AI Structured Summary
Not yet generated for this judgment
Judgment
The petitioner is an establishment engaged in the conduct of chits or kuris and it carries on all operations connected with the said business. For
over two decades, the petitioner was carrying on conventional chits. The nature of the business being carried on by the petitioner is set out in
paragraph 6 of affidavit. It states -
A Chits is usually started by an individual known as the Foreman, who invites members of the public to subscribe to the chit, agreeing to pay his
own subscription periodically from the subscribers and pays the collections to such of those subscribers as may be determined by lot to be publicly
drawn. The advantage of being a Foreman is that the Foreman is entitled to receive the first instalment of the collections. An ordinary chit is
essentially a transaction by which such subscriber gets a loan from the common fund. The subscriber to a chit fund scheme usually join the scheme
in order to avail themselves of the facility of bidding the kuris when they are in urgent need of money, but that they may receive the chit amount in a
lump sum as a loan with the facility of repaying it in monthly instalments. The conduct of chits is regulated by statute. Under law, it is specifically
provided that the Foreman is entitled to a commission which shall not exceed five per cent and from out of that commission, he is expected to meet
the expenses in connection with the conduct of the chit. It is clear that the Foreman does not earn any amount other than the commission due to
him and certainly no interest on any amount advanced by him. The Foreman neither lends nor borrows money.
According to the petitioner, the provision of the Employees Provident Fund and Miscellaneous Provisions Act, is not applicable to their
establishment. But in December 1979, the first respondent informed the petitioner that the Act and the scheme framed thereunder are applicable to
the petitioner-establishment and called upon the petitioner to furnish the details in the proforma enclosed. The petitioner filed W.P. 947 of 1981 in
this Court, and also made representations to the Central Government under S. 19-A of the Act, requesting the Government to determine the
question of application of the provisions of the Act to the petitioner. The Central Government has since passed orders under S. 19-A of the Act,
dated 3rd August, 1981, holding that the petitioner establishment would come within the Notification issued under S. 1(3)(b) of the Act, since it is
a financial establishment. Aggrieved by the same, the present writ petition No. 2292 of 1982, has been filed.
The Notification in question GSR 1458 issued in exercise of the power under S. 1(3)(b) of the Employees Provident Funds and Miscellaneous
Provisions Act 1962 states -
... The Central Government hereby specifies all financial establishments other than Banks engaged in the activities of borrowing, leading, advancing
of money and dealing with other monetary transactions with a view to earn interest, not being the Unit Trust of India, establishment under the Unit
Trust of India Act, 1963 (52 of 1963) ...
In the impugned orders passed under S. 19-A the Central Government has held that the petitioner is a financial institution. which is the same as a
financial establishment. There cannot be any quarrel with the same. Secondly, it is held that the Foreman gets a commission of 5 per cent and also
has the advantage of drawing the first or a specified chit without furnishing any security. Thirdly, it was held that the commission or remuneration of
5 per cent and other benefits to which the Foreman is entitled to are the earnings, profits or compensation for use of money. The meaning of the
word ''interest'' should be equated to the meaning of the word ''compensation''. Since the Foreman gets compensation or earnings, it means that he
earns interest. On the reasonings, the Central Government held that since the petitioner is a financial establishment and since the Foreman earns
commission upto a maximum of 5 per cent and is also entitled to the benefit of the first or specified chit, it should be held that the petitioner is
engaged in monetary transactions with a view to earn interest, which words is equivalent to the word ''compensation.''
The learned counsel for the petitioner submits that chit transactions are well known scheme and widely prevalent in South India and that it is not
a transaction similar to a banking transaction. In Reserve Bank of India v. Peerless General Fiance and Investment Co. Ltd. AIR 1887 S.C.
1023., the Supreme Court has set out the main features of business chit a follows :-
Business chit :- In this case, there is a promoter called foreman who enrolls a number of subscribers and draws up the terms and conditions of the
scheme in the form of an agreement. Every subscriber has to pay his subscription in regular instalments. The foreman charges, for his services, a
commission on which there is a celling fixed by law in some States. He also reserve the right to take the entire chit amount at the first right to take
the entire chit amount at the first or second instalment as prize. Depending on the terms of agreement, a fixed amount is also sometimes set aside
for distribution among the non-prized members. After making provisions for the above deductions, the balance is put to auction (except at the last
instalment) and given an prize to the member who is prepared to forego the highest discount. The amount of discount is distributed as dividend
either among all the members or only among the non-prized members. In some States a ceiling has been fixed on the discount that a member can
offer. In case more than one person is prepared to offer the same discount or when there are no bidders, lots are drawn to choose the prize
winning member. The number of subscribers in a chit series equals the number of instalments so that every member is assured of the opportunity of
getting the prize. Sometimes with a view to catering as many subscribers as possible a chit comprises a series expressed in terms of a sub-division
or fraction of a full ticket (ticket means the share of a subscriber which entitles the holder thereof to the prize amount at any one instalment). In such
cases, the number of subscribers can exceed the number of instalments. In some cases only auctions are held to determine the prize winner while
there are chit funds in which prize winning tickets are determined both by lots and by auction.
The petitioner further states that the Notification, GSR 1458, is intended to cover only non-banking financial establishments engaged in the
activities similar to Unit Trust of India, Agricultural Refinance Corporation, Industrial Development Bank of India, Industrial Finance Corporation
of India, State Fiance Corporation etc. and not financial establishments doing chit business. His further case is that the petitioner establishment is
not engaged in the activity of borrowing or lending or advancing of money, with a view to earn interest. His case is that the word ''and'' occurring in
the Notification is used in a conjunctive sense and unless the activity of the financial establishment is proved to be one undertaken with a view to
earn interest the establishment cannot be brought within the scope of the Act. The learned counsel for the respondents while supporting the order
of the Government made under S. 19-A of the Act, on the grounds mentioned in the order, further states that the order can also be supported by
two other grounds, first of such grounds being that the word ''and'' occurring in the Notification is used in a disjunctive sense and it is enough if the
financial establishment is shown to be engaged in borrowing, lending or advancing money and it is not necessary to prove that its activities are
intended to earn interest. Secondly, he submits that in any event, the petitioner has admitted in paragraph 4 of the affidavit that the objects of the
company include the power to draw, make, accept, endorse, discount, execute and issue promissory notes, bills of trading, warrants, debentures
and other negotiable transferable instruments, and therefore, on the petitioner''s own admission, it is engaged in activities for the purpose of earning
interest and consequently, the petitioner establishment has been rightly covered under the Act.
Notification (GSR No. 1458) states that financial establishments of particular category in which 20 or more persons are employed would be
covered by the Act. These financial establishments should be those other than Banks. They must be engaged in the activities of borrowing, lending
and advancing of money, dealing with other monetary transactions, with a view to earn interest. If we read the word ''and'' as conjunctive, then
only such of those financial establishments engaged in monetary transactions with a view to earn interest would be covered by the Act. Meaning of
the word ''interest'' is obviously a return for the money advanced. When a person gets commission for services rendered, it can hardly be
described as interest earned on moneys advanced. The scheme of business chits, which has already been referred to, would show that the
Foreman renders some service to the subscribers by collecting the moneys, conducting auctions or distributing the prize amount to the subscribers,
after taking a security from him to assure the subscribers'' obligation to pay the balance of instalments. The commission earned by him for the
services rendered by him has been equated in the impugned orders as interest. This conclusion of the Government cannot be supported. In Chits,
there is no element of interest earned by the Foreman. He only earn commission not exceeding 5 per cent. Within that commission, he has to bear
the expenses relating to the bids and the establishment costs. The only reason given in the order of the Government that the commission earned by
the Foreman is the interest earned by the establishment on monetary transactions not being supportable, the writ petition is liable to be allowed on
this short ground.
However, it is necessary to deal with other two contentions raised by the learned counsel for the respondents. As stated earlier, his first
submission is that the word ''and'' occurring in the notification is disjunctive and therefore it is not necessary to prove that the establishments are
engaged in monetary transactions with a view to earn interest. He states that it is enough if there is a financial establishment, other than a Bank,
engaged in the activity of borrowing, lending or advancing of money. According to the learned counsel, the petitioner-establishment is engaged in
the activities of borrowing, lending or advancing of money. He relies upon the judgment in Sukhnandan Vs. Suraj Bali and Others, and the
judgment in K. B. Barua v. State of Assam A.I.R.1955 Ass 249, to contend that in appropriate cases in order to avoid an anomaly and to make a
meaningful interpretation, the word ''and'' may be understood as ''or''. There cannot be any quarrel with the said proposition. But in the instant
case, the question is whether if the word ''and'' used in the Notification is understood in conjunctive manner, the Notification itself would be
rendered meaningless and would result in any absurdity. The answer to this question is that if the word ''and'' is understood in a conjunctive manner
the notification would still make sense and the Notification can be operative on that basis. Therefore, when the Government had carefully used the
word ''and'' in the Notification, there is no compelling reason to depart from the normal interpretation of understanding words on their dictionary
meaning and to import words which are not there. Hence, the word ''and'' has to be understood only in conjunctive manner and if so understood, it
should be held that unless it is proved that the establishment is a financial establishment and is dealing in any monetary transactions with a view to
earn interest, it cannot be covered by the Notification. In the instant case, it has already been found that the transactions of the petitioner
establishment are not made with a view of earn interest. Therefore, the second submission of the learned counsel for the respondent is rejected.
The third contention of the learned counsel for the respondents is that in paragraph 4 of the affidavit, the petitioner has admitted that the objects
of the Company include the power at draw, make, accept, endorse, discount, execute and issue promissory notes. Therefore, it is contended that
the transactions are intended to earn interest. But such was not the case put forward by the department before the Central Government nor in the
impugned orders, the said reason has been given. It should be seen that the Notification carefully uses the expression - ""financial establishment
engaged in the activity of ..."" Though the objects of the establishment may be very wide, it must be proved that the financial institution is actually
engaged in activities with a view to earn interest. In the instant case, there is no such proof to show that the petitioner establishment was actually
engaged at the relevant time in any monetary transactions of the nature referred to in paragraph, though the same may be well within the objects of
the company. Hence, all the three contentions of the respondent fail and the Write Petition No. 2922 of 1982 is allowed. There will be no order as
to costs.
The points raised in W.P. 2810 of 1988 are identical to the points in W.P. 2922 of 1982. Following the said judgment, W.P. 2810 of 1988 is
also allowed. No costs.
The order impugned in W.P. 7704 of 1988 has been issued consequent to the order impugned in W.P. 2810 of 1988. In view of the fact that
W.P. 2810 of 1988 is allowed, W.P. 7704 of 1988 will also stand allowed. No costs.