WP/18381/2007 of D.BALARAMAN Vs THE COMMISSIONER AND on 30 December 2019

1. The Commissioner and Secretary, Department of Commercial Tax Appellate Authority under Chit Funds Act, Government of Tamil Nadu, Secretariat, Chennai – 600 009.

... Petitioner

2. The Registrar of Chit Funds, North and South Chennai, Chennai – 600 001.

3. The Foreman, M/s.Sri Ram Chit Funds, Tamil Nadu Limited, Anna Nagar Branch – 3, No.2, Main Bazaar Road, Collector Nagar, Mugapair East, Chennai – 600 050. ... Respondents PRAYER : Writ Petition is filed under Article 226 of theConstitution of India, to issue a Writ of CertiorarifiedMandamus, to call for the records relating to G.O(D)Ms.No.109dated 10.03.2006 passed by the Commissioner and SecretaryCommercial Tax and Registration (K) Department in partiallyconfirming the award passed by the Registrar, Chit Funds, NorthMadras in ARC No.905/2000 dated 08.10.2001 and quash the sameand consequently remit the matter to the Registrar, Chit Funds.

For Petitioner :Mr.D.Govindareddy

Mr.K.V.Ananthakrishnan [R3]ORDER

The petitioner was a subscriber to one of the chit groupsrun by the third respondent. The value of the chit was Rs.3.00lakhs payable at Rs.10,000/- per month in 30 monthlyinstallments. He bid in the second auction held on 20.08.1998in the third month. The case of the petitioner is that heprized the chit for a sum of Rs.2.10 lakhs, the discount beingRs.90,000/-. He executed a promissory note for a sum of

Rs.2.70 lakhs and three of his relatives stood as sureties. Yetthe foreman paid him only a sum of Rs.86,900/- after deductingRs.3,100/- towards verification charges, Rs.10,000/- towards thecurrent installment and retaining a sum of Rs.1.00 lakh as FixedDeposit for a period of twelve months. The petitioner continuedto remit the monthly dues till the 20[th] installment. Followinghis default, the foreman issued legal notice dated 13.02.2000calling upon the petitioner to pay the entire balance amount ofRs.1,42,222/-. After receiving the same, the petitioner paid asum of Rs.9,400/-, Rs.8,500/- and Rs.8,250/- on various dates.Since the demand of the chit company was not complied with infull, the foreman filed ARC No.905 of 2000 before the DistrictRegistrar of Chit Funds, North and South, Chennai claiming a sumof Rs.1,24,537.60 with interest at the rate of 24% per annum.The petitioner filed his response to the claim. TheArbitrator/District Registrar of Chits by award dated 08.10.2001allowed the claim of the chit company and directed thepetitioner herein as well as the guarantors to pay a sum ofRs.1,24,537.60/- with interest at the rate of 24% per annumfrom the date of the filing of the arbitral case. Aggrieved bythe same, the petitioner filed an appeal under Section 70 of theChit Funds Act, 1982 before the State Government. TheGovernment by the impugned order bearing G.O (D) No.109,Commercial Taxes and Registration (K) Department, dated10.03.2006 declined to interfere with the award of the ChitRegistrar except as regards the rate of interest, which wasreduced from 24% to 12% per annum. The other contentions of thepetitioner were rejected. Challenging the same, this writpetition came to be filed.

Conclusion

2. A detailed counter affidavit has been filed by thethird respondent. The learned counsel appearing for the thirdrespondent reiterated the contentions set out therein.According to the third respondent, the total chit value wasRs.3.00 lakhs. The amount paid by the petitioner wasRs.1,94,459.40/-. Adding the interest amount of Rs.18,997.00/-,the claim in the ARC was quantified at Rs.1,24,537.60/-. Thethird respondent denied the allegation of the petitioner thatthe entire prize amount was not paid to him. The learnedcounsel would further contend that the jurisdiction of thisCourt under Article 226 of the Constitution of India is ratherlimited and that this Court cannot conduct any factualinvestigation. The proceedings under the Chit Funds Act aresummary in nature. In as much as the impugned order has notbeen shown to be illegal or perverse or against law, he prayedfor dismissal of the writ petition.

3. The question that now arises for consideration iswhether the rights of the petitioner have been infringed or not.To answer this, it is necessary to have a look at the statutory scheme. The parliament enacted the Chit Funds Act, 1982(Central Act 40 of 1982) to provide for the regulation of chitfunds and for matters connected therewith. It repealed theearlier State legislations including the Tamil Nadu Chit FundsAct, 1961. The constitutional validity of the Act was upheldby the Hon'ble Supreme Court in Shriram Chits and Investment (P)Limited vs. Union of India, (1993) Supp 4 SCC 226. The juralrelationship between a chit fund entity and the subscriberscreated by a chitty agreement and the issue as to whether it isa debt in prasenti or a promise to discharge a contractualobligation has been dealt with by the Hon'ble Supreme Court inM/s.Oriental Kuries Ltd., rep.by its Chairman P.D.Jose vs. Lissain Civil Appeal No.5401 of 2009 on 06.11.2019. The Hon'bleSupreme Court observed as under :

“At the time when modern banking was notfully developed in small towns and rural areas, chitfund institutions emerged to cater to the financialneeds of low-income households. A conventional chitfund is an old indigenous financial institutioninvolving periodic subscriptions by a group ofpersons. It is, in law, a contract between thesubscribers and the foreman, which provides that thesubscribers shall subscribe a certain sum by way ofregular installments for a specified period of time.Each subscriber in his turn, as determined by lot,or auction, or in any other manner specified, isentitled to the prize amount. The number ofsubscribers in a chit fund would constitute thenumber of installments, so that every subscriber isassured of receiving the prize amount. As there is amutuality of interest amongst the subscribers toeach chit fund, it constitutes a convenientinstrument which combines savings and borrowings.The duties of the foreman of the chit fundinclude enrolling subscribers, and drawing up theterms and conditions of the scheme in the form of anagreement. For these services, the foreman charges acommission, on which a ceiling is fixed.Each prized subscriber must furnishacceptablesecurityagainsttheremaininginstallments, so as to be eligible to receive thelumpsum payment. The security is to be furnished bythe subscriber directly to the foreman. In the eventof default by a subscriber to pay his installmentson the due date, the chit fund scheme may providefor forfeiture of dividend, or levy of penalinterest...

Where a contract provides for payment ofmoney in installments, and contains a stipulation that on default being committed in paying any of theinstallments, the whole sum shall become payable atonce, such a stipulation would not be in the natureof a penalty.....

When a prized subscriber is allowed to drawthe chit amount, which is in the nature of a grantof a loan to him from the common fund in the handsof the foreman, with the concessional facility ofeffecting re-payment in installments; this issubject to the stipulation that the concession isliable to be withdrawn in the event of default beingcommitted in payment of any of the installments.

The chit subscriber at the time ofsubscription, incurs a debt which is payable ininstallments. If a subscriber is permitted towithdraw the collected sum on his turn, withoutbeing bound to pay the future installments, it wouldjeopardize the interest of all other subscribers,and the entire mechanism of the chit fund systemwould collapse. A perusal of the provisions of Chapter V ofthe 1982 Act makes it clear that if a prizedsubscriber defaults in making payment of aninstallment, the chit foreman has the right torecover the amount covering all future subscriptionsfrom the defaulting subscriber as a consolidatedamount.Section 32 of the 1982 Act empowers theforeman to recover the consolidated payment of allfuture subscriptions forthwith in the case of adefault.”

The object is to empower the foreman torecover the amount in a lump sum from a defaultingsubscriber, so as to secure the interest of theother subscribers, and ensure smooth functioning ofthe Chit Fund. Such a provision would not amount toa penalty.

The relationship between the foreman andthe subscribers in a chit fund transaction is ofsuch a nature that there is a necessity andjustification for making stringent provisions tosafeguard the interest of the other subscribers, andthe foreman. If a prized subscriber defaults inpayment of his subscriptions, the foreman will beobliged to obtain the equivalent amount from othersources, to meet the obligations for payment of thechit amount to the other members, who prize the chiton subsequent draws. For raising such an amount, the foreman may be required to pay high rates ofinterest.

The stipulation of empowering the foreman torecover the entire balance amount in a lump sum, inthe event of default being committed by a prizedsubscriber, is to ensure punctual payment by each ofthe individual subscribers of the chit fund. Withoutpunctual payments, the system would becomeunworkable, and the foreman would not be in aposition to discharge his obligations to the othermembers of the chit fund.

....., the relationship between a chitsubscriber and the chit foreman is a contractualobligation, which creates a debt on the day ofsubscription. On default taking place, the foremanis entitled to recover the consolidated amount offuture subscriptions from the defaulting subscriberin a lump sum.”

4. The Act contains ninety sections spread over VIIChapters. Chapter V deals with the rights and duties of prizedsubscribers. Section 31 of the Chit Funds Act, 1982 reads asunder :

“31.Prized subscriber to furnish security.-Every prized subscriber shall, if he has notoffered to deduct the amount of all futuresubscriptions from the prize amount due to him,furnish, and a foreman shall take, sufficientsecurity for the due payment of all futuresubscriptions and, if the foreman is a prizedsubscriber, he shall give security for the duepayment of all the future subscriptions to thesatisfaction of the Registrar.

In exercise of the powers conferred by Section 89 of the ChitFunds Act, 1982, the Tamil Nadu Chit Funds Rules, 1982 wereframed. Form VIII contains the model form of chit agreement.Clause 7 of the model form sets out the procedure for receivingthe prize amount by a prized subscriber. It reads as under :

VII.Procedure for receiving the prize amount by a prized subscriber.

1. A prized subscriber or his nominee shallreceive from the foreman the prize amount within(here specify the period) after furnishing to thesatisfaction of the foreman sufficient security, forthe payment of future subscriptions. 2.In case theprized subscriber or his nominee fails to receivethe prize amount after furnishing sufficientsecurity the foreman shall deposit the amount in theapproved bank and inform the prized subscriber ofthat fact. 3.In case the amount so deposited is not sufficient for the payment of futuresubscriptions, it shall be competent to the foremanto realize from such prized subscriber such amountas may be deficient together with the interest duethereon and all other incidental charges.

4. In case there remains any portion of theamount deposited after paying the futuresubscriptions and other charges such portion shallbe payable by the foreman to the prized subscriberafter the termination of the chit, failing which itshall be competent for the prized subscriber or hisnominee to realize from the foreman such portion asremains together with the interest due thereon fromthe date of termination of the chit.

5. If at any time after the prize amount isdeposited in an approved bank, the prized subscriberof his nominee furnishes sufficient security, theforeman shall withdraw the amount so deposited andpay it to the prized subscriber or his nominee afterdeducting there from the amount due from him for thepayment of the installment prior to the date onwhich the security is furnished. 6.If the foreman fails to pay the prizeamount to the prized subscriber or his nomineefurnishing sufficient security, it shall becompetent for such subscriber or his nominee torealize from the foreman the prize amount togetherwith interest due thereon from the date offurnishing such security.”

5. Section 31 of the Act is in two parts. The first partapplies to a subscriber of a chit group who has prized thechit. The second part deals with the situation where theforeman himself is a subscriber. The subscriber is under aduty to furnish security if he has not offered to deduct theamount of all future subscriptions from the prize amount due tohim. Such a situation may arise if the subscriber afterremitting some installments is unable to take part in the chitgroup any further. He may therefore prize the chit and callupon the foreman to deduct all his future subscriptions from theprize money at one go. If that is not the case and thesubscriber intends to receive the prize money, he has tonecessarily furnish sufficient security for the due payment ofall future subscriptions. In fact, duty is cast on the foremanto take it.

6. The expression “security” does not appear to have beendefined either in the Act or in the Rules framed thereunder.Black's Law Dictionary defines it as follows :

“Collateral given or pledged toguarantee the fulfillment of an obligation;esp., the assurance that a creditor will berepaid (usu. with interest) any money or creditextended to a debtor.”

P.Ramanatha Aiyar's Advanced Law Lexicon 5[th] Edition, Volume 4,at page 4708 reads as under :

“The word 'security' as used in OrderXXXVIII of Code relates to the security of theamount. This word cannot be stretched to theextent that in garb of security, defendant may bedirected to deposit the suit amount. (DevendraKumar Jain vs. G.N.Goyal, AIR 2006 M.P.25, 28, para8) (CPC (5 of 1908), O.XXXVIII)”I am of the view that the expression “security” found in Section31 of the Act must receive a similar construction. The securitycan be in the form of a promissory note or an immovable propertyor a third party guarantee or any other thing of value. Ofcourse, this must be to the satisfaction of the foreman. Hecan, on reasonable grounds, reject the security offered by thesubscriber in toto or say that it is insufficient. In such acase, he must pay the portion of the prize money in proportionto the security and deposit the balance amount in an approvedbank. He cannot retain it himself. Nor can he deposit the prizemoney or the portion thereof in a group company or sisterconcern as that would amount to an unfair chit practice. Therecannot also be any delay in the disbursement of the prizeamount. If there is delay, the Arbitrator/Chit Registrar willtake that into account and scale down the liability of thesubscriber by applying the terms of the chit agreement. If thechit agreement is silent, the general principles of law andequity shall be invoked. A careful reading of Clause VII ofthe model form VIII would show that a distinction has been drawnbetween furnishing security and depositing the amount. Thesubscriber after all is badly in need of funds. That is why, heis willing to forego a certain amount as discount and it can beas high as 30%. “Prize amount” means the difference between thechit amount and the discount. The foreman in the garb of takingsecurity cannot make the subscriber to deposit a major portionof the prize money itself. “Security” in this context willonly mean a non-monetary collateral security. The prize amountor a portion thereof cannot be retained or diverted when thesubscriber furnishes non-monetary security to the satisfactionof the foreman. This alone can be the true import of Section 31of the Act.

7. The petitioner's claim is that even though he prizedthe chit for a sum of Rs.2.10 lakhs, what was paid to him wasonly a sum of Rs.86,900/-. The chit company in their claimpetition in ARC No.905 of 2000 averred that the petitioner herein received the prize money of Rs.2.10 lakhs by way ofcheque bearing No.248583 dated 25.09.1998. However, in para 4of their counter affidavit filed in this writ petition, thestand is as under :

“The prize amount of Rs.2,10,000/- waspaid to him after deducting the currentinstallment, verification charges and adjusting asum towards Rs.1,00,000/- fixed deposits withShriram City Union Finance Ltd., as security tocover the future liability and the balance ofRs.86,900/- was paid to him.”

In paragraph 6, the third respondent alleges that the petitionercould not furnish sufficient security for payment of the prizemoney of Rs.2.10 lakhs. I must observe here that the thirdrespondent is not taking a consistent stand and this isunfortunate. The petitioner has enclosed a copy of the chequebearing No.254082 dated 08.12.1998 issued by the chit companyfavoring him for a sum of Rs.86,900/-. Thus, it has beenestablished beyond doubt that even though the petitioner prizedhis chit for Rs.2.10 lakhs, he was paid only a sum ofRs.86,900/-. It is relevant to note that the auction was heldon 20.08.1998. Thus, there is a clear gap of more than threeand half months between the date on which the petitioner prizedhis chit and the date when he was paid a portion of the prizemoney.

8. The amount of Rs.1.00 lakh was deposited in ShriramCity Union Finance Ltd., which belongs to the same group ofcompanies as that of the third respondent. The deposit detailsare as under :

The third respondent would claim that the petitioner receivedthe entire prize money and on his own deposited a portion of theprize money in fixed deposits in the Shriram City Union FinanceLtd., in his name. The petitioner made such deposits in smalldenominations of six deposits of Rs.15,000/- and one deposit fora sum of Rs.10,000/- so that he can withdraw the amount at his own convenience without losing the interest on the said deposit.

9. The learned counsel appearing for the chit companyemphasized that the voluntary nature of the arrangement can bediscerned from the fact that after the deposits attainedmaturity, a sum of Rs.58,409.40/- was adjusted towards a portionof the petitioner's chit liability and the balance amount ofRs.48,072.40/- was received by the petitioner. It is obviousthat the fixed deposits had earned interest in the meanwhile.Though this contention of the counsel appearing for the chitcompany appears attractive, I find it difficult to subscribe tothe story. Judicial gaze cannot stop at the surface or bemisled by a fig leaf. It must tunnel beyond. Only a deep andprobing perception will reveal the truth. In this case, thepetitioner had foregone a sum of Rs.90,000/-. He was obviouslyin urgent need of funds. That is why, he prized his chit inthe second auction itself. No prudent person would be contentwith Rs.86,900/- when he was entitled to receive Rs.2.10 lakhs.The third respondent delayed making the payment. He withheldRs.1.00 lakh. The amount was deposited in a sister concern andmarked as lien towards future installments. Yet the petitionerdid not protest. That does not establish that the arrangementhad the approval of the petitioner. It only proves hishelplessness.

10. The petitioner had executed a promissory note for asum of Rs.2.70/- lakhs. Three of his relatives stood assureties. Their details are as follows :a).D.Narayanan, Asst. Ex.Engineer, TNEB Kalasapakkam, Thiruvannamalai District.b).M.V.Narayanamoorthy, Bank of India, Kodungaiyur.c).M.Ganesan, Health Inspector Gr.I, Govt. Primary Health Centre, Mangalam, Thiruvannamalai District.

A mere look at the service details of the sureties is sufficientto convince any one that sufficient security had been given forthe due payment of all future subscriptions. The thirdrespondent has not seriously challenged the sufficiency ofsecurity offered by the petitioner. That is why, in the claimpetition as well as in more than one place in the counteraffidavit the chit company states that the entire prize moneywas paid. The chit company tried to make it appear that thefixed deposit was voluntarily made by the petitioner.

11. I, therefore, hold that the foreman had illegally withheldthe sum of Rs.1.00 lakh after the petitioner prized his chitfor Rs.2.10 lakhs. The foreman not only withheld asubstantial portion of the prize money but also deposited theamount in a company that belongs to his group. I can see arustic logic in the conduct of the petitioner. The chit valueis Rs.3.00 lakhs. The foreman had retained the sum ofRs.1.00 lakh in his own group company. Thus, the amountpayable by the petitioner was Rs.2.00 lakhs. That is why, thepetitioner probably stopped the remittance of dues from the20[th] installment onwards. In this case, both the ChitRegistrar as well as the appellate authority failed to notethat the statutory right of the petitioner enshrined inSection 31 of the Act to receive the entire prize money wasviolated. Therefore, the orders impugned in the writ petitionare quashed. I am however constrained to remit the matter.This is for more reasons than one. The petitioner hadreceived a sum of Rs.48,072.40/- out of the F.D maturityvalue. The foreman did not pay even the portion of the prizemoney immediately. There was a delay of more than three andhalf months. The F.D was held by a group company. Therefore,the liability figure will have to be reworked in the light ofwhat has been laid down above. Hence, the matter is remittedto the file of the Chit Registrar, North and South, Chennaifor fresh disposal in accordance with law.

12. The writ petition stands allowed on these terms. Nocosts.

Sd/-

Asst.Registrar (CS III )

/true copy/

Sub Asst. Registrar

Skm

To1.The Commissioner and Secretary, Department of Commercial Tax Appellate Authority under Chit Funds Act, Government of Tamil Nadu, Secretariat, Chennai – 600 009.

2. The Registrar of Chit Funds, North and South Chennai, Chennai – 600 001.

+1 cc to M/s.K.V.Ananthakrushnan Advocate sr106833

WP No.18381 of 2007

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