Skip to content

Chockanathan Chit Fund and Finance (P) Ltd., Pondicherry and ors. Vs. Union Territory of Pondicherry and ors. - Court Judgment

LegalCrystal Citation
CourtChennai High Court
Decided On
Case NumberWrit Petn. nos. 3306 and 3475 of 1968 and 99, 1068, 1092, 1952 to 1954 and 2743 of 1969
Reported inAIR1972Mad99
ActsPunditry Chit Funds Act, 1966 - Sections 2, 2(3), 3, 6, 8, 10, 12 to 22, 24, 25, 38 and 52; Constitution (Fourteenth Amendment) Act, 1962; Madras Chit Funds Act, 1961
AppellantChockanathan Chit Fund and Finance (P) Ltd., Pondicherry and ors.
RespondentUnion Territory of Pondicherry and ors.
Cases ReferredVide Sajjan Bank (P) Ltd. Alandur v. Reserve Bank of India
.....of the act are reasonable and valid; on the question raised as the validity of the pondicherry chit funds act, 1966, on the ground that it is ultra vires the legislative competence of the pondicherry state legislature, since the subject-matter of the legislation falls under list i in the seventh schedule of the constitution and consequently the parliament alone has competency to make law on the subject,; held, the enactment falls under entry 7 of list iii and not under entry 30 or entry 26 of list ii. the impunged enactment does not fall under entry 34 of list ii as there is no question of gambling in running chits. the system only provides an easy facility to raise money and promotes thrift in the subscribers. running of chits does not fall under entry 45 of list i, as the essence..........restraining the union territory of pondicherry from enforcing the provisions of the punditry chit funds act 1966. under the constitution (fourteenth amendment) act, 1962, pondicherry was constituted as a union territory and de jure transfer of pondicherry state to the indian union was made on 16-8-1962. the legislative assembly of the union territory of pondicherry constituted under section 18 of the government of union territory act 1963, has made the pondicherry chit funds act 1966 which received the assent of the president on 14-2-1967 and became law on 1-10-1967. the provisions of the said act were enforced and the present writ petitions are filed for the aforesaid relief.2. all the petitions are of the same pattern and we shall take up the allegations in w. p. 1068 of 1969......
1. The petitioners in each of the above writ petitions are companies or firms conducting chit funds of all classes in the State of Pondicherry and the present writ petitions are for the issue of a writ of Mandamus restraining the Union Territory of Pondicherry from enforcing the provisions of the Punditry Chit Funds Act 1966. Under the Constitution (Fourteenth Amendment) Act, 1962, Pondicherry was constituted as a Union territory and de jure transfer of Pondicherry State to the Indian Union was made on 16-8-1962. The Legislative Assembly of the Union Territory of Pondicherry constituted under Section 18 of the Government of Union Territory Act 1963, has made the Pondicherry Chit Funds Act 1966 which received the assent of the President on 14-2-1967 and became law on 1-10-1967. The provisions of the said Act were enforced and the present writ petitions are filed for the aforesaid relief.

2. All the petitions are of the same pattern and we shall take up the allegations in W. P. 1068 of 1969. The system of chit funds has been in existence for over 100 years. Broadly stated, the petitioners are carrying on business in the shape of chit running transactions. The person who organises the chit business is called the stake holder or the foreman. A certain number of individuals join together and subscribe in daily, weekly or monthly instalments for a fixed period of days, weeks or months. On a date appropriate to each class, auction is conducted in respect of the total of the subscriptions of any one instalment less certain discounts. The difference between the collection and the bid is distributable among the other subscribers. The bidder (prize winner) draws the money on his furnishing security for the payment of the further instalments for the duration of that chit. This form of transaction is widely prevalent and affords an opportunity to subscribers both to borrow on reasonable terms as it were and to make profitable investments. The conduct of this business is on these lines. The foreman takes upon himself the responsibility of conducting the chit and financing the chit transactions. He gets a commission of 5 per cent. of the total chit amount. He has to finance every auction, even though some of the subscribers may be in default and to pay the full amount of the prize money even if the collections fall short. To that extent he has to advance his own moneys. If the security given by a prize winner proves useless or the amount is irrecoverable. the foreman has to enforce the security, if need be by filing suits. This in short is the scheme of chit run by the petitioners. This system is referred to in a number of decisions particularly in Raghavan Pattar v. Arumugham. 68 Mad LJ 283 = (AIR 1935 Mad 385);Ramanatha Ayyar v. Narayanaswami Ayyar. AIR 1937 Mad 364; Dhoosa Narasimloo v. Yalala Rajanna, 1958-2 Andh WR 5 and G. K. Naidu v. C. K. Mouleswar, AIR 1962 Andh Pra 406.

3. The Pondicherry Chit Funds Act 1966 is practically a copy of the Madras Chit Funds Act, 1961. The said Pondicherry enactment is in substance as follows. "Chit" is defined in Section 2 and "chit agreement" is defined in Section 2(3). Under Section 3 by laws of Chit Funds signed by the foreman have to be registered with the Registrar of Chits. Under Section 6, every chit agreement signed by the subscribers or by persons authorised in that behalf by the subscribers and the foreman shall be filed with the Registrar. No business of chit can be commenced unless a certificate of commencement is obtained from the Registrar under Section 7. Copies of any laws and chit agreements have to be given to all subscribers under Section 8. Under Section 10 the Minutes of the proceedings of every drawing shall be drawn up and entered in a book to be kept for that purpose and shall be signed by the foreman and all the subscribers. a copy of minutes shall be filed with Registrar. Chapter III containing Sections 12 to 18 deals with the duties and liabilities of the foreman. Under Section 12 of the Act the foreman has to furnish security or deposit or invest in Government securities of not less than half of the chit amount. Under Section 13 the foreman is entitled to a commission not exceeding five percent, of the chit amount. The duties of the foreman, his liability and the books he has to maintain are all provided in Sections 14 to 17.

Chapter IV consisting of Ss. 19 to 22 deals with the obligations of non-prized subscribers. Chapter V relates to the obligations of the prized subscribers. The duties of prized subscribers are contained in Sections 24 and 25. Chapter VI deals with the transfer of rights of foreman and non-prized subscribers. Chapter VII relates to termination of chits. In Chapter VIII the right of the subscriber to examine the chit records and the records which the foreman has to maintain are provided. Chapter IX relates to winding up of chits. Section 38 therein mentions the circumstances under which chits can be wound up by court. The procedure to be followed is indicated in the various sections of the said chapter. Chapter X deals with the appointment of Director of Chits. Inspecting officers, Registrars and Chit auditors. Section 52 therein authorises any person to inspect the documents kept by the Registrar and obtain a copy or extract of any document certified by the Registrar. Chapter XI is a Miscellaneous Chapter dealing with appeals, penalties, the rule making power and various other matters.

4. Mr. K. K. Venugopal appearing for the petitioners, raised the following contentions., (1) The State Legislature has no power to make the impugned enactment, as the enactment will fall neither under Entry 30 (money lending and money lenders) nor under Entry 34 (betting and gambling) of List II but falls under Entry 45 (banking) of List I. (2) The requirement under Section 12 of the Act calling upon the petitioners to deposit or furnish security for half of the chit amount is onerous and unreasonable and violates the rights to carry on their business. (3) The filing of chit agreement with the Registrar and maintenance of other records is expensive and destroys or wipes out the small margin of profit which the foreman gets. (4) The fixation of five per cent as remuneration of the foreman is an unreasonable restraint on his right to carry on his business under Art. 19(1)(g). (5) Sections 27, 28 and 29 in so far as they interfere with the discretion of the foreman are onerous. (6) Section 37 operates as an unreasonable restraint on the right of the foreman to carry on his business. (7) Section 52 is a violative of Art. 14 of the Constitution. (8) The provisions of the enactment were not discussed in the Legislature clause by clause and therefore the Act is invalid.

Mr. Venugopal referred to a number of cases to show the nature of chit funds and the position of the foreman in such chit funds. He referred in particular to 68 Mad LJ 283 = (AIR 1935 Mad 385) where it was held:

"that in essence the person who offered the highest discount and thereby became owner of the chit fund was purchaser at an auction, and that the contract was one of sale and not one of borrowing.."

To the same effect are the decisions in AIR 1937 Mad 364 and 1958-2 Andh WR 5. In AIR 1962 Andh Pra 406, it was held that the foreman was in the position of a trustee and on his insolvency the Official Receiver has no right to enforce the security given to the foreman by the subscriber of a chit.

5. The validity of the Madras Chit Funds Act 1961 from which the impugned Act was copied has been upheld by this court in Tuticorin T. and C. Corpn. (P) Ltd., v. State of Madras, 1966-1 Mad LJ 313. The only provision that was held unconstitutional was Sec. 52.

6. As the impugned enactment is a copy of the Madras Chit Funds Act 1961, we issued a notice to the Advocate General. Madras who appeared and supported the enactment practically on the same lines as that done by Sri V.K.T. Chari in W. Ps. Nos. 1125 of 1967 etc (Mad) batch.

7. On the legislative competence of the State Legislature to enact the impugned law, we have held in W. P. Nos. 1125, 1126 and 1127 of 1967 (Mad) that the Madras enactment falls under Entry 7 of List III and not under Entry 30 or Entry 26 of List II. We are of opinion that the impugned enactment does not fall under Entry 34 of List II as there is no question of gambling in running chits. The system only provides an easy facility to raise money and promotes thrift in the subscribers. We are also of opinion that running of chits does not fall under Entry 45 of List I, as the essence of a banking business, namely, receiving money on current account for deposit from the public repayable on demand and withdrawals by cheque or drafts or otherwise, is absent in running chits-Vide Sajjan Bank (P) Ltd. Alandur v. Reserve Bank of India, Madras. .

8. The Act is intended provide a measure of safety for the subscribers to a chit fund transaction. When a person starts operating a chit transaction as the stake-holder or a foreman, he takes upon himself certain responsibilities. At the same time he is entitled to certain benefits which are considerable. We can find nothing objectionable in those provisions which call upon the foreman to register the by-laws of the chit. furnish security as required by Section 12 and obtain a certificate of commencement from the Registrar. Strong objection was taken to Section 12 of the Act requiring the foreman to furnish security. This provision is absolutely necessary to ensure fulfilment of the objections of the foreman. The foreman receives at each instalment of the chit transaction a large amount of money which he has under the rules to disburse to the prize winner less certain deductions. If the foreman fails to carry out his obligation in this regard, the numerous without any remedy except by way of preferring suits, which in some cases will be fruitless. It is true that this provision calls upon the foreman to provide security even in advance of his commencement of the chit business. The foreman is at liberty to realise the whole amount of the security by taking to himself the prize at the first instalment. This provision requiring security to be furnished in our opinion is in s the interests of the large body of subscribers. The other provisions sought to be attacked cannot be said to be unreasonable. Mr. Venugopal, the learned counsel for the petitioners, however, contended that the chapter relating to the winding up has to be struck down. Under the system of running chits, if subscribers are not able to realise the money due to them, they are entitled to file suits for recovery of money due to them, and when some of them are paid in execution of the decree obtained against the foreman, the fund is depleted to that extent, the chit cannot be continued thereafter and the other subscribers will be seriously prejudiced. it is to avoid such a contingency that the provision relating to winding up is introduced. so that there can be an equitable distribution. We consider that winding up is absolutely necessary. In similar enactments provisions for winding up has been made. We do not see anything objectionable in this Chapter.

9. Regarding S. 52 in the Pondicherry Chit Funds Act 1966 similar to the one in the Madras Chit Funds Act which has been struck down in 1966-1 Mad LJ 313, we consider that Section 52 is not so obnoxious as to be struck down. Chit fund transactions are not secret transactions and there can be no objection to any person obtaining copy of any document from the Registrar.

10. The writ petitions are dismissed with costs (one set). Counsel's fee Rs. 250/-

11. Petitions dismissed.

Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //