1971 Supreme(Mad) 44

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE VEERASWAMI & THE HONOURABLE MR. JUSTICE RAGHAVAN
Mayavaram Financial Corporation Limited and Others - Appellant
Versus
Reserve Bank of India and Others - Respondent
Case No : C.M.P. Nos. 14437, 14438 and 14439 of 1969 in W.P. Nos. 1125, 1126 and 1127 of 1967
Decided On : 29 January 1971

The impugned provisions falling under Chapter III-B of the Reserve Bank of India Act, 1934, and the notification dated October 29, 1966, issued by the Reserve Bank of India are valid and that there is no substance in any of the contentions raised by the petitioners.

Headnote:

CHIT FUND - RESERVE BANK OF INDIA ACT, 1934 - SECTIONS 45J TO 45L - DIRECTIONS ISSUED BY RESERVE BANK OF INDIA - VALIDITY - CONSTITUTION OF INDIA, 1950 - ENTRIES 30, 36, 38 OF LIST I, SEVENTH SCHEDULE - ENTRIES 7, 26, 30 OF LIST II, SEVENTH SCHEDULE - WHETHER THE IMPUGNED PROVISIONS ENTRENCH UPON ENTRY 30 OF LIST II - WHETHER THE IMPUGNED PROVISIONS FALL UNDER ENTRY 36 AND 38 OF LIST I - WHETHER CHIT FUNDS FALL UNDER ENTRY 7 OF LIST III - WHETHER THE IMPUGNED PROVISIONS ENTRENCH UPON ENTRY 26 OF LIST II - WHETHER THE IMPUGNED PROVISIONS ARE COLOURABLE - WHETHER THE MONEYS RECEIVED FROM THIRD PARTIES BY THE FOREMAN WILL AMOUNT TO BANKING - WHETHER THE IMPUGNED PROVISIONS ARE VALID.

Fact of the Case:

The petitioners are companies carrying on business as foreman of chits. The allegations in each of the writ petitions are of the same pattern and we shall take up the allegations in W.P. No. 1126 of 1967. The scheme of working of chits as set out by the petitioners in their affidavits is as follows : A number of persons called subscribers join together undertaking to subscribe a certain sum of money at stated intervals for a certain period. The aggregate of the sums payable by all the subscribers in one instalment is called the capital of the chit. The prize amount is ascertained by auctioning the fund among the subscribers or by draw. After deducting the discount which is either a fixed percentage of the capital or the difference between the capital and the price amount, the prize amount is taken by the successful bidder in full satisfaction of his claim under the chit, but subject to his liability to pay future instalments. The person who conducts the chit is called the foreman. It is the duty of the foreman to collect the subscriptions from every subscriber, to conduct and manage the chit, to keep regular accounts and to pay the prize amount to the subscriber concerned whether or not the other subscribers have paid the instalments due. If all the subscribers pay the instalments due without default, there will be no problem for the foreman in paying the prize amount to the subscriber entitled thereto. But it is often found that 15 to 20 per cent. of the subscribers default in payment of instalments. Before drawing the prize amount, the successful subscriber is required to furnish security for due payment of future subscriptions till the culmination of the chit. Sometimes subscribers are unable to furnish the necessary security and allow the prize amounts to remain with the fund on interest. The petitioners, in addition to carrying on the business of chits, accept deposits and loans from third parties, and they utilise the amounts so obtained as working funds and also do business by lending the deposits so received at higher rates of interest ostensibly to tide over their financial difficulties in meeting their obligations as foreman of chits.

Finding of the Court:

The impugned provisions falling under Chapter III-B of the Reserve Bank of India Act, 1934, and the notification dated October 29, 1966, issued by the Reserve Bank of India are valid and that there is no substance in any of the contentions raised by the petitioners.

Issues: 1. Whether the impugned provisions entrench upon entry 30 of List II? 2. Whether the impugned provisions fall under entry 36 and 38 of List I? 3. Whether chit funds fall under entry 7 of List III? 4. Whether the impugned provisions entrench upon entry 26 of List II? 5. Whether the impugned provisions are colourable? 6. Whether the moneys received from third parties by the foreman will amount to banking? 7. Whether the impugned provisions are valid?

Ratio Decidendi: 1. The impugned provisions in pith and substance relate to control of currency by the Reserve Bank and fall under entries 38 and 36 of List I of the Seventh Schedule, and that they do not in any way entrench upon entry 30 of List II. 2. The contract entered into by the foreman with the subscriber is a special contract falling under entry 7 of List III of the Seventh Schedule. 3. The impugned provisions do not entrench upon entry 26 of List II and that chit funds do not fall under entry 26 of List II. 4. There is no substance in the contention that the impugned provisions are colourable. 5. The distinction between money-lending and money borrowing and the impugned provisions in so far as they control money borrowing in the state of deposits from third parties and lending the same are valid. 6. The Amending Act 4/68 introducing an Explanation to section 45-I(c) is valid. 7. Parliament being supreme, is entitled to make a law abrogating or replacing by implication the provisions of any pre-existing law and no exception can be taken to such legislation on the ground of excessive delegation to the Act of Parliament itself.

Final Decision: The writ petitions accordingly fail and are dismissed with costs (one set). Counsel's fee Rs. 250 . C.M.P. Nos. 14437 to 14439/69 for leave to raise additional grounds ordered.