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Madras High Court
K. VEERASWAMI,RAGHAVAN
Chockanathan Chit Fund and Finance (P) Ltd., Pondicherry - Appellant
Versus
Union Territory of Pondicherry - Respondent
Decided On : 01/29/1971
CHIT FUNDS - PONDICHERRY CHIT FUNDS ACT 1966 - VALIDITY - LEGISLATIVE COMPETENCE - ENTRIES 30, 34 OF LIST II AND ENTRY 45 OF LIST I - WHETHER THE ACT FALLS UNDER ANY OF THESE ENTRIES - WHETHER THE PROVISIONS OF THE ACT ARE UNREASONABLE RESTRAINT ON THE RIGHT TO CARRY ON BUSINESS - WHETHER THE PROVISIONS ARE IN THE INTEREST OF THE SUBSCRIBERS.
Fact of the Case:
The petitioners, companies or firms conducting chit funds in Pondicherry, challenged the validity of the Pondicherry Chit Funds Act 1966, claiming it was beyond the legislative competence of the State Legislature and violated their fundamental rights.
Finding of the Court:
The court upheld the validity of the impugned Act, holding that it fell under Entry 7 of List III and not under Entries 30 or 26 of List II or Entry 45 of List I. The court found that the provisions of the Act were necessary to protect the interests of the subscribers and were not an unreasonable restraint on the right to carry on business.
Issues: 1. Whether the Pondicherry Chit Funds Act 1966 was within the legislative competence of the State Legislature? 2. Whether the provisions of the Act were an unreasonable restraint on the right to carry on business?
Ratio Decidendi: 1. The court held that the impugned Act fell under Entry 7 of List III and not under Entries 30 or 26 of List II or Entry 45 of List I. The court found that the Act was intended to provide a measure of safety for the subscribers to a chit fund transaction and that the provisions of the Act were necessary to ensure fulfillment of the obligations of the foreman. 2. The court held that the provisions of the Act were not an unreasonable restraint on the right to carry on business. The court found that the provisions were necessary to protect the interests of the subscribers and that the foreman was entitled to certain benefits which were considerable.
Final Decision: The writ petitions were dismissed with costs.
ORDER:- 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 Pondicherry 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 Pondichery 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 subscribers bid at the auction and the lowest bidder gets the amount. 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 face the loss. 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
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