserve Bank stated that they had considered the claim for exemption on merits and found that it was necessary to cancel the exemption already granted. The reasons for the proposed cancellation were set out and the Company was asked to show cause why the exemption should not be cancelled. On August 30, 1979 the Company replied at great length stating how necessary it was in the public interest to grant exemption to the Company. Exemption was, however, refused by the Reserve Bank on March 19, 1980. On August 10, 1979 the Government of West Bengal addressed a communication to the Peerless Company pointed out that the Prize Chits/Money Circulation Schemes conducted by the Company came within the purview of the Prize Chits and Money Circulation Schemes Banning) Act, 1978 and, therefore, the Company was under an obligation to submit a winding up plan under Rule 4 of the Prize Chits and Money Cir....
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....cy of the writ petition in the Calcutta High Court we do not desire to say anything on the merits of the claim of the Company for exemption or on the question whether the Company is a financial institution within the meaning of paragraph 11 of the Non-Banking Financial Companies (Reserve Bank) Directions. We leave that question open as we consider that the appeals preferred by the Reserve Bank of India, the Union of India and the State of West Bengal may be decided without expressing any opinion on the question. Appeals preferred by the Company are disposed of with these observations. 40. The question for our consideration is, "Is the Endowment Scheme of the Peerless Company a prize chit within the meaning of Section 2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act?" The particulars of the scheme are not in dispute. What is its nature? It is not a gambling scheme. It is not a lottery scheme. There are no prizes, no gifts, no elements of chance. It is just a plain Recurring Deposit Scheme such as the many schemes floated by Commercial Banks and National Savings Organisation. This is admitted in the Inspection Report of the Reserve Bank of India. But, says the C....
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....yees and putting in jeopardy the small savings of millions of little Depositors. We must add here that both sides talked of the public interest and shed copious tears for the 'unfortunate depositors' but neither side appeared to have any ready plan or even a contingent plan to protect or benefit the depositors. On the one hand, there is a demand for the retributive pound of flesh, unmindful of the future of thousands of employees and the fate of the small savings of millions of depositors, all in the name of the interest of the depositors. On the other, having bled the depositors white there is now a glib and make-believe offer of submission to strict regulation or even nationalisation for the protection, it seems, of employees and depositors. 42. In the ultimate analysis the question turns on the interpretation of the definition of 'Prize Chit' in s.2(e) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. On this, we are not without guidance. We have it in Srinivasa Enterprise v. Union of India, [1981] 1 SCR 801. The very provision was considered and construed there by a bench of three Judges of the Court which included one of us. The Court, fo....
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.... through prize chits benefit the organisers of such schemes who have no social responsibility for national productivity and in their hands is easy money with little developmental benefits or attractive returns for the poor investors. "The noxious net cast by the prize chit promoters was large and the State moved to stop this menace. Many a little makes a mickle, and those small sums collected from a substantial number of subscribers accumulated into huge resources which otherwise would ordinarily have been available for national development. The grim picture of the luckless may who were losing their money, appetized by gambling prospects, and the sterlisation of people's resources which were siphoned off by private adventurists through prize chits to the detriment of national development ignited the impugned legislation." The Court identified the vice sought to be prevented by the Banning Act as the glitter of glamorous prizes, the lure of big money for small. What it sought to prevent was the exploitation of the ignorant poor by the glare of publicity of fabulous prizes. The Court found that it was this mischief that was remedied by the Act. According to Srinivasa the....
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....ed harmless by the Parliament. We must notice here that in a 'Conventional Chit' as defined in the Act, though every subscriber is entitled to the prize amount, some get it sooner than the others depending on the result of the auction or the draw and to the extent and it depends on a draw there is a slight element of chance. In the Recurring Deposit Schemes such as the ones we are concerned with, even that element of chance is lacking. If 'Conventional Chits' are not banned, it is a legitimate question to ask whether Parliament could have contemplated the banning of schemes not involving the element of the kind of harm intended to be prevented, even to the slight degree as in Conventional Chits? 45. Much argument was advanced on the significance of the word 'includes' and what an inclusive definition implies. Both sides relied on Dilworth's case. Both sides read out the well known passage in that case where it was stated, "The word "include" is very generally used in interpreta-, tion clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comp....
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....ultimate refund of the amount of subscriptions (Vide Para 6.3 of the report of the Raj Study Group). It was recommended that prize chit and the like by whatever name called should be banned. Since prize chits were 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 Groups had given it. That this is the only permissible interpretation will also be further evident from the text Chit and the context as we shall presently see. 48. Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual. A statute is b....
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....rize Chit' expressly excludes the Conventional Chit obviously for the reason that the 'chance' element is overshadowed by the 'certain' element. If so, why should any construction be placed on the definition so as to bring in all Recurring Deposit Schemes, even if they do not involve a chance element? Such a construction would reduce the definition to a near absurdity and render the reference to the giving or awarding of a prize or gift, a meaningless superfluity. If a conventional chit is not a 'prize chit' by definition, there appears to be no logic in construing the definition to include a Recurring Deposit Scheme. 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 s.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 "all or an....
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.... one thousand rupees. Section 8 provides for forfeiture of newspapers or other publications connected with any Prize Chit or Money Circulation Schemes. Surely these provisions are far too draconian to be applied to schemes which are but Recurring Deposit Schemes. 51. However we look at it, we arrive at the conclusion that s.2(e) does not contemplate a scheme without a prize and, therefore, the Endowment Certificate Scheme of the Peerless Company is outside the Prize Chits and Money Circulation Schemes (Banning) Act. The conclusion appears to us to be irresistable. The appeals filed by the Reserve Bank of India, the Union of India and the State of West Bangal 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. We must also record our dissatisfaction with some of the schemes of the Life Insurance Corporation which appear to us to be even less advantageous to the subscribers than the Peerless Scheme. We suggest that there should be a complete ban on forfeiture clauses in ....