Case: Aregistrar Of Firms, Societies And Chits, Utiar Pradesh Vs. Secured Investment Company, Lucknow And Another

2. The said writ petition was filed by the respondent which is a partnership firm called as. The company mainly carries on business at Lucknow. It has branch offices at Kanpur and Bareilly. The nature of business of the company is termed as. The question raised in this appeal is whether that scheme for investment falls within the category of prize chit as defined under the Prize Chits and Money Circulation Scheme (Banning) Act, 1987 (for short. 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 Article 226 of the Constitution. The High Court allowed the writ petition and quashed the orders made by the Registrar

Court's reasoning:
6. 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 was meant for mutual benefit in which some people joined to save and others to borrow. What distinguishes the chit fund, however, from other financial transactions is that it connects the borrowing class directly with the lending class. The pooled saving is lent out to the same group of contributors. A chit fund collects the savings of the members by periodical subscriptions for a definite period. At the same time, it makes available the pooled savings to each member by turn as agreed by them. The collected fund may be given either by drawing lots or by bidding. Lots are drawn periodically and the member whose name appears on the winning chit gets the collection without any deductions. He, however, continues to pay his sub-scriptions but his name is removed from subsequent lots. Thus every member gets a chance to receive the whole amount of the chit. These are generally the features of a conventional chit. It is operated without a professional promoter or manager and without any risk of loss of capital7. During the course of years, the chit funds became more and more popular and attractive. In the usual process of social growth, the chitties crossed boundaries of its birth place. It assumed new institutional forms with emergence of new types of entrepreneurs. The partnership firms, private or public limited companies took over the chit business in various forms. They gave different names, such as prize chit, lucky draw, benefit scheme or money circulation scheme. They offered prizes to attract subscribers. The basic features, however, remained the same in all such schemes. Periodically the names of the subscribers were put to draw and the lucky member was given a prize either in cash or in kind like articles of utility. The subscribers were also given refund of a portion of their contributions. This became regular business of ever so many people24. In spite of all these glaring attributes of exploitative nature of the scheme, the High Court appears to have been carried away with the Reinvestment Deposit Plan Receipt for Rs. 220. The High Court was of the view that the scheme could not be considered as. The High Court saidIt is thus clear from a reading of the document (Annexure 1) that the so-called member deposits the amount with the petitioners for the purpose of obtaining a Reinvestment Deposit Plan Receipt, which is promised to him by the petitioners. He may have been having an idea in the background that by depositing the amount of Rs. 220 with the petitioners and obtaining the Reinvestment Deposit Plan Receipt, he would also be considered for the distribution of Lucky Prizes. But that is not enough inasmuch as the amount which he had deposited with the petitioners was to be invested in a nationalised bank and he was to get a Reinvestment Deposit Plan Receipt. If the person from whom the money has been collected has not deposited it with the petitioners asit is difficult to hold that it is collected by the petitioners as hisn or subscription25. The High Court appears to have proceeded on the basis that the members of the scheme do not pay subscription to the company. Nor do they pay the amount as contribution. The High Court was also of the view that payment of money to the company for the purpose of obtaining RDP receipt with the hope of getting any prize is not sufficient to attract the definition of prize chit26. In our view, the conclusion of the High Court is patently erroneous. It is unsustainable both on facts and law. The High Court has failed to consider that the company undisputedly takes away Rs. 92 out of Rs. 220 paid by each member. The High Court has further failed to note that the company utilises the deducted amount of Rs. 92 for the purpose of giving prizes to members. Dr. L. M. Singhvi, learned counsel for the company, did not and indeed could not dispute that the company is deducting Rs. 92 out of the payment of Rs. 220. The counsel however, urged that 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 lump sum 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. 123 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 or this amount. He forgoes 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 the scheme may not bring out the exploitative nature of the scheme. But it is there if anybody wants to know it. The Company undisputedly collects Rs. 92 from every subscriber and utilises a portion of it for giving prizes and to meet overhead charges. The Company in all collects an amount of Rs. 18, 44, 907.75 at the rate of Rs. 92 per head from 19, 999 subscribers. The company distributes monthly prizes of the value of Rs. 15, 000. The total value of all the prizes for 60 months works out to Rs. 9 lakhs. The balance of about 9.5 lakhs with interest thereon would be utilised by the company. Is this a promotion of thrift, investment or saving ? At whose cost ? and for whose benefit ?27. We are, however, glad to note that Madhya Pradesh High Court while considering a similar scheme in Sahara India v. State of M.P. (AIR 1983 MP 128 : 1983 MPLJ 435), has held that it is prize chit falling within the scope of Section 2(e) of the Act28. We have no doubt that the scheme of the company with which we are concerned is primarily for the benefit of the promoter or the company at the costs of the subscribers. This is the kind of transactions or arrangements which Dr. J. S. Raj Study Group said that should be banned altogether. Section 2(e) was intended to cover all such arrangements or schemes. The interpretation given by the court should not be stultifying the underlying principle in the definition which was meant to protect people from exploitation. We would like to emphasise that the Act was intended to ban all kinds of prize chits where persons part with their money and risk the chance of getting prizes of gifts. Therefore, any scheme or arrangement in which a person agrees to lose or is made to part with a portion of his payment against the chance of getting any prize or gift, should be considered as prize chit falling within the inclusive definition under Section 2(e)29. From the above discussion, and in the light of the principles to which we have called attention the scheme of the Company is nothing but prize chit as defined under Section 2(e) of the Act and the action of the Registrar of Firms deserves to be upheld