Case: Srinivasa Enterprises and Others Vs. Union of India Etc

The quintessential aspects of a prize chit are that the organizer collects moneys in lump sum or installments, pursuant to a scheme or arrangement, and he utilises such moneys as he fancies primarily for his private appetite and for (1) awarding periodically or 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 aof 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 illafford 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 themoney which they have invested hardly carries any interest. They are eligible to get back the money t hey have paid in driblets, virtually without interest, the expression bonus in s. 2(a) being an euphemism for a nominal sum. What is more, the repayable amount being small and the subscribers being scattered all over the country, they find it difficult even to recover the money by expensive, dilatory litigative process.Since there are a large number of prize chits all over the country which have almost become aepidemic and since the total number of people victimised by these projects are considerable the injury to the community is substantial, so that a welfare state dedicated to the Directive Principles of Part IV has to awake and protect the vulnerable sector. Another weighty factor which has alerted the State into action is that the flood of funds flowing 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 poornoxious 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 many who were losing their money, appetized by gambling prospects, and the sterilization of peoples resources which were siphoned off by private adventurists through prize chits to the detriment of national development ignited the impugnedis the case of the State as justification for enacting what is contended for as unconstitutional for three reasons which we will presently examine. The Union of India has furnisheddata to help the court appreciate how expert opinion had been collected before launching on the prohibitory legislation. A study group headed by Dr. J. S. Raj made a report to the Central Government wherein pointed reference was made to prize chits and allied schemes. The report devoted a whole chapter to prize chits, savings schemes, and others of their ilk and exposed the modus operandi of such schemes and theirimpact upon the community and recommended to the State to intervene and interdict.We may quote briefly to bring home tersely the trauma inflicted by lucky draw schemes on the host of luckless illiterates succumbing (perhaps astrologically) to the prizewas observed that several companies conducting prize chits, benefits or savings schemes or lucky draws claimed themselves to be either mutual benefit financial companies (by enrolling subscribers as associate members under the directions as they stood prior to January 1, 1973) or as chit fund companies and thus contended that the subscriptions collected by them were not deposits as defined in the directions and hence not subject to any ceiling restrictions.....Modus Operandi of Prize Chits/Benefit or Savings Schemes or Lucky Draws6.3. Companies conducting the above types of Schemes are comparatively of a recent origin and of late, there has been a mushroom growth of such companies which are doing brisk business in several parts o f the country, especially in big cities like Ahmedabad, Bangalore, Bombay, Calcutta and Delhi. They have also established branches in various States. These companies float schemes for collecting money from the public and the modus operandi of such schemes is generally as described below:The company acts as the foreman 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 member holding the lucky ticket gets the prize 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 publicity expenses and remuneration and other perquisites to the directors.The financialof these schemes were also examined by the Study Group to demonstrate how the promotercompanies were gargantuan and were swallowing up huge surpluses from the public who lost interest on their subscriptions, and, sometimes, even the principal amounts paid:... . Even if the company offers some amount by way of bonus or premium to the subscribers at the time of refund of their subscriptions and allowing for reasonable expenditure on publicity, commission to agents, etc., a sizeable balance will still be left with the company. This is exclusive of the amounts which the company might be collecting by way of membership fees and service charges from the subscribers and also of the amounts which it might be appropriating in respect of the subscriptions on forfeited tickets on which there will be no future liability for refund to the members at the end of the scheme. It will thus be obvious from the foregoing that such schemes confer monetary benefit only on a few members and on the promoter companies.There is reference in the Study Group report to other studies conducted by the Reserve Bank which also demonstrated the many sinister effects upon the community on account of proliferous prizeschemes.(a) the companies had advanced sizeable amounts to the directors or their relatives or firms in which they were interested as partners, directors or as commission agents and there were practically no repayments of the loans;(b) the books of account had not been maintained satisfactorily;(c) close relatives of the directors had been employed in the companies as members of the staff or as agents on high salaries;(d) In one case, it was observed that a scheme announced by a company in which collections had been made was withdrawn subsequently without notice t o the subscribers and no refunds of the subscriptions already received had been made to the subscribers. Prize moneys had not been paid to all the subscribers who had won the prizes; and(e) subscriptions were shown to have been refunded in the books of account of a company but doubts have been expressed by the Inspecting Officer about the genuineness of the payments in view of certain attendant circumstances. There have also be en allegations that some companies had resorted to certain malpractices in drawing the names of prize winners.** ** **........ in the absence of any authoritative judicial pronouncement on the subject, we are not sure whether the activities of companies conducting price chits, etc., are clearly prohibited by the existing legislations.6.10. It has been reported that resources of prize chits are used for wasteful spending and hoarding commodities and that these schemes "enable certain persons to convertincome into accounted money. The persons concerned pay a premium to the promoters in re turn for the facility." It has also been stated that "there are a number of agents who go about contacting persons who are likely to face the problem of saving their income from the tax authorities. The prize chit pass books issued to them under different names become their passports for travelling from black money territory to the white moneyeasiest and surest way of using ill gotten wealth. Besides, by their misleading names and companies the prize chit companies divert private savings into their personal drains, thus disrupting the national economy.

Court's reasoning:
Surely, Art. 19(6) permits reasonable restrictions in the interest of the general public on the exercise of the right conferred by Art. 19(1)(g). It is a constitutional truism restrictions, in extreme cases, may be pushed to the point of prohibition if any lesser strategy will not achieve the purpose. Fundamental rights are fundamental, and so, no ban can be glibly imposed unless effective alternatives are unavailable. Counsel on both sides cited rulings for the two sides of the proposition but it is an act of supererogation to load judgments with or profusion precedential erudition to make out what is plain,twin requirements of Art. 19(6) are (a) the reasonableness of the restriction upon the fundamental right to trade, and (b) the measure of the reasonableness being the compelling need to promote the interest of the general public. Public interest, of course, there is. But the controversy rages round the compulsive necessity to extinguish the prize chit enterprises altogether as distinguished fromthem with severe conditions geared to protection of public interest. We have already indicated that the Raj Report does recommend a total ban on prize chits. In matters of economics, sociology and other specialised subjects, courts should not embark upon views of halflit infallibility and reject what economists or social scientists have, after detailed studies, commended as the correct course of action. True, the final word is with the court in constitutional matters but judges hesitate to rush in where even specialists fear to tread. If experts fall out, court, perforce, must guide itself and pronounce upon the matter from the constitutional angle, since the final verdict, where constitutional contraventions are complained of, belongs to the judicial arm. The alternative proposals to save the public from prize chit rackets attractively presented by Shri Venugopal do not impress us. In many situations, the poor and unwary have to be saved from the seducing processes resorted by unscrupulous racketeers who glamourize and prey upon the gambling instinct to get rich quick through prizes. So long as there is the resistless spell of a chance though small, of securing a prize, though on paper, people chase the prospect by subscribing to the speculative scheme only to lose what they had. Can you save moths from the fire except by putting out the fatal glow ? Once this prize facet of the chit scheme is given up, it becomes substantially a conventional chit and the ban of the law ceases to operate. We are unable to persuade ourselves that the State is wrong in its assertion, based upon expert opinions that a complete ban of prize c hits is anor excessive blow. Therefore, we decline to strike down the legislation on the score of Art. 19(1)(f) and (g) of the Constitution.We may not be taken to mean that every prize chit promoter is aIn deed, Shri Venugopal persuasively presented the case of his client to make us feel that responsible business was being done by the petitioner. May be. But when a general evil is sought to be suppressed some martyrs may have to suffer for the legislature cannot easily make meticulous exceptions and has to proceed on broad categorisations, not singulardo not agree. Not only do the definitions show the differentiation between the two schemes, but the Raj Report also brings out the fact that conventional chits and prize chits are different categories with different financial features and different damaging effects . We see no force in the plea of violation of Art.bare reading of that provision makes it clear that the exempted categories do not possess the vices of private prize chits. For one thing, what ar e exempted are prize chits and money circulation schemes promoted by or controlled by the State Governments, the Central Government or the State Bank of India or the Reserve Bank. Even Rural Banks andcovered by s. 11, are subject to public control. Likewise, charitable and educational institutions are exempted only if they are notified by the State Government in consultation with the Reserve Bank. There are enough arguments to justify the different classification of these items and their exemption cannot be called in question on the ground of violation of Art. 14. Reasonable classification wins absolution from the charge of discrimination if the differentia has a nexus with the statutoryare not persuaded that in pith and substance the present legislation is one against lotteries. It deals with a special species of contracts with sinister features, although one such feature is the award of prizes to subscribers. While motives cannot validate or invalidate a legislation the core of the subject matter must govern competency. So viewed, it is easy to accept the submission of the Union of India that Parliament wanted to restrict and prohibit certain types of contracts because of the noxious element of gambling and lottery implicit therein and apt to entice the credulous and uncautious. We do not think it necessary to expand on the subject and the incidental impact on lotteries does not affect the vires of the Act .Judicial validation of a social legislation only keeps the path clear for enforcement. Spraying legislative sociomoral pesticides cannot serve any purpose unless the target area is relentlessly hit. We hope that this legislation enacted in response to expert recommendation and popular clamour will be implemented by dynamic Statewish to make it clear that the possible hardship that bona fide prize chit promoters may suffer on account of the total prohibition clamped down by this legislation can be relieved against by the Central Government acting under s. 12. The learned Solicitor General assured the court that the Union of India would take ameliorative measure to avoid unjust hardship, especially because it h ad power to do so under s.wanted the court to declare so but we decline to do so, since under Art. 32 this Courts function is not to give advisory opinion to petitioners but to pronounce upon transgression of fundamental rights by State action. While there is no merit in his submission of procedural unreasonableness in the provisions of the Act, it is perfectly open to the writ petitioner to urge his plea that the Act does not apply to his scheme if he were prosecuted. We leave the matter at that Shri Parekh, as intervener, Shri Kanta Rao, appearing in Writ Petition No. 1546/79, Shri Subba Rao pressing Writ Petition No. 138/79 and Shri K.R.R. Pillai in W.P. No. 1152/79 have adopted the leading arguments of Shri Venugopal which we have rejected. All of them must share the same fate.