Holding

The scheme is a prize chit as defined in Section 2(e) of the Act and the Registrar’s orders are valid.

Summary

The Secured Investment Company, a partnership firm, operated a scheme where members paid a lump sum of Rs 220, received a bank RD receipt, and were entered into monthly lucky draws for prizes, with Rs 92 of each payment deducted to fund the prizes. The Registrar of Firms, Societies and Chits seized the company's documents and barred banks from maintaining accounts, deeming the scheme a prohibited "prize chit" under Section 2(e) of the Prize Chits and Money Circulation Scheme (Banking) Act, 1978. The High Court quashed the Registrar’s orders, but the Supreme Court on special leave examined whether the scheme fell within the statutory definition of a prize chit. The Court held that the scheme involved collection of money, awarding of prizes, and refund of the balance, satisfying both clauses (i) and (ii) of Section 2(e), and therefore was a prize chit prohibited by the Act. Consequently, the Registrar’s action was upheld and the High Court’s judgment set aside.

Issues considered

Whether the investment scheme of Secured Investment Company constitutes a "prize chit" within the meaning of Section 2(e) of the Prize Chits and Money Circulation Scheme (Banking) Act, 1978.
Whether the Registrar of Firms, Societies and Chits was authorized to seize the company's documents and direct banks not to maintain accounts in relation to the scheme.

Legislation cited

Prize Chits and Money Circulation Scheme (Banking) Act, 1978s. 11, s. 2(c), s. 2(e), s. 3, s. 4, s. 5, s. 6, s. 7, s. 8

Subjects

prize chitmoney circulation schemeinvestment schemepublic interestexploitationSection 2(e)Supreme Courtappealregistrarchits

Judgment

I
)..._,
A REGISTRAR OF FIRMS, SOCIETIES AND CHITS,

UTTAR PRADESH
v.
>\
SECURED INVESTMENT COMPANY, LUCKNOW AND
ANOTHER.
l.l
DECEMBER 17, 1987

[B.C. RAY AND JAGANNATHA SHETTY, JJ.]

Prize Chits-Prohibited category under section 2(e) of the Prize
Chits and Money Circulation Scheme (Banking) Act, 1978-Prohibi-
c tion of Participation therein.

The respondent, a partnership firm, carried on business termed
as a "Scheme for Investment". The Registrar of Firms, Societies and <
Chits, the appellant, holding the view that the investment scheme of the
D respondent company fell within the prohibited category of prize chits as
defined in section 2(e) of the Prize Chits and Money Circulation Scheme
(Banking) Act, 1978, seized all the documents of the company and
directed the concerned banks not to have accounts in relation thereto.
The respondent challenged the action of the appellant by a writ petition
in the High Court. The High Court allowed the Writ Petition, quashing
E the orders of the appellant. The appellant appealed to this Court by
special leave.

Allowing the appeal, the Court, ~·
,-
-fl
HELD: The prize chit, by a simple definition, includes a scheme
F by which a person in whatever name _collects moneys from individuals
for the purpose of giving prizes and refunding the balance with or
without premium after the expiry of a specified period. The reach and
range of the definition of 'Prize Chit' is sweeping. The participation of
"'
any personiri such chit or scheme has been prohibited, the object being -
that people should not be attracted to invest their moneys in the hope of
G getting prizes or gifts. [468A-B, CJ y

There is no doubt that the scheme of the company is primarily for -A -
the benefit of the promoter or the company at the cost of the subscrib-
ers. Section 2(e)ofthe Act was intended to cover all such arrangements
or schemes. It is emphasized that the Act was intended to ban all kinds
H of prize chits where people part with their money and risk the chance of
456
REGISTRAROFF.S.C. U.P. v.SECUREDINVESTMENTCO. [SHETIY,J.I 457
. I
.... ' getting prizes and gifts, and to protect the people from exploitation. A
~ Any scheme or arrangement in which a person agrees to lose or is make
,. 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 inclu-
sive definition under Section 2(e). The scheme of the company is
nothing but prize Chit as defined under Section .2(e) of the Act.
The conclusion of the High Court is patently erroneous and is unsus- B
tainable both on facts and law. The action of the Registrar, appellant,
upheld. [473E-H; 473A-B]

OBSERVATION: The Registrar of the firms will, while faking action
·against the persons or firms under the Act, take care to see that the
members of the scheme are not denied, their contributions or prizes C
which they are legitimately entitled to, if the prize chit is allowed to be
run for the full term. [473B-C]

~ Srinivasa Enterprises and others v. Union of India etc., [198111
SCR 801 at 804 and Rese111e Bank of India v. Peerless General Insur-
ance and Investment Co. Ltd., A.I.R. 1987 SC 1023, referred to. D

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1988
of 1982.

From the Judgment and order dated 20.4.1982 of the High Court
-t of Allahabad in Writ Petition No. 630 of 1982. E

Anil Dev Singh and Mrs. Shobha Dikshit for the Appellant.
'r
., L.M. Singhvi and C.L. Sahu for the Respondent.
~

. The following Judgment of the Court was delivered by

JAGANNATHA SHETTY, J. This appeal by special leave, is by
F

the Registrar of Firms, societies and chits of the State of Uttar Pradesh
and directed against the judgment and order passed by the High Court
of Allahabad in writ petition No. 630 of 1982.
..,. G
The said writ petition was filed by the responde!'t which is a
.*' partnership firm called as "M/s. Secured Investment Company" ("The
Company"). 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 "a .~cheme for investment". The question
raised in this appeal is whether that scheme for investment falls within H
458 SUPREME COURT REPORTS [1988] 2 S.C.R.

A the category of 'prize chit' as defined under the Prize Chits and ~
Money Circulation Scheme (Banning) Act, 1978 (for short "The I
Act"). The Registrar of Firms, Societies and Chits was of the opinion \c...
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
tlie company and also directed the concerned banks not to have
B 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 thls
appeal, it is better.to have first the clear picture of the law governing
c the question. Section 3 of the Act imposes a ban not merely on prom-
oting or conducting any prize chit or money circulation scheme, but
also on participation in such chit or schemes. Section 4 makes a contra·
vention of the provisions of Section 3 punishable with imprisonment
which may extend to three years or with fine which may extend to
D Rs.5,000 or with both. Section 5 provides penalty for other offences
'· like printing or publishing any ticket, coupon or other document for
' use in the prize chit or money circulation scheme with a view to prom-
ote such scheme in contravention of the Act. Section 6 deals with
offences by companies. Section 7 confers power on the police officers
not below the rank of an officer in charge of a police station to enter,
E search and seize. Section 8 provides for the forfeiture of newspapers or
other publications containing prize chit or money circulation scheme.
Section 11 provides exemption to certain categories of prize chits or
money circulation schemes. The prize chits or money circulation
schemes promoted by the State Government or any officer or author-
ity on its behalf, or by a Company wholly owned by a State Govem-
F ment are exempted from the provisions of the Act.

'Conventional Chit' has been defined under Section 2(a), and
"Prize Chit" has been defined under Section 2(e) of the Act. Conven-
tional Chit stands excluded from the definition of prize chit, and so
much so, the Conventional Chit remains untouched by provisions of the
G Act. The definition of the conventional chit is as follows: >
"Section 2(a). "Conventional Chit" means a transac-
tion whether called chit, chit fund, kuri or by any other
name or under which a person responsible for the conduct
of· the chit enters into an agreement with a specified
H number of persons that every one of them shall subscribe a
REGISTRAR OFF.S.C. U.P. v. SECURED INVESTMENT CO. (SHETIY, J.] 459
.-4_
certain sum of money (or certain quantity of grain instead) A
by way of periodical instalments for a definite period and
that each 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 chit agreement, be entitled to a
prize chit."
B
We may presently refer to the definition of 'prize chit' and before
that it is better to have a little bit of history of chit transactions. The
words 'Chitty' or 'kuri' Chit or Chit Fund appear to be the common
words but with regional variations. Although there is no clear evidence
to_show the exact place of origin of chit fund, the available text [(i)
'Chit Finance' by C.P. Somanath Nayar (1973); (ii) Chit Funds and
Finance Corporation by S. Radha Krishan an (1974)] indicate that it has
c
spread from the Southern most parts of India. In the Travancore area
of the State of Kerala it is generally called 'chitty'. 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'. D
'!- These terms appear to be synonymous, meaning thereby a written
piece of paper. These transactions were purely indigenous institution.
They originated in village life organised 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 collec-
tion which was termed as 'fund' to one of the subscribers. It was E
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 F
)I-'
meet some unusual expenditure and (ii) to provide a form of accumu-
lated 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 sopie people joined to save and others to borrow.
What distinguishes the chit fund, however, from other financial trans-
'i actions is that it connects the borrowing class directly with the lending G
class. The pooled saving is lent out to the same group of contributors.
k A chit fund collects the savings of the members by periodical subscrip-
tions for a definite period. At the same time, it makes available the
pooled savings to each member by turn as agreed by them, The col-
lected fund may be given either by drawing lots or by bidding. Lots are
drawn periodically and the member whose name appears on the win- H
460 SUPREME COURT REPORTS (1988] 2 S.C.R.
)
A ning chit gets the collection without any deductions. He, however,
continues to pay his subscriptions but his name is removed from subse-
quent Jots. Thus every member gets a chance to receive the whole
amount of the chit. This is generally the features of a conventional
chit. It is operated without a professional promoter or manager and
without any risk of Joss of capital.
B
During the course of years, the chit funds became more and
more popular and attractive. In the usual process of social growth; the
chillies crossed boundaries of its birth place. It assumed new institu-
tional forms with emergence of new types of enterpreneurs. The part-
nership firms, private or public limited companies took over the chit
C business in various forms. They gave different names, such as price
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
D also given refund of a portion of their contributions. This became
regular business in ever so many people.

Undoubtedly, this rapid growth of chit funds has carried with it
some unhealthy features of exploitation. That has been graphically
described by Krishna Iyer, J. in Srinivasa Enterprises & Ors. v. Union
E oflndiaetc., [1981] 1SCR801at804asfollows: ·

"The quintessential aspects of a prize chit are that the
organiser collects moneys in lump sum or instalments,
pursuant to a scheme or arrangement, and he utilises such
moneys as he fancies primarily for his private appetite and
F 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
G describe the scheme, Small sums are collected from vast y
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 pay-
H ments. The indigent agrestics and the proletarian urbani-
REGISTRAROFF.S.C. U.P. v. SECURED INVESTMENT CO. lSHEITY,J.] 461

tes, pressured by dire poverty and doped by the hazy hope A
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 B
next to nil and even the hard earned money which they
have invested hardly carries any interest. They are eligible
to get back the money they have paid in driblets, virtually
without intere,t, the expression 'bonus' ins. 2(a) being an
euphemism for a nominal sum. What is more, the repay-
able amount being small and the subscribers being scattered C
all over the country, they find it difficult even to rocover
the money by expensive, dilatory litigative process."

In 1974, the Reserve Bank of India intervened. The Reserve
Bank constituted a Study Group headed by Dr. J.S. Raj to examine
the adequacy of existing statutory provisions in regulating the conduct D
of business by non-banking companies. The Study Group was also
asked to suggest remedial measures so as to ensure that the activities
of such companies, in so for as they pertained to the acceptance of
deposits, investment, lending operations, etc. subserved the national
interest.
E
The Study Group went into the matter in some depth. Chapter
VI of their report was devoted to Miscellaneous Non-Banking Com-
panies which were conducting prize chits, benefit/savings scheme or
lucky draws etc. Paragraph 6.3 of the report contains interesting infor-
mations and it reads as follows:
F
"6.3 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 of the
country, especially in big cities like Ahemdabad, Banga-
lore, Bombay, Calcutta and Delhi. They had also estab- G
lished 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 H
462 SUPREME COURT REPORTS [!988] 2 S.C.R.

A collects subscriptions in one lump sum or by monthly instal-
ments spread over a specified period from the subscribers
to the schemes. Periodically, the numbers allotted to mem- )

bers holding the tickets or units are put to a draw and the
number holding the lucky ticket gets the prize either in cash
or in the form of an article of utility, such as, a motor car,
B scooter, etc. Once a person gets the prize he is very often
not required to pay further instalments 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 aL
the end of the stipulated period in case they do not get any
prize. The principal items of income of these companies are
c 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
D heads of expenditure are prizes given in accordance with
the rules and regulations of the schemes, advertisements
and publicity expenses and remuneration and other per-
quisites to the directors."

The Study Group recorded its conclusions in paragraph 6.11 as
E 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
F 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 that the conduct
G of prize chits or benefit schemes by whatever name called
should be totally banned in the larger interests of the public
and that suitable legislative measures should be taken for
the purpose if the provisions of the existing enactments are
considered inadequate. Companies conducting prize chits,
benefit schemes, etc., may be allowed a period of three
H years which may be extended by one more year to wind up
REGISTRAROFF.S.C. U.P. v. SECUREDINVESTMENTCO. (SHE1TY,J.J 463

their business in respect of such schemes and/or switch over A
to any other type of business permissible under the law."

It will be seen that the Study Group was of the opinion, that
prize chits or benefit schemes primarily benefit the promoters and do
not serve any social purpose. They are prejudicial to the public
interest. They adversely affect the fiscal and monetary policies of the B
Government. The Study Group was firmly of the view that the conduct
of prize chits or benefit schemes by whatever name called should be
totally banned in the larger interests of the public.

The Government of India accepted that report, and decided to
implement the above recommendations of the Study Group. In 1978,
the Act with which we are concerned was passed in the Parliament.
c
The Act provides for banning the promotion or conduct of 'money
circulation scheme' or 'prize chit' which have been defined as follows:

"Section 2( c) 'money circulation scheme' means any
scheme, by whatever name called, for the making of quick D
or easy money, or for the receipt of any money or valuable
thing as the consideration for a promise to pay money, on
any event or contingency relative or applicable to the
enrolment of members into the scheme, whether or not
such money or thing is derived from the entrance money of
the member of such scheme or periodical subscription; E

Section 2(e) 'prize chit' includes any transaction or
arrangement by whatever name called under which a
person collects whether as a promoter, foreman, agent or
in any other capacity, moneys in one lump sum or in instal-
ments by way of contributions or subscriptions or by sale of F
units, certificates or other instruments or in any other man-
ner or as membership fees or admission fees or service
charges to or in respect of any savings, mutual benefits,
thrift, or any other scheme or arrangement by whatever
name called, and utilises the moneys so collected or any
part thereof or the income accruing from investment or G
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 cash or in kind, H
464 SUPREME COURT REPORTS (1988] 2 S.C.R.

A 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 subscrip-
B tion, 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.,,
c
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
D must first try to ascertain the purpose of the legislation. The legal
interpretation is not an activity sui generis. Under the view, now
widely held, the purpose of the enactment is the touchstone of
interpretation. The first step in interpretation, therefore, is to gather
all informations about the purpose of the Act. If the Act was meant
for the public good, then every provision thereof must receive fair and
E liberal construction. It must be construed with vision to ensure the
achievement of the object of the Act.

The purpose of the Act could be gathered by having recourse to
the Statement of Objects and Reasons accompanying the Bill and .in
long title of the enactment. The Statement of Objects and Reasons
F reads as follows:

"In June 1974, the Reserve Bank of India had con-
stituted a Study Group under the Chairmanship of Shri
James S. Raj, the then Chairman, Unit Trust of India, for
examining in depth the provisions of Chapter III-B of the
G Reserve Bank of India Act, 1934, and the directions issued
thereunder to non-banking companies in order to assess
their adequacy in the context of ensuring the efficacy of the
monetary and credit policies of the country and affording a
degree of protection to the interests of the depositors who
place their savings with such companies. In its report sub-
H mitted to the Reserve Bank in July 1975, the Group,ob-
REGISTRAR OFF.S.C. U.P. v. SECURED INVESlMENTCO. [SHETIY, J.] 465

served that the prize chit/benefit/savings schemes benefit A
primarily the promoters and do not serve any social pur-
pose. On the contrary the Group have stated that they are
prejudicial to the public interest and affect the afficacy of
the fiscal and monetary policies of the country.

2. Prize chits would cover any kind of arrangement B
under which moneys are collected by way of subscriptions,
contributions etc. and prizes, gifts etc. are awarded. The
prize chit is really a forrn of lottery. Its basic feature is that
the foreman or promoter who ostensibly charges no com-
mission collects regular subscriptions from the members.
Once the member gets the prize, he is very often not C

l required to pay further instalments and his name is drop-
ped from further lots. The institutions conducting prize
chits are private limited companies with a very low capital
• base contributed by the promoters, directors or their close
relatives. Such schemes confer monetary benefit only on a
few members and on the promoter companies. The Group D
had, therefore, recommended that prize chits or money
circulation schemes by whatever name called should be
totally banned in the larger interests of the public and suit-
able legislative measures should be undertaken for the
purpose.
E
3. The Bill proposes to implement the above recom-
mendations of the Group by providing for the banning of
the promotion or conduct of any prize chit, or money circu-
lation scheme by whatever name called, and of the partici-
pation of any person in such chit or scheme. The Bill pro-
vides for a period 0f two years within which the existing F
units carrying on the business of prize chits or money circu-
lation schemes may be wound up and provides for penalties
and other incidental matters. The repeal of' t.he existing
State Legislations on the subject has also been provided for
in the Bill."
G
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
r~citals .that the Parliament intended to ban all prize chits and money
Clfculatton scheme. Some of the aspects of the definition of prize chit
has been considered by this Conrt. In Reserve Bank of India v. Peerless H
466 SUPREME COURT REPORTS (1988] 2 S.C.R.

A General Insurance and Investment Co. Ltd., AIR 1987 SC 1023 0.
Chinnappa Reddy, J. speaking for this Court observed (p. 1041):

"We do not think that by using the word "includes",
in the definition in s. 2(e) of the Act the Parliament in-
tended to so expand the meaning of prize chit as to take in
every scheme involving subscribing and refunding of
money. The word "includes", the context shows, was
intended not to expand the meaning of "prize chit" but to
cover all transactions or arrangements of the nature of
prize chits but under different' names. The expression
"Prize Chit" had no where been statutorily defined before.
The Bhabatosh Datta Study Group and the Raj Study
Group had identified the schemes popularly called "Prize
Chits". The Study Group also recognised that "Prize
Chits" were also variously called benefit/savings schemes
and lucky draws and that the basic common features of the •
schemes were the giving of a prize and the ultimate refund
D of the amount of subscriptions (vide Para 6.3 of the report
of the Raj Study Group). It was recommended that prize
chits and the like by whatever name 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
E arrangements containing these two elements. We do not
think that in defining the expression 'Prize Chit', the Par-
liament 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 Group had
given it." y
F
The learned judge while examining the scope of two clauses (i)
and (ii) of sec. 2(e) observed (p. 1042-43):

"The argument is that the two clauses (i) and (ii) are
to be read disjunctively and that they should not be read as
G if they are joined by 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 context requires the definition
to be re;td as if both clauses have to be satisfied. There is
nothing in the text which makes it imperative that it be read
H 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 the following purposes" indicates that the A
purpose may be either the one mentioned 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 B
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 c
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: D

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 sate of
-t" units, certificates or other instruments. The collection may be in E
respect of any savings, mutual benefits, thrift or any other scheme or
arrangement, no matter by what name. The Collection may be made
> 'r by a promoter, foreman, agent or in any other capacity. The collection
\t moneys or any part thereof is utilised for all or any of the purposes
s!'t out in clauses (i) and (ii). They are the two distinct attributes of
prize chit, each of which has to be satisfied. The definition goes a step F
~ further. The amount collected as such need not be utilised for any of
the purposes under clauses (i) and (ii). It may be sufficient to attract
the definition if the amoun;accrued from investment of such collection
is used for all or any of the purposes under clauses (i) and (ii).

--i Clauses (i) and (ii) provide for giving or awarding prize or gift to G
subscribers. It may be periodical or otherwise. The prize or gift may be
~awarded by lot, draw or in any other manner. Then there may be
refund of the whole or part of the collection. The refund may be made
to all or such of them who have not won any prize or gift. The refund
may be made with or without any bonus, premium interest or other
advantage. H
468 SUPREME COURT REPORTS (1988] 2 S.C.R.

A · · Leaving aside the verbiage, if we rewrite the definition whiclt.(
.. reeks of simplicity, it runs like this: Prize chit includes a scheme by
which a person in whatever name collects moneys from individual,, for
the_ purpose _of giving prizes and refunding _the balance with or "'ith·
out premium after the expiry of a specified period; ·

B From the above analysis, it will be clear that the reach and rangy
of the definition of 'prize chit' is sweeping. The generality of thei
- language appears to have been deliberately used so that the transac-
tion; arrangement or scheme in which subscribers or contributors
agree to forego a portion of their contnlmtions in the hope of getting
- any prize or gift should not escape from the net of the definition. Even
C the participation of any person in such chit or scheme has been pro-
hibited. The object being that.the people should not be attracted to:(
invest their moneys in the hope of getting prizes or gifts. The reason
being that _it has been found by the Study Group of Dr. S. Raj that all
such prize chits or schemes are in the form of lottery and they do not
serve any social purpose. They are prejudicial to the· public interest.
D They affect the monetary policies of the country. They benefit only
the promoters.

So much is about the law. Let us now have the fact of the caseA
The terms and conditions of the scheme offered by the company are as
follows: '
E
\
. "1. Secured Investment Company will b_e known~,
COMPANY. 7
. 2. Every member will deposit with the company--""'
Rs~220 ONLY ONCE in return he will get a Reinvestment I
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.

H 5. The duration of the scheme is for 66 months.
REGISTRAROFF.S.C. U.P. v. SECUREDINVESTMENTCO. [SHETIY,J.l 469

Therefore, the duration of the bank's R.D.P. Receipt is A
also for 66 months.

6. Lucky draws for articles totalling Rs.15,000 per
month will be given every mon.th 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 B
the recruitment of 19,999 members per group.

7. Every month, 2 llucky prizes will be given. The Ist
Prize will be a Vijay Scooter, the 2nd Prize will be a
Kelvinator refrigerator (10 Its.) or a T.V. and 19 other
·, '
consolidation prizes consisting of articles like transistor, C
sewing machine, cycle, pressure cooker, stainless steel thali
sets, alarm, clocks, etc.
,. 8. If there is any price increase, later in the period of
the scheme of the value of the prize articles which are
detailed below the winning member shall pay for the actual D
price increase. Cash in lieu of the articles will not be given.

1. One Vi jay Super Scooter Rs.8000
2. One Kelvinator Fridge
(10 Its.) or one T.V.
Plus one Mixi Rs.3900 E
3. One cycle Rs.400
4. One table fan Rs.350
5. One Sewing Machine Rs.325
6. 2 Nos. Philips Transistors
(Rs. 230 each) Rs.460
7. 3 Nos. Pressure Cookers Rs.525 F
(Rs. 175 each)
8. 5 Nos. Steel thali sets
(Rs. 100 each set) Rs.500
9. 6 Nos. Alarm Clocks
(Rs.90 each) Rs.540
TOTAL Rs.15,000 G
' ,.. 9. A winning member will be entitled to participate
in.subsequent draws. Thus a member can win prizes over
and over again.

10. If a member withdraws during the duration of the
scheme, he can encash his Bank's R.D.P. directly the H
470 SUPREME COURT REPORTS 11988] 2 S.C.R.
A entire amount of Rs.200 but will lose interest for the ba-
lance months as per Reserve Bank of India rules governing
from time to time. For example, ifa member withdraws
immediately after he gets his R.D.P. Receipt, he loses up
to a maximum of Rs.92. This is the maximum amount a
B member can lose if he withdraws from the scheme
immediately after he becomes a member and after getting
his Bank R.D.P. Of course, he will also not be entitled for
the balance lucky draws.

11 The reason for deduction of interest is that the
company gives these fantastic prizes through the interest
c thus gained, also this interest gained has to cover the com-
I

pany's 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.
D
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 re-
E ject 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
~·· "
1./
-
F every draw will go to an actual member.
r-~-""
15. The lucky draws will take place in rotation at 'j
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." IA!

G
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 21 prizes each. The members are not told that the '.
company deducts Rs.92 for its own use. They are only informed that
they are assured of the money deposited in the Bank, and in the event
H of premature withdrawal, they will lose interest upto Rs.92 only.
REGISTRAROFF.S.C. U.P. v. SECURED INVESTMENT CO. [SHETfY,J.] 471

In spite of all these glaring attributes of exploitive nature of the A
scheme, the High Court appears to have been carried away with the
-r Reinvestment Deposit Plan Receipt for Rs.220. The High Court was of
the view that the scheme could not be considered as "prize chit". The
High Court said:

"It is thus clear from a reading of the document (anne- B
xure !) that the so-called 'member' deposits the amount
with the petitioners for the purpose of obtaining a Rein-
vestment 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 distribu-
c
lion 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 D
with the petitioners as "contributions'' or "subscription", it
is difficult to hold that it is collected by the petitioners as
his "contribution or subscription".

The High Court appears to have proceeded on the basis that the
members of the scheme do not pay subscription to the company. Nor E
do they pay the amount as contribution. The High Court was also -0f
' »; the view that payment of money to the company for the purpose of
obtaining R.D.P. receipt with the hope of getting any prize is not
'x sufficient to attract the definition of prize chit.

~ In our view, the conclusion of the High Court is patently errone- F
ous. 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 G
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 invest-
ment scheme and not prize chit. We are unable to accept th;s submis-
sion. 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 H
472 SUPREME COURT REPORTS [1988] 2 S.C.R.

A 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
B 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
C 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 col-
lects 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
D subscribers. The company distributes monthly prizes of the value of
Rs.15,000. The total value of ail 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 costs? and for whose benefit?

E We are, however, glad to note that Madhya Pradesh High Court
while considering a similar scheme in Sahara India v. State of M.P. &
Others, [1983] M.P. 2 128 has held that it is prize chit falling within the
scope of Section 2( e) of the Act.
, .

We have no doubt that the scheme of the company with which we
f are concerned is primarily for the benefit of the promoter or the Com-
pany at the costs of the subscribers. This is the kind of transactions or
arrangements which Dr. J .S. Raj Study Group said that it 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
G 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 or gifts. Therefore, any scheme or arrangement in which a
person agrees to lose or made to part a portion of his payment against
the chance of getting any prize or gift, should be considered as prize
H chit falling within the inclusive definition under Section 2(e).
REGISTRAROFF.S.C. U.P. v. SECUREDINVES1MENTCO. [SHETIY,J.) 473

j_ From the above discussion, and in the light of the principles to . A
whicli we he ve called attention the scheme of the company is nothing
but P"··' c>·:.asdefined under Section 2(e) of the Act and the action of
the Re)•c; ~-.-of fin:Ils deserves to be upheld. • · ·

.. In the result, we allow the appeal with costs and set aside the . B
"}judgment and order of the High Court. . ·

Before parting with the case we may, however, observe that the
Registrar of the Firms while taking action against the persons or firms
under the Act will take care to see that the members of the scheme are
not denied of their contributions or prizes which they are legitimately
}..entitled to, if the prize chit is a~lowed to run for the full term . c
. S.L. Appeal allowed.