JUDGMENT
V.A. Mohta, J.
1. This an order of acquittal from an offence of promoting a “prize chit” in contravention of section 3 and punishable under section 4 of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (“the Act”), the State has filed the present appeal with leave under section 378 of the Code of Criminal Procedure. The complainant, H. R. Pahuja, at whose instance the police machinery was moved, has also filed a criminal revision. Both the matters are heard together.
2. The basic facts are not in dispute. The firm, Ganesh Traders (described as “the company”) sponsored a gift scheme for getting a Rajdoot motor cycle. Eleven ingredients and conditions of the scheme printed overleaf the application form for membership are : (i) the membership fee will be Rs. 11 and each group shall consists of 200 members; (ii) every member will have to deposit a sum of Rs. 330 per months for a period of 30 months; (iii) instalments will have to be deposited in the office every month between 1st and 10th. In the event of a member not depositing the instalment in time, he would be declared as a defaulter and the rule applicable to a defaulter-member would be applicable to him; (iv) Lots will be drawn in the presence of the members every month on the 15th and the lucky member would not be required to deposit further instalments; (v) defaulter-members will not be entitled to received the benefit of the gift scheme. If a defaulter is found to be a lucky winner; the company will have the right to receive the benefit; (vi) the defaulter-member will be refunded on the expiry of 30 months his dues after deducting the amount equivalent to two instalments; (vii) the defaulter-member, in order to become a regular member, will have to pay Rs. 10 per month as penalty; (viii) The membership number of a member who is a defaulter for the membership can be changed with the consent of the company; (ix) The lucky winner will be presented with a Rajdoot motor cycle (as per price of the manufacturer). All expenses over and above the manufacturer’s actual price of the motor cycle will be borne by the lucky winner; (x) On the expiry of the scheme after 30 months, each of the remaining members will be given a Rajdoot motor cycle at the price then prevalent. The difference will be paid by the member; (xi) the company will have the right to change the rules from time to time and so also the date of lucky draw.
3. The complainant had applied for the membership, had deposited a sum of Rs. 11 as membership fee and paid six installments admittedly. Payment of the seventh instalment is disputed. At the time of the seventh draw, Puhuja was the lucky winner. Delivery of the motor cycle was, however, not given to him on the ground that he had not paid the seventh instalment. The complainant reported to the police that the scheme was illegal and that he was cheated. Police presented a charge-sheet in the Court of the Judicial Magistrate. The complainant also filed a private complaint. Both cases were merged. No charge under section 420, Indian penal Code, was framed. In the criminal trial, an application form for membership with conditions printed overleaf (exhibit 49) was filed and oral evidence of as many as six witnesses including the complainant, other members, a police officer, a bank officer and a dealer in Rajdoot Motor cycles was recorded. It is in evidence that the scheme was sponsored with the concurrence of the manufacturer and local dealer of the vehicle. Waiting period for getting the vehicle was nearly two years and it was not available instalments.
4. The trial court came to the conclusion that under the scheme, there was guarantee of delivery of a motor cycle to every members, that there was a chance for poor people to get a motor cycle at negligible and/or low price and on instalments, that the amount deposited with the promoters was safe with them and, under the circumstances, it cannot be said that the accused persons – the partners of the company – had contravened any provisions of the Act. We find it difficult to sustain this view and, consequently, the order of acquittal, for the following reasons.
5. The Act, as the preamble indicates, is intended to “ban the promotion or conduct of prize chits and money circulation schemes.” The Statements of Objects and Reason reads thus :
“In June, 1974, the Reserve Bank of India had constituted 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 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 saving with such companies. In its report submitted to the Reserve Bank in July, 1975, the group observed that the prize chit/benefit/saving schemes benefit primarily the promoters and do not serve any social purpose. On the contrary, the group has stated that they are prejudicial to the public interest and affect the efficacy of the fiscal and monetary policies of the country.
Prize chits would cover any kind of arrangement under which money are collected by way of subscriptions, contributions, etc., and prizes, gifts etc., are awarded. The prize chit is really a form of lottery. Its basic feature is that the foreman or promoters who ostensibly charge no commission collects regular subscriptions from the members. Once the members gets the prize, he is very often not required to pay further instalments and his name is dropped 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 had, therefore, recommended that prize chits or money circulation schemes, by whatever name called, should be totally banned in the larger interest of the public and suitable legislative measures should be undertaken for the purpose.
The Bill proposes to implement the above recommendation of the group by providing for the banning of the promotion or conduct of any prize chit or money circulation scheme, by whatever name called, and of the participation of any person in such chit or scheme. The Bill provides for a business of prize chits or money circulation schemes may be wound up and provides for penalties and other incidental matters. The repeal of the existing State legislations on the subjects has also been provided for in the Bill.” (See Gazette of India, Extraordinary, dated May 15, 1978, part II, section 2, Page 649).
6. Section 2 is a definition clause. Three terms are relevant : (i) “conventional chit” – section 2(a);(ii) “money circulation scheme” – section 2(c); and (iii) “prize chit” – section 2(e). “Conventional chit’ means a transaction whether called chit, chit fund, kuri or by any other name by or under which a persons that every one of them shall subscriber a certain sum of money (or certain quantity of grain instead) by way of periodical instalments for a definite period and that each such subscriber shall, in his turn, as determined by a 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 amount.
7. Explanation. – In this clause, ‘prize amount’ shall mean the amount, by whatever name called, arrived at by deducting from out of the total amount paid payable at each instalment by all the subscribers,
(i) the commission charged as service charge as a promoter or a foreman or an agent; and
(ii) any sum which a subscribed to forgo, from out of the total subscriptions of each instalments, in consideration of the balance being paid to him.”
8. “Money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money of 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 members of such scheme or periodical subscriptions.
9. “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 or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any saving, mutual benefit, third or any other scheme or arrangement by whatever name called, and utilises the monies so collected or any part thereof or the income accruing from investment or other use of such monies 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, whether or not the recipient of the prize on gifts is under a liability to make any further payment in respect of such scheme or arrangement;
(ii) refunding to the subscribes or such of them as have not won any prize or gift, the whole or part of the subscriptions, contributions or other monies collected, with or without 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.
10. Section 3 bans prize chits and money circulation schemes or enrolment as members to such chits and schemes and participation therein. Section 4 makes contravention of section 3 punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees, on with both. Proviso to section 4 prescribes a minimum sentence. Section 5 deals with penalty for other offence in connection with prize chits or money circulation schemes. Section 6 deals with the subject of offences by companies. Section 10 makes the offences under the Act cognizable. Section 11 provides for exclusion of certain prize chits or money circulation schemes from the operation of the Act. Section 12 deals with transitional matters.
11. The Supreme Court had three occasions to examine the object and scheme of the Act and hence there is sufficient light on the subject. In the (SC), the validity of the Act on the touchstone of articles 14 and 19(1)(g) and the legislative competence was tested. The Act was found valid Dealing with prize chits, it was observed (at page 466) :
“The quintessential aspect of a prize chit are that the organizer collects money in lump sum or instalments, pursuant to a scheme or arrangement, and he utilises such money as he fancies primarily for his private appetite and for, (i) awarding periodically or otherwise to a specified number of subscribers, prizes in cash or kind, and (ii) 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, ordinary of slender means, in urban and rural areas. They are induced to believer 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 periodically payment. The indigent agrestics and the proletarian urbanites, pressured by dire poverty and doped by the hazy hope of a lucky draw, subscriber to the scheme although they can ill afford to spare any money. This is not promotion of thrift or wholesome small saving because the poor who pay are bound to continue to pay for a whole period of a few years over peril of losing what has been paid and, at the end of it, the fragile prospects of their getting prizes are next to nil and even the hard earned money which they have invested hardly carries any interest. They are eligible to get back the money they have paid in driblets, virtually without interest, the expression ‘bonus’ in section 2(a) being an euphemism for a nominal sum. What is more, the repayable amount being small and the subscribed being scattered all over the country, they find it difficult even to recover the money by expensive, dilatory litigative process.”
12. In the case of State of West Bangal v. Swapan Kumar Guha [1983] 53 Comp Cas 114 (SC), the term “money circulation scheme” fell for consideration. A first information report was lodged against Sanchaita Investment alleging that the said firm had been offering nearly 36 to 48 per cent. interest which showed that a “money circulating scheme” was being promoted and conducted for making quick and easy money. Considering the details of the said scheme, it was held that every activity for making quick or easy money is not comprehended in the definition and chance of making such money must depend upon a contingency applicable to the enrolment of members in the scheme in order to bring the activity in the net of the definition.
13. In the case of Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 (SC), the Endowment Certification Scheme sponsored by the Peerless General Finance and Investment Company Limited fell for consideration. It was held that the Act was designed to fight the baser human instinct of gambling aroused by the prize element which was essential to constitute “prize chit”. Dealing with the concept of prize chit sought to be prohibited, it is observed (at page 693) :
“… In fact, a prize chit, by whatever name it may be called, does not contemplate the exhaustion of the entire fund by giving of prizes; it invariably, to all the subscribers or to scheme Clauses (i) and (ii) refer to the twin attributes of a prize chit or like scheme and not two alternative attributes.”
14. The study group headed by Dr. Datta constituted by the Banking Commission has the following report to make about a prize chit :
“Prize chits. – In the ‘prize chit’, there is a foreman who ostensibly charges no commission and promises to return the whole of the contributions made by a member back to him at the end of a certain period. Periodically, the names of non-prized’ members are put to draw and the lucky members gets the prize either in cash or in the form of an article of jewellery or utility. Once a person gets a prize, he does not have to pay further instalments. The lucky members will get the prize irrespective of the number of instalments he has paid provided all the due instalments till the drawal of prize have been paid; he will then be exempted from further liability to pay. On the contrary, the majority of the members may not have got the prize when the scheme closes though they get back their total contributions without any deduction or its equivalent in the shape of an article. This is a scheme which is nothing short of lottery which is an offence punishable under section 294A of the Indian penal Code. The name ‘chit fund’ is rather a misnomer in this case.”
15. A Division Bench of this Court (to which one of us was a party) had occasion to deal with a somewhat a similar scheme in the context of the Bombay Lotteries (control and Tax) and Prize Competitions (tax) Act, 1958, in the case of Santosh Enterprises v. State of Maharashtra (Criminal Writ Petition Nos. 49 and 51 of 1985, decided on 3-2-1986). The sponsors of that scheme were dealers in plots and several consumer goods. The number of the members registered ranged from 150 to 250. Specified price of the plot/articles was to be paid in 40 monthly instalments. Every month one draw was made. A member whose name was declared in the draw was entitled to get a plot/article without being required to pay further instalments. From that stage, the lucky winner ceased to be a member of the scheme. This exercise was to go on for 40 months on the expiry of which the unlucky remaining members were entitled to get a plot/article at a specified price or refund without interest of the amounts deposited. This court held that the scheme was a “lottery” within the meaning of section 2(1) of the said Act. An argument similar to the one which is advanced before us in support of an order of acquittal was advanced in that cas, viz., there was a guarantee of refund and so also a chance of getting an article at almost no price and in instalments and hence it was beneficial specially to those poor who cannot even dream of having that article at the market rate and what is lost by them is nothing but “negligible” amount of interest Dealing with this aspect, it was observed :
“So examined, it will be clear to any discerning mind that the scheme have sinister features and have tendencies for exploitation of a vast number of persons generally of slender means for whom getting money at the right time even for their genuine needs is difficult. They are persuaded by means of irresistible propaganda and publicity to believe that they stand a chance of getting a fortune by making small periodical contributions, they stand to lost almost nothing as the schemes provide for refund of the whole amount after the last lot is drawn. People are either greedy or ignorant or both. There is always a dormant desire to gamble in every human being and all these weaknesses are fully exploited by these schemes. Ignorant people do not realise in a moment of weakness the money value of retaining the amount for a long period, which goes up to nearly four years. The promoters of such schemes stand to gain and the contributors stand to lose a huge amount by way of interest. Commercial current rate of interest even for a reputed business is nearly 18% per annum – by and large that is also the bank rate of interest – and after periodical credits the amount of interest becomes equivalent to principal in four years. Surely, poor people with slender means cannot get loans at that rate of interest which in their cases is manyfold than the normal. The people fall a prey to these illusory temptations and remain either half-hungry or cut down their genuine needs for fulfilling the obligations imposed under the schemes. Example are not unknown where people have even pledged their utensils to obtain loans at astronomical rates of interest solely with a view to participate in such schemes. Thus, their structure is based on chance and one cannot be guided merely by a facade. These schemes thus have a great anti-social impact. Many time people need protection against themselves and this is what the Act Provides.”
16. In our view, what is said about the scheme in that case squarely applies to the scheme in question. Predominant in the scheme in question is the element of chance for a very small number of 30 out of 200 members and for a large number of remaining 170 members loss of interest for 30 months.
17. Learned counsel for the complainant has placed before us a chart of the probable income derived from one scheme by the company on investment of a “negligible” amount of incident expenses. After reducing the contribution of each members every month by a sum of Rs. 10,000 (price of motor cycle), the total receipts come to Rs. 15,29,150 at the end of the 30th month. The amount of simple interest calculated at 18 per annum comes to Rs. 3,66,987. Thus, the company got a total sum of Rs. 18,96,137 in a span of 30 months and was required to incur (if at all) expense of only Rs. 16,83,000 in distributing the motor cycles to the unlucky 170 members after 30 months. Thus it earned a profit of Rs. 2.17 lakhs. To this income will have to be added amount of membership fee and the amount forfeited of recovery of the dues of the members is an added factor. What a lucky draw indeed for the company ? Is there any doubt that 170 out of 200 members have together lost nearly a sum of Rs. 2.17 lakhs in the bargain in return of a mere chance of being a lucky winner in a draw ?
18. Learned Counsel for the respondents-accused invited our attention to the title of the scheme which reads as “Rules and conditions for obtaining Rajdoot motor cycle.” It is contended that in substance and reality, this was a scheme for purchase of a Rajdoot motor cycle in instalments with a view promotes sales and there was no intention on the part of the promoters to violate the provisions of the Act. We are unable to see how the innocent title of the scheme will change its basic character. We are told that the waiting period for Rajdoot motor cycle was approximately two years. We are heavy, why was sponsoring of such a scheme at all necessary. But we do not want to enter into this controversy, because nothing turns on that. In the whole of the judgment of the learned Magistrate, we do not find even a whisper about the definition of “prize chit” and the object behind the Act. He seems to have been overwhelmed by “utility” of the scheme for those who cannot normally afford the vehicle.
19. What punishment and to whom is the next question. It is contended before us that only accused No. 1 Shivji Patel was managing the affairs of the company and the rest of the accused had no knowledge whatsoever of the scheme. We have ascertained whether the other accused persons belong to the family of accused Shivji. We are informed that all the four partners are major independent businessmen belonging to different families. No suggestion that only accused Shivji was in charge of the business was made to any prosecution witness. Therefore, it is difficult to hold that the scheme was sponsored without the knowledge and/or connivance of the other partners or that they had exercised all due diligence to prevent the commission of an offence. Thus, the case of the other accused persons offences by companies. All the four accused are, therefore, equally guilty of the offence and no one can be exonerated.
20. Though not obliged to do so, we heard the parties even on the question of sentence. Learned counsel for the accused informed us – and this statement is not controverted – that it was for the first and the last time that such a scheme was sponsored by the accused and that the said business has been closed down as soon as prosecution was launched.
21. Having regard to all the circumstances, we allow the State appeal and convict the accused for promoting a “prize chit” in contravention of section 3 of the Act and impose a fine of Rs. 3,000 under section 4 of the Act on each of the accused. In default of payment of fine within a period of one year.