TaxTMI 
TaxTMI 
1987 (12) TMI 334
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....e 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 Rs. 5,000 or with both. Section 5 provides penalty for other offenc....
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.... 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) 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....
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.... 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 urbanites, pressured by dire poverty and doped by the hazy hope of a lucky draw, subscribe to the scheme although they can ill afford to spare any money. 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 ....
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....they do not get any prize. The principal items of income of these companies are interests earned on loans given to the subscribers against the security of the subscriptions paid or on unsecured basis as also loans to other parties, service charges and member ship fees collected from the subscribers at the time of admission to the membership of the schemes. The major heads of expenditure are prizes given in accordance with the rules and regulations of the schemes, advertisements and publicity expenses and remuneration and other perquisites to the directors. " The Study Group recorded its conclusions in paragraph 6.11 as follows: "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 t....
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....r 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 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....
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....mended 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 Ban....
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....ntioned 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, cert....
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....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. 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. E....
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....d, 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. 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 member....
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.... 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 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 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....