Documents on Multi Level Marketing- Direct Selling Fraud

Documents on Money Chain Fraud

1. M/s. Apple FMCG Marketing (Pvt) Limited 2. Commissioner of Income Tax3. Amway India Enterprises 4. Kuriachan Chacko5. M/s. Gemini Techno Marketing Private Limited6. Press Note 7. Notice Issued by Manipur Government8. Ministry of Consumer Affairs Clarification

Prepared by J Jayanath IPS , SP, Wayanad 1

9. IN THE HIGH COURT OF JUDICATURE AT MADRAS

7.1.2005/W.P.No:22674 OF 2004 AND W.P.M.P.No:27411 OF 2004

Hon’ble A.K.Rajan, J.

M/s. Apple FMCG Marketing (Pvt) Limited, rep. by its Chief Executive Oficer Mr. R.Eric No:172, Arcot Road, Vadapalani, Chennai- 600 026.2 Mr.R.Eric…. Petitioners

Versus 1.The Union of India. Rep. by its Secretary to Government, Ministry of Finance, New Delhi. 2.The State of Tamil Nadu, rep. By its Chief Secretary, Secretariat, Chennai-600 009. 3.The Director General of Police, Kamarajar Salai, Mylaport, Chennai-600 004 … Respondents.

1.The first petitioner is a company registered under the Companies Act. It is marketing various products including shampoo, tea, coffee power, after-shave lotion etc. under the brand –name ‘joy Eternal’ through “network marketing”. This method of marketing differs from the conventional sale through a distributor and the retail network: any person could take up the marketing and sale, and make an earning: it is done by several reputed companies like. Hindustan Lever and Indian Express. Several unemployed youth have taken up the marketing of these products and have earned satisfactory in-comes depending on their talents and efforts.

(i) No complaints have been received from any consumer about the quality of the goods sold. Under the scheme of network marketing the company sells products to the customers and the consumers in turn can sell the products to their peers and earn commission out of the sale. In fact it avoids many middlemen and cost of advertisement, etc. The marketing process is carried out directly by recruiting the customers themselves as distributors of the products and services; the company regularly organises business development meetings and seminars, distributors meetings, etc. The participants of the meetings are encouraged to take up the distributorship of the products and are suitably registered if they so desire. There is no service fee for registration as distributor. Any person who is interested is given a product for the price fixed. The distributors are encouraged to en-roll more distributors. The commissions are given only as per the volume of sales made by the individual distributor and his team. This system ensures that intermediate distributors are not like a chain leading to the customer and the company.

(ii)There are only two stages, viz. stockist and distributor. The distributor can introduce another person as a distributor and he will also get commission. The distributor has to put in his effort in selling the products and then only he will get the commission. The company also takes care of the risks involved in the trading activities; there is no deposit of money by the consumers and the products are given to the person who pays the money for the same. The distributors are paying the price for the products they purchase. Thus, the possibility of the principal company or its Directors making use of any funds of others is avoided. Except service charges, no charges or deposits are levied to enroll as a distributor. There is no risk of non- recovery of the funds due to the consumer since the products are given out only on receipt of payment. Thus, the process of network marketing is a foolproof and beneficial mechanism for the conduct of trade and commerce. The pricing of the products is always a contentious issue. The product is not exornitantly priced. But, some others, who are inimical towards the company, are trying to overturn the trading activity of the company by resorting to various crooked means and methods. They maligned the name of the company by publishing reports in a magazine and consequently the company is faced with roving enquiries by the police Stockists and distributors of the company have also faced similar harassment. It is an infringement of the fundamental right conferred under Article 19(1) (a) of the Constitution. No complaint has been registered against the company in any of the police stations. The Union of India has also examined the issue of the network marketing and has come to the conclusion that there is no illegality in the said system. The Union of India has also stated that the system of network marketing will not come under the purview of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The labour of a person in selling goods is rewarded by


payment of commission. Several companies have launched similar network marketing system. Therefore, it is quite annoying when the police go around the meeting venues and seek statements from them and ask several questions. Such invasive process causes considerable delays and difficulties and results in violation of the rights conferred under Art. 19 (1) (g) of the Constitution. The company understands that similar companies have been targeted in similar way and their accounts have been frozen by the respondents and the company apprehends that the respondents will take steps to freeze the accounts of the company and disrupt the business activities. There is no promise of easy or quick money held out to the distributors. The distribution of commission for selling is different from the prize chits. The system only results in advancing the socialist vision of the farmers of the Constitution and the wealth is evenly distributed without being concentrated in a group of persons. The people at large are given more opportunity to earn money depending on their skill and labour. The officials of the third respondent are harassing the petitioner and its distributors and it resulted in decline of the trade activities. Hence the writ petition.

2. The first respondent has not chosen to file any counter in spite of the time granted repeatedly for enabling them to file a counter.

3. The second respondent has filed a counter stating that the second respondent has been impleaded unnecessarily in the writ petition. It is also stated that the third respondent would take action in accordance with the provisions of the Act, if the petitioner commits any illegal act.

4. The third respondent in his counter has stated that the petitioner has explained how the marketing of certain goods through their network is carried on; the petitioner has also stated that there is no FIR pending against their company and hence no investigation is taken up by the police. When that be so, the other facts that the seminars and meetings are all being disturbed by the police is absolutely false. Police would not interfere with any business conducted by any person in accordance with law. If specific complaints are received by the police against the petitioner firm, it is thee duty of the police to take up investigation; such investigation can not be prevented. The facts and figures given by the petitioner are illusory and imaginary. The apprehension that their accounts would be freezed would come to the mind only if the business carried on by them is not legal. Under those circumstances, the writ petition tiled only on apprehension and fear of intervention and hence it is to be dismissed.

5. After seeing the counter affidavit, the petitioner wanted to withdraw the petition. But in view of the importance of the issues raised in this writ petition, this Court refused to grant permission to withdraw the writ petition.

6. The learned counsel Mr.Giridhar appearing for the petitioner submitted that this system of network marketing practiced by the petitioner company does not fall within the provision of Prize Chits and Money Circulation Scheme (Banning) 2978 Act. He submitted that he has filed documents which shows how the net work marketing is carried on. He has filed the pamphlets issued in that regard.

7 (i) According to the system, when a person purchases any product from the company, he has to make an application (form filed in the typed set) which contains the column for three user names (name of person who registers with the company). It also contains a column to fill up the sponsors’ name and his placement. He has to sign a declaration that he has entered into this agreement as an independent distributor. In addition to the agreement, they are bound by the conditions contained the brochures (not filed in the typed set) and it is valid for one year from the date of joining.

(ii) The type set also contains Product price list of “Rs.550 plan” (also there are “Rs.1000 plan” and others). It contains six products namely Nutrimalt, Coffee, tea, Soap, Shampoo and Pickles. The maximum retail price (MRP) and the distributor’s price (DP) also are given. The sum of maximum retail price of all these six products comes to rs.497/-. The total amount for which it is


sold to the distributors is Rs.372/-.

(iii) Admittedly, for these products, the so called distributor pays a sum of Rs.550/-, whereas the distributor’s price is only Rs. 372/-. Therefore, Rs.178 is charged extra from the distributors. This amount, the distributor pays to the company because he is made to believe that when he sells these goods to others and enroll others in the scheme, he gets commission from the petitioner company. Such Commission depends upon the total volume of business that he generates by enrolling new distributors, it progresses like a chain; the amount of commission depends on the subsequent “distributors” who is made to join by the petitioner or a purchaser through him. The promise of the possible commission is the reason for one’s enrolment. The form requires to be filled up with three “distributors” names through whom the new entrant get into the scheme and their placement.

(iv) One has, to purchase one or more starter kit by paying the money as stated above; the starter kit are valued at Rs.550/-, Rs.1000/- and so on; he must sell the product to two other persons and get their application form filled up and sent to the company; those two persons in turn have to purchase starter kits from the company and in turn they must sell and enroll two other persons each. Each new entrant shall purchase the starter kit from the company and in turn sell enroll two other persons. Like this, every new purchaser from whom the new entrant purchases shall enter the three names of his predecessors in the chain. Like this, the chain progresses. The three names filled up by each and every new distributor depending upon the rank of placement and volume of the business, everyone in the chain gets the commission. If a person gets started with five starter kits, he will sell it to ten persons and that ten will become twenty at the next stage and twenty will become forty and so on. When it goes up to ten stages in this manner, the person who sold first will get a commission.

8. As seen already, a starter kit which is sold at Rs.550/- for the goods which may be sold at Rs. 372. Therefore, in one kit, an excess amount of Rs.178/- is collected. This amount is shared by the company and the so called distributors. When a person first purchases the starter kit, he pays Rs. 178/-- more as above. Thereafter, he sells the same at the lesser price (distributor’s price) and he may sell it others and earn the profit. That is, each time a person purchases a starter kit, the petitioner gets a sum of Rs. 178/- in excess.

9. The learned counsel for the petitioner further submitted that earlier 45% of the sale amount was distributed as commission but presently it is increased to 65% of the sale price. That means the goods which are worth only Rs.35/- are sold at rs.100/- and this rs.35/- covers not only the price of the goods, but also expenditure involves for the administration of the company. Of course, the Court can not interfere with the fixation of the price. Anybody is free to fix any price and it is for the customers to accept or not. But, it is not an ordinary sale of goods. The persons are lured to become a distributor only on the hope or expectation that he may get more money by way of commission if he sells the products similarly to others. Of course, many persons are earning lot of commission in this manner. This chain is likely to progress for some time. At one point of time the progress of the chain will stop. On that day persons who buy the product may not find any further distributor to purchase from them. By the time, the company would have earned enormous profit. But a very large number of persons would be left cheated.

10 (i) To be a distributor of such product, it requires registration under the TNGST Act, in case the value of turn over exceeds a particular limit. It is possible that a few of the distributors may exceeds that limit. But, those persons are not registered under the TNGST Act and also would not be pay to the Government the sales tax.

(ii) That apart, this system is not an ordinary business transaction, it exploits the personal influence an individual has in the society. The distributors’ are found to influence their subordinates or friends. Many of such distributors gets included because of such undue influence by their superiors. Many unwilling purchasers would be forced to purchase only to obey their superiors or


satisfy their friends or at times under threat or coercion or inducement and so on. Therefore, the deemed agreement became void under the Indian Contract Act. Therefore, it is duty of the law enforcing authorities to prevent such undue influence being exercised.

11. As rightly submitted by the learned counsel for the respondents only under promise or expectation of getting huge commission (easy or quick money), the public are lured to invest more money in such of the schemes. It is only an imaginary profit. Every one cannot sell all the products (as stated already) to some others. If a person is unable to get purchasers or distributors at one point of time, very large number (may be in lakhs) of people would be left at that stage, unable to find a purchaser or distributor. At that stage, all such persons would be cheated.

12.From the averments, made in the counter affidavit, it is seen that the law enforcing authorities are keeping the surveillance against such meetings and record statement from the persons who attend the meetings. By that, the law enforcing authorities are doing their duty cast on them. It is indeed appreciable that at least now the law enforcing authorities are vigilant that people should not get cheated and ultimately come to them for redress.

13.But there is also a prayer for declaration that the activities are not illegal and does not amount to violation of any of the laws. Therefore, this Court has to decide the aspect as to whether this multilevel marketing is legal or not.

14. The main contentions of the petitioner are as follows:- (1) So far no complaints have been received against them from any distributor. Therefore, this Multi-level Marketing has not caused any loss to any of the distributors. (2) There is no ‘service fee’ for registration as distributor. (3) Every distributor gets commission on the basis of the volume of business that is generated by him. (4) No chain of customers in the process. (5) The distributors and the purchasers pay the value of the product that is purchased, therefore, they are not paying any excess amount. (7) They collect only nominal service charge for the service rendered. (8) The surveillance by the respondents violates the petitioners’ fundamental right provided under Articles 19(1) (a) and 19(1) (g) of the Constitution of India. (9) Further the Union of India has also clarified that the “Multi-level Marketing” does not infringe the Prize Chits and Money Circulation Schemes (Banning) act, 1978 (Hereinafter referred to as ‘The Act’).

15. Mere fact no complaints were received does not make an act legal, if it be otherwise illegal. It is true that no service fee is collected by the petitioner for registration. It is also true that the commission that is received by the distributor depends upon the volume of business generated by him. From the scheme of Multi-level Marketing, as reflected in the brochure issued by the petitioner, the commission is received only if the distributor sells the product, which he purchases, to two others and those two persons sell it to two other persons each and those four persons sell similarly to two persons each. In this manner, if more number of persons in the next stages come into this scheme, the person through whom those persons got enrolled gets commission.

16. The contention of the petitioner is that there is no chain of customers. This contention appears not acceptable. The scheme, as stated above, creates chain of customers and only when the chain progresses without any break in any of the links, the ‘principal distributor’ gets more commission. If, for any reason, the chain is broken, at any stage, then the principal distributor’s commission would get reduced proportionally to that extent. Therefore, it is not correct to say that there is no chain of customers in the process.

17.The next contention is that the purchasers pay the value of the product as stated above and they do not pay the excess amount. It is seen that a ‘starter kit’ is purchased by the principal


distributor for a sum of rs.550/- as per the plan found in the brochure. The very same brochure contains the MRP of the kit as Rs.497/-, which is rounded off to Rs.500/- and a service charge of Rs.50/- is collected when a kit is sold. The contention that no service charge is collected also does not appear to be correct in view of the fact that every person who purchases a kit has to pay a service charge of rs.50/- for each kit. Service charges are collected by governmental institutions like Electricity Board and Telephones as they are authorized by the Statutory Rules No individual can collect any charge has service charges. The collection of service charge is therefore, not legal.

18. As submitted by the learned counsel for the petitioners, the petitioners-Company originally was giving 45% of sale price as commission and now that is increased to 65%. From the very fact that 65% is earmarked for paying as commission to the distributors, it is clear that the value of the product is only 35 % of the sale price. That is, when the goods are sold at Rs. 550/-, the actual value of the goods that are sold is only Rs.188/- calculated at 35 %). For the value of goods worth Rs.188/-, the purchaser pays Rs.550/-. But ,selling the goods at higher price that is fixed by the seller, does not offend any law. To get commission one has to purchase starter kits. If the distributor wants to get more commission through a member of ‘sub-distributor’ under him, he shall purchase more number of such starter kits. There is no authority to collect Rs.50/- as service charges for one kit. If it is purely a sale of goods, no service charges are permissible under any law.

19.The progress of the chain of customers, at some point of time, would get saturated and the distributor, who purchases the goods, will not find any purchaser/sub-distributor to sell or enroll afresh. At that time, due to the progress of the chain, in the manner stated above, such persons who would not fine new members may be in lakhs or even millions. Therefore, lakhs or even millions of people are bound to lose their entire money of Rs.550/0 (value of one starter kit). At the same time, major portion of 65% of the amount would be a gain to the petitioners-company since there would be no one share that money.

20.Section 2(c) of the Prize Chits and Money Circulation Schemes(Banning) Act, defines ‘Money Circulation Scheme’, as follows:

“Money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration or a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions.”

The above definition makes it clear that any scheme by whatever name it is called whereby on a promise that one would receive or would make quick or easy money by enrolment as members into the scheme is ‘money circulation scheme’. In this case, there is enrolment of members into the scheme; there is also a promise made that on such enrolment of large number of persons into the scheme, one would make quick money or easy money. There cannot be any doubt that by enrolling new members and by the process of selling the goods to new distributors this chain progresses; the person who became such members earlier get commission without doing any work; getting such a commission is nothing but getting quick or easy money. Therefore, such schemes the so called ‘Multilevel Marketing’, definitely falls within the definition of ‘money circulation scheme’.

21.The learned counsel for the petitioner submitted that Union of India has made a clarification in an answer to a question in Parliament that Multi-level Marketing does not violate or offend the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act. It is suffice to say that it is not for Union of India or any Member of Parliament to interpret the provisions of any Member of Parliament. The act has been passed by the Parliament, but the power to interpret the Act is only vested in judiciary and that power is not given to the Executive. The statement given by the Union of India or its Officers that Multi-level Marketing does not attract the provisions of the Act cannot legalise an illegal act.

22.It is true that several companies including Multinational Companies carry on the business of the


“Multilevel Marketing” and it is also true that the executive and the law enforcing authorities keep a blind eye on such activities. This also does not make an illegal act legal. It is always a fact that the law enforcing authority would try to close the stable only after the horse had escaped.” That is the law enforcing authority would realize that this scheme would ultimately leave a large number of persons cheated. Thereafter, after losing their money, they would approach the executive complaining that they were cheated. Till such time, the law enforcing authorities do not act. They do not take preventive action to enforce the provisions of the existing law.

23. The learned counsel for the petitioner placed reliance upon the judgment of the Supreme Court in Reserve Bank of India vs. Peerless G.F. & I Co. Ltd (AIR 1987 SC 1023) to support his argument that there is no element of chance in the scheme adopted by the petitioner and hence the Act is not attracted. In the Peerless’s case the Supreme Court had an occasion to interpret Sec.2 (e) of the Act and held that the endowment scheme of the Peerless Company was not a prize chit on the ground that there was no element of chance in that scheme. It also held that Section 2 e) does not contemplate a scheme without a prize and therefore the Endowment Certificate Scheme of the Peerless Company was outside the Prize Chits and Money Circulation Scheme (Banning) Act. In this case Section 2 (e) has not been considered by the Supreme Court.

24. The learned counsel also referred to another judgment in State of Wet Bengal v.. Sanchaita Investments (AIR 1982 SC 949). In this case sec. 2 (c) has been considered. The Supreme Court has held that.

“To be a money circulation scheme, a scheme must be for the making of quick or easy money on any event or contingency relative or applicable to the enrolment of the members into the scheme”.

In this case, the Supreme Court has held that when a firm indulging in high risk investments. It was not illegal. Further, payment of interest in excess of stipulated rate was not a scheme for marking easy or quick money. The Supreme Court further held that a scheme has necessarily to be judged as a whole, both from the viewpoint of the promoters and also of the members. The Supreme Court in that case had considered only one aspect namely, whether promise of giving more interest attracts money circulation scheme? While deciding that issue, the Supreme Court held that if such transactions are made openly and not in violation of any law, it would amount to violations of the Act. In that case, promise to give 48% of interest was not a promise of getting quick money since the promise was given openly. In that case, the materials placed before the Court went to show that though the rate of interest stipulated in the loan certificate was 12 % the firm used to pay altogether interest at 36% to 48% in all, which was held not a money circulation scheme. Further, the Supreme Court held that the materials did not indicate that the payment of interest to the depositors whether at the stipulated rate or at the enhanced rate is dependent on any element of chance.

25.Therefore, the two judgments relied upon by the learned counsel for the petitioners, are not on the point whether the so-called Multi-level Marketing would attract the provisions of the Prize Chits and Money Circulation (Banning) Act. Therefore, the argument of the learned counsel for the petitioner that the Prize Chits and Money Circulation Schemes (Banning) Act does not attract the scheme, is not correct. There is no decision by the Supreme Court on this issue.

26.As stated above, this scheme called Multi-level Marketing creates a chain of customers and the long and unbroken chain would ensure larger amount of quick or easy money. The shorter and missed links in the chain would result in earning lesser commission. Therefore, there should be unbroken chain or customers. Secondly, the person does not get the value of the money he pays; thirdly the companies are collecting service charges as stated above in a sale of goods. No service charges can be collected while the goods are sold.

27.For all these reasons the scheme of so called Multi-level Marketing cannot be said not to violate


the provisions of Sec. 2 (c) of the Act.

28.Apart from that this Multi-level Marketing results in exploitation of the personal influence of each and every distributor or his close relative. As stated already, a superior Officer or his ward when he involves in this Multi-level Marketing, the subordinates are forced to become members in the chain. Though it may not amount to violation of this Act, it would attract some other laws; it may result in undue influence, extraction, coercion, etc.

29.For the reasons stated above, the petitioners are not entitled for the declaration as prayed for. That apart, such a blanket and omnibus prayer that the scheme is not in contravention of the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 or any other law in force cannot be granted by any Court.

30.It is, indeed, appreciable that the Chief Secretary and the Director General of Police have stated that though there are no complaints received against the petitioners so far, if any complaints are received or if the activities of the company amounts to violation of any of the act, they would definitely take action against the petitioners. That shows that they are alive to the situation.

31.It is true that the petitioners are comparatively a small fish in the business of the so called Multi-level Marketing. There are other comparatively bigger associations or institutions or companies which adopt similar schemes. It is for the Director General of Police and other law enforcing authorities to have a watchful eye on all such activities and to take timely action as and when it is called for.

32.The grievance of the petitioners is that the petitioners are conducting conferences and lectures in order to propagate the scheme. But, they are under surveillance by the police. This intimidate people who come to attend their seminars and lectures; and this would amount to violation of the petitioner’s fundamental rights under Articles 19(1) (a) and 19 (1) (g) of the Constitution of India. This argument is not acceptable. It is true that they have the right to freedom of speech and expression and also to the freedom to carry on business. But, both the rights are subject to reasonable restrictions as contemplated and Articles 19(2) and 19(g). The right to freedom of speech is subject to reasonable restriction on the ground of public order and the right to freedom to carry on business is subject to reasonable restriction in the interest of ‘general public’. Therefore, when the police keeps watch over any seminars or lectures. It is in the interest of maintenance of public order and also it is with a view to protect the interest of general public. Therefore such acts cannot be complained of by any person including the petitioners who conduct any seminar or lecture for promoting their business.

33.In this part of India, people are gullible and fall an easy prey to the tall promises made through the media. That was the reason why the lottery tickets were sold in large numbers in this State. Many companies want to exploit this attitude of people and float many schemes and lure the people to join the schemes. Only when they ultimately lost the money, they realize that they were misled: by that time it becomes too late. Thereafter, they approach the law enforcing authorities and question them how did they permit such schemes. That is the reason why the police keep a watch over such activities. The petitioner is not entitled for direction for prohibiting the authorities from keeping surveillance over any meeting. Sec. 7 of the Act confers the right on the police officer to enter any premises, where he has got a reason to suspect that the premises are being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of the Act.

34.According to the Prize Chits and Money Circulation Schemes (Banning) Act, “Money Circulation Scheme” means-

.. any scheme, by whatever name called- ( i ) for making quick or easy money ; or (ii) for the receipt of any money or valuable thing as the consideration (or a promise to pay


money) on any event or contingency relative to the enrolment of members into the scheme. Thus the definition covers two aspects- (i) A scheme for making quick or easy money; (ii) For receipt or any money or a promise to pay money: on an event relative to the enrolment in the scheme. It is applicable to both- the sponserer and the participants or subscribers.

35. In the present case, as seen from the materials placed- (i) The petitioner company gets an extra amount of Rs.3-/ by rounding off (Rs. 497 as Rs.500). It also gets Rs. 50/- as service charge, while selling the product. Thus, the company (petitioner) gets quick or easy money, as per the above definition. (ii) It enables the receipt of money (by way of commission) by the so-called distributor also on his enrolling new members.

36.The event is enrolment of new members; the commission received is relative to such enrolment of new members into scheme. Therefore, the argument of the learned counsel for the petitioners that there is no promise of quick or easy money is not correct for the reasons stated above. Thus, the so-called Multi-level Marketing, though called by a very attractive name squarely falls within the definition of ‘Money Circulation Scheme’ under the Act. Hence, it is prohibited by the Act. It is for the law enforcing authorities to take appropriate action.

37. In the result, the writ petition is dismissed. No costs. Consequently WPMP No.27411 of 2004 is dismissed.

*******


HIGH COURT OF KARNATAKA

Coram : H. L. DATTU, A. S. BOPANNA

C/W ITRC 55 Of 1999 (JANUARY 31, 2006)

COMMISSIONER OF INCOME TAX VS. AMARJEET KAUR

H. L. DATTU, J

(1) IN all these reference cases, the question of law and the facts referred by the Income Tax appellate Tribunal, Bangalore Bench, Bangalore, for our consideration and decision is common and similar, and therefore, all these cases are taken up together, heard and disposed of by this common order.

(2) THE facts in ITRC No. 48/1999 is noticed in this judgment for disposal of these reference cases. The assessee has her own proprietary business "mis Manjog Home" and also gets share income from firms. For the assessment year 1985-86, the assessee is assessed in the status of "individual". M/s. Manjog Home was dealing in home appliances like refrigerators, television sets, electric and electronic goods, etc. The assessee as a proprietrix of M/s. Manjog Home had launched a sales promotion scheme known as "deposit Linked Incentive Scheme" for the purpose of raising additional funds to extend her business. Under the Scheme, as noticed by the first appellate authority, the public are invited to become members by making deposits with the assessee and on the making of such deposits, goods dealt by the assessee of the value of about 75% of the deposit would be given free to the members as incentive/gift. The deposit so made by the members were returnable to the members without interest after the expiry of 5 to 10 years depending on the nature of the goods involved. Based on this Scheme, deposits were accepted from the members and goods and articles of the members choice was given to them as gift or incentive. The price of the article was credited as and when the issues were made in the Scheme and a like amount was debited as incentive in the profit and loss account.

(3) THE assessee debited the value of the goods supplied to the customers in a sum of rs. 27,27,191/- for the relevant assessment year in her profit and loss account and claimed the same as expenses towards "deposit Linked Incentive Schemes" and the same amount was also credited by the assessee to the sales account increasing the amount of sales thereby. By this modus operandi, the assessee was able to mobilise deposit to the extent of Rs. 41,92,920/-during the accounting period relevant to the assessment year under this Scheme. In the return of income filed for the relevant assessment year, the assessee had claimed allowance of the above mentioned amount as revenue expenditure for the purpose of income chargeable to tax. The same was disallowed by the assessing authority on various grounds. In sum and substance, the view of the assessing authority appears to be, that the expenses towards mobilising deposit cannot be allowed Page 1 under Section 37 of the Income Tax Act, 1961 ('act' for short), as revenue expenditure.

(4) IN the appeal filed by the assessee, the first appellate authority has allowed the appeal in part and while doing so, has observed in his order:

"8. With regard to the first issue, I have no difficulty in holding that the expenditures incurred are wholly and exclusively for business. The Learned Income Tax Officer's observation that there was no trading with reference to the articles given as incentive is incorrect; The only articles given as incentives are articles dealt with by the appellant as a


trader. The other observation of the I. T. O. that the collection of deposits was not a business activity is again incorrect. The appellant needed money for expanding the turnover; the appellant had several methods of obtaining this finance ego from borrowals etc. The appellant however chose to obtain deposits and to lure these deposits, offered the articles tree to the gullible public on condition that by taking away of these articles worth 75% of the deposit, the depositor has been sufficiently recompensed for making the deposit tree of interest. I would observe that by setting out Rs. 27 lakhs of incentives, the appellant was able to mobilise deposits of Rs. 42 lakhs. I would also observe that these incentives of Rs. 27 lakhs are but a small traction of the total turnover in this case of Rs. 143 lakhs

9. Had the deposits been taken for interest, the appellant would have been had to pay interest every year on the deposits. On the other hand, instead of making this annual payment of interest, the appellant has incurred a one time expenditure of Rs. 27 lakhs. Can this setting out of expenditure of Rs. 27 lakhs, be then said to be not for the purposes of business I think not. The expenditure has clearly been set out wholly and exclusively for the purposes of business. "

(5) FEELING aggrieved by the aforesaid order passed by the first appellate authority, the assessee as well as the revenue had filed separate appeals before the Income Tax Appellate Tribunal. The Tribunal by its common order dated 5-3-1996 has allowed the assessee's appeal and has rejected the revenue's appeal, holding that the entire expenditure claimed by the assessee is in the nature of business expenditure and requires to be allowed in computing the income chargeable under the head "profits and gains of business or profession" .

(6) THOUGH the revenue in its application filed under Section 256 (1) of the Act had requested the tribunal to state the case and refer four questions of law, the Tribunal has thought it fit to refer only one question of law said to be arising out of the orders passed by the Tribunal in ITA no. 1654/1989 dated 5-3-1996 for the assessment year 1985-1986 for our consideration and decision, The same is as under:

"whether on the facts and in the circumstances of the case, the ITAT is right in law in holding that the expenditure being' the cost of goods given to the depositors at the time of accepting deposits received under DLIP Scheme, being deferred revenue expenditure (claimed by the assessee also as such) as revenue expenditure relating to the previous year assessable for the assessment year 1985-86?"

(7) AT the time of hearing of these reference cases, Sri Seshachala, Learned Counsel for the revenue would contend, that in view of insertion of Explanation to Section 37 of the Act by finance (No. 2) Act, 1998 with effect from 1-4-1962, the expenditure claimed by the assessee as allowable expenditure, is an expenditure incurred in a Scheme which is prohibited by law and therefore, the expenditure claimed cannot be deemed to have been incurred for the purpose of business or profession and therefore, no deduction or allowance can be made in respect of such expenditure. It is further contended by the Learned Counsel that this plea could not be raised by the revenue before the Tribunal when the appeal filed by the assessee was disposed of on 5-3-1996, since the Explanation to Section 37 of the Act was inserted by Finance (No. 2)Act, 1998, with effect from 1-4-1962. Proceeding further, the Learned Counsel would contend, that the matter need not be remanded by this Court to the Income Tax Appellate Tribunal, since the legal issue referred for consideration and decisions by the Tribunal can be decided by this court with reference to the amended provision, namely, insertion of Explanation to Section 37 of the Act with retrospective


effect i. e. with effect from 1-4-1962. In aid of this submission, the learned Counsel for the revenue relies on the observations made by this Court in the case of sterling Foods Vs Commissioner of Income Tax (1991) 190 ITR 275, wherein this Court by relying on the observations made by the Apex Court in the case Of CST vs. Bijli Cotton Mills (1964) 15 STC 656 (SC) has concluded that "when the law has been amended with retrospective operation, it should be the duty of the High Court to apply the law so amended if it applies". In our view, the law declared by the Apex Court in Bijli Cotton Mill's Case (Supra) and the law declared by this Court in Sterling Food's Case (Supra) following the view expressed by the Apex Court in the aforesaid decision requires to be noticed. Therefore, they are extracted and they are as under: in Bijli Cotton Mill's Case (Supra), the Apex Court has stated as under:

"mr. Desai, Learned Counsel for the respondent, objects to this Order being relied on by Mr. Sastri on various grounds. He further says that on a true interpretation of the Order, it does not apply to the case of the assessee. The question then arises whether we are entitled to take into consideration the 1962 Order. Learned Counsel has cited various cases and has argued that this being an appeal by special leave from a reference, we should not take the order into consideration. It is unnecessary to refer to the cases because the point is concluded by a judgment of this Court in CST vs. Bijli (Supra) as follows (pp 664, 665); 'undoubtedly the tribunal called upon to decide a taxing dispute must apply the relevant law applicable to a particular transaction to which the problem relates, and that law normally is the law applicable as on the date on which the transaction in dispute has taken place. If the law which the Tribunal seeks to apply to the dispute is amended, so as to make the law applicable to the transaction in dispute, it would be bound to decide the question in the light of the law so amended. Similarly, when the question has been referred to the High Court and in the meanwhile, the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. By taking notice of the law which has been substituted for the original provision, the High Court is giving effect to legislative intent and does no more than what must be deemed to be necessarily implicit in the question referred by the Tribunal, provided the question is couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law, and the enquiry does not necessitate investigation of fresh facts. If the question is not so couched as to invite the High Court to decide the question in the light of the law as amended or if it necessitates investigation of facts which have not been investigated, the high Court may refuse to answer the question Application of the relevant law to a problem raised by the reference before the High Court is not normally excluded merely because at the date when the Tribunal decided the question the relevant law was not or could not be brought to its notice'. Therefore, following this judgment, we must hold that Mr. Sastri is entitled to rely on the 1962 order and it is our duty to answer the reference in accordance with the amendment made by the Order, unless the question referred is not couched in terms of sufficient amplitude to cover an enquiry into the question in the light of the amended law. "

In Sterling Food's Case (Supra), this Court has stated as under:

"when a question has been referred to the High Court and, in the meanwhile, the law has been amended with retrospective operation, it would be the duty of the High Court to apply the law so amended if it applies. Application of the relevant law to a problem raised by reference before the high Court is not normally excluded merely because at the date when the Tribunal decided the question, the relevant law was not or could not be brought to its notice. "


(8) SRI Parthasarathy, Learned Counsel for the assessee would submit, that the Scheme floated by the assessee was for her business purpose and that by no stretch of imagination, it could be characterised as a Scheme which is prohibited by law and therefore, the expenditure incurred by the assessee is purely for business purpose and therefore, the allowance or deduction claimed in respect of such expenditure requires to be allowed as revenue expenditure inspite of insertion of Explanation to Section 37 of the Act by Finance (No. 2) Act, 1998 with effect from 1-4-1962

(9) IN reply, the Learned Counsel for the revenue would submit, that the "deposit Linked incentive Scheme", which the assessee had floated for the purpose of her business activities is nothing but ''money Circulation Scheme", which was not only deprecated by the Apex Court in the case of Registrar of Firms, Societies And Chits, Uttar Pradesh Vs M/s. Secured Investment co. , Lucknow and Another. AIR 1988 SC 492, but also had declared that such Schemes are prohibited by law and therefore, the assessee in view of the Explanation inserted by Finance (No. 2) Act, 1998 is not eligible and entitled to claim deduction or allowance of such expenditure as an expenditure for the purpose of business or profession

(10) AFTER hearing the Learned Counsel for the parties to the lis, the question of law referred by the Income Tax Appellate Tribunal requires to be re- framed as under:

"i. Whether the business carried on by the assessee is prohibited by law and thereby the expenditure incurred by the assessee is deemed not to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure? II. Whether in the facts and circumstances of the case, the matter requires to be remanded to the Tribunal for a fresh disposal in view of insertion of Explanation to Section 37 of the Act by finance (No. 2) Act, 1998, with effect from 1-4-1962?"

(11) WE will take up the second issue first for our consideration. The Tribunal while disposing of the assessee's appeal for the assessment year 1985-1986, has concluded, that the expenditure incurred by the assessee being the cost of the goods given to the depositors at the time of accepting deposits received under "deposit Linked Incentive Scheme", is a revenue expenditure relating to the previous year assessable for the assessment year 1985-1986. The question so referred covers the issue, whether the expenditure incurred by the assessee for her business or profession is allowable deduction in computing the income chargeable under the head "profits and gains for business or profession"? This question of law now requires to be decided in view of the Explanation inserted retrospectively by Finance (No. 2) Act, 1998, with effect from 1-4-1962. Whether this can be done by this Court without remanding the matter to the Tribunal is now well settled by the decision of the Apex Court in Bijli Cotton Mill's Case (Supra), which view is adopted by this Court in the case of Sterling Food's Case (Supra). Therefore, we are of the opinion that these reference cases need not be remanded to the Income Tax Appellate Tribunal for determination of the legal issue canvassed by the Learned Counsel for the revenue

(12) THE next question that falls for our consideration is whether the amounts collected by the assessee from depositors under the "deposit Linked Incentive Scheme" is allowable expenditure in computing the income chargeable under the head "profits and gains of business or profession"? The Learned Counsel for the revenue placing heavy reliance on the observations made by the Apex Court in the case of M/s. Secured Investment Co. , Lucknow and Another (Supra), contends that the Scheme evolved by the assessee is nothing but "money circulation Scheme" which is prohibited by law and therefore, in view of the language employed in the Scheme, the expenditure is deemed to


have been incurred for a purpose which is prohibited by law and therefore, no deduction or allowance could be made in respect of such expenditure.

(13) IN our view, the reliance placed by the Learned Counsel for the revenue may not assist him much in the fact situation of the present case, for the reason, in M/s Secured and Investment co. 's Case (Supra), the Supreme Court was considering a case of 'prize Chit' and what are the ingredients, which constitutes a 'prize Chit' for the purpose of Section 2 (e) of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978

(14) IN our view, the case law which is nearer to the issue which has fallen for our consideration, is the decision of the Apex Court in the case of State of West Bengal Vs Swapan Kumar Guha and Others AIR 1982 SC 949. In this case, the expression "money Circulation Scheme" on which heavy reliance is placed by the Learned Counsel for the revenue came up for consideration. While explaining the concept of "money Circulation Scheme" and the test or tests for determination whether a particular Scheme floated by a business house or promoter would fall within the meaning of the expression "money Circulation Scheme", which is banned under the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, etc. , the court has stated:

"7. In order to give meaning and content to the definition of the expression 'money circulation scheme' which is contained in Section 2 (c) of the Act, one has, therefore, to look perforce to the adjectival clause which qualifies the words "for the making of quick or easy money". What is within the mischief of the Act is not "any scheme, by whatever name called, for the making of quick or easy money" simpliciter, but a scheme for the making of quick or easy money, "on any event or contingency relative or applicable to the enrolment of members into the Scheme", (whether or not such money or thing is derived from the entrance money of the members of such scheme or their periodical subscriptions). Two conditions must, therefore, be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2 (c) of the Act. In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. The legislative draftsman could have thoughtfully foreseen and avoided all reasonable controversy over the meaning of the expression "money circulation scheme" by shaping its definition in this form: 'money circulation scheme' means any scheme, by whatever name called, (i) for the making of quick or easy money, or (ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions; I have reshaped the definition, in order to bring out its meaning clearly, without adding or deleting a single word or comma from the original text of Section 2 (c). The substance or the matter is really not in doubt: only the form of the definition is likely to create some doubt as to the meaning of the expression which is defined and, therefore, I have made a formal modification in the definition without doing violence to its language and indeed, without even so much as altering a comma.

8. There is another aspect of the matter which needs to be underscored, with a view to avoiding fruitless litigation in future. Besides the prize chits, what the Act aims at banning is money circulation schemes. It is manifestly necessary and indeed, to say so is to state the obvious, that the activity charged as falling within the mischief of the Act must be shown to


be a part of a scheme for making quick or easy money, dependent upon the happening or non-happening of any event or contingency relative or applicable to the enrolment of members into that scheme. A 'scheme', according to the dictionary meaning of that word, is 'a carefully arranged and systematic programme of action', a 'systematic plan for attaining some object', 'a project', 'a system of correlated things'. (See Webster's New World Dictionary, and Shorter Oxford English dictionary, Vol II). The systematic programme of action has to be a consensual arrangement between two or more persons under which, the subscriber agrees to advance or lend money on promise of being paid more money on the happening of any event or contingency relative or applicable to the enrolment of members into the programme. Reciprocally, the person who promotes or conducts the programme promises, on receipt of an advance or loan, to pay more money on the happening of such event or contingency. . "

Proceeding further, the Court has observed:

"8. . In other words, there has to be a community of interest in the happening of such event or contingency. That explains why Section 3 makes it an offence to "participate" in the scheme or to remit any money "in pursuance of such scheme". He who conducts or promotes a money spinning project may have manifold resources from which to pay fanciful interest by luring the unwary customer. But, unless the project envisages a mutual arrangement under which, the happening or nonhappening of an event or contingency relative or applicable to the enrolment of members into the arrangement is of the essence, there can be no "money circulation scheme" within the meaning of Section 2 (c) of the Act. "

(15) NOW coming to the Scheme floated by the assessee in these proceedings, we had the advantage of seeing the application form issued by the assessee that requires to be filled and filed by any person interested in becoming a member under the Scheme. We are told by Sri parthasarathy, Learned Counsel, who appears for all the assessees in these reference cases, that similar application forms had been issued by all the assessees while floating the "deposit linked Incentive Scheme".The nomenclature that the assessee has given to her Scheme is "guru Credit Card Goods Linked Incentive Schemes". According to the promoters of the scheme, it is a double benefit Scheme and to avail the benefits of a free present item as an incentive, a person must become a regular credit card member by paying the prescribed security deposit amount and once he becomes a member under the Scheme, he can terminate his membership only after five years and the security deposit would be refunded to him without interest after adjusting any dues from the member. The security deposit can also be paid in monthly installments and in such cases, member is required to provide two guarantors preferably by Government/bank/public Sector employees. The free present item would be given only after acceptance of membership and the security deposit. If for any reason, the item as per the choice of the member cannot be supplied within a reasonable period, the security amount would be refunded in full less Rs. 10/- as processing charges.

(16) NOW the question is, whether such a Scheme floated by the assessee is a Scheme which is prohibited by law as envisaged under the provisions of 'the Prize Chits and Money Circulation schemes (Banning) Act, 1978'? The preamble of the Act makes clear the object of the Act. It is an Act to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith or incidental thereto. Section 2 of the Act is the interpretation clause. Clause (c) of Section 2 of the Act defines "money Circulation Scheme" to mean any scheme, by whatever name called for making of quick or easy money, or for the receipt of any money or valuable thing


as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrollment of members into the Scheme, whether or not such money or thing is derived from the entrance money of the member of such Scheme or periodical subscriptions. Section 3 of the Act imposes ban of prize chits and money circulation schemes or enrolment as members or participating therein. Section 4 of the Act provides penalty for contravention of Section 3 of the Act. A reading of these Sections would reveal as observed by the Apex Court in the case of Swapan Kumar Guha and Others (Supra), that two conditions must be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2 (c) of the Act. In the first place, it must be proved that promoter of the scheme is promoting or conducting a Scheme for making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrollment of members into that Scheme.

(17) THE basic features of the Scheme in the present case is that the assessee collects deposits from its subscribers, gives them free present item of the value of about 75% of the deposit amount and refunds the deposit after five years without interest. For instance, a subscriber, who enrolls himself as a member, makes a deposit of Rs. 525/-, he is given a free present item/gift of the value of Rs. 400/- and thereby a sum of Rs. 125/- of such deposit would be retained by the promoter for a period of five years, but it would not earn any interest to the member and after the expiry of period of five years, the deposit of Rs. 525/- is refunded to the depositor. The assessee as promoter of the Scheme has promoted a Scheme where she can make a quick and easy money. The Scheme so promoted by the assessee would include a person to invest his/her money by way of deposit to get an incentive or gift worth 75% of the amount deposited. The remaining 25% of the amount is retained by the assessee not for a short term but for a period of five years and sometimes more and after the expiry of the stipulated period, what the member gets is what is deposited by him/her without interest. This Scheme, in our view, answers the requirements of definition of "money Circulation Scheme", which is banned under the, provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. Now coming back to the facts of this case, in the previous year relevant to the assessment year, the assessee had received deposit of Rs 41,92,920/- from its members and as against this, the assessee had distributed articles worth of Rs. 27,27,191/- by way of gift/free present item and under this Scheme, the assessee could retain a sum of Rs. 14,65,729/- for a period of five years, use it the way she wants it, and return thereafter the depositors money without any interest. In our view, this Scheme has all the basic ingredients of money circulation scheme, which is banned under Section 3 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978, and therefore, the expenditure incurred by the assessee is an expenditure prohibited by law and therefore, in view of Explanation inserted by Finance (No. 2) Act, 1998 to Section 37 (1)of the Act, which has come into force with effect from 1-4-1962, the expenditure shall not be deemed to have been incurred for the purpose of business and therefore, no deduction or allowance can be made in respect of such expenditure in computing the income chargeable under the head "profits and gains of business or profession".This amendment is given retrospective effect from 1-4-1962 and will accordingly, apply in relation to assessment year 1962-1963 and subsequent years. It is relevant to note that in the Explanation inserted, the legislature has specifically employed the deeming provision for the purpose of creating a fiction. The purpose of introduction of a deeming provision is explained by the Supreme Court in the case of Consolidated Coffee Limited Vs Coffee Board (AIR 1980 SC 1468), wherein the court has stated that "a deeming provision might to be made to include what is obvious or what is uncertain or to impose for the purpose of a statute, an artificial construction of a word or phrase that would not otherwise prevail but ill such cases, the motive of the legislature would be relevant". The Speech of the Finance


Minister on the floor of the Parliament does not provide any clue for insertion of the Explanation with retrospective effect. To our mind, it appears, it could be to overcome the pronouncement of decisions by various High Courts, wherein it is stated that in considering the allowability of an expenditure under Section 10 (2) (xv) of the income Tax, Act 1922, and the corresponding provision, namely, Section 37 of the Income Tax act, 1961, one cannot travel outside the provisions of the Income Tax Act and deny the benefit of deduction under that Section on the ground that the payment is unauthorised or has been prohibited by some statute.

(18) IN view of our above discussions, the question of law, which we have re-framed, requires to be answered in the affirmative i. e. in favour of the revenue and against the assessee. Accordingly, reference proceedings are disposed of No order as to costs. Ordered accordingly

***


IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD

HON’BLE SHRI G.S.SINGHVI, CHIEF JUSTICE

AND

HON’BLE SHRI JUSTICE C.V.NAGARJUNA REDDY

WRIT PETITION Nos. 20470 AND 20471 OF 2006 – DECIDED ON 19-07-2007.

Between:

Amway India Enterprises, (a Private Company with unlimited liability),

Through Mr.Yoginder Singh, Authorised Signatory and another … Petitioners

Vs.

Union of India, rep., by Secretary, Ministry of Home, New Delhi and others. … Respondents

(Per C.V.Nagarjuna Reddy, J)

1.Whether the business activities being carried on by the petitioners attract the provisions of Prize Chits and Money Circulation Schemes (Banning) Act 1978 (for short “the Act”) and whether the action of respondents 3 to 6 in interfering with the activities of the petitioners by invoking the provisions of the Act is arbitrary, are the questions which fall for consideration in these two writ petitions.

The resume of facts in W.P.Nos.20470 and 20471 of 2006:

2.Petitioner No.1 is a private company with unlimited liability registered under the Companies Act 1956 having its registered office at C-3, Quatab Institutional Area, New Delhi. It is the wholly owned subsidiary of Amway Corporation, United States of America and is engaged in manufacture/marketing of its various products through a network of distributors. Petitioner No.2 in W.P.No.20470 of 2006 and all the three petitioners in W.P.No.20471 of 2006 are distributors of the 1st petitioner. The 1st petitioner approached Government of India, Ministry of Industry, Department of Industrial Development with an application dated 2.6.1994 to convey approval of Government of India for setting up a wholly owned subsidiary of Amway Corporation of United States of America in India for the purpose of establishing and developing a direct selling business of products. The Government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approval, Foreign Collaboration-II Section conveyed to the Amway Corporation, its approval of the said proposal, namely, to set up the wholly owned subsidiary in India, to establish and develop a direct selling business of products which shall be sourced from local independent Indian manufacturers particularly small scale units by providing technology support to products of international standard, vide its letter dated 26.8.1994. The approval was subject to certain conditions which inter alia include the condition that the proposed Indian subsidiary does not envisage any manufacture by itself and that if it decides to take up the manufacturing also, it shall


obtain prior approval from Government of India as per the prescribed policy and procedure and a further condition that the approval is made a part of the foreign collaboration agreement to be executed between the Amway Corporation of USA and the Indian Company and that the approval is valid for a period of two years from the date of issue within which period Amway Corporation was required to file agreement with the Reserve Bank of India/Authorised Foreign Exchange dealer. Condition No.13 of the approval stipulated that the company shall not manufacture the items reserved in the small scale sector without prior approval of the Government.

3.The conditions contained in the original approval dated 26.8.1994 were amended from time to time on the applications made either by Amway Corporation, USA or by the 1st petitioner on issues such as foreign equity participation, rescheduling of fresh marketing period etc. A significant amendment to the initial approval was the amendment dated 4.8.2004 whereby the 1st petitioner was permitted to set up its own units for manufacturing a number of personal care and cosmetic products, home care range of products, nutrition and wellness range of products and surfactants. By the same proceedings the Government of India permitted the 1st petitioner to import products such as fragrance, deodorants, shampoos, conditioners, cleansers etc.

4.One A.V.S.Satyanarayana, Director of Altus Systems Private Limited, Basheerbagh, Hyderabad (Respondent No.8 in W.P.No.20471 of 2006) lodged a complaint in the CID Police Station, Hyderabad which was registered as FIR No.10 of 2006 dated 24.9.1996. In his complaint, Mr. A.V.S.Satyanarayana stated that he was approached by Smt.M.Padmavathi and Sri M.Ramu introducing themselves as Amway Distributors; that they informed Mr.Satyanarayana that if he joins the scheme by paying Rs.4,000/- and sponsor 5 to 6 persons per month into the scheme he will get money not only through sale of products but also with the efforts of downline distributors; that the said two persons by visiting his house several times tried to induce him to join in the scheme; unable to bear the mental agony and harassment caused by the said two persons, he joined the scheme on 29.8.2005 by paying Rs.5,200/- to the 1st petitioner; that the said Padmavathi and Ramu informed him that if he introduces new members and sell the products to them, he will become a silver producer in lessthan four months time. He further mentioned that he was explained about the money circulation scheme and product selling scheme. For the sake of convenient reference, the complaint of Mr. A.V.S. Satyanarayana is reproduced below:

“One of the schemes which involves enrolment of further members is called as 9-6-3. Under this scheme, I have to enroll 9 members first and then those members will enroll 6 members each and further each such person will enroll three members. Thus under me there will be 225 members and from whose sales, I was told that I will be earning lakhs & lakhs of rupees without doing anything. They also further told that if I enroll 2 members per month then at the end of 9 months, there will be 512 persons under me and I will be getting 10,000 PV (4,00,000 BV) and it is also called as 1 leg which is 21%. Thus the scheme I felt was nothing but a chain, where each one were asked to enroll further.

It is further stated in the complaint:

“ The Amway India Enterprises is luring the public including me to introduce new distributors by showing the bait in the name of commission on sale of products to make quick money. The Amway India Enterprises is instigating the distributors like Padmavathi and Ramu to join the new distributors to sell the products in a large way, which is causing mental agony. It is nothing but money circulation which is illegal and also cheated me on the premise that they will return the money and


commission according to company Multi-level Scheme (pyramid). I came to know that Amway India Enterprises, Hyderabad opened its branches all over Andhra Pradesh and exploiting youth like me and their families for their further gains.”

5.The CID police registered a case for the offences under Section 385 and 480 of the Indian Penal Code and Sections 4, 5, and 6 of the Act on 24.9.2006. Within three days of registration of the crime, the petitioners filed these two writ petitions for issue of a writ of Mandamus to declare that the provisions of the Act have no application to the scheme run by petitioner No.1 and to restrain the respondents from interfering with the business carried by the petitioners.

Contentions:

6.Sri B.Adinarayana Rao, assisted by Sri C.Sudesh Anand, appearing for the petitioners in W.P.No.20470 of 2006 contended that the 1st petitioner company has been carrying on its business activity in India with the approval of Government of India and that the Government of India had neither withdrawn the approval nor interdicted the petitioners’ business activities which are being carried on in accordance with the approved scheme. He further submitted that the registration of criminal case by the CID police and their interference with the petitioners’ business on the ground that it is hit by the provisions of the Act is highly illegal, arbitrary and unconstitutional. He argued that none of the ingredients of Section 2(c) of the Act exists in the business carried on by the petitioners as there is neither quick or easy money nor payments received by the promoter on promise of payment of money on the contingency relative or applicable to the enrollment of new members into the scheme. Learned counsel further argued that the registration of the crime and interference with the petitioners’ business activities by the State and its authorities is patently illegal, highhanded, arbitrary and unauthorized. According to the learned counsel, the first petitioners’ holding company, namely, Amway Corporation, USA is carrying on the direct selling business of products by avoiding middlemen (wholesale and retail traders) in more than 80 countries all over the world and that the petitioner which is incorporated as a wholly owned company of the Amway Corporation of USA has introduced the said method in India like many other companies and that since the money is payable on the basis of the skill and business turnover of the distributors, the prohibition contained in Section 3 of the Act is not attracted. In support of his contention, the learned counsel relied upon the judgment of the Supreme Court in State of West Bengal Vs. Swapan Kumar Guha1[1]. The learned counsel while making copious reference to various portions of the said judgment explained the scheme under which the petitioners are carrying on business and submitted that the ratio laid down therein is squarely attracted to the cases on hand.

7.Sri S.R.Ashok, Senior Counsel appearing for the petitioners in W.P.No.20371 of 2006 supported the arguments of Sri B.Adinarayana Rao and submitted that the scheme under which the petitioners are carrying on the business is not comprehended by the provisions of Section 2(c) of the Act. He argued that no distributor will get any money merely on the enrollment of other members sponsored by him and that the money he gets depends upon marketing of products by himself and the other members whom he sponsored. The learned counsel further contended that there is no compulsion or coercion on the members to sponsor other members and that the scheme does not provide for payment of money on mere enrollment per se which alone attracts the definition of Section 2(c) of the Act. The scheme therefore, according to the learned counsel, cannot by any stretch of imagination be termed as “money circulation scheme” within the definition of Section 2(c) of the Act.

1[1] (1982) 1 SCC 561


8.Per contra, learned Advocate General submitted that the business activity of the petitioners squarely falls within the definition of “money circulation scheme” and is, therefore, hit by the provisions of Section 3 of the Act. Learned Advocate General invited the Court’s attention to brochure at Page-32 of the material papers filed in W.P.No.25749 of 2006 (a Public Interest Litigation filed by one of the alleged victims of the petitioners’ business) to explain how a person on his becoming a member is credited with points value (PV) and on his sponsoring other distributors how he is benefited on their business volume (BV). The learned Advocate General referred to diagram contained in the said brochure and pointed out that the whole scheme is evolved in such a manner that a person who joins as distributor is required to enroll six persons and each of the six persons would enroll four persons who in turn would enroll three persons each and, in this manner, the strength of the entire group becomes 103. He further pointed out that the money the person at the top of the group is supposed to get according to the scheme includes the money which, the other 102 persons, who are directly or indirectly sponsored by the first member, pay either towards subscriptions (initial/renewal) or by selling products. The learned Advocate General argued that there are reciprocal promises involved in the scheme. He submitted that while the promoter gets money from the members as a consideration for promise made to pay them money on the happening of event or contingency relative or applicable to the enrollment of new members, the members earn easy or quick money in redemption of the promise so made by the promoter. He controverted the arguments of the learned counsel for the petitioners that there is no compulsion or coercion to sponsor the members. The learned Advocate General then argued that petitioner No.1 evolved a mechanism where introduction of new members is made so attractive and luring that every distributor strives for sponsoring others in order to earn more and more money consequent on the enrollment of new members. He also submitted that the scheme as is being implemented was not the one which was placed before the Government of India or the one which is pleaded in the writ petition.

9.In order to fortify his contention that easy/quick money is involved, the learned Advocate General referred to para-11 of the counter affidavit of the Deputy Superintendent of Police, Economic Offences Wing, CID, Hyderabad (Respondent No.6). It would be convenient to extract para-11 herein below:

“ 11.Easy/quick money and it being dependent on enrollment of members:

a) A substantial sum of Rs.1,800/- out of Rs.4,400/- is credited direct to the account of “Amway”. It is stated on behalf of the company in the Writ Petition that it enrolled 4,50,000 distributors all over India. Taking this as correct, a sum of Rs.81,00,00,000/- (Rupees Eighty One Crore) is appropriated by the company at the time of enrollment of the members itself. This cannot but be stated “easy/quick money” got by it from the so called distributors/member de hors any service.

b) The terms and conditions of “Distribution Renewal from”, supplied by “Amway” shown as Annexure-3 read as follows:

Condition No.3: “The distributorship agreement if not renewed by Amway shall stand terminated on 31 December or on expiry of one year from the date of distributorship, as the case may be.”


Condition No.12: “The Renewal of subscription fee including Block Renewal subscription fee is non-refundable.”

Condition No.14: “Renewal of subscription fee is mandatory to continue with business and maintain your position in line of sponsorship”

Thus, from 4,50,000/- distributors the company would get a sum of Rs.45,00,00,000/- (rupees forty five crores) (4,50,000 x 995) per annum on completion of every year which can only be stated to be “easy/quick money” sans any service to the distributors/members.

c) To enable him to get the so called commission @ 3% every month, the ABO has to distribute/purchase/sell products worth Rs.2,000/- of “Amway” every month or else he will not be eligible to get any commission or continue as member in the scheme. Thus, each member is forced/induced/lured to purchase the products worth Rs.2,000/- every month to keep his chance of getting commission alive. Thus, “Amway” would automatically get a business of the quantum of Rs.1080/- crores (4,50,000 x 2,000 x 12(months) ) per annum which would yield an astronomical profit and it cannot but be stated as “easy/quick money” without any service to the distributors/members irrespective of whether they sell the products or not, though the company may conveniently refer it as “turnover by sale of products”.

10.The learned Advocate General also explained how the scheme ensures payment of money on any event or contingency relative or applicable to the enrollment of members into the scheme. He submitted that a person who joins the scheme and becomes a distributor earns money in different ways. The learned Advocate General explained the mechanism of the scheme in the following manner:

1) Retail Profit Margin: On his becoming a member products are purchased or delivered to him. When he sells the product at a price not exceeding the MRP printed on the pack, he will get retail profit margin calculated as the difference between the distributor’s price and the MRP printed on the pack.

2) Performance Based Incentive: He will get incentives by way of fixed business volume (BV) and point value (PV) upon achieving a minimum PV for the month, i.e., if he reaches the level of the sale of products by earning minimum PV of 100, he becomes entitled to receive additional incentives on a graded scale depending upon the PV achieved for the month. The percentage of incentives depends upon the percentage of PV and the incentive is paid at the relevant percentage on the BV. All this is explained from the 1st petitioner’s scheme (Annexure-A at page-71 onwards in W.P.No.20470 of 2006).

3) On enrollment of other distributors sponsored by him, the sponsor distributor will get incentives under as many as 10 heads which are solely related to the PV and BV achievement of the sponsored distributors. The learned Advocate General referred to page-33 of the W.P.No.25749 of 2006 which contains the 1st petitioner’s scheme wherein the various incentives which the existing member gets on completion of the sponsoring of the entire group comprising 103 members.

11.The learned Advocate General distinguished the judgment of the Supreme Court in Swapan Kumar Guha (1 supra). He pointed out that after interpreting Section 2(c) of the Act, the Supreme Court held that the complaint lodged by the State in that case failed to satisfy the ingredients of the said provision and quashed the registration of criminal case and argued that the ratio of that


judgment has no application to the facts of the present case in which the allegations contained in the First Information Report taken on their face value constitute an offence under the provisions of the Act.

12.Sri A.Rajasekhar Reddy, learned Assistant Solicitor General appearing for Union of India submitted that the scheme approved by the Government of India is different from the scheme which the 1st petitioner company is executing and, therefore, the approval given by the Government of India cannot be used as a shield by the petitioners for carrying unlawful business. He referred to the letters dated 31.3.2003 and 23.9.2003 addressed by the Secretary, Government of India, Ministry of Consumer Affairs and submitted that though in the first letter a reference was made to the Judgment in Swapan kumar Guha (1 supra) and the Secretary opined that the companies dealing with direct/ network/middlemen marketing do not fall within the provisions of the Act, later on, he clarified that the unlawful activities are prohibited in the Act. Shri Rajasekhar Reddy submitted that as per letter dated 29.3.2003, the pyramid structured marketing schemes fall within the provisions of the Act and the people running those schemes cannot claim the benefit of the approvals granted by the Government of India. The learned counsel further argued that having regard to the serious allegations which prima facie show that the petitioners are involved in money circulation prohibited by the Act, they cannot seek to interdict the investigation by the police and that the truth or otherwise of the allegations made in the criminal case should be allowed to be revealed and this Court cannot issue writ to stultify the investigation.

13.Mr.D.Sheshadri Naidu, who appeared for respondent No.8 in W.P.No.20471 of 2006 argued that the business being carried on by the petitioners attracts the definition of Section 2(c) of the Act. He submitted that the sale of product envisaged in the scheme is only a camouflage for the money circulation business. He referred to certain passages of G.P.Singh on Interpretation of Statutes and submitted that even though the scheme evolved by the 1st petitioner and being implemented does not overtly replicate a scheme prohibited under the provisions of the Act, a dynamic interpretation is required to be given to the provisions of the Act in order to prevent social evil being perpetrated by the petitioners.

14.In his rejoinder, Shri B. Adinarayana Rao reiterated that the Government of India has not taken a specific stand that the business activity of petitioner No.1 is hit by the provisions of the Act. He submitted that the main ingredient of quick or easy money envisaged under Section 2(c) of the Act does not exist in the petitioners’ scheme. He further submitted that the 1st petitioner has an annual business turnover of 700 crores and even assuming that all the 4,50,000 subscribers paid the annual renewal fees of Rs.995/-, the 1st petitioner gets only about Rs.40 crores and by no stretch of imagination it can be said that the 1st petitioner is getting quick or easy money on this count. He referred to the instance pertaining to Accused No.4 (Raja Naren) in Crime No.10 of 2006 narrated in the counter affidavit wherein it is stated that the said person became a diamond member of the 1 st

petitioner company in the month of August 2006 and that he has not purchased goods worth a single rupee, but still he has credited with points worth Rs.7,61,140/- during that year and submitted that even if these figures are correct, the provisions of Section 2(c) of the Act are not attracted because making of such a profit by a person is not forbidden by any law. The learned counsel submitted that the commission credited to a sponsor on the purchases made by the downline distributors is only one of the components of the payments received by the sponsor members. The learned counsel then submitted that even if the Court comes to the conclusion that Section 2 (c) is attracted in the case of the petitioners, they cannot be forced to close the business till the conclusion of the criminal proceedings and indiscriminate seizure of products being effected by the police should be declared illegal and nullified.


15.We have given serious thought to the respective arguments. However, before dealing with the same, we may notice the background in which the Act was enacted and the salient features thereof.

Analysis:

16.A study group constituted by the Reserve Bank of India made an in-depth examination of the provisions of Chapter-III-B of the Reserve Bank of India Act, 1934 and submitted its report with the recommendations that prize chits or money circulation scheme, by whatever name called, should be banned in the larger interest of public and suitable legislative measures should be undertaken. In order to implement these recommendations, the Parliament enacted Prize Chits and Money Circulation (Banning) Act 1978. Section 2 (c) of the Act defines money circulation scheme as:

“money circulation scheme” means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrollment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions”

17.Section 3 of the Act imposed a prohibition on promotion or conduct of any prize chit or money circulation scheme or enrollment as a member to any such chit or scheme or participation in it otherwise or receive or remit any money in pursuance of any chit or scheme. Section 4 of the Act postulates that whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to Rs.5,000/- or with both. Proviso to Section 4 prescribed minimum sentence of imprisonment of one year and fine of Rs.1,000/- in the absence of special and adequate reasons to the contrary to be mentioned in the judgment. If a person in promotion or conduct of any prize chit involves himself in the acts enumerated in section 5 (a) to (f) of the Act, he shall be punishable with imprisonment for a term which may extend to three years or fine which may extend to Rs.3,000/- or both. A minimum sentence of one year and a fine of Rs.1,000/- is also prescribed in respect of those offences. Under Section 6 of the Act where an offence has been committed by a company every person who at the time of the commission of offence was incharge of and was responsible to the company for the conduct of the business of the company as well as the company shall be deemed to be guilty of the offence. Section 7 of the Act empowers any police officer not below the rank of an officer in charge of a police station inter alia to enter, if necessary, by force any premises which he has reason to suspect or being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of provisions of the Act, to take into custody and produce before any Judicial Magistrate all such persons against whom a complaint has been made etc., and to seize all things found in the said premises which are intended to be used or reasonably suspected to have been used in connection with any prize chit or money circulation scheme. Under Section 10 of the Act the offences are made cognizable.

18.In the light of the above, it has to be considered whether the business activity of the petitioners falls within the definition of money circulation scheme.


19.In Swapan Kumar Guha (1 supra) the Supreme Court made an in-depth analysis of Section 2(c) of the Act. A.N.Sen, J who rendered the leading judgment interpreted and analyzed the said provision as under:

“ (i) there must be a scheme;

(ii) there must be members of the scheme;

(iii) the scheme must be for the making of quick or easy money on any event or contingency relative or applicable to the enrollment of members into the scheme or there must be a scheme for the receipt of any money or valuable thing as the consideration for a promise to pay money on any event or contingency relative or applicable to the enrollment of members into the scheme;

(iv) the event of contingency relative or applicable to the enrollment of members into the scheme will however not be in any way affected by the fact whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscription.”

20.The learned Judge held that the words “on any event or contingency relative or applicable to the enrollments of members into the scheme whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscription” applies to, a) quick or easy money, and b) for the receipt of any money or valuable thing as consideration for promise to pay money and not merely to the latter.

21.Chandrachud, CJ while agreeing with A.N.Sen, J held that any and every activity for the making of quick or easy money by itself would not fall within clause (c) of Section 2 of the Act and that making of such quick or easy money must depend upon any event or contingency relative or applicable to the enrollment of members into the scheme. It was held that to hold a person to be guilty of an offence under Section 4 read with Section 3 and 2(c) of the Act, two conditions must be satisfied, they are, 1) it must be proved that he is promoting or conducting a scheme for the making of quick or easy money; and 2) the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrollment of members into that scheme.

22.We shall now examine whether on the admitted facts and the material available on record, the scheme envisaged by petitioner No.1 attracts the aforementioned ingredients of clause (c) of Section 2 of the Act.

The Scheme:

23.The purported theme behind the scheme appears to be direct selling which means sale of products to the customers by the distributors of the company without there being any wholesaler or retailer. It is explained in the affidavit filed in support of the writ petition that a person becomes a distributor by purchasing a business kit at a cost of Rs.4,400/- comprising; a) Rs.2,600/- towards the products and other material (sales aid and literature) and b) Rs.1,800/- towards product literature and subscription fee. In this process, the distributors are provided with incentives. Annexure-7 (brochure) to the reply affidavit filed by the petitioner titled “Amway Sales and Marketing Plan in India” unfolds the entire scheme. It is explained therein that distributors can generate income in


two ways, namely; 1) by earning retail sales profit, and 2) through performance incentive; that the distributors purchase products from Amway at distributors cost and then sell these products at higher price (not more than printed MRP) which is the retail sales profit. As regards performance incentive, it is appropriate to extract the relevant portion of the brochure:

“ Performance Incentive:

Your performance incentives are based on monthly calculation of your individual and group PV/BV. This incentive is based on a slab system that ranges from 3% to 21@ depending on your business volume. Your earnings would be proportionate to your efforts.

PV (Point Value) is a unit amount assigned to each product. It is an effort index, which puts emphasis on the units sold and not the selling price. Each month the PV is totaled in order to determine the performance incentive bracket. These brackets range from 3% to 21%.

BV (Business Volume) is a monetary figure assigned to each product. In order to calculate the Performance Incentive, the percentage amount determined by total PV is applied to the total BV for the month. The ratio of PV to BV in India is 1 PV = 45 BV.

Performance Incentive table

If Total Monthly PV is BV is Performance incentive is

10,000 4,50,000 21% of Your BV

7,000 3,15,000 18%

4,000 1,80,000 15%

2,000 90,000 12%

1,000 45,000 9%

500 22,500 6%

100 4,500 3%

24.From the above reproduced information furnished by the petitioner it is clear that the performance incentive increases with the increase in the PV (points value) and BV (business volume).

25.The table given above shows that A who became the member and introduced B invested Rs.4,500/- on which 100 PV and 4,500 BV are credited to him. The income he earned consists of two components, i.e., 1) retail margin worked out at 20% of 4500 BV which comes to Rs.900/- and 2) commission comprising group turnover of Rs.9,000/- valued at 9000 BV and 200 PV. It is significant to note here that in calculating the commission not only A’s business turnover of Rs.4,500/- is taken into account but also the business turnover of Rs.4,500/- of B is included. Since PV earned by A by sponsoring B alone was at the lowest slab, namely 200, the lowest commission


of 3% is applied by taking BV of both A and B into consideration. The amount of Rs.270 towards commission was distributed in equal proportions among A and B. A person by sponsoring more number of distributors will be credited with the business turnover of all other members of the group sponsored by him is illustrated in the table given under example-2 which is reproduced hereinbelow:

26.In the above table, ‘A’ directly sponsored B and B in turn sponsored C, D, and E. While A’s retail margin was calculated on the basis of the products sold by him, his commission was calculated on the total group turnover of B, C, D and E @ 18,000 BV = 400 PV which are worth Rs.18,000/-. As the sponsor distributor enrolls more members, his earning gets increased. This is evident from one of the downloaded copies of the brochure with the title “Amway Success Seminars and Positrim Launch”, a copy of which is filed by the petitioner in W.P.No.25749 of 2006 and the authenticity of which is not disputed by the petitioners. For proper appreciation, the same is extracted herein below:

27.In the above given diagram drawn to a 1-6-4-3 pattern, the first member sponsors six members. Each of the six members in turn sponsors four members and each of the twenty four members sponsors three members. Thus the strength of the total group becomes 103. At the minimum level of PV and BV, the profit margin and the commission the person heading the group, by taking his personal PV and BV gets is Rs.12,420/-, from the PV and BV of the six persons he sponsored he gets Rs.23,760/-, from the PV and BV of the 24 distributors who were sponsored by six distributors he gets Rs.1,14,480/- and from the PV and BV of 72 distributors whom the 24 distributors sponsored he will get Rs.6,83,300/. This is the admitted position under the scheme.

28.As is evident from the contentions advanced on behalf of the petitioners as noted earlier, the petitioners have taken the stand that there is no quick or easy money involved in the scheme and that the money which the sponsor member gets does not depend on any event or contingency relative or applicable to the enrollment of the members into the scheme. But on a careful analysis of the true nature of the scheme as explained above, it is quite apparent that one of the components of the income earned by a sponsor member is the commission which is calculated not only on the personal PV of the sponsor member, but also from the PV earned by all the remaining 102 members falling within his group. There is, therefore, no gainsaying that a substantial part of the income which the first sponsor member of the group gets depends on the event or contingency relative or applicable to the enrollment of members into the scheme. This conclusion can be tested by a further analysis of the income figures given in the earlier paragraph. Supposing the sponsor member at the top does not introduce any member and if he merely sells the products given to him, he gets an income of Rs.12,420/-. If he sponsors only six people and they in turn do not sponsor any member, then he will get an additional income of Rs.23,760/-. If those six members whom he sponsored again sponsor four members each, he will get a further income of Rs.1,14,480/- and if the 24 members sponsor three members each, he will get a further sum of Rs.6,83,300/-. Thus the money which the member at the top of the line gets depends upon the members whom he enrolls or the members enrolled by him enroll.

29.In Para 21 of the counter affidavit of respondent No.6 the example of Raja Naren is cited and the petitioner did not dispute the averment relating to the income he earned in a year. The said instance is illustrative of a person earning fabulous income without doing anything after he accomplishes his task of enrolling the required number of persons as members into the scheme.


30.From the aforementioned discussion, it is proved that the scheme provides for easy/quick money to its distributors. The first ingredient is thus satisfied.

31.Whether second ingredient is also satisfied or not is to be considered now. As seen above, each member on his enrollment pays Rs.4,400/-. Payment of Rs.4,400/- by a member on his enrollment and his future earnings through marketing/enrolling other members constitutes event or contingency relative to his enrollment. The distributor gets all this money as a consideration for promise made by the sponsor at the time of his enrollment. Thus as far as the member joining the scheme is concerned, both the ingredients of Section 2(c) of the Act, i.e., a) making of quick or easy money, and b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied.

32.Whether these two ingredients are satisfied qua the promoter of the scheme who is the 1st

petitioner in this case is required to be examined now.

33.As pleaded by the petitioners themselves, out of Rs.4,400/- a substantial part, namely Rs.1,800/- is collected as subscription fee, license fee, business kit etc. To qualify for earning commission a member has to earn the minimum monthly PV of 50 which he will get by selling products worth Rs.2,000/-. Respondent No.6 in para-11(c) of his counter affidavit specifically pleaded as under:

“To enable him to get the so called commission @ 3% every month, the ABO has to distribute/purchase/sell products worth Rs.2,000/- of “Amway” every month or else he will not be eligible to get any commission or continue as member in the scheme. Thus, each member is forced/induced/lured to purchase the products worth Rs.2,000/- every month to keep his chance of getting commission alive. Thus, “Amway” would automatically get a business of the quantum of Rs.1080/- crores (4,50,000 x 2,000 x 12(months) ) per annum which would yield an astronomical profit and it cannot but be stated as “easy/quick money” without any service to the distributors/members irrespective of whether they sell the products or not, though the company may conveniently refer it as “turnover by sale of products”.

Significantly, this assertion made in the counter affidavit is not denied in the rejoinder of the petitioners. They have merely tried to explain the said allegation by offering certain justifications. The petitioners have not specifically denied that the first petitioner would get a sum of Rs.1,080/- crores by ensuring that each distributor maintains the minimum sales level. Even though the scheme per se does not stipulate that each distributor has to maintain the minimum required business level, prescription of minimum level of 50 PV to qualify for getting commission is sufficient inducement for the members to relentlessly strive for maintaining the PV level at or above the said minimum levels.

34.It is, thus, evident that the whole scheme is so ingeniously conceived that the inducement for aggressive enrollment of new members to earn more and more commission is inherent in the scheme. By holding out attractive commission on the business turned out by the downline members, the scheme provides for sufficient inducements for its members to chase for the new members in their hot pursuit to make quick/easy money. On the part of the promoter by pushing each member to achieve the minimum sales worth Rs.2,000/- per month, (this sale includes enrollment of new members) he is assured of about 1000 crores per annum. All this squarely satisfy the description of quick/easy money. In addition to this, it is an admitted fact that each person in order to continue to be the distributor, shall pay renewal subscription fee of Rs.995/- per annum. In para-11(b) of the counter affidavit on the admitted number of distributors of 4,50,000 this amount is calculated at about Rs.45 crores per annum. These figures are not denied by the


first petitioner in its rejoinder. The plea of the first petitioner that there is no compulsion that a member shall renew his distributorship looks to us to be specious. Once a person becomes a distributor in a scheme of this nature where the sops in the shape of commission are so luring, it would be very difficult for a member to withdraw from their membership to avoid payment of the annual renewal subscription fee.

35.From the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him. In any event the petitioners have not specifically denied the turnover they are achieving and the income they are earning towards the initial enrollment of the distributors, the renewal subscription fee and the minimum sales being achieved by the distributors as alleged in the counter affidavit. By no means can it be said that the money which the first petitioner is earning is not the quick/easy money. By promising payment of commission on the business turned out by the down-line members sponsored either directly or indirectly by the up-line members (which constitutes an event or contingency relative to enrollment of members), the first petitioner is earning quick/easy money from its distributors, apart from ensuring its distributor earn quick/easy money. Thus the two ingredients are satisfied in the case of promoter too. We are, therefore, of the considered view that the scheme run by the petitioners squarely attracts the definition of “Money Circulation Scheme” as provided in Section 2(c) of the Act.

36.We may now deal with the petitioners’ plea that the Government of India has not cancelled the scheme and, therefore, the respondents cannot prosecute them. From the record produced by the learned Advocate General and the Assistant Solicitor General, we find that none of the brochures as referred to and discussed above were placed before the Government of India. It is also clear from the record that the details of the scheme were not discussed by the committee which recommended for grant of approval to the scheme of the petitioners. As already noted above, in his letter dated 29.3.2003, the Secretary, Government of India, Ministry of Consumer Affairs, had clarified that the pyramid structured marketing scheme fall within the provisions of the Act. Therefore, the mere fact that the approval accorded by the Government of India has not been cancelled or withdrawn is not sufficient to stultify the investigation of the case registered against the petitioners. At any rate, whether the Government of India has taken any action or not or what view it takes on the schemes run by the 1st petitioner have no relevance in the adjudication of the issues raised by the petitioners in the cases before us.

37.The stage is now set for detailed consideration of the judgment of the Supreme Court in Swapan Kumar Guha (1 supra). Both Sri B.Adinarayana Rao and Sri S.R.Ashok learned counsel appearing for the petitioners made strenuous efforts to convince us that the judgment in Swapan Kumar Guha (1 supra) applies to the present cases and therefore, the petitioners are entitled to the relief sought for in the writ petitions. In order to appreciate this contention, it will be appropriate to notice the facts in Swapan Kumar Guha (1 supra). One Sanchita Investments is a registered partnership firm consisting of three partners with a share capital of Rs.7,000/-. In the year 1975 the said firm started its business in finance and investments. On a report given by the Commercial Tax Officer concerned, FIR was registered with the allegations that the firm had been offering 48% interest which was later reduced to 36 % and that therefore it was involved in money circulation scheme for making of quick or easy money. The firm and its partners filed two writ petitions in the Calcutta High Court under Article 226 of the Constitution of India for quashing the FIR. The High Court allowed the writ petition and quashed the FIR and the State of West Bengal filed appeal by Special Leave in the Supreme Court. After an in depth analysis of the definition of “money circulation scheme” in Section 2(c) of the Act, the Supreme Court went into the question as to whether the FIR


prima facie discloses an offence under Section 4 read with Section 3 of the Act in the light of the requirements of Section 2(c) of the Act. The Supreme Court mentioned the gist of the allegations in the leading opinion of A.N.Sen, J which is extracted below:

“1. Sanchaita Investments is a partnership firm. Its partners are Sri Bihari Lal Murarka, Sri Shambhu Prasad Mukherjee and Sri Swapan Kumar Guha. The firm was started in or around 1975.

2. The firm had been offering fabulous interest at the rate of 48 per cent to its members until very recently. The rate of interest has of late been reduced to 36 per cent per annum.

3. Such high rates of interest were and are being paid even though the loan certificate receipts show rate of interest to be 12 per cent only.

4. Thus, the amount in excess of 12 per cent so paid clearly shows that 'money circulation scheme' is being promoted and conducted for the making of quick and/or easy money, prizes and/or gifts.

5. Prizes or gifts in cash are also being awarded to agents, promoters and members too.

6. In view of the above, Sarvashri Bihari Lal Murarka, Shambhu Prasad Mukherjee and Swapan Kumar Guha appear to have been carrying on the business in the trade name of 'sanchaita Investments' in prize chits and money circulation scheme in violation of S. 3 of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.”

In para-66 of the Judgment, it is held:

“ Whether an offence has been disclosed or riot must necessarily depend on the facts and circumstances of each particular case. In considering whether an offence into which an investigation is made or to be made, is disclosed or not, the court has mainly to take into consideration the complaint or the F.. R. and the court may in appropriate cases take into consideration the relevant facts and circumstances of the case. On a consideration of all the relevant materials, the court has to come to the conclusion whether an offence is disclosed or not. If on a consideration of the relevant materials, the court is satisfied that an offence is disclosed, the court will normally not interfere with the investigation into the offence and will generally allow the investigation into the offence to be completed for collecting materials for proving the offence. If, on the other hand, the court on a consideration of the relevant materials is satisfied that no offence is disclosed, it will be the duty of the court to interfere with any investigation and to stop the same to prevent any kind of uncalled for and unnecessary harassment to an individual.”

In para-68 it is held:

“An analysis of these materials suggests that the firm is carrying on activities of accepting deposits from the members promising to pay them interest on such deposits at an agreed rate of 12 per cent as stipulated in the loan certificate; but, in fact, it has been paying interest to them at much higher rate of interest. The materials further indicate that the firm is making high-risk investments of the monies received from the depositors and has also been advancing monies to political parties.”

In paras-69 and 70 of the Judgment the Supreme Court framed the questions which read:


“69. The crux of question is whether these allegations disclose an offence under the Act namely, violation of S. 3 of the Act even if all these allegations are deemed to be correct.

70. The question whether these allegations disclose an offence under the Act and can be the basis for any suspicion that an offence under S. 3 of the Act has been committed or not, must necessarily depend on the provisions of the Act and its proper interpretation.”

While holding that there was no allegation that Sanchita Chit Fund is conducting prize chit, the Supreme Court went on considering whether the business carried on by Sanchita Chit Funds attracted the definition of money circulation under Section 2(c) of the Act. In para-74, the requirements of money circulation scheme are mentioned which were already extracted in the earlier part of this judgment. In para-75 the Supreme Court held that the condition in the definition “on any event or contingency relative or applicable to the enrollment of members into the scheme whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions” qualifies both the provisions contained therein, namely; i) a scheme for making of quick/easy money, or ii) a scheme for receipt of any money or valuable thing as the consideration for a promise to pay money and not merely to the latter provision. In other words the Supreme Court held that in order to attract the definition of Section 2(c) of the Act it must be shown that not only that the scheme envisages making of quick/easy money but it must also be shown that such quick/easy money is earned on any event or contingency relative or applicable to the enrollment of members into the scheme. Having so analyzed the definition of “money circulation scheme”, the Supreme Court applied the said definition to the allegations made in the FIR and negatived the contention that the scheme attracted the provisions of Section 2(c) of the Act. The reasoning of the Supreme Court in coming to the said conclusion is discernible from para-79, which is extracted hereunder:

“79. Judged from the point of view of the firm, there is nothing to indicate that the firm makes any investment in consultation with its depositors. The materials only indicate that the firm indulges in high-risk investments and also advances monies to political parties. Neither of these acts appears to be illegal and they do not go to show that the firm makes easy or quick money. It is no doubt true that the materials go to show that the firm pays a larger amount by way of interest than payable on the basis of the rates stipulated in the loan certificate and the firm pays the excess amount of interest to the depositors in a clandestine manner. The clandestine manner of payment of interest in excess of the stipulated rate does not, in any way, indicate the existence of any scheme for making quick or easy money. It is again to be pointed out that in any event the materials do not indicate that the payment of interest by the firm in excess of the stipulated rate is in any way dependent on any event or contingency. There is nothing to indicate any scheme for the receipt of the money by the firm from its depositors as a consideration for promise to pay the interest in excess of the stipulated rate and also to pay back principal amount on the expiry of the term dependent in any way on any event or contingency relative or applicable to the enrolment of new depositors, considering the depositors to be members. I am, therefore, of the opinion, that not any of the requirements of a money circulation scheme is satisfied in the instant case. As there is no money circulation scheme, there can be no scheme as contemplated in the Act in view of the definition of 'scheme' in the Rules. The material, appear to disclose violation of revenue laws. They, however, do not disclose any violation of the Act. The materials do not disclose that the firm is promoting or conducting money circulation scheme and the question, therefore, of any violation of S. 3 of the Act does not arise in the instant case. As the firm is not conducting or promoting a money


circulation scheme, and as no case is made that the firm is conducting or promoting a chit fund, the Act cannot be said to be applicable to the firm. In my opinion, it does not become necessary to refer to the Rules for coming to the conclusion. I may, however, add that a consideration of the Rules also clearly lends support to the conclusion to which I have come. I find that the learned Judge has very carefully and elaborately considered all the aspects in his judgment and in the course of elaborate discussion, he has noted all the contentions raised by the parties and has carefully considered them. The learned Judge on a careful consideration of all aspects and on a proper interpretation of the Act, has expressed the view that no offence under the Act is' disclosed against the firm which does not conduct or promote money circulation scheme or a chit fund and the Act has no application to the firm. It may also be noted that the learned Judge has also in his judgment referred to the report of the Reserve Bank and the opinion of the learned Advocate General of the State which lent support to the view taken by the learned Judge. The view expressed by the learned Judge that the materials do not disclose that the firm is promoting or conducting a money circulation scheme and the Act has, therefore, no application to the firm meets with my approval and I agree with the same.”

39.From the above analysis of the scheme, and the allegations in the FIR relating to the scheme carried on by Sanchita Chit Funds, the Supreme Court found that the allegations contained in the FIR and the materials produced before the court do not disclose that the firm was conducting or promoting money circulation scheme to attract the provisions of Section 3 of the Act. As the facts in the said case bear no similarity whatever with the facts involved in the present case, the said judgment is of no help at all to the petitioners to claim relief.

40.Unlike in the case of Swapan Kumar Guha (1 supra), though the petitioners herein have not specifically sought for quashing of FIR and it is stated in para-27 of the writ affidavit that the petitioners are reserving their right to initiate appropriate action for annulment of the action of respondents 5 and 6 in registering the case against the petitioners, in reality granting of relief claimed in these writ petitions would virtually have the effect of quashing the criminal proceedings initiated against the 1st petitioner. Therefore it is necessary for us to consider the contents of the complaint in the light of the law laid down by the Supreme Court on the scope of interference by the High Courts in criminal investigation/trial while exercising power under Article 226 of the Constitution or Section 482 of the Code of Criminal Procedure.

41.The complaint submitted to the CID Police, Hyderabad in this case is exhaustive. The complainant graphically described how the scheme run by petitioner No.1 through the other petitioners and various distributors in the country constitutes money circulation scheme. The gist of the complaint has already been extracted herein before. From the conclusion arrived at by us on the analysis of the admitted material available before us concerning the scheme, we have no doubt whatsoever that if the allegations contained in the report of C.No.1474/C-27/CID/2006 dated 24.9.2006 are taken on their face value they make out an offence punishable under the provisions of Sections 4, 5 and 6 of the Act.

42.Law with regard to interference with the criminal investigation and quashing of criminal proceedings is well settled. In State of Haryana & Others Vs. Bhajan Lal & Others 2[2] the Supreme Court laid down broad guidelines mentioned to be illustrative rather than exhaustive for the High Courts to exercise their extraordinary powers under Article 226 of the Constitution of India or

2[2] 1992 Suppl (1) SCC 335


inherent powers under Section 482 of the Code of Criminal Procedure either to prevent abuse of the process of court or otherwise to secure the ends of justice. They are as follows:

“1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety do not prima facie constitute any offence or make out a case against the accused.

2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offence, justifying an investigation by police officers under S. 156 (1) of the Code except under an order of a Magistrate within the purview of S. 155 (2) of the Code.

3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offence and make out a case against the accused.

4) Where, the allegations in the FIR do not constitute a cognizable offence but constitute only a non-cognizable offence, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under S. 155 (2) of the Code.

5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused.

6) Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party.

7) Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.

43.In State of Bihar Vs. P.P.Sharma, IAS & Another3[3] the Supreme Court reviewed the case law on this aspect including the judgment of Supreme Court in Swapan Kumar Guha’s case (1 supra). While referring to the said judgment on which reliance was placed on behalf of the accused for the quashing of the criminal proceedings, Ramaswamy, J observed as under:

“ The decision of this Court, strongly relied on namely, State of West Bengal v. Swaran Kumar, (1982) 3 SCR 121, is of no assistance to the respondents. In that case it was found that the First Information Report did not disclose the facts constituting the offence.”

44.In State of Orissa v. Saroj Kumar Sahoo4[4] the Supreme Court reviewed various judicial precedents and laid down the following propositions:

“1) The exercise of power under Section 482 CrPC is the exception and not the rule. The section does not confer any new powers on the High Court. It only saves the inherent power

3[3] 1992 Supp (1) SCC 222 4[4] (2005) 13 SCC 540


which the Court possessed before the enactment of CrPC. It envisages three circumstances under which the inherent jurisdiction may be exercised, namely, (i) to give effect to an order under CrPC, (ii) to prevent abuse of the process of court, and (iii) to otherwise secure the ends of justice. It is neither possible nor desirable to lay down any inflexible rule which would govern the exercise of inherent jurisdiction. No legislative enactment dealing with procedure can provide for all cases that may possibly arise.

2) While exercising the powers under Section 482 Cr.P.C., the High Court does not function as a court of appeal or revision. Inherent jurisdiction under the section, though wide, has to be exercised sparingly, carefully and with caution and only when such exercise is justified by the tests specifically laid down in the section itself. It is to be exercised ex debito justitiae to do real and substantial justice for the administration of which alone the courts exist. Authority of the court exists for advancement of justice and if any attempt is made to abuse that authority so as to produce injustice, the court has the power to prevent abuse. It would be an abuse of process of the court to allow any action which would result in injustice and prevent promotion of justice. In exercise of the powers the court would be justified to quash any proceeding if it finds that initiation/continuance of it amounts to abuse of the process of court or quashing of these proceedings would otherwise serve the ends of justice.

3) The inherent power should not be exercised to stifle a legitimate prosecution. The High Court being the highest court of a State should normally refrain from giving a prima facie decision in a case where the entire facts are incomplete and hazy, more so when the evidence has not been collected and produced before the Court and the issues involved, whether factual or legal, are of magnitude and cannot be seen in their true perspective without sufficient material. Of course, no hard-and-fast rule can be laid down in regard to cases in which such power can be exercised can be laid down.”

45.In A.V. Mohan Rao v. M. Kishan Rao5[5] the Supreme Court considered the correctness of order passed by this Court refusing to quash the summons issued against the appellants by the Special Judge for Economic Offences, Hyderabad. The facts of that case shows that respondent No.1 filed a complaint in the Court of Special Judge, Economic Offences at Hyderabad with the allegation that accused persons by making false, deceptive and misleading statements and by suppressing facts induced various persons to pay them money for purchase of shares of the Power Company; raised millions of dollars from Non-Resident Indians (NRIs); siphoned of the money into bogus companies exclusively owned by them and purchased shares of the Power Company in India in the names of bogus offshore companies owned and controlled by them. According to the complainant, all this came to his notice when some of the prospective NRI investors made correspondence with the Power Company demanding share certificates for which they had paid substantial amounts to the accused. The complainant alleged that the accused had committed fraud on the Power Company in whose name they collected money and invested the same in their own companies. The Special Judge for Economic Offences, Hyderabad issued summons to the accused persons requiring them to appear before the Court. On receipt of the summons, the appellants filed petition under Section 482 Cr.P.C. This Court refused to quash the proceedings. While approving the order of the High Court, the Supreme Court referred to the earlier judgments in State of Bihar v. Murad Ali Khan6[6] ,

5[5] (2002) 6 SCC 1746[6] (1988) 4 SCC 655


State of Haryana v. Bhajan Lal (supra), Mahavir Prasad Gupta v. State of National Capital Territory of Delhi7[7] and held:

“Reading of the complaint petition and the materials produced by the complainant with it in the light of provisions in the aforementioned sections, it cannot be said that the allegations made in the complaint taken in entirety do not make out, even prima facie, any of the offences alleged in the complaint petition. We refrain from discussing the merits of the case further since any observation in that regard may affect one party or the other. The allegations made are serious in nature and relate to the Power Company registered under the Act having its head office in this country. Whether the appellants were or were not citizens of India at the time of commission of the offences alleged and whether the offences alleged were or were not committed in this country, are questions to be considered on the basis of the evidence to be placed before the Court at the trial of the case. The questions raised are of involved nature, determination of which requires enquiry into facts. Such questions cannot be considered at the preliminary stage for the purpose of quashing the complaint and the proceeding initiated on its basis.”

46.In State of Karnataka v. M.Devendrappa8[8] (supra), the Supreme Court referred to some of the earlier judgments and laid down the following propositions:

“1) It is important to bear in mind the distinction between a case where there is no legal evidence or where there is evidence which is clearly inconsistent with the accusations made, and a case where there is legal evidence which, on appreciation, may or may not support the accusations. When exercising jurisdiction under Section 482 of the Code, the High Court would not ordinarily embark upon an enquiry whether the evidence in question is reliable or not or whether on a reasonable appreciation of it accusation would not be sustained. That is the function of the trial Judge. Judicial process should not be an instrument of oppression, or, needless harassment. Court should be circumspect and judicious in exercising discretion and should take all relevant facts and circumstances into consideration before issuing process, lest it would be an instrument in the hands of a private complainant to unleash vendetta to harass any person needlessly. At the same time the section is not an instrument handed over to an accused to short-circuit a prosecution and bring about its sudden death. The inherent power should not be exercised to stifle a legitimate prosecution.

2) The High Court being the highest court of a State should normally refrain from giving a prima facie decision in a case where the entire facts are incomplete and hazy, more so when the evidence has not been collected and produced before the Court and the issues involved, whether factual or legal, are of magnitude and cannot be seen in their true perspective without sufficient material. Of course, no hard-and-fast rule can be laid down in regard to cases in which the High Court will exercise its extraordinary jurisdiction of quashing the proceeding at any stage. Court must be careful to see that its decision in exercise of this power is based on sound principles. It would not be proper for the High Court to analyse the case of the complainant in the light of all probabilities in order to determine whether a conviction would be sustainable and on such premises arrive at a conclusion that the proceedings are to be quashed. It would be erroneous to assess the material before it and conclude that the complaint cannot be proceeded with.

7[7] (2000) 8 SCC 1158[8] (2002) 3 SCC 89


3) In a proceeding instituted on complaint, exercise of the inherent powers to quash the proceedings is called for only in a case where the complaint does not disclose any offence or is frivolous, vexatious or oppressive. If the allegations set out in the complaint do not constitute the offence of which cognizance has been taken by the Magistrate, it is open to the High Court to quash the same in exercise of the inherent powers under Section 482 of the Code. It is not, however, necessary that there should be meticulous analysis of the case before the trial to find out whether the case would end in conviction or acquittal. The complaint has to be read as a whole. If it appears that on consideration of the allegations in the light of the statement made on oath of the complainant that the ingredients of the offence or offences are disclosed and there is no material to show that the complaint is malafide, frivolous or vexatious, in that event there would be no justification for interference by the High Court.

4) When an information is lodged at the police station and an offence is registered, then the malafides of the informant would be of secondary importance. It is the material collected during the investigation and evidence led in court which decides the fate of the accused person. The allegation of malafides against the informant is of no consequence and cannot by itself be the basis for quashing the proceedings.”

47.In State of Maharashtra v. Ishwar Piraji Kalpatri9[9] the Supreme Court held that if a prima facie case is made out on the basis of allegations made in the complaint then the High Court cannot quash the proceedings on the ground of malafides or animus of the complainant or prosecution.

48.By applying the principles set out in the aforementioned judgments, we hold that there is no warrant for us to restrain the investigating agency from proceeding with the criminal case.

49.Sri B.Adinarayana Rao next contended that even assuming that the police are satisfied that the petitioners are indulging in money circulation scheme, they cannot high- handedly interfere with the business of the petitioners till the criminal court after a full fledged trial holds the petitioners guilty of the offence alleged against them. We have carefully considered this submission of the learned counsel. It is a well settled principle of criminal jurisprudence that no person shall be presumed to be guilty until his guilt is proved, but we are unable to accept the broad submissions of the learned counsel for the petitioners that till the conclusion of the criminal case the police have no power to interfere with the business activities of the petitioners. Section 7 of the Act empowers the police officer not below the rank of an officer in charge of a police station to exercise all or any of the powers enumerated therein. It is relevant to extract the said provision which reads as under:

“7.Power to enter, search and seize:- (1) It shall be lawful for any police officer not below the rank of an officer-in-charge of a police station,-

(a) to enter, if necessary by force, whether by day or night with such assistance as he considers necessary, any premises, which he has reason to suspect, are being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of this Act;

(b) to search the said premises and the persons whom he may find therein,

(c) to take into custody and produce before any Judicial Magistrate all such persons as are concerned or against whom a complaint has been made or credible information has been

9[9] (1996) 1 SCC 542


received or a reasonable suspicion exists of their having been concerned with the use of the said premises for purposes connected with, or with the promotion or conduct of, any such prize chit or money circulation scheme as aforesaid;

(d) to seize all things found in the said premises which are intended to be used. or reasonably suspected to have been used, in connection with any such prize chit or money circulation scheme as aforesaid.

(2) Any officer authorized by the State Government in this behalf may-

(a) at all reasonable times, enter into and search any premises which he has reason to suspect, are being used for the purposes connected with or conduct of, any prize chit or money circulation scheme in contravention of the provisions of this Act:

(b) examine any person having the control of, or employed in connection with any such prize chit or money circulation scheme:

(c) order the production of any documents, books or records in the possession or power of any person having the control of. or employed in connection with. Any such prize chit or money circulation scheme; and

(d) inspect and seize any register, books of accounts, documents or any other literature found in the said premises.

(3) All searches under this section shall be made in accordance with the provisions of Code of Criminal Procedure, 1973.”

50.In para-28 of the affidavit filed in support of the writ petition it is averred that after registering the crime respondents 5 and 6 have conducted simultaneous raids on the petitioners’ branches at 9 centers in Andhra Pradesh and sealed the various office premises of the petitioners. The action complained of in the writ petition falls well within the powers of the police vested in them by Section 7 of the Act. However, we would like to observe that if in the process of exercising such powers the police exceed their powers, it is always open to the petitioners to approach the competent court of law for redressal of their grievance.

51. For the reasons aforementioned, the writ petitions are liable to be dismissed.

52. In the result, the two writ petitions i.e., Writ Petition Nos.20470 and 20471 of 2006 are dismissed.

53.As regards Writ Petition Nos. 24799 of 2000, 7515 of 2003, 22914, 22915, 22916, 22913, 21128, 20616, 23737, 26149 of 2006, 3202, 2462, 9397 and 9398 of 2007, which were listed for hearing along with these petitions, it is appropriate to observe that the Court did not have the benefit of the arguments of the learned counsel appearing for the petitioners. It is, therefore, appropriate that all these petitions be listed for hearing on 24.8.2007.

********


SUPREME COURT OF INDIA

(C.K. Thakker AND D.K. JAIN. JJ.)

KURIACHAN CHACKO AND OTHERS ..Versus STATE OF KERALAAND OTHERS,

decided on July 10.2008

1. Leave granted.

2. The present appeals have been instituted by the appellants against the judgment and order dated 19th July, 2007 passed by the High Court of Kerala in Criminal Revision Petition No. 4126 of 2006 and companion matters. By the impugned order, the High Court dismissed revision petitions filed by the appellants herein as also by the State of Kerala.

3. To understand the issue raised in the present appeals, few relevant facts may be stated:

4. The appellants are partners of M/s LIS, Ernakulam, a partnership firm engaged in the business of sale of lotteries and magazines after collecting advance money. They floated a scheme known as "LIS Deepasthambham Scheme".The scheme was simple in its conception. A person has to pay Rs.625/- and purchase one 3 unit of lotteries from the promoters. The promoters will make use of Rs.350/- to purchase 35 lottery tickets of the Kerala State Government each of Rs.10/- for the unit holder for the next 35 weeks. If the unit holder wins any prize up to Rs.5,000/- in the 35 draws, the promoters shall collect the amount and pay the same to the unit holder. If the unit holder wins any prize above Rs.5,000/-, the ticket shall be handed over to the unit holder for collection of the amount. The balance of Rs.275/- (Rs.625 - Rs.350) will be used to make the unit holder a subscriber of a magazine by name `Thrikalam' for one year. The said magazine would reproduce relevant and important materials from other magazines. It would also furnish necessary information about the lottery tickets which have won prizes.

5. The unit holder will be returned (paid) not only Rs.625/- which he had initially invested, but twice his investment i.e. Rs.1,250/- (less Rs.100/- as service charges 4 for the promoters and legal deduction for tax, etc.) on an early date. As per the scheme, on sale of three tickets of Rs.10/- each, the Government would pay commission of 28% of which the promoters would share 25% with the unit holders. Likewise, the publisher of the magazine would give commission of 30% to the promoters and promoters would share 25% with the unit holders. All these amounts are available to the unit-holders. Under the scheme, in order of strict seniority, the senior most unit holder would be paid Rs.1,250/- as soon as the requisite amounts are available as commission with the promoters. The promoters, in addition to 28% commission for the lottery tickets, and 30% commission for the magazines, would also get commission for the prizes won by the tickets sold through them from the Government. Those amounts also would be entirely made available for payment to unit holders. If a unit holder is paid Rs.1,250/- before the expiry of 35 weeks, no lottery 5 tickets will be purchased on his behalf thereafter. It is because he had already been paid the requisite amount. On the same reasoning, if the amount of Rs.1,250/- is paid to the subscriber before the expiry of one year, `Thrikalam' magazine would also not be sent to the subscriber thereafter. The price of unpurchased lottery tickets and unused magazines thereafter will be used by the promoters towards the payment of amount of Rs.1,250/- to other unit holders. According to the promoters, the scheme was viable as well as workable. All persons would be able to double their investment at the earliest. No specific time, however, was given but it was assured that the amount would be doubled at the


earliest and it would be paid on the basis of seniority. Under the scheme, the amount of Rs.1,250/- (double the investment by the unit holder) will be paid as soon as 14 more members are enrolled. The advantage of technology was borrowed. Passwords could be chosen. There was a web site for promoters. The unit holder could use his password and the site would reveal all details about the tickets purchased on behalf of the unit holder by the promoters. The unit holders thus would be able know the details of the tickets purchased for them by the promoters and would also able to ascertain whether any prizes had been won by any ticket purchased on their behalf by the promoters.

6. The idea appeared to be very attractive. Several persons participated and invested money. The membership collection during a short period of time reached to almost Rs.500 crores. Amounts were being paid to the unit holders initially very promptly--on many occasions even before the expiry of 35 weeks.

More and more subscribers joined the queue.

There was aggressive publicity and marketing through visual (TV) and printed media (pamphlets and newspapers). The scheme was proceeding very happily. More and more amounts were coming into the kitty of the promoters from unit holders.

7. Suddenly, however, there was a jolt to the scheme. Police Authorities registered a crime against the promoters for an offence punishable under Section 420 of Indian Penal Code (IPC), under the Prize, Chits & Money Circulation Scheme (Banning) Act, 1978 (hereinafter referred to as `the Act') and also under the Reserve Bank of India Act, 1934.

Certain proceedings were initiated even earlier with which we are not concerned in the present proceedings. The learned Chief Judicial Magistrate, Ernakulam by an order, dated November 14, 2006, framed charge against the appellants herein for offences punishable under Section 420 read with Section 34, IPC and under Sections 4 and 5 read with Section 2(c) and 3 of the Act. He, however, discharged all the accused for the offences punishable under Sections 4 and 5 read with Sections 2(e) and (3) of the Act and also under Sections 45I(bb), 8 45S and 58B of the Reserve Bank of India Act, 1934.

8. Being aggrieved by the order passed by the trial Court, the accused as well as the State filed revision petitions in the High Court of Kerala. Whereas the accused were aggrieved by the order of the trial Court framing charge against them, the State was aggrieved by the order discharging the accused for certain offences under the Act and under the Reserve Bank of India Act, 1934.

9. A Single Judge of the High Court considered rival contentions of the parties and noted that the learned Additional Advocate General/Special Public Prosecutor fairly submitted that on the facts of the case Section 2(e) of the Act was not attracted. Similarly, there was no error on the part of the trial Court in not framing charge against the accused for offences punishable under the Reserve Bank of India Act, 1934. The High Court observed that though no express concession was made by the State, it was not seriously challenged by the prosecution that the trial Court had committed any error in discharging the accused.

10. The accused, on the other hand, strenuously contended that the trial Court was wholly wrong in framing charge against the accused for an offence punishable under Section 420 read with Section 34, IPC as also under Sections 4 and 5 read with Sections 2(c) and 3 of the Act and the said order was liable to be set aside ordering discharge of the accused in respect of all offences.


11. The High Court, after considering the rival contentions of the parties and referring to the relevant decisions on the point, held that the trial Court was right in discharging the accused for offences punishable under Sections 4 and 5 read with Sections 2(e) and 3 of the Act and also under the Reserve Bank of India Act, 1934. The High Court held that the trial Court was also right in framing the charge against the accused for offences 10 punishable under Sections 4 and 5 read with Sections 2(c) and 3 of the Act and also under Section 420 read with Section 34, IPC. The High Court, therefore, confirmed the order passed by the trial Court and dismissed revisions of both the parties. The said order is challenged by the appellants-accused in present appeals.

12. On September 7, 2007, notice was issued by this Court. On February 22, 2008, the matters were ordered to be posted for final hearing on a non-miscellaneous day. That is how they are before us.

13. We have heard learned counsel for the parties.

14. The learned counsel for the appellants submitted that the trial Court and the High Court were right in discharging the accused for certain offences punishable under the Act and also under the Reserve Bank of India Act, 1934.

The State has not preferred appeal against the said order and the decision has become final.

He, however, contended that both the Courts were wrong in not discharging the accused for offences punishable under Sections 4 and 5 read with Sections 2(c) and 3 of the Act as also for an offence punishable under Section 420 read with Section 34, IPC.

15. It was submitted that the scheme formulated by the appellants could not fall within the mischief of `Money Circulation Scheme' as defined in clause (c) of Section 2 of the Act. If it is so, ban envisaged by Section 3 would not apply. Consequently, penal provisions of Sections 4 and 5 cannot be invoked. The Courts below were wrong in observing that prima facie, the provisions of the Act got attracted and appellants could not be discharged. Moreover, for application of Section 415, IPC, there must be fraudulent and dishonest intention which was not present in the instant case. Penalty provision of Section 420, IPC had, therefore, no application. Even there, the Courts were wrong in framing charge against the accused.

16. The learned counsel for the respondents, on the other hand, supported the order passed by the trial Court and confirmed by the High Court. It was submitted that both the Courts considered the relevant provisions of law, requisite ingredients under the Act and formed a prima facie opinion that the scheme in question was covered by definition clause 2(c) (Money Circulation Scheme) and the case was required to be gone into by a competent Court.

Likewise, the Courts below observed that there was `cheating' as defined in Section 415, IPC and the accused could not be discharged. No fault can be found against the approach adopted by both the Courts and the appeals deserve to be dismissed.

17. Before we deal with the merits of the matter and reasoning of the Courts below, it would be appropriate if we refer to the relevant provisions of the Act.

18. The Preamble of 1978 Act declares that it has been enacted "to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith and incidental thereto".


19. Section 2 is legislative dictionary and defines certain terms. The phrase `Money Circulation Scheme' is defined in clause (c) which reads as under;

(c) "money circulation scheme" means any scheme, by whatever name called, for the making of quick or easy money, or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

20. The definition is not simple. Judicial notice thereof had been taken in the leading decision of this Court in State of West Bengal v. Swapan Kumar Guha, (1982) 1 SCC 561.

Chandrachud, C.J. after taking note of legislative drafting, reshaped and rearranged Section 2(c) thus;

'money circulation scheme' means any scheme, by whatever name called, (i) for the making of quick or easy money, or (ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment, of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

21. Section 3 bans money circulation schemes or enrolment as member to any such scheme or participation in such scheme.

Sections 4 and 5 are penal provisions and prescribe punishment. Section 6 deals with offences committed by Companies. Section 7 authorizes Police Officer not below the rank of officer in charge of a police station to exercise power to enter and search premises and to seize things used for such scheme. Section 8 provides for forfeiture of newspaper and publication containing money circulation scheme. Section 9 declares that no Court inferior to the Court of Chief Metropolitan Magistrate or Chief Judicial Magistrate shall try any offence punishable under the Act. All offences punishable under the Act have been made cognizable under Section 10. Section 11 grants exemption from the operation of the Act to certain money circulation schemes.

22. From the perusal of the above provisions, it is clear that the Act prohibits `money circulation scheme'. The main question, therefore, is whether the scheme in question is a `money circulation scheme' covered by the Act? 23. In Swapan Kumar Guha, this Court had an occasion to consider the provisions of the Act. Interpreting the connotation `Money Circulation Scheme' and speaking for the majority, Chandrachud, C.J. observed: "Commas or no commas, and howsoever thoughtfully one may place them if they are to be there, I find it impossible to take Clause (c) to mean that any and every activity "for the making of quick or easy money" is comprehended within its scope. For the matter of that, I cannot believe any law to ban every kind of activity for making quick or easy money, without more, on pain of penal consequences. It is far too vague and arbitrary to prescribe that "whosoever makes quick or easy money shall be liable to be punished with fine or imprisonment". For then, in the absence of any demarcation of legitimate money making activities from those which fall within the ban, the question whether the penal provision is attracted in a given case will depend upon the will and temper, sweet or sour, of the magistracy. Besides, speaking of law and morals, it does not seem morally just or proper to say that no person shall make quick or easy money, especially quick. A person who makes quick money may do so legitimately by the use of his wits and wisdom and no moral turpitude may attach to it. One need


not travel after to find speaking examples of this. Indeed, there are honourable men (and now women) in all professions recognised traditionally as noble, who make quite quick money by the use of their talents, acumen and experience acquired over the years by dint of hard work and industry. A lawyer who charges a thousand rupees for a Special Leave Petition lasting five minutes (that is as far as a Judge's imagination can go), a doctor who charges a couple of thousands for an operation of tonsillitis lasting ten minutes, an engineer, an architect, a chartered accountant and other professionals who charge likewise, cannot by any stretch of imagination be brought into the drag- net of Clause (c). Similarly, there are many other vocations and business activities in which, of late, people have been notoriously making quick money as, for example, the builders and real estate brokers. I cannot accept that the provisions of Clause (c) are directed against any of these categories of persons. I do not suggest that law is powerless to reach easy or quick money and if it wills to reach it, it can find a way to do it. But the point of the matter is that it will verge upon the ludicrous to say that the weapon devised by law to ban the making of quick or easy money is the provision contained in Section 2 (c) of the Prize Chits and Money Circulation Schemes (Banning) Act".

24. Explaining the ambit and scope of the expression `Money Circulation Scheme', the Court proceeded to state;

"In order to give meaning and content to the definition of the expression 'money circulation scheme' which is contained in Section 2(c) of the Act, one has, therefore, to look perforce to the adjectival Clause which qualifies the words "for the making of quick or easy money". What is within the mischief of the Act is not "any scheme, by whatever name called, for the making of quick or easy money" simpliciter, but a scheme for the making of quick or easy money, "on any event or contingency relative or applicable to the enrolment of members into the scheme", (whether or not such money or thing is derived from the entrance money of the members of such scheme or their periodical subscriptions). Two conditions must, therefore, be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2(c) of the Act. In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. The legislative draftsman could have thoughtfully foreseen and avoided all reasonable controversy over the meaning of the expression 'money circulation scheme' by shaping its definition in this form;

'money circulation scheme' means any scheme, by whatever name called, (i) for the making of quick or easy money, or (ii) for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment, of members into the scheme, whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions;

I have reshaped the definition, in order to bring out its meaning clearly, without adding or deleting a single word or comma from the original text of Section 2(c). The substance of the matter is really not in doubt : only the form of the definition is likely to create some doubt as to the meaning of the expression which is defined and, therefore, I have made a formal modification in the definition without doing violence to its language and indeed, without even so much as altering a comma".

25. The Court observed that besides the prize chits, the Act aims at banning `Money Circulation Scheme'. It is, therefore, necessary that the activity charged as falling within the mischief of the


Act, must be shown to be a part of the scheme for making quick or easy money depending upon the happening or non-happening of an event or contingency relative or applicable to the enrolment of members into the scheme.

26. Referring to dictionary meanings, this Court proceeded to state;

"Therefore, a transaction under which, one party deposits with the other or lends to that other a sum of money on promise of being paid interest at a rate higher than the agreed rate of interest cannot, without more, be a 'money circulation scheme' within the meaning of Section 2(c) of the Act, howsoever high the promised rate of interest may be in comparison with the agreed rate. What that section requires is that such reciprocal promises, express or implied, must depend for their performance on the happening of an event or contingency relative or applicable to the enrolment of members into the scheme. In other words, there has to be a community of interest in the happening of such event or contingency".(emphasis supplied)

27. On the facts of the case, the Court held that it was not a `Money Circulation Scheme' and proceedings initiated against the accused were liable to be dropped.

28. Strongly relying on Swapan Kumar Guha and the observations of this Court, the learned counsel for the appellants contended that the point is directly covered by the said decision and the Courts below were not right in distinguishing it and in not discharging the accused.

29. We are unable to uphold the contention. We have closely gone through Swapan Kumar Guha and in our opinion, the case is clearly distinguishable. This Court, in that case, reproduced First Information Report (FIR) in toto. The Court then considered whether FIR prima facie disclosed an offence under the Act.

The Court analyzed FIR `carefully, and even liberally' and came to the conclusion that the FIR against `Sanchaita Investments' and its partners (`accused' in that case) made in respect of following allegations;

(1)The firm had been offering fabulous interest @ 48% per annum to its members, which rate of interest was later reduced to 36% per annum;

(2)Such high rate of interest was being paid even though the loan certificate receipts show that interest was liable to be paid at the rate of 12% per annum only; and (3)The fact that interest was paid in excess of 12% shows clearly that a 'Money Circulation Scheme' was being promoted and conducted for the making of quick or easy money.

30. The Court then proceeded to apply the provisions of the Act to the allegations of prosecution against the accused. According to the Court, the respondents did not allege, directly or indirectly, that the firm was promoting or conducting a scheme for the making of quick or easy money, dependent on any event or contingency relative or applicable to the enrolment of members into the scheme. Secondly, the FIR did not contain any allegation whatsoever that the persons who advanced or deposited their monies with the firm were participants of a scheme for the making of quick or easy money, dependent upon any such event or contingency. The Court noted the contention of the learned counsel for the prosecution that the accused were promoting or conducting a scheme for making quick or easy money. According to the Court, however, such argument could not be upheld since it was fallacious. It was observed in the paragraph we have reproduced hereinabove that it would be arbitrary to hold that whoever makes `quick or easy


money' should be punished. The Court noted some illustrative cases in which a person may be able to make `quick or easy money'; for instance, a lawyer who charges a thousand rupees (in early eighties, not now) for a Special Leave Petition lasting five minutes, a doctor who charges a couple of thousands for an operation of tonsillitis lasting ten minutes, an engineer, an architect, a chartered accountant and other professionals who charge likewise. There are many other vocations and business activities in which people notoriously make quick money, e.g. builders and real estate brokers. From that, however, one cannot jump to the conclusion that they are all liable to be punished under Sections 4 and 5 of the Act.

31. The Court also took into account, apart from FIR, a detailed affidavit in reply filed in the High Court. Even in the said affidavit, there was no clear basis in respect of allegations, nor material was disclosed to show that prima facie, the firm was promoting or conducting a scheme for making quick or easy money which was dependent on any event or contingency relative or applicable to the enrolment of members into the scheme. The `song' of the State was that the scheme conducted by the accused would generate black money and would paralyze economy of the country. The Court was conscious and alive of seriousness of the problem and observed that unquestionably a private party could not be allowed to issue `bearer bonds' by a back door.

At the same time, however, such activities should be curbed by the Government by taking appropriate action in accordance with law. But if the activity does not fall within the definition of `money circulation scheme' within the meaning of Section 2(c) of the Act, no prosecution can be launched against them. Thus, the second ingredient of Section 2(c) of the Act, according to the Court, was totally absent.

32. In the instant case, both the essentials of Section 2(c) are present. The scheme provides for (i) making of quick or easy money, and (ii) it is dependant upon an event or contingency relative or applicable to the enrolment of members into the scheme. As observed by us, a member would be entitled to double amount only after his enrolment, additional 14 members are enrolled in the scheme. The second ingredient, namely, such payment of money is dependant on the "event or contingency relative or applicable to the 26 enrolment of members into the scheme" is thus very much present. Swapan Kumar Guha, therefore, in our considered opinion, does not apply and carry the case of the accused further.

33. It was next contended that there is no obligation on the part of the unit holder to enlist/enroll more members into the scheme and, therefore, the scheme does not attract Section 2(c). The contention has no force. Section 2(c) no where provides that a member of the scheme must himself enroll other members and only in that eventuality, the provision of the Act would apply. The section does not provide for positive or dominant role to be played by a member of the scheme. In our opinion, the requirement of law is "an event or contingency relative or applicable to the enrolment of members into the scheme" and nothing more. The plain language of the section does not insist that such enrolment of members must be by the 27 members already enrolled. It is impossible to read into the statutory provision such requirement which is not stipulated by Parliament. Upholding of the argument of the learned counsel would result in re-writing of the section, which is certainly not permissible in our constitutional system. The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrolment of the members into the scheme. It is immaterial by whom such members are enrolled. It may be by members, by promoters or their agents or by gullible sections of the society suo motu (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or


applicable to the enrolment of more persons into the scheme, nothing more, though nothing less. In the present case, the second ingredient is very much present.

34. It was then contended by the learned counsel for the appellants that in the present case, all the promises have been fulfilled by the promoters and contract was complete inasmuch as for payment of Rs.625/- by the unit holder, he was given 35 lottery tickets each of Rs.10/- and thus an amount of Rs.350/- gets appropriated. Likewise, for the balance amount of Rs.275/- (Rs.625/- - Rs.350/-), he has been made subscriber of a magazine `Thrikalam' for one year. Nothing, therefore, remains to be done thereafter by the promoters except the benefit which is likely to accrue in future.Such a scheme cannot be termed as a scheme for the making quick or easy money on any event or contingency relative or applicable to the enrolment of the members of the scheme.

35. We are unable to agree with the learned counsel. The Courts below rightly held that prima facie case had been made out against the accused. Both the ingredients necessary for application of Section 2(c) of the Act are present in the case on hand. The trial Court, for coming to that conclusion, referred to certain documents. The advertisement clearly declared that a member would get double the amount when after his enrolment, two members were enrolled under him and thereafter, 4 other persons were enrolled and after the rolled 4 persons, 8 persons were enrolled under them. Thus, only after 14 persons under the first enrolled person become members under the scheme, the first person would get Rs.1,250/- i.e., double the amount of Rs.625/- (1+2+4+8). The trial Court also noted that Kuriachan Chacko (Accused No.1) who proposed the project for implementation, described how the project would work from which also it is clear that the double amount will be given to a person who purchases a unit only after 14 persons are enrolled subsequent to him.

36. In the affidavit in reply filed in this Court, respondent State has relied upon a letter written to the Reserve Bank of India by 30 the accused on October 9, 2004 wherein the scheme has been explained. The relevant part reads thus:

1. We are collecting Rs.625 from a person to be considered as a member of the Deepasthambham project.

2. The Rs.625 is intended as follows Rs.10 worth Kerala Lottery Ticket per week for 35 weeks : Rs.350/- Rs.10 worth Thrikalam Tri-Monthly Collage Magazine one year subscription : Rs. 275/- 3. As such, we are collecting money in advance for the Kerala Lottery ticket and subscription of the Thrikalam magazine and not as DEPOSIT at all.

4. We are giving membership in a particular style--adopting the principle of Multi Level Marketing method.

1st Stage First One member joins

2nd Stage Below him Two members join

3rd Stage Below them Four members join

4th Stage Below them Eight members join

Thus 14 members join below the first one.


5. From one membership we take 27% commission to be distributed in the three stages in the above manner.

On collecting such commissions, we get Rs.1150/- from the members below him. Otherwise, when the 14th member joins, the commission reserved for the first member is paid.

6. The Rs.1150 paid to the first member is claimed by us as payment of double the amount he had entrusted and we explain it as "Refund and Commission" less our service charge.

i.e. Refund Rs.625

Commission Rs.625

-------

Rs.1250

Less Service Charge Rs. 100

-------

Rs.1150

7. Once the Rs.1150 is paid to the member, the membership is ceased, and no more ticket or Thrikalam will be given to him, even if the promised 35 tickets and one year Thrikalam are not yet over.

8. To justify this stand of ours, though the Rs.1150 paid is actually the commission, we term it as Refund and Commission so that the member shall not make any claim for the remaining tickets or Thrikalam.

9. If the member wish to get lottery ticket and Thrikalam again he has to join again by taking new membership.

10. The lottery commission available to us on Kerala Government Lottery is 28% alone. As the commission we are paying to the member is 27%, the margin for us is only 1%.But then there will be a lot of other commissions on prizes bagged by the members which will add to our gain.At the beginning, we offered the Superlotto and Thunderball online tickets also. But we stopped that since 2 months and now we are issuing only Kerala Govt. tickets. By October end, we will be purchasing a minimum of 1 lakh tickets every week i.e. 10 lakh rupees worth tickets in a week from Kerala Government.

37. The High Court also upheld the argument of the prosecution that the scheme was a `mathematical impossibility'. The promoters of the scheme very well knew that it is certain that the scheme was impracticable and unworkable making tall promises which the makers of the promises knew fully well that it could not work successfully. It could work for some time in that `Paul can be robbed to pay Peter' but ultimately when there is a large mass of Peters, they will be left in the lurch without any remedy as they would by then have been deceived and deprived of their money.

38. The Court, taking into account the scheme as a whole, recorded a finding thus:


"The question therefore is very important as to whether the Scheme is a possibility or is only a tall false claim made to fraudulently induce persons to part with their money. In this context, it has to be seen that the profitable working of the Scheme is impossible from the very nature of the Scheme offered. Simple arithmetics reveal that utilising the amount of Rs. 625/-, only an amount of Rs. 180.50 will be available as commission of which Rs. 24.25 is claimed by the promoter and Rs. 156.25 is offered for payment to the unit holders.The details of the same are given below:

If the amount of Rs. 625/- were to be returned, there will be a deficit of Rs. 468.75. If double the amount i.e., Rs. 1,250/- were to be returned, there will be a deficit of Rs. 1,093.75. Therefore for every person for whom double payment is made, the promoter will have to make Rs. 1,093.75 and this obviously is paid to him from the money which subsequent subscribers pay as the price of the unit. Of course, I have not taken note of the uncertain commission which would be receivable by the promoter for prizes won by the unit holders through them. I have also not taken specific note of the savings in respect of unpurchased tickets and non-supplied magazines after the subscriber receives the double amount and closes the transaction before elapse of the period of 35 months. It must be evident for any discerning mind that this Scheme cannot work unless more and more subscribers join and the amount paid by them as unit price is made use of to pay the previous subscribers. The system is an inherently fragile system which is unworkable. Foolish, gullible and stupid persons alone may fall for the Scheme without carefully analysing the stipulations of the Scheme. It would be totally erroneous to assume that the offence of cheating would not lie if the persons deceived are gullible, unintelligent and stupid persons. The system and the law has a duty to protect such victims of crime also. According to me, there is no reason to assume that the promoters had no contumacious intention and they embarked on the venture without any culpable motive on the honest assumption that the tickets sold through them will win prizes and sufficient commission will be available to pay double the amount to all the unit holders".

39. The Court also stated;

"I take note of the fact that inherently there is merit in the allegation of the prosecution that the Scheme is so grossly unworkable that the persons who made representations to that effect and induced persons to part with money did entertain the contumacious intention. They knew fully well that unworkable false representations were being made. The obvious attempt, it can be presumed at this stage, was to induce persons by such false unworkable representations to part with money. Initially some subscribers can be kept satisfied to induce them and others similarly placed to join the long queue. But inevitably and


inescapably later subscribers are bound to suffer unjust loss when they swallow the false promises and make payments".

40. The ratio laid down by this Court in State Of Madhya Pradesh v. Mir Basit Ali Khan & Ors., (1971) 2 SCC 96 has no application. In that case, the Court was considering the provisions of Section 420, IPC read with Section 120B. Obviously, it was not a case under 1978 Act.

41. On the facts and in the circumstances of the case, in our opinion, the Courts below were right in not interfering with the prosecution at the stage of framing of charge.

We see no reason to interfere with the order.

42. So far as the offence punishable under Section 420 read with Section 34, IPC is concerned, it is true that for application of penal provision of Section 420, IPC, there must be `cheating' as defined in Section 415, IPC.

43. The said Section reads thus:

415. Cheating Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to "cheat".

44. Mere reading of the Section makes it clear that it requires the following ingredients to be satisfied;

1. Deception of any person;

2.(a) Fraudulently or dishonestly inducing that person;

(i) to deliver any property to any person, or

(ii) to consent that any person shall retain any property, or

(b) intentionally inducing that person to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property.

[vide Ram Jas, (1970) 2 SCC 740; Hridaya Ranjan Prasad Verma v. State of Bihar, (2000) 4 SCC 168; S.W.Palamitkar v. State of Bihar, (2002) 1 SCC 241].

45. The trial Court as well as the High Court considered the facts of the case and held that there is element of cheating inasmuch as a representation was made by the accused that every unit holder will get double the amount invested by him; the representation was false, the maker of the representation was aware that the representation was not true and by such representation, he deceived the victim to believe the representation to be true and actuated him to act on such representation. The promoters induced common public to part with money on the lure of doubling the amount.


http://www.indiankanoon.org/doc/532300/

http://www.indiankanoon.org/doc/532300/

Prima facie, the Courts were satisfied that but for such representation and the benefit sought to be given under the scheme, the victims would not have acted on such representation. It was, therefore, a case of application of Section 415, IPC. Prima facie case had been made out in absence of better explanation by the accused.If it is so, it could be said to be a case for application of Section 420 read with Section 34, IPC, of course, at this stage.

46. In our opinion, the Courts below have not committed any error in coming to such conclusion at the stage of framing of charge and no interference by this Court is, therefore, called for.

47. For the foregoing reasons, in our opinion, both the Courts below were right in framing the charge against the appellants and no illegality has been committed by them in coming to such conclusion. It is no doubt, true, that the above orders do not mean that the accused have committed such offences. It only means that a prima facie case has been made out to frame charge and at that stage, no interference is called for. We are, therefore, not inclined to interfere with the said order.

The appeals deserve to be dismissed and are hereby dismissed.

48. Before parting with the matter, we may clarify that we may not be understood to have expressed any opinion on the merits on the matter one way or the other. All the observations made by the trial Court, by the High Court as well as by us in this judgment, must be construed as limited to the framing of charge and nothing more than that. As and when the main matter will come up before the Court for hearing, the Court will decide it on merits without being inhibited or influenced by the above observations.

49. Ordered accordingly.


IN THE HIGH COURT OF JUDICATURE ANDHRA PRADESH AT HYDERABAD

WRIT PETITION No. 22914, 22916, 23737 AND 25749 OF 2006

THE HON'BLE SRI JUSTICE GODA RAGHURAM AND

THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN

COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan)

W.P. No.22914 of 2006:

This Writ Petition is filed by M/s. Gemini Techno Marketing Private Limited seeking a declaration from this Court that the provisions of the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 (hereinafter referred to as the “Act”) has no application to the business carried on by the petitioner and its distributors. The petitioner seeks a consequential direction to the respondents not to apply or enforce the provisions of the Act to the petitioners’ business, and to restrain them from interfering with their lawful business.

W.P. No.22916 of 2006:

The relief sought for in this Writ Petition (Win Win Vartaka Pvt Ltd) is to declare that the provisions of the “Act” have no application to the business carried on by the petitioner, and the action of the respondents, in interfering with the business carried on by the petitioner and its distributors, is arbitrary and illegal. The petitioner seeks a consequential direction to the respondents not to apply or enforce the provisions of the Act to their business, and to restrain the respondents from interfering with their lawful business.

W.P. No.23737 of 2006:

M/s. Dewsoft Overseas Private Limited, and their franchisees, have filed this Writ Petition seeking a declaration from this Court that the action of the respondent, in applying the provisions of the Act to the petitioners’ business and interfering with their business activities, is illegal and arbitrary. They seek a consequential direction to restrain the respondents from interfering with their lawful business and that of their associates/franchisees.

W.P. No.25749 of 2006:

This petition is filed by (Mr R Uma Maheswara Rao) a retired scientist of the National Geo-physics Research Institute in public interest to declare the action of respondents 1 to 12, in permitting M/s Amway India Enterprises to run its business in India, as arbitrary and illegal and in violation of the provisions of the Act.

It would suffice for the disposal of this batch of writ petitions if the facts, in W.P. No.22914 of 2006, are noted. The petitioner is a private limited company registered under the Companies Act, 1956. It claims to be engaged in the marketing of its products through a network of distributors; to be providing accident insurance of Rs.1.00 lakh to its distributors in collaboration with Bajaj Allianz Life Insurance Company limited; and to have provided employment to thousands of unemployed individuals, more particularly in rural areas.The petitioner would submit that it is an income tax assessee; it is registered under the Sales Tax Acts; it provides accident insurance of Rs.1.00 lakh to each distributor in collaboration with Bajaj Allianz; no easy and quick money circulation is involved in its marketing; there is no element of deception in its marketing business; it is a member of the Indian Direct Selling Association; the members of the association are strictly product sales companies which do not indulge in quick or easy money making/money circulation schemes; the distributors have a separate and independent legal identity from that of the petitioner; the relationship between the petitioner and its distributors is strictly at arm’s length; the distributors are solely responsible for the overall management of their business including sales, income, profit or loss, accounting, taxation etc; the petitioner’s business is not a money circulation scheme under the Act; the petitioner’s sales and marketing plans do not envisage promoting or conducting a


scheme for the making of quick or easy money; it is identical for every distributor; each distributor’s success is dependent on the time, effort and commitment put in by him, and the sales and marketing of the products of the petitioner which results in his earning commission on the personal purchase of products for sale to the end consumers amongst the public; the commission earned is on the group turnover of product purchases, for sale to the consumers amongst the public, made by the distributor and his/her group distributors; there is no compulsion for a person to continue as a distributor; within the 90 days trial period he can return the business kit and obtain full refund of the money paid by him; free product training sessions are held for training of distributors; the distributors go to the consumers amongst the general public, receive orders and place purchase orders with the petitioner at the distributor price, and sell products to the end consumer at a price not exceeding the MRP printed on the product; the petitioner’s sale and marketing plan does not envisage making quick or easy money; distributors do not earn money by enrolling new distributors; the focus is only on the sale of products; none of the conditions precedent for attracting Sections 2(c), 3 and 4 of the Act are attracted; and the incentives given by the petitioner towards distribution is for the efforts put in by them.

The petitioner would assert that, without recognizing the factual and legal position, the respondents were interfering with their lawful business by taking action against them under the Act; respondents 5 and 6 had conducted simultaneous raids on their branches; had caused wide publicity regarding the arrest of some of their distributors; had registered cases against the petitioner and its distributors; had sealed various office premises of the petitioner; and had thereby created panic in the minds of the petitioner’s distributors and consumers with malicious intent.

The 2nd respondent would submit that implementation of the Act falls within the purview of the State Government; in case there are fraudulent schemes being carried on in the name of Direct/Network/Multilevel Marketing companies, with the object of making quick and easy money, such schemes should be investigated by the State Government; the Reserve Bank of India issued a clarification in its letter dated 5.2.2003; and it is for the State Government to decide whether or not any given scheme attracts the provisions of the Act.

The 7th respondent (Corporate Frauds Watch) would submit that the petitioner’s scheme is a binary scheme which means one person has to sponsor or enroll two persons each, and again these two persons are required to enroll or sponsor two persons each to join into the scheme; the new member must be sponsored or enrolled by the already enrolled members in the scheme; the new member ie., those sponsored are called the downline workers and the sponsor is called the upline member; the entrance fee is Rs.2699/-; when a new member joins the scheme, all upline members in the same network or chain get commission irrespective of their efforts; as soon as new members are sponsored either directly, or by the efforts of his downliners, all the upliners in the group get points and, on the basis of points, commission is paid and distributed; as money circulation is based on the contingency relative or applicable to enrolment of members, and on the efforts of the down line members, it is nothing but easy money; the petitioner is promoting an illegal money circulation scheme under the guise of sale of products; the amount of commission paid by the company is directly dependant on the sponsoring of new members into the scheme, not only on his personal efforts but also on the event of contingency relative or applicable to the enrolment of new members by their downline members without effecting any sales; and the scheme squarely falls within the definition of Section 2(c) of the Act. Reference is made to the judgment of the Supreme Court in Kuriachan Chacko v. State of Kerala in this regard.

The 7th respondent (Corporate Frauds Watch) gives a graphical representation, of the enrolment scheme of the petitioner, in the form of a chart. It is contended on behalf of the respondents that the petitioners’ scheme requires enrolled members to sponsor new members called independent business associates; the members so enrolled are required to pay Rs.10,000/- as entrance fee for which the company claims that it would allot web space which is completely intangible in nature; subsequently the new members are required to sponsor more members for which attractive incentives are provided to them by the company; the sponsoring scheme is a binary system where each member sponsors two members; additional incentives are given for sponsoring of new members in addition to the normal merchandise; the sponsored member is treated as a down liner


to the sponsorer and his upline members; this scheme of enrolment of new members, attracting them in the form of commission which is relative to the enrolment of new members into the scheme, falls within the definition of “Money Circulation Scheme” under the Act; these Money Circulation Schemes are pyramid schemes wherein the levels grow with induction of new members at every level; the scheme works to benefit those in the first level, and the vast majority of participants who join at lateral levels lose their original investments; while these companies could challenge their prosecution and contend in the criminal cases filed against them that the Act does not apply to their activities, they cannot pre-empt criminal action being initiated on the basis of a declaratory relief as sought for in the present writ petition.

The Prize Chits and Money Circulation Scheme (Banning) Act, 1978, (hereinafter called the Act), is an Act to ban the promotion or conduct of prize chits and money circulation schemes, and for matters connected therewith or incidental thereto. Section 2(c) of the said Act defines money circulation scheme to mean any scheme, by whatever name called, for making of quick or easy money; or for the receipt of any money or valuable thing as the consideration for a promise to pay money, on any event or contingency relative or applicable to the enrolment of members into the scheme; whether or not such money or thing is derived from the entrance money of the members of such scheme or periodical subscriptions. Section 2(e) of the Act defines prize chit as under:

“prize chit” includes transaction or arrangement by whatever name called under which a person collects whether as a promoter, foreman, agent or in any other capacity, moneys in one lumpsum or in instalments by way of contributions or subscriptions or by sale of units, certificates or other instruments or in any other manner or as membership fees or admission fees or service charges to or in respect of any savings, mutual benefit, thrift or any other scheme or arrangement by whatever name called, and utilises the moneys so collected or any part thereof or the income accruing from investment or other use of such monies for all or any of the following purposes, namely:-

i. giving or awarding periodically or otherwise to a specified number of subscribers as determined by lot, draw or in any other manner, prizes or gifts in cash or kind, whether or not the recipient of the prize or gift is under liability to make any further payment in respect of such scheme or arrangement;

ii. refunding to the subscribers or such of them as have not won any prize or gift, the whole or part of the subscriptions, contributions or other monies collected, with or without any bonus, premium, interest or other advantage by whatever name called, on the termination of the scheme or arrangement, or on or after the expiry of the period stipulated therein, but does not include a conventional chit.

Under Section 3, no person shall promote or conduct any prize chit or money circulation scheme, or enrol as a member to any such chit or scheme, or participate in it otherwise, or receive or remit any money in pursuance of such chit or scheme. Under Section 4, whoever contravenes the provisions of Section 3 shall be punishable with imprisonment for a term which may extend to three years, or with fine which may extend to five thousand rupees or with both. Section 7 (1) of the Act confers powers on a police officer to enter any premises which he has reason to suspect is being used for purposes connected with the promotion or conduct of any prize chit or money circulation scheme in contravention of the provisions of the Act; to search the said premises and the persons he may find therein; to take into custody and produce before any Judicial Magistrate all such persons against whom a complaint has been received or a reasonable suspicion exists of their being concerned with the use of the said premises for purposes connected with, or with the promotion or conduct of any such prize chit or money circulation scheme; to seize all things found in the said premises which are intended to be used, or reasonably suspected to have been used, in connection with any such prize chit or money circulation scheme.

What is within the mischief of the Act is not “any scheme, by whatever name called, for the making of quick or easy money” simpliciter, but a scheme for the making of quick or easy money, “on any event or contingency relative or applicable to the enrolment of members into the scheme”, (whether or not such money or thing is derived from the entrance money of the members of such


scheme or their periodical subscriptions). Two conditions must be satisfied before a person can be held guilty of an offence under Section 4 read with Sections 3 and 2(c) of the Act. In the first place, it must be proved that he is promoting or conducting a scheme for the making of quick or easy money and secondly, the chance or opportunity of making quick or easy money must be shown to depend upon an event or contingency relative or applicable to the enrolment of members into that scheme. It is necessary that the activity, charged as falling within the mischief of the Act, must be shown to be a part of a scheme for making quick or easy money, dependent upon the happening or non-happening of any event or contingency relative or applicable to the enrolment of members into that scheme. The systematic programme of action has to be a consensual arrangement between two or more persons under which the subscriber agrees to advance or lend money on the promise of being paid more money on the happening of any event or contingency relative or applicable to the enrolment of members into the programme. Reciprocally, the person who promotes or conducts the programme promises, on receipt of an advance or loan, to pay more money on the happening of such event or contingency. (State of W.B. v. Swapan Kumar Guha)

The event or contingency on the happening of which the amount would become payable must be relative or applicable to the enrolment of members into the Scheme. It is immaterial by whom such members are enrolled. It may be by members, by promoters or their agents or by gullible sections of the society suo motu (by themselves). The sole consideration is that payment of money must be dependent on an event or contingency relative or applicable to the enrolment of more persons into the Scheme, nothing more, though nothing less. (Kuriachan Chacko).The petitioner sells its products through individuals called distributors in terms of a distributorship agreement. Under the terms of the agreement of distributorship, the company has reserved to itself the right to confirm the independent business associates only after receipt of full payment; all distributors/IBAs are advised to sponsor new distributor/IBA in their downline only after their personal distributor/IBA is confirmed; the terms and conditions also stipulate that the company would distribute 90% of its total revenues; the application form, for registration as a distributor, shows that Rs.2,688/- is required to be paid as agency fee/distributor fee/membership fee for which free gifts of a dinner set, an idly cooker set, and a kadai 3 pieces set, are given to the applicant; in addition Rs.10,000/- is required to be paid for which the distributor is insured under the Bajaj Allianz unit gain policy, and he receives as free gifts a dinner set, an idly cooker set and a kadai 3 pieces set; the application for registration also requires the applicant to disclose who his sponsor IBA/distributor is; his position, and whether it is to the left or to the right. It is this scheme which the respondents contend attracts the provisions of the Act.

It is evident from the facts aforementioned that a person can become a “so called distributor” of the petitioner company, only if he is sponsored by another independent business associate/distributor. The incentives to which a newly enrolled distributor is entitled to is based on the number of distributors/independent business associates he sponsors. The petitioner company claims to distribute 90% of its total revenues among its distributors/IBAs. A substantial part of the income which the distributors/IBAs get, therefore, depends on an event or contingency relative or applicable to the enrollment of new distributors/IBAs into the scheme. The scheme is formulated as an inducement for enrollment of new distributors/IBAs to earn higher incentives. The lure of more incentives is the inducement for existing distributors/IBAs to aggressively pursue enrollment of new members, as distributors/IBAs, with a view to make quick/easy money. The petitioner company promises payment of incentives to the sponsorer distributors/IBAs, on the business turned out by the newly sponsored and enrolled distributors/IBAs, which constitutes an event or contingency relative to the enrollment of such members. The petitioner not only earns quick/easy money from its distributors, but it also provides attractive inducements to its distributors to earn quick/easy money. The ingredients of Section 2(c) of the Act, i.e., (a) making of quick or easy money; and (b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme, are satisfied in the cases on hand. As the provisions of the Act are attracted, Section 7 of the Act empowers the respondents to enter into the petitioner’s business premises, and take into custody the persons involved in the scheme. The action of the respondents in initiating criminal proceedings against the petitioners,


who have promoted such schemes, does not, therefore, necessitate interference in proceedings under Article 226 of the Constitution of India.

In more or less similar circumstances the Division Bench of this Court, in Amway India Enterprises v. Union of India, observed:-

“……But on a careful analysis of the true nature of the scheme as explained above, it is quite apparent that one of the components of the income earned by a sponsor member is the commission which is calculated not only on the personal PV of the sponsor member, but also from the PV earned by the remaining 102 members falling within his group. There is, therefore, no gainsaying that a substantial part of the income which the first sponsor member of the group gets depends on the event or contingency relative or applicable to the enrollment of members into the scheme…….. Thus the money which the member at the top of the line gets depends upon the members whom he enrolls or the members enrolled by him enroll……..”

“………Whether second ingredient is also satisfied or not is to be considered now. As seen above, each member on his enrollment pays Rs. 4,400/ -. Payment of Rs. 4,400/- by a member on his enrollment and his future earnings through marketing/enrolling other members constitutes event or contingency relative to his enrollment the distributor gets all this money as a consideration for promise made by the sponsor at the time of his enrollment Thus as far as the member joining the scheme is concerned, both the ingredients of Section 2 (c) of the Act, i. e. , a)making of quick or easy money, and b) the chance or opportunity of making quick or easy money depending on an event or contingency relative or applicable to the enrollment of members into the scheme are satisfied. …….”

…….It is, thus, evident that the whole scheme is so ingeniously conceived that the inducement for aggressive enrollment of new members to earn more and more commission is inherent in the scheme. By holding out attractive commission on the business turned out by the downline members, the scheme provides for sufficient inducements for its members to chase for the new members in their hot pursuit to make quick/easy money. On the part of the promoter by pushing each member to achieve the minimum sates worth Rs. 2,000/- per month, (this sale includes enrollment of new members) he is assured of about 1000 crores per annum. All this squarely satisfy the description of quick/easy money….. The plea of the first petitioner that there is no compulsion that a member shall renew his distributorship looks to us to be specious. Once a person becomes a distributor in a scheme of this nature where the sops in the shape of commission are so luring, it would be very difficult for a member to withdraw from their membership to avoid payment of the annual renewal subscription fee. ……”

“…..FROM the whole analysis of the scheme and the way in which it is structured it is quite apparent that once a person gets into this scheme he will find it difficult to come out of the web and it becomes a vicious circle for him….. By no means can it be said that the money which the first petitioner is earning is not the quick/easy money. By promising payment of commission on the business turned out by the down-line members sponsored either directly or indirectly by the up-line members (which constitutes an event or contingency relative to enrollment of members), (the first petitioner is earning quick/easy money from its distributors, apart from ensuring its distributor earn quick/easy money. Thus the two ingredients are satisfied in the case of promoter too. We are, therefore, of the considered view that the scheme run by the petitioners squarely attracts the definition of "money Circulation scheme" as provided in Section 2 (c) of the Act…..” (emphasis supplied)

The petitioners in W.P. No.22914 of 2006, 22916 of 2006 and 23737 of 2006 are not entitled to the relief sought for in the writ petitions filed by them. These writ petitions fail and are, accordingly, dismissed. Writ Petition No.25749 of 2006 is disposed of accordingly. However, in the circumstances, without costs.

GODA RAGHURAM, J


RAMESH RANGANATHAN, J

Date: 30.07.2010


PRESS NOTE

PUBLIC CAUTIONED AGAINST MONEY CIRCULATION SCHEMES(MCS),

MULTI-LEVEL MARKETING SCHEMES(MLM), NETWORK MARKETING(NWM), AND OTHER SUCH SCHEMES.

1. “MONEY CIRCULATION SCHEMES-(MCS)” throughout the nation, particularly in the state of A.P. and adjoining southern states viz. Karnataka, Kerala and Tamilnadu are progressing, post haste eating away monies of the gullible public by luring them to become rich overnight through money circulation schemes. This kind of cheating under various attractive captions have taken a major section of people from different walks of life to fall prey benefiting a section of people and huge loss of money to larger section of people. It is said that people are being cheated of Crores of Rupees by these companies all over India. This menace committed against the society is going unchecked.

2. It is brought to our notice that quite a few money circulation schemes in various parts of A.P. State are thriving as “MULTI LEVEL MARKETING-(MLM)” “NETWORK MARKETING-(NWM)” involving hundreds of crores of rupees. Off late, many small companies have mushroomed themselves in every nook and corner of the state. The promoters of the money circulation schemes through high profile campaign have entrapped middle class people who would be eagar to become rich overnight. By enrollment into such scheme one would be getting back the initial paid investment and keep gaining financially by enrolling new members. So also, the second set of enrollers keep multiplying and gain financially, fascinating every onlooker to get engrossed into such dubious money circulation schemes. Such a system of chain to work endlessly to provide profit to everyone concerned would ultimately breakdown at some stage, resulting the financial benefit to some who joined the scheme at initial stages (they will be none other than the promoters of the scheme), resulting in big financial loss to those who joined at a later stage. When a person fails to get his required clients or enrollers, the promoters of the scheme does not tell about the non-viability of the scheme but blame it as one’s personal failure. The gullible people are taken unaware when the real picture of the money circulation schemes emerges. By the time the people realize that they were taken for a ride and cheated, it would be too late.

3. The promoters of such schemes float companies with attractive names like viz. “Wonder World Co.” “Miracle Co” “Japan Life India” “Bigway” “Diamond Quest” “Ayerveda Life” “Herb Life” “Happy Life Co” “Glory Co” “Magic Co.” “Nice Co.” “Mega Co.” etc., to start with in a particular area and keep shifting over to new key areas on attaining saturation of member enrollments. The names of these companies itself speaks about their mensrea. While promoting the schemes they induce the Film stars, Politicians, Bureaucrats, Sportspersons, Engineers, Doctors etc., and honor them by organizing indoor and outdoor parties/functions with big fanfare to make the general public believe genuinity of schemes, while enrolling other members in the chain with attractive and stylish titles to the enrolled members as “Silver member, Gold member, Diamond member, Platinum member, so on and so forth. They also call them as “Master Distributor, Super Distributor, Double Super Distributor etc.”,


etc. They also use attractive slogans like “Earn in rupees or dollars. Work from home” “ Work four hours and earn Rs.50,000 per month” “ U R the boss of your business, so enroll immediately” “Earn up to Rs.35,000/- + Monthly by just working 2 hours at home” “Do u want to earn extra by sitting at Home? Then contact us” “Do u want to lose your weight, then contact us” “Your pathway to Heaven” “Enroll with us for Healthy and Wealthy life” “Do u want to travel in Benz Car within one year then enroll with us” “Sky is the limit with us, so enroll immediately, before u miss the bus” “Earn while you earn” etc. Many of these companies are taking promotional trips to Bangkok, Pataya, Singapore, Srilanka and other countries in the name of Conferences, Meetings etc. Locally also they conduct meetings, conferences in 5 star hotels, in Posh Kalyan Mantapams etc. These dubious companies do whatever possible to attract gullible public. Ultimately the easy prey, the middle class building castles in the air, loses all their savings even at the cost of their blood relations, the kith and kin and are victimized. Worst sufferers in such schemes are none other than poor middle class women, retired persons, educated youth, unemployed men and women who lose their health, wealth in the chase of wild goose and dreams. Such schemes ultimately have destroyed the families and friendships.

4. The losers of such schemes would not like to complain of cheating against such owners of dubious money circulation schemes, multi level marketing, network marketing schemes etc., as the induced members or sufferers struggle to wriggle out of the situation atleast to save their initial investments. These companies win over confidence of the victims and maintain their image as charitable and benevolent, by offering donations to charitable, social and service oriented institutions by attracting publications, photographs of VVIP’s donating cheques. Likewise they boost their image in a corporate style and try to gain mileage.

5. In early nineties, money circulation schemes were floated involving cash gains. Later they have infringed into marketing goods, services, drugs and health care products. Under the guise of money circulation scheme these companies are camouflaging themselves with various consumer products. Many companies are pressurizing the enrolled members to go for repeated buying by telling them to do so, so as to enable them to be in the rat race. A single company will launch many sister companies to fool public as if to show that they are big group of companies. A single company renamed many a time attracts people of different places, takes its chameleon stride through colourful gifts, brochures, calanders, diaries with messages of VVIPs, hardly get booked under case of cheating. Likewise, all innovative methods are put action to successfully grow them well and make money for themselves causing irrepairable financial loss to the general public and society. The agitating point in issue, is that such unscrupulous promoters and companies go unchecked and are growing day by day with their shady acts causing a big blow to peace and tranquility of society and to the life and property of the constituents of society which is at stake .

6. The specific provisions under Prize Chits and Money Circulation Schemes (Banning) Act 1978 read with relevant sections under cheating Section 420 of IPC, Drugs and Cosmetics Act 1940, Drugs and Magic Remedies Objectionable (Advertisement) Act, 1954, A.P. Financial Depositors Protection Act 1999 etc, are abundantly available to be invoked and effectively check and prevent progress of such dubious floated companies. Further it is important to note that Andhra Pradesh is the first state to Ban Money Circulation Schemes in the year 1965. Much later on Central Government bought the Central Act in the year 1978 banning Money circulation Schemes in India through an act called Prize Chits and Money Circulation Schemes (Banning) Act 1978.


7. Recently, The Hon’ble High Court of Madras dismissing the petition filed by FMCG Marketing Pvt. Ltd. v/s Union of India, Chief Secretary and Director General of Police Govt. of Tamilnadu (Writ Petition)with reference to context observed in its landmark judgment that under promise or expectation of getting huge commission (easy or quick money) the public is lured to invest more money in such schemes and that it is only an imaginary profit. Further, the Hon’ble High Court observed that the event is enrollment of new members, the commission received is relative to such enrollment of new members into the scheme. Thus the so-called Multi-level marketing, though called by a very attractive name squarely falls within the definition of “Money Circulation Scheme” under the Act. Hence it is prohibited by the Act”. The High Court came heavily on the Pricing policy of these companies. It further observed that “this MLM scheme creates a chain of customers and the long and unbroken chain ensures a large amount of easy money. The shorter and missing links in the chain results in earning lesser commission. Secondly, the person concerned does not get the value of money he pays. Thirdly, the companies collect service charges on the sale of goods. No service charge can be collected while the goods are sold. Apart from that, the MLM results in exploitation of personal influence of each and every distributor or his close relative. If a Superior officer or his ward involved in MLM, the subordinates are forced to become members in the chain”. It is important to note that the stand hitherto taken by Government Officers regarding non-application of Prize Chits and Money circulation Schemes to Multi-Level Marketing is found to be not valid in the wake of judgment of Madras High Court.

APPEAL TO PUBLIC

8. Therefore, we appeal to public not to enroll themselves into Multi Level Marketing Companies, Money Circulation Schemes, Network Marketing Companies and other such Companies and such schemes and get cheated. It is an appeal seeking your co-operation with the Investigating Agencies to curb such menace and nip it in the bud before it engulfs the gullible Public. It is every duty of the citizen to educate the public, as such companies not only destroy the economic fabric of our country but also the fiscal system of our nation. More damaging is that MLM schemes destroy the well knitted social fabric of our Indian society and make your house as well as your neighborhood a market.

9. We also request the public to pass on information about such companies and schemes to the nearest Police Station and concerned Superintendent’s of Police of the concerned districts and to Addl. DGP, CID Hyderabad for taking necessary and prompt legal action. We also request the Media, NGOs and all right thinking intellectuals to create awareness about such schemes and con companies and help the public and investigating agencies in saving from cheating of con companies like MLM, NWM and MCS. We also request the public not to associate with such con companies.

Tel. No: 040- 23232889

e.mail:[email protected]

Fax: 040- 23237474

040- 23237575

V.C. SAJJANAR, IPS.,

Superintendent of Police,

Economic Offences Wing,

CID, AP, Hyderabad


Notice Issued by Manipur Government

1.This is to inform to all the general public, Government officials and other concerned that the specific provisions under Prize Chits and Money Circulation Schemes (Banning) (Manipur) Rules, 1978, relevant sections under cheating Section 420 of IPC, Drugs and Cosmetics Act 1940 by the Ministry of Health and Family Welfare, Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954 are abundantly available to be invoked and effectively check and prevent progress of such dubious floated companies.

2.Section 3 of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 bans prize chit and money circulation schemes or enrolment as members to any such schemes or participation in such schemes. Section 4 and 5 are penal provisions and prescribe punishment. Section 6 deals with offences committed by Companies. Section 7 authorizes Police Officer not below the rank of Officer in charge of a police station to exercise power to enter and search premises and to seize things used for such scheme. Section 8 provides for forfeiture of newspaper and publication containing money circulation scheme. The Preamble of 1978 Act declares that it has been enacted “to ban the promotion or conduct of prize chits and money circulation schemes and for matters connected therewith and incidental thereto”.

3. The Hon’ble Supreme Court and various Hon’ble High Courts have issued judgments against Multi- Level Marketing (MLM)- a camouflaged illegal money circulation scheme. The Andhra Pradesh High Court (Amway Vs, State of A.P & others), Madras High Court (Apple FMCG Vs. State of T,N & others), Karnataka High Court (Commissioner of Income Tax Vs. Amarjeet Kaur) and Supreme Court of India (Kuria Chan Chako Vs, State of Kerala) in their judgments on the above cases have clearly stated that these types of schemes are prejudicial to the public interest and are also adversely affect the efficacy of fiscal and monetary policy as siphoning of crores and crores of money takes place without accountability. Department of Financial Services, Ministry of Finance, Government of India have directed Directorate of Enforcement and Central Economic Intelligence Bureau for “taking up appropriate action against these major Financial Scam – Siphoning of money without accountability and check in the guise of Multi-Level marketing, Chain Business, Network Business etc. The Central Economic Intelligence Bureau, in turn, has directed State Governments for taking up appropriate action.

4. Therefore, Government of Manipur hereby informs that Prize chits or benefit schemes benefit primarily the promoters and do not serve any social purpose. Thus, the so-called Multi-level marketing (MLM), though called by a very attractive name squarely falls within the definition of “Money Circulation Scheme” under the Act and hence prohibited by the Prize Chits and Money Circulation Schemes (Banning) (Manipur) Rules, 1978. The general public should avoid and not enroll themselves into these schemes as they not only destroy the economic fabric of our State/country, but also the fiscal system of the country. It is also to inform that MLM schemes destroy the well knitted social fabric of our society and therefore, general public should not associate with such con companies.


F.No. 21/(22)/IT/2001

Government of IndiaMinistry of Consumer Affairs, Food & Public Distribution

Dept of Consumer Affairs

Shastri Bhavan, New DelhiDated 23.09.2003

ToMs. Sunitha Kalla,Dy Director General & Joint SecretaryMinistry of Finance, Dept of Revenue,Central Economic Intelligence Bureau6th Floor, B Wing Janpath BhavanJanpath, New Delhi

Subject: Applicability of the Provisions of the Prize Chits & Money Circulation Schemes (Banning) Act, 1978 to pyramid marketing structure/schemes - Regarding.

Madam,

I am directed to refer to your D.O. Letter No. 301/15/200-CEIB (Pt-II) dated 22nd September 2003 addressed to Shri Wajahat Habibullah, Secretary (Consumer Affairs) on the subject mentioned above and to say that this department was considering the issue of direct selling/network/multi-level marketing as an alternative form of marketing of goods and the entire issue was looked from that angle. However, subsequent feedback/response have showed that companies using pyramid structured marketing techniques to sell their products putting forth their schemes based on the clarification issued vide D.O. letter of even no dated the 31st March, 2003 claiming that their activities also do not fall within the provisions of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. It is clarified that this Department's clarification of even number dated 31st March, 2003 does not cover pyramid structured marketing schemes. That area also does not fall within the purview of this Department.

This is issued with the approval of Secretary (CA).

Yours faithfully(Sd)

Alice ChackoUnder Secretary of Govt of India

Copy to : Chief Secretaries of all States and Union Territories.


Documents on Multi Level Marketing- Direct Selling Fraud

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Transcript of Documents on Multi Level Marketing- Direct Selling Fraud