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I REGISTRAR OF FIRMS, SOCIETIES AND CHITS, )..._, A UTTAR PRADESH > v. SECURED INVESTMENT COMPANY,LUCKNOW AND ANOTHER. l.l DECEMBER 17, 1987 [B.C. RAY AND JAGANNATHA SHETTY, JJ.] Prize Chits-Prohibitedcategory under section2(e) of the Prize c Chits and MoneyCirculationScheme (Banking)Act, 1978-Prohibi- tion of Participationtherein. The respondent,a partnershipfirm, carriedon businesstermed asa "Scheme for Investment". TheRegistrarof Firms,Societiesand < Chits, the appellant,holding the view that the investmentscheme of the Drespondentcompany fell withinthe prohibitedcategory of prizechits as definedin section2( e) of the PrizeChits and MoneyCirculation Scheme (Banking)Act, 1978,seizedall thedocumentsof thecompanyand directed the concernedbanks not to haveaccountsin relationthereto. The respondentchallenged the actionof theappellantby a writpetition in the HighCourt.The HighCourtallowedthe WritPetition,quashing E the orders of the appellant.The appellantappealed to thisCourtby specialleave. Allowingthe appeal,the Court, ~· ,- HELD:The prize chit,by a simpledefinition,includes a scheme -fl F bywhicha personin whatevername _collects moneysfrom individuals "' for the purposeof givingprizes and refundingthe balancewith or withoutpremiumafter the expiryof a specifiedperiod. The reachand range of the definition of 'PrizeChit' is sweeping.The participationof any personiri such chit or schemehas beenprohibited,the objectbeing - that peopleshould not be attractedto investtheir moneysin thehopeof Ggetting prizes or gifts. [468A-B, CJ y There is no doubtthat the schemeof thecompanyis primarilyfor -A - the benefit of the promoter or the company at the costof thesubscrib- ers. Section 2(e)ofthe Actwasintendedto coverall sucharrangements or schemes. It is emphasizedthat the Actwasintendedto banall kinds H of prizechits wherepeople part with theirmoneyand riskthe chanceof 456 REGISTRAROFF.S.C. U.P. v.SECUREDINVESTMENTCO.[SHETIY,J.I 457 . I .... ' gettingprizes and gifts,and to protectthe peoplefrom exploitation.A ~ Any scheme or arrangementin whicha personagrees to lose or is make ,. to part with a portionof hispaymentagainst the chanceof gettingany prize or gift,shouldbe consideredas prizechit fallingwithin the inclu sive definitionunder Section 2(e). The scheme of the company is nothingbut prizeChit as definedunder Section .2(e) of theAct. Theconclusionof the High Court is patentlyerroneousand is unsus-B tainableboth on factsand law.The actionof theRegistrar,appellant, upheld.[473E-H; 473A-B] OBSERVATION: The Registrarof thefirmswill, whilefakingaction ·against the persons or firmsunderthe Act,takecare to see that the membersof theschemeare not denied,their contributions or prizesC whichthey are legitimatelyentitled to, if theprizechit is allowed to be run for the full term. [473B-C] ~ Srinivasa Enterprises and others v. Union of India etc., [198111 -t 'r ., ~ .. ..,. . *' SCR 801 at 804 and Rese111e Bank of India v. Peerless General Insur- anceand Investment Co. Ltd., A.I.R. 1987 SC 1023, referredto.D CIVILAPPELLATE JURISDICTION:Civil Appeal No. 1988 of 1982. From the Judgmentand orderdated 20.4.1982 of theHighCourt of Allahabadin WritPetitionNo. 630 of 1982. Anil Dev Singh and Mrs. Shobha Dikshitfor the Appellant. L.M. Singhvi and C.L.Sahu for theRespondent. ThefollowingJudgmentof theCourtwas delivered by JAGANNATHA SHETTY, J. Thisappeal by specialleave, is by the Registrarof Firms,societiesand chitsof the State ofUttarPradesh anddirectedagainst the judgmentand orderpassed by the HighCourt of Allahabadin writpetitionNo. 630 of 1982. The saidwrit petitionwas filed by the responde!'twhich is a partnershipfirm calledas "M/s. Secured Investment Company"("The Company"). Thecompanymainly carries on businessat Lucknow. It hasbranchoffices at Kanpurand Bareilly. The natureof businessof thecompany is termed as "a .~cheme for investment". Thequestion raisedin thisappeal is whetherthat schemefor investmentfalls withinE F G H A B c D ' 458 SUPREME COURT REPORTS [1988] 2 S.C.R. thecategoryof 'prizechit' as definedunder the PrizeChitsand ~ MoneyCirculation Scheme (Banning)Act, 1978 (for short "TheI Act"). The Registrar of Firms, Societies and Chits was of theopinion c... thatthe schemeof thecompanyfalls withinthe prohibitedcategory of prizechits as definedunder the Act. So he seizedall thedocuments of tlie companyand alsodirectedthe concernedbanks not to have accountsin relationthereto.Challengingthe action of theRegistrar, thecompanymoved the HighCourtwith a writpetitionunder Art; 226 of the Constitution.The HighCourtallowedthe writpetitionand quashedthe ordersmade by the Registrar. In orderto correctlyappreciatethe questionraised in thls appeal,it is better.tohave first the clearpictureof the law governing thequestion. Section 3 of the Actimposesa ban not merelyon prom oting or conductingany prizechit or moneycirculationscheme, but alsoon participationin suchchit or schemes.Section 4 makesa contra· vention of the provisionsof Section 3 punishablewith imprisonment whichmay extendto threeyearsor withfine which may extendto Rs.5,000 or with both.Section5 providespenalty for otheroffences '· like printing or publishingany ticket,coupon or other documentfor usein theprizechit or moneycirculationscheme with a viewto prom- ote suchscheme in contraventionof theAct.Section6 dealswith offencesby companies.Section 7 conferspower on thepoliceofficers notbelowthe rank of an officerin charge of a policestationto enter, Esearchand seize. Section 8 providesfor theforfeitureof newspapers or other publicationscontaining prize chit or moneycirculationscheme. Section 11 provides exemptionto certaincategories of prize chits or moneycirculationschemes. The prizechits or moneycirculation schemespromotedby the State Governmentor anyofficeror author ity on its behalf, or by a Companywholly owned by a State Govem- Fmentare exemptedfrom the provisionsof theAct. 'ConventionalChit' has beendefinedunder Section2(a), and "PrizeChit" has beendefinedunder Section 2(e) of theAct. Conven tionalChit standsexcludedfrom the definitionof prizechit, and so muchso, theConventionalChit remainsuntouched by provisionsof the GAct.The definition of the conventionalchit is as follows: > H "Section 2(a). "ConventionalChit" means a transac tion whethercalled chit, chit fund, kuri or by any other name or underwhicha personresponsiblefor theconduct of· thechitentersinto an agreementwith a specified number of personsthat everyone of them shall subscribea REGISTRAR OFF.S.C. U.P. v. SECURED INVESTMENT CO. (SHETIY, J.] 459 .-4_ certain sum of money (or certainquantityof graininstead) A by way of periodicalinstalmentsfor a definiteperiod and that each such subscribershall, in histurn,as determined bylotor byauctionor bytender or in suchothermanneras may be providedfor in thechitagreement,be entitledto a prize chit." B Wemaypresentlyrefer to thedefinitionof 'prizechit' and before that it is better tohavea littlebit of historyof chittransactions.The words'Chitty' or 'kuri' Chit or Chit Fundappearto bethecommon words but withregionalvariations.Although there is noclearevidence to_ showthe exactplaceof originof chitfund,the availabletext [(i) 'Chit Finance'by C.P.SomanathNayar (1973);(ii) ChitFundsand c FinanceCorporationby S. Radha Krishanan (1974)] indicate that it has spread fromthe Southernmost partsof India.In theTravancorearea of the State of Keralait is generallycalled 'chitty'.Within the same • State, in Cochinand Malabarareas it ispopularlycalled 'kuri'.In other parts of thecountryit isordinarilycalled 'chit' or 'chit fund'.In Tamilit istermedas 'chit'.In Malayalamit is called as 'chitti' or 'kuri'. D '!- Theseterms appearto besynonymous,meaning thereby a written piece of paper.These transactionswere purelyindigenousinstitution. They originatedin villagelife organisedby a smallgroupof people wellknowto eachother.They agreedto contributeperiodicallya certainamount of grain or money and to distributethe entirecollec- tion whichwas termedas 'fund'to oneof thesubscribers. It was E carriedon withsomemutuallyagreed basis. In thenineteenthcentury, ., if not earlier, it wasverypopularin centralTravancoreand Trichur areasprobablyamong Churchcongregations. ~ The chit fundsappearto haveoriginatedfrom two legitimate )I-' demands of the ruralpeople:(i) a necessityfor a lump sumamount to F meet some unusualexpenditureand (ii) to providea formof accumu- lated savingwhen peoplehad no bankingfacilities. It was considered asa source of creditand mode of saving. It was meantfor mutual benefitin which sopie peoplejoined to saveand othersto borrow. What distinguishesthe chitfund,however,from otherfinancialtrans- 'i actions is that it connectsthe borrowingclass directlywith the lending G k class. The pooledsaving is lentout to thesamegroupof contributors. Achitfundcollectsthe savingsof themembers by periodicalsubscrip- tionsfor a definiteperiod. At the sametime, it makesavailablethe pooled savings to each memberby turnas agreedby them,The col- lectedfund may be giveneitherby drawinglots or bybidding.Lots are drawn periodicallyand the memberwhose name appearson the win- H A B 460 SUPREME COURT REPORTS (1988] 2 S.C.R. ning chit getsthe collectionwithout any deductions.He, however, continuesto payhis subscriptionsbut his name is removedfrom subse quent Jots.Thuseverymembergets a chanceto receivethe whole amount of thechit.This is generallythe featuresof a conventional chit. It is operatedwithout a professionalpromoter or manager and withoutany risk of Joss of capital. Duringthe course of years,the chitfundsbecamemore and morepopularand attractive.In theusualprocessof socialgrowth;the chilliescrossedboundariesof itsbirthplace. It assumednew institu tionalforms with emergence of new typesof enterpreneurs.The part nershipfirms, privateor publiclimitedcompaniestook over the chit C businessin variousforms. They gave differentnames, such as price chit,lucky-draw,benefit scheme or money circulationscheme. They offeredprizes to attractsubscribers.The basicfeatures,however, remainedthe same in all suchschemes.Periodicallythe namesof the subscriberswere put to draw and the luckymember was given a prize eitherin cash or in kindlike articlesof utility.The subscriberswere Dalsogivenrefundof a portionof theircontributions.This became regularbusiness in ever so many people. Undoubtedly,this rapidgrowthof chitfundshas carriedwith it someunhealthyfeatures of exploitation.That has beengraphically describedby KrishnaIyer, J. in SrinivasaEnterprises & Ors. v. Union E oflndiaetc., [1981] 1SCR801at804asfollows:· F G H "The quintessential aspects of a prizechit arethat the organisercollects moneys in lump sum or instalments, pursuantto a schemeor arrangement,and he utilisessuch moneys as he fanciesprimarilyfor his privateappetiteand for(1) awardingperiodically or otherwiseto a specified numberof subscribers,prizes in cashor kindand (2) refundingto thesubscribers thewhole or partof themoney collectedon theterminationof thescheme or otherwise. Theapparenttenor may not fullybringout the exploitative importlurkingbeneaththe surfaceof thewordswhich describethe scheme, Small sums are collectedfrom vast numbersof persons,ordinarilyof slendermeans in urban andruralareas.They are reduced tobelieve by the blare of glitteringpublicity and the danglingofastronomical amountsthat theystanda chance-in practice negligible of gettinga hugefortune by makingpetty periodicalpay ments.The indigentagresticsand the proletarianurbani- ) y REGISTRAROFF.S.C. U.P. v. SECURED INVESTMENT CO. lSHEITY,J.] 461 tes, pressuredby direpovertyand doped by the hazy hopeA of a luckydraw,subscribe to the schemealthoughthey can ill afford to spareany money.This is not promotionof thrift or wholesomesmall savingsbecausethe poor who pay,are boundto continueto payfor a wholeperiodof a fewyearsover perilof losingwhat has beenpaid and,at the endof it,thefragileprospectsof theirgettingprizes are B next to nilandeventhe hardearnedmoney which they haveinvestedhardly carriesany interest.They are eligible to getbackthe moneythey havepaid in driblets,virtually without intere,t, theexpression'bonus' ins. 2(a) being an euphemismfor a nominalsum. What is more,the repay ableamountbeing small and the subscribersbeing scattered C all overthe country,they find it difficulteven to rocover themoney by expensive,dilatory litigative process." In 1974, the ReserveBank of Indiaintervened.The Reserve Bankconstituteda Study Group headed by Dr. J.S. Raj to examine theadequacyof existingstatutoryprovisionsin regulatingthe conductD of business by non-bankingcompanies. The Study Group was also askedto suggestremedialmeasuresso as to ensurethat the activities of suchcompanies,in sofor as theypertainedto theacceptanceof deposits,investment,lending operations,etc. subservedthe national interest. The Study Groupwent into the matterin somedepth. Chapter VI of their report was devotedto MiscellaneousNon-Banking Com panies which were conductingprize chits,benefit/savingsscheme or luckydrawsetc. Paragraph6.3 of thereportcontainsinterestinginfor mationsand it reads as follows: E F "6.3Companies conductingthe abovetypes of schemesare comparativelyof a recentorigin and of late, therehas beena mushroomgrowth of such companies whichare doingbrisk business in severalparts of the country,especiallyin bigcitieslike Ahemdabad,Banga lore,Bombay, Calcutta and Delhi.They had alsoestab- G lishedbranchesin various States. Thesecompaniesfloat schemesfor collectingmoney from the publicand the modusoperandiof suchschemes is generally as described below: The companyacts as the foremanor promoterand H 462 A B c D SUPREME COURT REPORTS [!988] 2 S.C.R. collectssubscriptionsin onelumpsum or bymonthlyinstal mentsspreadover a specifiedperiod from the subscribers totheschemes.Periodically,the numbersallotted to mem bersholdingthe tickets or unitsare putto a drawand the numberholding the luckyticketgets the prizeeither in cash or in theformof anarticleof utility,such as, a motorcar, scooter,etc. Once a persongets the prize he is veryoften notrequiredto payfurtherinstalmentsand his name is deletedfrom furtherdraws. The schemesusually provide forthereturnof subscriptionspaid by thememberswith or withoutan additionalsum by wayof bonus or premium aL theendof thestipulatedperiod in casetheydo notget any prize.The principalitems of incomeof thesecompaniesare interestsearned on loansgivento thesubscribersagainst thesecurityof thesubscriptionspaid or onunsecuredbasis asalsoloansto otherparties,service chargesand member shipfees collectedfrom the subscribersat thetimeof admissionto themembershipof theschemes.The major heads of expenditureare prizesgiven in accordancewith therulesand regulationsof theschemes,advertisements andpublicityexpensesand remunerationand otherper quisitesto the directors." The StudyGrouprecordedits conclusionsin paragraph6.11 as Efollows: F G H "From theforegoingdiscussion,it wouldbe obvious thatprizechits or benefitschemes,benefit primarilythe promotersand do notserveany socialpurpose. On the contrary,they are prejudicialto thepublicinterestand also adverselyaffect the efficacyof fiscaland monetarypolicy. Therehas alsobeena publicclamourfor banningof such schemes;this stemslargelyfrom the mal-practicesindulged inbythepromotersand alsothe possibleexploitation of such schemesby-unscrupulouselements to theirown advantage.We are,therefore,of theviewthat the conduct of prizechits or benefitschemesby whatevername called shouldbe totallybannedin thelargerinterests of the public and that suitablelegislativemeasures should be takenfor thepurposeif theprovisionsof theexistingenactmentsare consideredinadequate.Companies conducting prize chits, benefitschemes,etc., may be alloweda periodof three yearswhichmay be extendedby onemoreyear to windup ) REGISTRAROFF.S.C. U.P. v. SECUREDINVESTMENTCO.(SHE1TY,J.J 463 their businessin respectof suchschemesand/or switch over toanyothertype of businesspermissibleunder the law." It willbe seenthat the Study Groupwas of theopinion,that prizechits or benefitschemesprimarilybenefit the promotersand do A notserveany socialpurpose.They are prejudicialto thepublic interest.They adverselyaffect the fiscaland monetarypolicies of the B Government.The Study Group was firmlyof the view thatthe conduct of prizechits or benefitschemes by whatevername calledshouldbe totallybannedin thelargerinterestsof thepublic. The Government of Indiaacceptedthat report,and decidedto implementthe aboverecommendationsof the Study Group.In 1978, the Actwithwhichwe areconcernedwas passedin theParliament. The Act providesfor banningthe promotionor conductof 'money circulationscheme' or 'prize chit' which have beendefined as follows: "Section 2( c) 'moneycirculationscheme' means any scheme, by whatevername called,for themakingof quick or easymoney,or forthereceiptof anymoneyor valuable thing as theconsiderationfor a promiseto paymoney, on anyevent or contingencyrelative or applicableto the enrolmentof membersinto the scheme,whetheror not suchmoney or thing is derivedfrom the entrancemoney of themember of suchscheme or periodicalsubscription; Section 2( e)'prizechit' includesany transactionor arrangement by whatevername calledunder whicha personcollectswhether as a promoter,foreman,agentor inanyothercapacity,moneys in one lumpsum or in instal mentsby wayof contributionsor subscriptions or by saleof units,certificates or other instrumentsor in anyotherman ner or asmembershipfees or admissionfees or service chargesto orin respectof anysavings,mutual benefits, thrift,or anyotherscheme or arrangementby whatever namecalled,and utilisesthe moneys so collectedor any partthereofor theincomeaccruingfrom investmentor otheruse of such moneysfor all or anyof thefollowing purposes,namely: (i)giving or awardingperiodicallyor otherwiseto a specifiednumber of subscribers as determined by lot,draw or in anyothermanner,prizes or gifts in cash or inkind, c D E F G H A B c D E F G H 464 SUPREMECOURT REPORTS (1988] 2 S.C.R. whether or not the recipientof theprize or gift is under a liabilityto makeany furtherpaymentin respect of such scheme or arrangement. (ii)refundingto thesubscribers or such of them as have not won anyprize or gift, the whole or partof thesubscrip tion,contributions or othermoneyscollected,with or with out any bonus,premiuminterest or other advantage by whatevername called, on the termination of thescheme or arrangement, or on or afterthe expiryof theperiod stipulatedtherein, but does not includea conventional_ chit.,, The scheme for investmentwith whichthe companyhas been carrying on itsbusinessis neithera conventionalchit not a 'money circulationscheme'. That is not disputedby theRegistrar of Firms. Accordingto him,the scheme is a 'prizechit' as definedunder Section 2( e) of the Act.To understandthe correctscope of the definition, we mustfirst try to ascertainthe purpose of the legislation.The legal interpretationis notan activity suigeneris. Under theview,now widelyheld, the purpose of the enactment is the touchstone of interpretation.The first stepin interpretation,therefore, is togather allinformationsabout the purpose of the Act. If theActwasmeant forthepublicgood, then everyprovisionthereof must receivefair and liberalconstruction. It must be construedwith visionto ensurethe achievement of theobject of the Act. The purpose of theActcould be gatheredby having recourseto theStatement of Objects andReasonsaccompanyingthe Billand .in longtitle of the enactment.The Statement of Objects and Reasons readsas follows: "In June 1974, theReserveBank of India had con stituteda Study Group under the Chairmanship of Shri James S. Raj, the thenChairman, Unit Trust of India,for examiningin depththe provisions of ChapterIII-B of the ReserveBank of India Act, 1934, and the directionsissued thereunder to non-bankingcompanies in orderto assess theiradequacyin thecontext of ensuringthe efficacyof the monetaryand creditpoliciesof thecountryand affordinga degree of protection to theinterests of the depositorswho placetheir savings withsuch companies.In itsreportsub mittedto theReserveBank in July 1975, the Group,ob- > l • REGISTRAR OFF.S.C. U.P. v. SECUREDINVESlMENTCO.[SHETIY, J.] 465 served that the prizechit/benefit/savingsschemes benefitA primarilythe promotersand do not serveany socialpur pose. On thecontrarythe Grouphave statedthat theyare prejudicialto the public interestand affectthe afficacyof thefiscaland monetary policies of thecountry. 2. Prize chitswouldcover any kindof arrangementB underwhichmoneysare collected by wayof subscriptions, contributionsetc. and prizes,gifts etc. are awarded.The prizechit is reallya forrnof lottery.Its basicfeature is that theforemanor promoterwho ostensiblycharges no com missioncollects regular subscriptionsfrom the members. Once themembergets the prize,he is very oftennot C requiredto payfurtherinstalmentsand his name is drop- pedfromfurtherlots. The institutionsconducting prize chitsare private limited companieswith a very low capital basecontributedby thepromoters,directors or theirclose relatives. Such schemesconfer monetarybenefit only on a fewmembersand on thepromotercompanies.The Group D had,therefore,recommendedthat prizechits or money circulationschemes by whatever name calledshouldbe totallybannedin thelargerinterestsof thepublicand suit- able legislativemeasures should be undertakenfor the purpose. 3. TheBill proposesto implementthe aboverecom mendationsof the Group by providingfor thebanningof E the promotion or conductof anyprizechit, or moneycircu lation scheme by whatevername called,and of thepartici pationof anypersonin suchchit or scheme.The Bill pro videsfor a period 0f twoyearswithinwhich the existing F unitscarryingon thebusinessof prizechits or moneycircu lationschemesmay be woundup andprovidesfor penalties andotherincidentalmatters. The repeal of' t.he existing State Legislationson thesubjecthas also been providedfor in theBill." G Thelong title of the Actreads: "An Act to banthe promotionor conduct of prizechits and moneycirculationscheme and for matters connected therewith or incidental thereto." It will beclearfromthese r~citals .that the Parliament intendedto banall prizechits and money Clfculattonscheme. Some of the aspectsof thedefinitionof prizechit hasbeenconsideredby thisConrt.In Reserve Bank of India v. Peerless H 466 SUPREME COURT REPORTS (1988] 2 S.C.R. A GeneralInsuranceand Investment Co. Ltd., AIR 1987 SC 1023 0. D E F G H Chinnappa Reddy, J. speakingfor thisCourtobserved(p. 1041): "We do not thinkthat by usingthe word "includes", in the definitionin s. 2(e) of the Act the Parliamentin tended to so expandthe meaning of prizechit as to take in everyschemeinvolvingsubscribingand refunding of money. The word "includes", the contextshows, was intended not to expand the meaning of "prizechit" but to coverall transactions or arrangements of thenature of prizechits but under different' names. The expression "Prize Chit" had no where been statutorilydefined before. The Bhabatosh Datta Study Group and the Raj Study Group had identified the schemespopularlycalled "Prize Chits". The Study Groupalso recognisedthat "Prize Chits" were also variouslycalled benefit/savingsschemes and lucky drawsand thatthe basiccommonfeatures of the schemeswere the giving of a prizeand the ultimaterefund of the amount of subscriptions( vide Para 6.3 of thereport of the Raj Study Group). It wasrecommendedthat prize chitsand the like by whatevername calleddifferently, 'prizechits','benefit/savingsschemes', 'lucky draws',etc. It becamenecessaryfor the Parliament to resortto an inclusivedefinitionsso as to bringin alltransactions or arrangementscontaining these two elements.We do not think that indefiningthe expression 'Prize Chit',the Par liament intended to departfrom the meaningwhich the expressionhad cometo acquirein the world of finance,the meaningwhich the Datta and the Raj Study Grouphad given it." The learned judge while examiningthe scope of twoclauses(i) and (ii) of sec. 2(e)observed(p. 1042-43): "The argumentis thatthe twoclauses(i) and(ii) are to be read disjunctively and thattheyshould not be readas y if theyare joinedby the conjunction'and'. We do not Y agree. There is no need to introduce the word 'or' eitheF. How clauses(i) and(ii) of sec.2( e)have to be read _,. depends on the context. The contextrequires the definition to be re;td as if both clauseshave to be satisfied. There is nothingin the text whichmakes it imperativethat it be read otherwise. Tue learned counsel urges that the expression • REGISTRAR OF F.S.C. U.P. v. SECURED INVESTMENT CO. [SHETTY, J .) 467 "all or any of thefollowing purposes" indicatesthat theA purposemay be eitherthe onementioned in (i) or theone mentionedin (ii). We donotagreewith this submission. Eachof theclauses(i) and(ii) containsa numberof alternativesand it is to thoseseveralalternativesthat the expression "all oranyof thefollowing purposes" referand B not to (i)or (ii) whichare notalternativesat all.In fact,a prizechit, by whatevername it maybe called,does not contemplateexhaustion of theentirefund by the givingof prizes;it invariablyprovides for a refundof theamountof subscription,less the deductions,to allthesubscribersor to thosewho havenot wonprizes,dependingon thenatureof thescheme.Clauses (i) and(ii) referto the twin attributes ofa prizechit or like schemeand not to two alternative attributes." In thelightof theseprinciples, we may now have a closelook at thedefinitionof 'prizechit' undersec. 2(e). We maycull out the followingattributes: c D There must be collectionof moneysfrom persons.The moneys maybe collected in onelumpsumor in instalments.The moneys may be collected by wayof contributions,subscriptions or as membership fees,admissionfees or servicecharges. It may be collected by sateof -t" units,certificates or other instruments.The collectionmay be in E respect of anysavings,mutual benefits,thrift or anyotherschemeor arrangement,no matter by whatname.The Collection may be made > 'r by a promoter,foreman, agent or in any othercapacity.The collection ठ moneys or any partthereof is utilisedfor all or anyof thepurposes s!'t out in clauses(i) and(ii). Theyare the two distinctattributesof prizechit, eachof whichhas to besatisfied.The definitiongoes a stepF ~ further.The amountcollected as such neednot be utilisedfor anyof thepurposesunder clauses(i) and(ii). It maybe sufficientto attract thedefinitionif theamoun;accruedfrom investmentof suchcollection is usedfor all or any of thepurposesunder clauses (i) and (ii). --i Clauses(i) and(ii) providefor giving or awardingprize or gift to G subscribers.It maybe periodical or otherwise.The prizeor giftmaybe ~awarded by lot,drawor in any othermanner.Then there may be refund of the whole or partof thecollection.The refundmay be made toall or such of themwho havenot wonany prizeor gift.The refund maybe madewith or withoutany bonus,premiuminterest or other advantage.H 468 SUPREME COURT REPORTS (1988] 2 S.C.R. A ·· Leavingaside the verbiage,if werewritethe definition whiclt.( .. reeks of simplicity, it runslike this: Prize chit includesa scheme by which a person inwhatevername collectsmoneysfrom individual,,for the_ purpose _of giving prizes and refunding _the balancewith or "'ith· out premium after the expiry of a specifiedperiod; · B From the above analysis,it will be clear that thereachand rangy of the definition of 'prizechit' is sweeping. The generality of thei -language appears to have been deliberatelyused so that the transac tion; arrangement or schemein whichsubscribers or contributors agree to foregoa portion of theircontnlmtionsin thehope of getting - any prize or giftshould not escapefrom the net of the definition.Even C the participation of any personin suchchit or schemehas been pro hibited. The object being that.the people should not be attracted to:( invest their moneys in the hope of gettingprizes or gifts. The reason being that _it has beenfoundby theStudyGroup of Dr. S. Raj that all such prize chits or schemesare in theform of lotteryand theydo not serve anysocialpurpose.They are prejudicial to the· publicinterest. D They affectthe monetarypolicies of the country.They benefitonly the promoters. E --.--- H So much is about the law. Let us nowhavethe fact of thecase A The terms and conditions of the schemeoffered by thecompanyare as follows: ' . "1. SecuredInvestmentCompany will b_e known~, COMPANY. 7 . 2. Everymemberwill depositwith the company--""' Rs~220 ONLY ONCE in return he willget a Reinvestment I Deposit Plan Receipt/BankCash Certificate (a type of 'Fixed Deposit receipt) of a GovernmentNationalised ··Bank. 3. No interest will be given to the member,thus the maturityvalue of the Bank's R.D .P. will be Rs.220. ' . 4. After a memberdeposits Rs.220 he will get his"' Bank's R.D.P. within7 days. For membersfrom Lucknow, '!'. - Kanpur and Bareilly,every effortwill be made to givethem the R.D.P. Receiptthe very next day. 5. The duration of theschemeis for 66 months. ·, ' ,. ' ,.. REGISTRAROFF.S.C. U.P. v. SECUREDINVESTMENTCO. [SHETIY,J.l 469 Therefore, the durationof thebank'sR.D.P.Receipt is A alsofor 66 months. 6. Luckydraws for articlestotalling Rs.15,000 per monthwill be givenevery mon.th for 60 months.Thus the totalvalue of prizesfor 60 monthswill be Rs.9 lakhs. Totally 60 luckydrawswill be held,one everymonth,after B the recruitment of 19,999 membersper group. 7. Everymonth,2 lluckyprizes will be given.The Ist Prizewill be a VijayScooter,the 2ndPrizewill be a Kelvinatorrefrigerator (10 Its.) or a T.V.and 19 other consolidationprizesconsistingof articleslike transistor,C sewingmachine,cycle, pressurecooker, stainlesssteel thali sets,alarm,clocks,etc. 8. If there is any priceincrease,later in theperiodof theschemeof thevalueof theprizearticleswhich are detailedbelow the winningmembershall pay for theactualD priceincrease.Cash in lieuof thearticleswill not be given. 1. One Vi jay Super ScooterRs.8000 2. One KelvinatorFridge (10 Its.) or one T.V. Plusone Mixi Rs.3900 E 3. One cycle Rs.400 4. One tablefan Rs.350 5. One Sewing Machine Rs.325 6. 2 Nos.PhilipsTransistors (Rs. 230 each) Rs.460 7. 3Nos.PressureCookers Rs.525 F (Rs. 175 each) 8. 5 Nos. Steel thalisets (Rs. 100 eachset) Rs.500 9. 6 N os.AlarmClocks (Rs.90 each) Rs.540 TOTAL Rs.15,000 G 9.A winningmember will be entitledto participate in.subsequent draws.Thus a membercan win prizes over andoveragain. 10. If a memberwithdrawsduring the duration of the scheme,he canencashhis Bank'sR.D.P.directlythe H 470 A B c D E F SUPREMECOURT REPORTS 11988] 2 S.C.R. entire amountof Rs.200 but will lose interestfor theba lancemonthsas per ReserveBank of Indiarules governing fromtime to time.For example, ifa memberwithdraws immediatelyafter he getshis R.D.P. Receipt,he losesup toa maximumof Rs.92.This is the maximumamount a membercan loseif hewithdrawsfrom the scheme immediatelyafter he becomesa memberand aftergetting hisBank R.D.P.Of course, he will also not be entitledfor thebalancelucky draws. 11 The reasonfor deduction of interest is thatthe companygives thesefantasticprizes throughthe interest thusgained,also this interestgained has to coverthe com pany'soverheadsand profit.However,a customer'srefund of his Rs.220 is 100 per centsecured,because at theendof thescheme he can go directlyto theBankand encashthe R.D .P. withoutany consentfrom the Company. 12. Outstationmemberscan encashthe R.D.P. by presentingit toanyBank.The procedure is the same as one normallyencashes an outstationcheque. 13. The Companyreserves the rightto accept or re jectany membershipwithout assigningany reasons. 14. In case,the totalmembership is not fully sub scribedto, memberscan stillbe scruited after thestartof the draws. However,the Company will at nostagekeep membershipsreserved in itsownname,thus winner of everydraw will go to anactualmember. 15. The luckydraws will take placein rotationat Lucknow,Kanpur and Bareillyon theIst Sunday of every month.The luckydraws will be takenout by members I " } ---., ;, - ~·· " 1./ 'j r-~-"" themselvesto ensurefairnessand honestyin the draw." IA! G Thereare as many as 19,999 subscribersin eachscheme.All of themdo notget prizesand indeedthey couldnot get,sincethereare only 60 drawswith 21 prizeseach. The membersare nottoldthat the companydeducts Rs.92 for its ownuse. Theyare onlyinformedthat theyare assured of the moneydepositedin theBank,and in theevent H of prematurewithdrawal,they will loseinterestupto Rs.92only. '. REGISTRAROFF.S.C. U.P. v. SECURED INVESTMENT CO. [SHETfY,J.] 471 In spite of alltheseglaringattributesof exploitivenature of the A -r scheme, the HighCourtappearsto havebeencarriedaway with the ReinvestmentDeposit Plan Receipt for Rs.220. The HighCourt was of the view that the schemecould not be considered as "prizechit". The High Court said: "It is thusclearfroma readingof thedocument( anne- B xure !) thatthe so-called'member'deposits the amount withthe petitionersfor thepurposeof obtaininga Rein- vestmentDeposit Plan Receipt, which is promisedto him bythepetitioners. He mayhavebeen havingan ideain the backgroundthat by depositingthe amountof Rs.220 with thepetitionersand obtainingthe ReinvestmentDeposit c Plan Receipt, he wouldalso be consideredfor thedistribu- lionof 'LuckyPrizes'.But that is not enoughinasmuchas the· amount which he haddepositedwith the petitioners wasto be invested in a nationalisedbank and he wasto get aReinvestmentDeposit Plan Receipt. If the personfrom whomthe moneyhas beencollectedhas not depositedit D with the petitionersas "contributions'' or "subscription", it is difficultto holdthat it is collectedby thepetitioners as his "contribution or subscription". The HighCourtappearsto haveproceededon thebasisthat the members of theschemedo notpaysubscriptionto thecompany.Nor E ' do they pay the amountas contribution.The HighCourtwas also -0f »; the view that payment of moneyto thecompanyfor thepurposeof 'x obtaining R.D.P. receipt with the hopeof gettingany prize is not sufficientto attractthe definitionof prizechit. ~ In our view,the conclusionof theHighCourt is patentlyerrone- F ous. It is unsustainableboth on factsand law.The HighCourthas failedto considerthat the companyundisputedlytakes away Rs. 92 out of Rs.220paid by eachmember.The HighCourthas furtherfailed to note that the companyutilises the deductedamount of Rs. 92 forthe -.. purpose of givingprizes to members.Dr. L.M.Singhvi,learned counselfor thecompany,did notandindeedcould not disputethat theG ~ ~ companyis deductingRs.92 out of thepaymentof Rs.220. The counsel however,urged that sincethe membergets the fullamountof Rs.220 from the bank at the instanceof thecompany,the schemeis aninvest- ment schemeand not prize chit.We are unableto acceptth;s submis- sion.The fact thatthe memberreceives Rs.220 from the bankafter the maturityperiod of his depositmakes little differencein thenatureof H 472 SUPREME COURT REPORTS [1988] 2 S.C.R. Athetransaction of the company.The fact remainsthat the company collectsin onelumpsum Rs.220 fromeverymember. It is only by payment of thatamount,the individualbecomes a memberof the schemeand eligibleto getmonthlyprizes. The companyinstead of returningthe balance of Rs.128 directlyto themembertakes him to a nearbybranch of the nationalisedbank. ThereRs.128would be Bdepositedin thename of the memberwho gets the samewith interest aftermaturity.But it shouldnot be forgottenthat the member does notget backRs.92deducted by the company.Nor he getsany interest onthisamount.He foregoes his amountof Rs.92with the hopeof gettingprizesoffered by the company.There is no guaranteethat he will get anyprize.He, however,takes chancemonth after month. If he C is unluckyhe waitsin vainfor 60 months.The apparenttenor of the scheme-may not bring out the exploitativenature of the scheme.But it isthereif anybodywants to knowit. Thecompanyundisputedly col lects Rs.92from everysubscriberand utilisesa portionof it forgiving prizesand to meetoverheadcharges. The companyin allcollectsan amount of Rs.18,44,907.75 attherate of Rs.92per headfrom 19,999 D subscribers.The companydistributesmonthly prizes of the valueof Rs.15,000.The totalvalueof ailtheprizesfor 60 monthsworks out to Rs.9lakhs.The balance of about9.5 lakhswith interestthereonwould be utilised by thecompany. Is thisa promotionof thrift,investmentor saving? At whosecosts? and for whosebenefit? E We are,however,glad to note that Madhya Pradesh HighCourt whileconsideringa similarschemein Sahara India v. State of M.P. & Others, [1983] M.P. 2 128 has heldthat it is prizechit fallingwithinthe scope of Section2( e)oftheAct. Wehave nodoubt that the scheme of the companywith which we f are concerned is primarilyfor thebenefitof thepromoteror the Com panyat thecostsof thesubscribers.This is the kind of transactionsor arrangementswhich Dr. J .S. Raj StudyGroupsaid that it shouldbe bannedaltogether.Section 2( e) was intended to coverall such arrangements or schemes.The interpretationgiven by theCourt shouldnot be stultifyingthe underlyingprinciple in thedefinition Gwhichwas meantto protectpeople from exploitation. We wouldlike to emphasisethat the Actwas intendedto banall kindsof prizechits wherepersonspart withtheirmoneyand riskthe chanceof getting prizes or gifts.Therefore,any scheme or arrangement in whicha personagrees to lose or madeto parta portionof hispaymentagainst the chance of getting any prize or gift,shouldbe consideredas prize Hchitfallingwithin the inclusivedefinitionunder Section2(e). > , . REGISTRAROFF.S.C. U.P. v. SECUREDINVES1MENTCO. [SHETIY,J.) 473 j_ From the above discussion,and in thelight of the principlesto .A whicli we he ve called attentionthe scheme of the company is nothing but P"··' c>·:.asdefined under Section 2(e)of theActandthe actionof the Re)•c; ~-.-of fin:Ils deservesto be upheld. • ·· . . In the result,we allowthe appeal with costsand set asidethe . B "}judgment and order of the HighCourt. .· Beforepartingwith the casewe may,however,observethat the Registrar of the Firmswhile takingaction againstthe persons or firms under the Act will takecare to seethatthe members of the schemeare not denied of their contributions or prizeswhichthey are legitimately }..entitled to, if the prize chit is a~lowed to runfor thefullterm. . S.L. Appealallowed. c |
