Multi Level Marketing/Direct Selling/Pyramid /Money

Circulation Schemes
A pyramid scheme is a non-sustainable business model that involves promising participants
payment, services or ideals, primarily for enrolling other people into the scheme or training them to
take part, rather than supplying any real investment or sale of products or services to the public.
Pyramid schemes are a form of fraud.
Pyramid schemes are illegal in many countries including Albania, Australia, Brazil, Bulgaria, Canada,
China, Colombia, enmark, the ominican !epublic, "stonia, #rance, $ermany, %ungary, &celand,
&ran, &taly, 'apan, (e)ico, *epal, +he *etherlands, *e, -ealand, *or,ay, the Philippines, Poland,
Portugal, !omania, .outh Africa, .pain, .ri /anka, .,itzerland, +ai,an, +hailand, +urkey, the 0nited
1ingdom, and the 0nited .tates.
A successful pyramid scheme combines a fake yet seemingly credible business ,ith a simple-to-
understand yet sophisticated-sounding money-making formula ,hich is used for pro2t. +he
essential idea is that a 3con artist3 (r. 4, makes only one payment. +o start earning, (r. 4 has to
recruit others like him ,ho ,ill also make one payment each. (r. 4 gets paid out of receipts from
those ne, recruits. +hey then go on to recruit others. As each ne, recruit makes a payment, (r. 4
gets a cut. %e is thus promised e)ponential bene2ts as the 3business3 e)pands.
.uch 3businesses3 seldom involve sales of real products or services to ,hich a monetary value
might be easily attached. %o,ever, sometimes the 3payment3 itself may be a non-cash valuable. +o
enhance credibility, most such scams are ,ell e5uipped ,ith fake referrals, testimonials, and
information. +he 6a, is that there is no end bene2t. +he money simply travels up the chain. 7nly
the originator and a very fe, at the top levels of the pyramid make signi2cant amounts of money.
+he amounts d,indle steeply do,n the pyramid slopes. &ndividuals at the bottom of the pyramid
8those ,ho subscribed to the plan, but ,ere not able to recruit any follo,ers themselves9 end up
,ith a de2cit.
+he net,ork marketing 8*(9 or multi-level marketing 8(/(9 business has become associated ,ith
pyramid schemes as 3.ome schemes may purport to sell a product, but they often simply use the
product to hide their pyramid structure.3 and the fact ,hile some people call (/(s in general
3pyramid selling3 others use the term to denote an illegal pyramid scheme mas5uerading as an
(/(.
&n modern days, it is also called as 3Chain Business3, 3&ntroduction Business3, 3!eferral Business3,
3irect (arketing Business3, 3irect .elling through &ndependent Business o,ner3 etc.
(ulti-level marketing 8(/(9 is a purported income opportunity, in ,hich persons recruited into a
pyramid of participants make ongoing purchases of products and services, and recruit others to do
the same, and they still others, etc. : in an endless chain of recruitment and personal consumption,
in order to 5ualify for commissions and bonuses and to advance up,ard in the hierarchy of levels in
a pyramid of participants. Product purchases become the means of disguising or laundering
investments in ,hat is in fact a product-based pyramid scheme.

+ypically, prospects are lured into the scheme ,ith e)aggerated product and income claims. And
because the pay plan is heavily stacked in favor of those at the highest levels in the pyramid, the
vast ma;ority of participants spend more than they receive and eventually drop out, only to be
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replaced by a stream of similarly misled recruits, appro)imately >>? of ,hom are like,ise destined
to e)perience loss and disappointment.
(ulti /evel (arketing 8(/(9 o@ers an ine)pensive alternative to other more e)pensive options for
o,ning a business. A good franchise or buying a business from someone else may cost a fortune,
and starting a business from scratch may take years to get o@ the ground. (/( is easy to get into
and can be a very pleasant ,ay to be your o,n boss. (ost of the people get into (/( because of
the potential of virtually unlimited income as advertised by the (/( companies. +he products and
company are usually marketed directly to consumers and potential business partners by means of
relationship referrals and ,ord of mouth marketing.
&ndependent distributors develop their organizations by either building an active customer base,
,ho buy direct from the company, or by recruiting a do,nline of independent distributors ,ho also
build a customer base, thereby e)panding the overall organization. Additionally, distributors can
also earn a pro2t by retailing products they purchased from the company at ,holesale price.
it has become apparent that a typical strategy of (/( sponsors is to produce dietary supplements
that supposedly cure or : ,ith appropriate anti-o)idants - prevent every disease under the sun.
(ost (/( companies & have studied claim to have the latest and greatest supplement that is ;ust
not available any,here else in such high 5uality for the price. +hey even claim to bypass the middle
man,,hen in fact ,ith their endless chain of recruitment, they create thousands of middle men :
all hoping for a share of commissions.
"ach ne, recruit has a personal stake in advancing the scheme so that he or she may pro2t from
an e)panding do,nline. *e, recruits are taught to Abe a product of the productsand to set the
e)ample of model recruiting and purchasing in suggested amounts so that others ,ill duplicate
their recruiting e@orts and purchases, carrying them to success on the backs of do,nline
participants.
Sympathy Buyer: As ne, recruits struggle to maintain purchases in order to 5ualify for
commissions and to advance up the various levels in the scheme, they soon become
desperate for buyers. +hey may pressure family members or colleges to buy - or give them
a,ay even if they are not interested.
Counterfeit customers: 7ther participants ,ould buy products that they could not use in
the name of someone they kne, but ,ho had no interest in the products ;ust to satisfy any
retail re5uirement the company may have. +hey may even give products a,ay to these
people as gifts or samples.
Dummy distributors: ,ho ,ere persons ,ho agreed to sign up and allo, their name to be
used to satisfy the head count, even though they ,ere not interested in becoming a
distributor. +he distributor ,ould then buy products in their name to satisfy head count
re5uirements. (any people re-;oin as members in their o,n chain ,hen they are able to get
more do,nline members.
nnocent leaders : .ome (/( leaders truly do not understand the inherent 6a,s in (/(
as endless chain recruitment schemes. .ince they interact mostly ,ith high level people in
the (/( organization, they donBt get much feedback from recruits ,ho lose money and drop
out. .ince they live and ,ork in an echo chamber of enthusiastic promoters, they ignore or
remain in denial of the harm ,hen they see signs of serious problems, such as high attrition
or high loss rates.
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!hite collar criminals : +he rapid and huge gains that can be made can be very enticing
to someone ,ho is ,illing to set principles of fairness and honesty aside in order to cash in
at others e)pense. +hese are the people ,ho continuously 6oat and break companies.
"orced customers: People are compelled by their superious oDcers to ;oin such schemes.
&f a .ub &nspector is member of treh scheme, he can forse all CP7s under him to ;oin the
scheme too.
#reedy customers: people can ;oin the scheme for making 5uick money ,ithout any
e@ort. +hey are largly una,are of the repercussions of the fraoud. A large number of
house,ives have been cheated by such schemes.
$he unemployed or underemployed: (any are struggling and eager to improve their
situation : often ,illing to grasp at any stra, that looks promising. +hey are sitting ducks for
the oft-repeated slogans of (/( recruiters that portray (/( as a solution to their 2nancial
,oes.
$he unsophisticated and uneducated% Persons unschooled or ,eak in their
understanding of basic mathematics or economics may they fail to see the inherent 6a,s in
endless chain recruitment systems. +hese folks may not be of lo, intelligence, ;ust lacking
in mathematical savvy.
&'nity groups: (/( recruiters have en;oyed an unusual pattern of success ,ith tightly-
knit groups. 1udumasree is an e)ample for this.
.ince the uplineEs income is dependent on the recruiting success of do,nline participants, the
upline is motivated to promote aggressive recruitment. And ne, recruits e)pect help ,ith their
recruiting from their uplline in order to 5ualify for commissions and advancement in the scheme.
+his pressure from above and belo, can create e)plosive gro,th in recruitment and purchases by
participants and sympathetic family members.
A study conducted by 'on (. +aylor based on a careful analysis of more than FGH (/( Companies,
found that appro)imately >>.I? of A// participants in such schemes lose money 8after subtracting
A// e)penses9J
According to "ric .cheibeler, <ho studied the functioning of Am,ay concluded that out of =H,HHH
participating members, only K=K remained in the business after the Gth rene,al. +hatEs a >G.>?
dropout rate in only 2ve years for the largest of all (/(s .
(/(s are recruitment-driven ,ith very little incentive to sell products to non-participants. Products
are priced too high to be competitive, and compensation plans provide re,ards to participants that
escalate e)ponentially as they climb the hierarchy 8pyramid9 of participants. +o sho, ho,
saturation is inevitable, in a binary pyramid one person recruits t,o people, each of them t,o more,
and they t,o more, etc., as follo,sL
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. . . and so on until by the FFrd person in the chain of recruitment, the total number of recruits
e)ceeds the population of the earth. 7f course, it happens much more 5uickly if three or more
participants are recruited by each ne, recruit.
&t is important to dra, a distinction bet,een total saturation and market saturation. A city of
=HH,HHH people surely could not support =HH,HHH direct selling distri-butors. Any e)pectation of
such total saturation ,ould be absurd unless everyone ,as selling only to himselfPherself. 7n the
other hand, market saturation may be reached ,ith only =H or CH distributors.
=. "ach person recruited is empo,ered and given incentives to recruit other participants,
,ho are empo,ered and motivated to recruit still other participants, etc. : in an endless
chain of empo,ered and motivated recruiters recruiting recruiters : ,ithout regard to
market saturation.
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C. Advancement in a hierarchy of multiple levels of QdistributorsR is achieved by recruitment
andPor by purchase amounts, rather than by appointment.
F.Company payout 8in commissions S bonuses9 per sale for the total of all upline
participants e5uals or e)ceeds that for the person selling the product : resulting in
inade5uate incentive to retail and e)cessive incentive to recruit. +his is ,hat is meant by a
Qtop-,eightedR pay plan.
K.+he (/( company pays commissions and bonuses on more QdistributorR levels than are
functionally ;usti2edT i.e., 2ve or more levels, ,hich only further enriches those at the top of
the pyramid.
&s a business model( MLM is likely the most successful con game of all time% $he very
people )ho are out recruiting are themselves victims until they run out of money and
*uit% &nd because victims seldom +le complaints( la) enforcement rarely acts% t is a
vicious cycle( ,o complaints( no la) enforcement action- no la) enforcement action( no
complaints% So the game goes on%
+he issue is not +7+A/ saturation, but (A!1"+ .A+0!A+&7*. &n a city of =HH,HHH people, the notion
of =HH,HHH distributors to serve them is absurd. Perhaps the (A!1"+ could be saturated ,ith at
most G or =H distributors. "ach added distributor ,ould reduce the opportunity for e)isting
distributors, and resistance ,ould build up for those ,ho have been approached several times. &n
fact, market saturation occurs rather 5uickly.
&t is both very demanding and very e)pensive to achieve success at recruiting a do,nline, ,hich is
essential if one is to realize signi2cant ongoing pro2ts from (/(. +hose ,ho lock in a position as
the 2rst ones in the chain of recruitment have a huge advantage over those ,ho come in later, but
this is seldom disclosed to ne, recruits.
(/( assumes both in2nite markets and virgin markets, neither of ,hich e)ists in the real ,orld.
Mictims almost never 2le complaints about such frauds for a variety of reasons, including the
follo,ingL
=. (ost people blame themselves, since theyve been taught that anyone ,ho properly
Q,orks the systemR ,ill succeed and that if a ne, participant fails it is their fault, rather than
the fault of the system. Companies 7 pay if the members bring ne, members.
C. .ince they are part of an endless chain of recruitment, they fear conse5uences for 2ling a
complaint from or to those they recruited or those ,ho recruited them, ,ho may be close
friends or relatives still in the program.
F. +hey may fear self-incrimination, since in (/( every ma;or victim has likely been a
perpetrator, recruiting un,itting persons in order to cover their escalating e)penses of
participation. &n fact +he Prize Chits and (oney Circulation .cheme 8Banning9 Act, =>NO
makes every participant in such schemes an o@ender.
K./a, enforcement agencies are generally hand in gloves ,ith the scamsters as many
people in the la, enforcement agencies themselves are active participants in such
schemes.
G.(any people are ashamed to admit that they are s,indled of their money and su@ers
silently.
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(/( observers have noticed cultish and even compulsive behavior from (/( participation. .ome
(/( programs adopt cultist patterns in recruitment and retention of members, becoming a rather
closed society. Also, the evolution of A(/( ;unkiesU has been observed, ,ith traits of addiction
similar to those for other addictions.
")cept for +7PPs 8top-of-the-pyramid promoters9, almost all (/( participants ,ind up losing money
: and eventually drop out of the program, many of them discouraged and blaming themselves :
rather than a 6a,ed program.
.uch .chemes give its perpetuators a Qlicense to steal.R&t is so ,idespread that a 'uly CH== google
search for combination of QfraudR and Q(ulti /evel (arketingR yielded F=,=HH,HHH results .
+here are three types of Pyramid schemes in e)istence.
=.0nilevel : +here is no limit to the number of distributors that can be recruited on the 2rst
level 8,ho Aretailproducts to end users9. %o,ever, there is usually a limit on the number
of levels deep that can 5ualify for commissions or overrides. &t could be considered a A6at
pyramidand is probably the most fair of the compensation plans : though fe, ,ould get
rich.
C.Binary : Binary plans promote recruiting in a do,nline of t,o legs of distributors 8left and
right Apro2t centers9, ,ith incentives to maintain matching sales volume bet,een the t,o
legs. Commissions are paid only on matching volume, and this can sharply limit company
payout. .eldom are high volume producers matched in the same leg of the do,nline. Binary
plans could be considered Asplit pyramids.Companies like Bizarre follo, this model.
F.(atri) : A limit is placed on the number of distributors in the 2rst level and on the number
of levels deep. Additional recruits Aspill overU into the ne)t level. $ro,th is limited 8for
e)ample, K)=CVKO total do,nline9. Can be played like a lottery : lazy participants can ,in.
(atri) plans could be vie,ed as a Ablock pyramids.U
+ypes of fraud schemes
=. Pure (oney Chain 8Ponzi .cheme9 fraud
&n the case of Ponzi schemes, ne, investors are recruited to provide revenues, but no real
investment occurs. &nstead, earlier investors are paid dividends or Apro2tsU from the
investments of ne, investors. &t is ;ust the transfer of money from one person to another
person. <e have information about no such company.
C. Pure Collective &nvestment #raud
%ere the company pools money from a large number of people in the prete)t of buying
property. +he investeres are asked to ,ait for some time before the property is ac5uired.
7ne the company collects enough money, it vanishes. PAC/ &ndia /td. is a classic case for
such a company. &t is involved in a collective investment scheme, as it pools money from
public for the purpose of buying property ,hich is clear from its advertisement. +hey claim
that !B& or ."B& have no control over it. But the truth is that the functioning of the company
is governed by ."B& guidelines.
.ection ==AA of the ."B& AC+, =>>C de2nes Collective &nvestment .cheme as follo,sL
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.ection ==AA
8=9 Any scheme or arrangement ,hich satis2es the conditions referred to in
subsection 8C9 shall be a collective investment scheme.
8C9 Any scheme or arrangement made or o@ered by any company under ,hich,---
8i9 the contributions, or payments made by the investors, by ,hatever name
called, are pooled and utilized solely for the purposes of the scheme or
arrangementT
8ii9 the contributions or payments are made to such scheme or arrangement
by the investors ,ith a vie, to receive pro2ts, income, produce or property,
,hether movable or immovable from such scheme or arrangementT
8iii9 the property, contribution or investment forming part of scheme or
arrangement, ,hether identi2able or not, is managed on behalf of the
investorsT
8iv9 the investors do not have day to day control over the management and
operation of the scheme or arrangement.
According to !egulation F of ."B& 8C7//"C+&M" &*M".+("*+ .C%"(".9 !"$0/A+&7*., =>>>
stipulates that, no person other than a Collective &nvestment (anagement Company ,hich
has obtained a Certi2cate under these regulations shall carry on or sponsor or launch a
collective investment scheme.
Accordingly PAC/ &ndia /td, applied to the ."B& for recognition. +his information is available
at the public notice issued by ."B&. !efer httpLPP,,,.sebi.gov.inPcisPnotice=.html
+he list of information 2led ,ith *orthern !egional 7Dce 8*!79 at *e, elhi sho,s Pacl
&ndia /td. based in 'aipur, !a;asthan as "ntry no. F having mobalised !s. FFNN.>= /akh .
+he notice further mentioned thatL
&n order to protect the interest of the investors and the securities market, ."B& has
permitted the e)isting collective investment schemes to raise further resources under
their e)isting schemes only after obtaining credit rating of their instruments from any
of the follo,ing credit rating agenciesL C!&.&/, &C!A /imited, CA!" or u@e and
Phelps Credit !ating &ndia Pvt. /imited.
&nvestors are advised not to invest any monies in any of e)isting collective
investment schemes unless the instruments issued by such collective investment
schemes are rated by the credit rating agencies mentioned above.
+he information about the ."B& approved Collective &nvestment (anagement Companies is
given in httpLPP,,,.sebi.gov.inPpmdWmb.;spXPmd&nd)*ameV$SlistCodeV& according to
,hich only the follo,ing companies are registered ,ith ."B& till date.
=. $&#+ C7//"C+&M" &*M".+("*+ (A*A$"("*+ C7(PA*Y /&(&+"
C. (P. $!""*"!Y "M"/7P"!. /+ 8Provisional9
But PAC/ &ndia /td. is still functioning, making a mockery of the legal guidelines.
F. (oney ChainZCollective &nvestment #raud
&n this case the company claims to ac5uire property by pooling resources of people ,ho are
compelled to recruit other people into the scheme in a money chain fashion. Bizarre is an
e)ample of this type of cheating.
K. Product .elling Z(oney Chain #raud
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+his is the classic (ulti /evel (arketing fraud as ,ill be e)plained. !(P infotec is an e)ample
for this #raud
G. Chit #unds #raud
+his is peculiar to &ndia. &n 1erala.+he chitty or kuri is governed by 1erala Chitties Act,
=>NG.But there is also a central act, viz.,+he Chit #unds Act, =>OC.
According to sub-section 8G9 of .ection F of the 1erala Chitties Act, =>NG,
3*o foreman shall be entitled to conduct at a time chillies, the aggregate amount of
,hich e)ceedsL--
8a9 <here the foreman is a banking company as de2ned in the Banking !egulations
Act, =>K> 8Central Act =H of =>K>9 or a corresponding ne, Bank constituted under
the Banking Companies 8Ac5uisilion and +ransfer of 0ndertakings9 Act, =>NH 8Cenlral
Act G of =>NH9, IH? of the net assets of the foreman.
8b9 in other cases, GH? of the net assets of the foreman L
Provided that the chitty amount in the case of any one chitty conducted by a foreman
shall not e)ceed t,enty 2ve thousand rupees T
Provided further that the ma)imum limit speci2ed in the foregoing proviso shall be
t,o lakhs rupees in the case of any chitty of ,hich the foreman is a banking company
as de2ned in the Banking !egulations Act, =>K> 8Central Act =H of =>K>9 or a
corresponding ne, bank constituted under the Banking Companies 8Ac5uisition and
+ransfer of 0ndertakings9 Act, =>NH 8Central Act G of =>NH9
Provided also that nothing contained in this sub-section shall apply in the case of any
chitty of ,hich the foreman is a company o,ned by the $overnment of 1erala.
")planation L-- &n determining the net assets of a foreman for the purposes of this
sub-section, the amount of the security furnished by him under .ection =G shall be
e)cluded if such amount is the amount of subscription received in advance from the
subscribers3.
But no such limitation is available in the central act. %ence almost all chitty companies are
registered in 'ammu or %yderabad. .o those ,ho ;oin in this type of kuris ,ill get only a
narro, protection of la,..o the state government introduced .ub-section =8a9 to .ection K of
the 1erala Chitties Act, =>NG by the 1erala #inance Act, CHHC ,ith e@ect from =.K.CHHC
,hich made the company registered outside 1erala to register in kerala if CH? or more of
the subscribers in .tate of 1erala have ;oined in the chitties. +his ,as challenged in
harmodayam Company vs 0nion 7f &ndia case in kerala %igh Court and a Bench comprising
of 1 !adhakrishnan and ( 1rishnan made the amendment invalid, rulingL
Q +he 1erala Chitties Act, =>NG has been included in the >th .chedule as item *o.
=K>. Article F=-B gives protection to all the statutes listed to the &4 .chedule of the
Constitution from any challenge on the ground of violation of any of the fundamental
rights secured under Part &&& of the Constitution. But .ection K8=98a9 introduced by the
1erala Chitties 8Amendment9 Act N of CHHC ,as not included in the &4 .chedule. &t is
trite the protection a@orded by Article F=-B to the Act included in the &4 .chedule
,ould not take in the amendments e@ected to the Act, unless it is speci2cally
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included in the schedule. .ub-section 8=98a9 of .ection K has not been included in the
>th .chedule, hence be made sub;ect to ;udicial revie,. &f the subse5uent
amendments are also a@orded protection it ,ould in e@ect confer a po,er on the
.tate /egislature to amend the Constitution ,hich is beyond its competence.
+herefore the contention that since the Act has been included in the >th .chedule it
is beyond the ;udicial scrutiny cannot be accepted.R-----
---- Q<e hold that .ub-section 8=98a9 of .ection K of the 1erala Chitties Act introduced
by the #inance Act N of CHHC is discriminatory and violative of Article =>8=98g9 of the
Constitution of &ndia and beyond the legislative competence of the .tate /egislature
and ,ould not bind chitties started and conducted outside the .tate of 1erala and
therefore declared void and unconstitutional.R
%ence /egislative intervention is re5uired to stop the fraud from the chitty companies.
.o the $overnment of 1erala amended the .tate act so that if conducted various places
outside the .tate of 1erala ,ould not cast any obligation on the foreman to open a branch in
the .tate of 1erala and to obtain registration under the provisions of the 1erala Chitties Act,
=>NG. .ub-s.8=98a9 of ..K is therefore clearly discriminatory
(oney Chain schemes are banned in many countries. #ore e)ampleT
&n the 0nited .tates of Ametrica, According to the .ection G8a98=9 of the #ederal +rade Commission
ActL
Q0nfair methods of competition in or a@ecting commerce, and unfair or deceptive acts or practices
in or a@ecting commerce, are hereby declared unla,fulR.U
#+C guidelines and most state statutes in the 0nited .tates of Ametrica include a key element in
de2ning pyramid schemes : the payment of money by the company in return for the right to recruit
other participants into the scheme. &f the primary emphasis is compensation from recruiting, rather
than from the sale of products to end users, it is considered a pyramid scheme. %o, such primary
emphasis is to be determined has until no, been a formidable challenge for investigators.
(oney Circulation .cheme means any scheme that promises easy or 5uick money by ,ay of
commissions based on enrolling members into the scheme, no matter ,hether it involves goods or
sales of goods at any stage. &n &ndia, +he Prize Chits and (oney Circulation .cheme 8Banning9 Act,
=>NO bans illegal (oney Circulation .cheme by ,hatever name called.
+he Prize Chits and (oney Circulation .cheme 8Banning9 Act, =>NO
.ec.C 8c9L 3money circulation scheme3 means any scheme, by ,hatever name called, for the
making of 5uick 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, ,hether or not such money or thing is derived from the
entrance money of the members of such scheme or periodical subscriptions
$raphical !epresentation of the above de2nition as per ;udgment of .upreme Court in .,apan
$uha Ms. .tate of <est Bengal L
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.ec.FL Banning of Prize Chits and (oney Circulation .cheme or enrolment as members or
participation herein L - *o person shll promote or conduct any prize Chit or (oney Circulation
scheme, or enroll as a member to any such chit or scheme or participate in it other,ise, or receive
or remit any money in pursuance of such chit or scheme3
.ec.=HL 7@ences under this Act to be cognizableL - All o@ences punishable under this Act shall be
cognizable3.
(odus 7perandi of (./.(.
(ulti-/evel (arketing 8(/(9 is a product camou6aged (oney circulation scheme. +he modus
operandi of (/( is collecting entrance free from the ne, members, bagging half of the collected
fee and distributing remaining among the chain or net,ork. +he commission depend on the making
others to ;oin in the scheme by them or by their do,n line members. +hey confuse enrolling activity
,ith sale. Commissions based on sales activity may be legal but Commissions based on enrolling
activity and sho,ing this enrolling activity as 3.ales3 is illegal, dangerous and thus deserves
punishable.
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%o, to identify (oney Circulation .cheme
Any scheme ,hatever name called promises commissions or income based on enrollment of ne,
members into the scheme.
ConditionsL
8i9 "nrollment P sponsoring P &ntroduction of *e, (embers.
8ii9 Promise of income based on the ;oining of ne, members.
&f conditions 8i9 and 8ii9 are satis2ed it is money circulation scheme. <hether or not the income
derived from entrance fee or other things including so called sale of goods or rene,al fee etc.
(odus 7perandiL
=. .ome companies collect ;oining fee of !s.F,HHHP- to I,GHHP- and out of this ;oining fee, half of the
money is directly being credited to the company account and the remaining money is being
distributed among the net,ork or chain or in the name of ,orth of products. +he .iphoning of huge
money through (/( is unimaginable. #or e)ample if a so called (ulti *ational Company like Am,ay
is credited !s.C,GHHP- from its enrolment fee ,hich claims nearly =F lakh members, then ,ithout
any service about !s.C,IHH crore money is being siphoned apart from commissions to uplines
including Company in foreign Countries.
C. +hey conduct meetings for enrollment. +hey ask their members to prepare list of friends, family
members, subordinates, colleagues, neighbours etc. and pursue them to ;oin into the scheme. +his
,ild pursue lead to undue harassment and inducement and ultimately cheating or putting mental
torcher.
F. .ocial relations ,ill be strained if anyone avoids this mental pressure.
K. %ere e)cept distribution of entrance fee camou6aged ,ith products, there is no tangible product
sale as per consumer choice and there is no consumerism in these schemes.
Court 'udgementsL
=. .upreme Court of &ndia - 10!&AC%A* C%AC17 A* 7+%"!. .Mersus .+A+" 7# 1"!A/A ,hich ,as
reported vide 8CHHO9O .CC NHO.
&n our opinion, the re5uirement of la, is 3an event or contingency relative or applicable to
the enrolment of members into the scheme3 and nothing more. +he plain language of the
section does not insist that such enrolment of members must be by the members already
enrolled. &t is impossible to read into the statutory provision such re5uirement ,hich is not
stipulated by Parliament. 0pholding of the argument of the learned counsel ,ould result in
re,riting of the section, ,hich is certainly not permissible in our constitutional system.
+he event or contingency on the happening of ,hich the amount ,ould become payable
must be relative or applicable to the enrolment of the members into the .cheme. &t is
immaterial by ,hom such members are enrolled. &t may be by members, by promoters or
their agents or by gullible sections of the society suo motu 8by themselves9. The sole
consideration is that payment of money must be dependent on an event or contingency
Prepared by ' 'ayanath &P. , .P, <ayanad ==
relative or applicable to the enrolment of more persons into the Scheme, nothing more,
though nothing less. &n the present case, the second ingredient is very much present.
+he %igh Court also upheld the argument of the prosecution that the .cheme ,as a
[3mathematical impossibility3. +he promoters of the .cheme very ,ell kne, that it is certain
that the .cheme ,as impracticable and un,orkable making tall promises ,hich the makers
of the promises kne, truly ,ell that it could not ,ork successfully. &t could ,ork for some
time in that 3Paul can be robbed to pay Peter3 but ultimately ,hen there is a large mass of
Peters, they ,ill be left in the lurch ,ithout any remedy as they ,ould by then have been
deceived and deprived of their money.
C. %igh Court of Andhra Pradesh - (Ps.Am,ay &ndia "nterprises Mersus 0nion of &ndia and others
,hich ,as reported vide 8CHHN9K A/+ OHO8B9.
#rom the ,hole analysis of the scheme and the ,ay in ,hich it is structured it is 5uite
apparent that once a person gets into this scheme he ,ill 2nd it diDcult to come out of the
,eb and it becomes a vicious circle for him. &n any event the petitioners have not
speci2cally denied the turnover they are achieving and the income they are earning to,ards
the initial enrollment of the distributors, the rene,al subscription fee and the minimum sales
being achieved by the distributors as alleged in the counter aDdavit. By no means can it be
said that the money ,hich the 2rst petitioner is earning is not the 5uickPeasy money. By
promising payment of commission on the business turned out by the do,n-line members
sponsored either directly or indirectly by the up-line members 8,hich constitutes an event or
contingency relative to enrollment of members9, the 2rst petitioner is earning 5uickPeasy
money from its distributors, apart from ensuring its distributor earn 5uickPeasy money. +hus
the t,o ingredients are satis2ed in the case of promoter too. We are, therefore, of the
considered view that the scheme run by the petitioners squarely attracts the defnition of
"Money irculation Scheme" as provided in Section !"c# of the $ct..
F. %igh Court of 1arnataka - C7((&..&7*"! 7# &*C7(" +A4 M.. A(A!'""+ 1A0! 8'anuary F=,
CHHI9 reported in 8CHHI9 &+! COF 8N=9.
3&n our vie,, this .cheme has all the basic ingredients of money circulation scheme, ,hich is
banned under .ection F of the Prize Chits and (oney Circulation .chemes 8Banning9 Act,
=>NO, and therefore, the e)penditure incurred by the assessee is an e)penditure prohibited
by la, and therefore, in vie, of ")planation inserted by #inance 8*o. C9 Act, =>>O to .ection
FN 8=9of the Act, ,hich has come into force ,ith e@ect from =-K-=>IC, the e)penditure shall
not be deemed to have been incurred for the purpose of business and therefore, no
deduction or allo,ance can be made in respect of such e)penditure in computing the
income chargeable under the head 3pro2ts and gains of business or profession3.
<ayanad .ituation
"ven though no ma;or (oney Chain Company is based in <ayanad, many are active in areas like
Bathery, Pulpalli, Ambalavayal,(ananthavady etc., Bathery and 1alpetta are ma;or centers for
conducting the meetings of these companies. Bizarre, !(P, *ano ")cel,PAC/ etc., are active here.
Apart from that a lot of Chit funds are also functioning.
+ill CH-I-CH==, a large number of cases are registered against money chain companies like Bizarre
8FK cases9, !(P 8CH cases9, *ano ")cel 8F cases9 and +ycoon 8F cases9. Apart from this, CF cases
Prepared by ' 'ayanath &P. , .P, <ayanad =C
are registered against .reekovil Chits, a Chitty company. $ood progress is made in the case of
Bizarre. +he (anaging irector of the company is arrested. etails regarding various assets of the
company are also seized by the investigating team led by y.P (ananthavady. Process is on to
arrest the remaining accused and cloning the ,ebsite used by the company.
(a;or ;udgments against the money chain companies by various %igh Courts and the .upreme
Court follo,L
Prepared by ' 'ayanath &P. , .P, <ayanad =F
&* +%" %&$% C70!+ 7# '0&CA+0!" A+ (A!A.
N.=.CHHGP<.P.*oLCCINK 7# CHHK A* <.P.(.P.*oLCNK== 7# CHHK
%onble A.1.!a;an, '.
(Ps. Apple #(C$ (arketing 8Pvt9 /imited, rep. by its Chief ")ecutive 72cer (r. !."ric *oL=NC, Arcot
!oad, Madapalani, Chennai- IHH HCI.C (r.!."ric\. Petitioners
Mersus
=.+he 0nion of &ndia. !ep. by its .ecretary to $overnment, (inistry of #inance, *e, elhi.
C.+he .tate of +amil *adu, rep. By its Chief .ecretary, .ecretariat, Chennai-IHH HH>.
F.+he irector $eneral of Police, 1amara;ar .alai, (ylaport, Chennai-IHH HHK \ !espondents.
=.+he 2rst petitioner is a company registered under the Companies Act. &t is marketing various
products including shampoo, tea, co@ee po,er, after-shave lotion etc. under the brand :name E;oy
"ternal through Qnet,ork marketingR. +his method of marketing di@ers from the conventional sale
through a distributor and the retail net,orkL any person could take up the marketing and sale, and
make an earningL it is done by several reputed companies like. %industan /ever and &ndian ")press.
.everal unemployed youth have taken up the marketing of these products and have earned
satisfactory in-comes depending on their talents and e@orts.
8i9 *o complaints have been received from any consumer about the 5uality of the goods sold. 0nder
the scheme of net,ork 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. &n fact it avoids
many middlemen and cost of advertisement, etc. +he marketing process is carried out directly by
recruiting the customers themselves as distributors of the products and servicesT the company
regularly organises business development meetings and seminars, distributors meetings, etc. +he
participants of the meetings are encouraged to take up the distributorship of the products and are
suitably registered if they so desire. +here is no service fee for registration as distributor. Any
person ,ho is interested is given a product for the price 2)ed. +he distributors are encouraged to
en-roll more distributors. +he commissions are given only as per the volume of sales made by the
individual distributor and his team. +his system ensures that intermediate distributors are not like a
chain leading to the customer and the company.
8ii9+here are only t,o stages, viz. stockist and distributor. +he distributor can introduce another
person as a distributor and he ,ill also get commission. +he distributor has to put in his e@ort in
selling the products and then only he ,ill get the commission. +he company also takes care of the
risks involved in the trading activitiesT there is no deposit of money by the consumers and the
products are given to the person ,ho pays the money for the same. +he distributors are paying the
price for the products they purchase. +hus, the possibility of the principal company or its irectors
making use of any funds of others is avoided. ")cept service charges, no charges or deposits are
levied to enroll as a distributor. +here is no risk of non- recovery of the funds due to the consumer
since the products are given out only on receipt of payment. +hus, the process of net,ork
marketing is a foolproof and bene2cial mechanism for the conduct of trade and commerce. +he
pricing of the products is al,ays a contentious issue. +he product is not e)ornitantly priced. But,
some others, ,ho are inimical to,ards the company, are trying to overturn the trading activity of
the company by resorting to various crooked means and methods. +hey maligned the name of the
company by publishing reports in a magazine and conse5uently the company is faced ,ith roving
en5uiries by the police .tockists and distributors of the company have also faced similar
harassment. &t is an infringement of the fundamental right conferred under Article =>8=9 8a9 of the
Constitution. *o complaint has been registered against the company in any of the police stations.
+he 0nion of &ndia has also e)amined the issue of the net,ork marketing and has come to the
conclusion that there is no illegality in the said system. +he 0nion of &ndia has also stated that the
system of net,ork marketing ,ill not come under the purvie, of the Prize Chits and (oney
Circulation .chemes 8Banning9 Act, =>NO. +he labour of a person in selling goods is re,arded by
Prepared by ' 'ayanath &P. , .P, <ayanad =K
payment of commission. .everal companies have launched similar net,ork marketing system.
+herefore, it is 5uite annoying ,hen the police go around the meeting venues and seek statements
from them and ask several 5uestions. .uch invasive process causes considerable delays and
diDculties and results in violation of the rights conferred under Art. => 8=9 8g9 of the Constitution.
+he company understands that similar companies have been targeted in similar ,ay and their
accounts have been frozen by the respondents and the company apprehends that the respondents
,ill take steps to freeze the accounts of the company and disrupt the business activities. +here is
no promise of easy or 5uick money held out to the distributors. +he distribution of commission for
selling is di@erent from the prize chits. +he system only results in advancing the socialist vision of
the farmers of the Constitution and the ,ealth is evenly distributed ,ithout being concentrated in a
group of persons. +he people at large are given more opportunity to earn money depending on their
skill and labour. +he oDcials of the third respondent are harassing the petitioner and its distributors
and it resulted in decline of the trade activities. %ence the ,rit petition.
C. +he 2rst respondent has not chosen to 2le any counter in spite of the time granted repeatedly for
enabling them to 2le a counter.
F. +he second respondent has 2led a counter stating that the second respondent has been
impleaded unnecessarily in the ,rit petition. &t is also stated that the third respondent ,ould take
action in accordance ,ith the provisions of the Act, if the petitioner commits any illegal act.
K. +he third respondent in his counter has stated that the petitioner has e)plained ho, the
marketing of certain goods through their net,ork is carried onT the petitioner has also stated that
there is no #&! pending against their company and hence no investigation is taken up by the police.
<hen that be so, the other facts that the seminars and meetings are all being disturbed by the
police is absolutely false. Police ,ould not interfere ,ith any business conducted by any person in
accordance ,ith la,. &f speci2c complaints are received by the police against the petitioner 2rm, it
is thee duty of the police to take up investigationT such investigation can not be prevented. +he
facts and 2gures given by the petitioner are illusory and imaginary. +he apprehension that their
accounts ,ould be freezed ,ould come to the mind only if the business carried on by them is not
legal. 0nder those circumstances, the ,rit petition tiled only on apprehension and fear of
intervention and hence it is to be dismissed.
G. After seeing the counter aDdavit, the petitioner ,anted to ,ithdra, the petition. But in vie, of
the importance of the issues raised in this ,rit petition, this Court refused to grant permission to
,ithdra, the ,rit petition.
I. +he learned counsel (r.$iridhar appearing for the petitioner submitted that this system of
net,ork marketing practiced by the petitioner company does not fall ,ithin the provision of Prize
Chits and (oney Circulation .cheme 8Banning9 C>NO Act. %e submitted that he has 2led documents
,hich sho,s ho, the net ,ork marketing is carried on. %e has 2led the pamphlets issued in that
regard.
N 8i9 According to the system, ,hen a person purchases any product from the company, he has
to make an application 8form 2led in the typed set9 ,hich contains the column for three user names
8name of person ,ho registers ,ith the company9. &t also contains a column to 2ll up the sponsors
name and his placement. %e has to sign a declaration that he has entered into this agreement as
an independent distributor. &n addition to the agreement, they are bound by the conditions
contained the brochures 8not 2led in the typed set9 and it is valid for one year from the date of
;oining.
8ii9 +he type set also contains Product price list of Q!s.GGH planR 8also there are Q!s.=HHH
planR and others9. &t contains si) products namely *utrimalt, Co@ee, tea, .oap, .hampoo and
Pickles. +he ma)imum retail price 8(!P9 and the distributors price 8P9 also are given. +he sum of
ma)imum retail price of all these si) products comes to rs.K>NP-. +he total amount for ,hich it is
Prepared by ' 'ayanath &P. , .P, <ayanad =G
sold to the distributors is !s.FNCP-.
8iii9 Admittedly, for these products, the so called distributor pays a sum of !s.GGHP-, ,hereas
the distributors price is only !s. FNCP-. +herefore, !s.=NO is charged e)tra from the distributors.
+his amount, the distributor pays to the company because he is made to believe that ,hen he sells
these goods to others and enroll others in the scheme, he gets commission from the petitioner
company. .uch Commission depends upon the total volume of business that he generates by
enrolling ne, distributors, it progresses like a chainT the amount of commission depends on the
subse5uent QdistributorsR ,ho is made to ;oin by the petitioner or a purchaser through him. +he
promise of the possible commission is the reason for ones enrolment. +he form re5uires to be 2lled
up ,ith three QdistributorsR names through ,hom the ne, entrant get into the scheme and their
placement.
8iv9 7ne has, to purchase one or more starter kit by paying the money as stated aboveT the
starter kit are valued at !s.GGHP-, !s.=HHHP- and so onT he must sell the product to t,o other
persons and get their application form 2lled up and sent to the companyT those t,o persons in turn
have to purchase starter kits from the company and in turn they must sell and enroll t,o other
persons each. "ach ne, entrant shall purchase the starter kit from the company and in turn sell
enroll t,o other persons. /ike this, every ne, purchaser from ,hom the ne, entrant purchases
shall enter the three names of his predecessors in the chain. /ike this, the chain progresses. +he
three names 2lled up by each and every ne, distributor depending upon the rank of placement and
volume of the business, everyone in the chain gets the commission. &f a person gets started ,ith
2ve starter kits, he ,ill sell it to ten persons and that ten ,ill become t,enty at the ne)t stage and
t,enty ,ill become forty and so on. <hen it goes up to ten stages in this manner, the person ,ho
sold 2rst ,ill get a commission.
O. As seen already, a starter kit ,hich is sold at !s.GGHP- for the goods ,hich may be sold at !s.
FNC. +herefore, in one kit, an e)cess amount of !s.=NOP- is collected. +his amount is shared by the
company and the so called distributors. <hen a person 2rst purchases the starter kit, he pays !s.
=NOP-- more as above. +hereafter, he sells the same at the lesser price 8distributors price9 and he
may sell it others and earn the pro2t. +hat is, each time a person purchases a starter kit, the
petitioner gets a sum of !s. =NOP- in e)cess.
>. +he learned counsel for the petitioner further submitted that earlier KG? of the sale amount ,as
distributed as commission but presently it is increased to IG? of the sale price. +hat means the
goods ,hich are ,orth only !s.FGP- are sold at rs.=HHP- and this rs.FGP- covers not only the price of
the goods, but also e)penditure involves for the administration of the company. 7f course, the
Court can not interfere ,ith the 2)ation of the price. Anybody is free to 2) any price and it is for the
customers to accept or not. But, it is not an ordinary sale of goods. +he persons are lured to
become a distributor only on the hope or e)pectation that he may get more money by ,ay of
commission if he sells the products similarly to others. 7f course, many persons are earning lot of
commission in this manner. +his chain is likely to progress for some time. At one point of time the
progress of the chain ,ill stop. 7n that day persons ,ho buy the product may not 2nd any further
distributor to purchase from them. By the time, the company ,ould have earned enormous pro2t.
But a very large number of persons ,ould be left cheated.
=H 8i9 +o be a distributor of such product, it re5uires registration under the +*$.+ Act, in case
the value of turn over e)ceeds a particular limit. &t is possible that a fe, of the distributors may
e)ceeds that limit. But, those persons are not registered under the +*$.+ Act and also ,ould not
be pay to the $overnment the sales ta).
8ii9 +hat apart, this system is not an ordinary business transaction, it e)ploits the personal
in6uence an individual has in the society. +he distributors are found to in6uence their subordinates
or friends. (any of such distributors gets included because of such undue in6uence by their
superiors. (any un,illing purchasers ,ould be forced to purchase only to obey their superiors or
Prepared by ' 'ayanath &P. , .P, <ayanad =I
satisfy their friends or at times under threat or coercion or inducement and so on. +herefore, the
deemed agreement became void under the &ndian Contract Act. +herefore, it is duty of the la,
enforcing authorities to prevent such undue in6uence being e)ercised.
==. As rightly submitted by the learned counsel for the respondents only under promise or
e)pectation of getting huge commission 8easy or 5uick money9, the public are lured to invest more
money in such of the schemes. &t is only an imaginary pro2t. "very one cannot sell all the products
8as stated already9 to some others. &f a person is unable to get purchasers or distributors at one
point of time, very large number 8may be in lakhs9 of people ,ould be left at that stage, unable to
2nd a purchaser or distributor. At that stage, all such persons ,ould be cheated.
=C.#rom the averments, made in the counter aDdavit, it is seen that the la, enforcing authorities
are keeping the surveillance against such meetings and record statement from the persons ,ho
attend the meetings. By that, the la, enforcing authorities are doing their duty cast on them. &t is
indeed appreciable that at least no, the la, enforcing authorities are vigilant that people should
not get cheated and ultimately come to them for redress.
=F.But there is also a prayer for declaration that the activities are not illegal and does not amount
to violation of any of the la,s. +herefore, this Court has to decide the aspect as to ,hether this
multilevel marketing is legal or not.
=K. +he main contentions of the petitioner are as follo,sL-
8=9 .o far no complaints have been received against them from any distributor. +herefore,
this (ulti-level (arketing has not caused any loss to any of the distributors.
8C9 +here is no Eservice fee for registration as distributor.
8F9 "very distributor gets commission on the basis of the volume of business that is
generated by him.
8K9 *o chain of customers in the process.
8G9 +he distributors and the purchasers pay the value of the product that is purchased,
therefore, they are not paying any e)cess amount.
8N9 +hey collect only nominal service charge for the service rendered.
8O9 +he surveillance by the respondents violates the petitioners fundamental right provided
under Articles =>8=9 8a9 and =>8=9 8g9 of the Constitution of &ndia.
8>9 #urther the 0nion of &ndia has also clari2ed that the Q(ulti-level (arketingR does not
infringe the Prize Chits and (oney Circulation .chemes 8Banning9 act, =>NO 8%ereinafter
referred to as E+he Act9.
=G. (ere fact no complaints ,ere received does not make an act legal, if it be other,ise illegal. &t is
true that no service fee is collected by the petitioner for registration. &t is also true that the
commission that is received by the distributor depends upon the volume of business generated by
him. #rom the scheme of (ulti-level (arketing, as re6ected in the brochure issued by the petitioner,
the commission is received only if the distributor sells the product, ,hich he purchases, to t,o
others and those t,o persons sell it to t,o other persons each and those four persons sell similarly
to t,o persons each. &n this manner, if more number of persons in the ne)t stages come into this
scheme, the person through ,hom those persons got enrolled gets commission.
=I. +he contention of the petitioner is that there is no chain of customers. +his contention appears
not acceptable. +he scheme, as stated above, creates chain of customers and only ,hen the chain
progresses ,ithout any break in any of the links, the Eprincipal distributor gets more commission. &f,
for any reason, the chain is broken, at any stage, then the principal distributors commission ,ould
get reduced proportionally to that e)tent. +herefore, it is not correct to say that there is no chain of
customers in the process.
=N.+he ne)t contention is that the purchasers pay the value of the product as stated above and
they do not pay the e)cess amount. &t is seen that a Estarter kit is purchased by the principal
Prepared by ' 'ayanath &P. , .P, <ayanad =N
distributor for a sum of rs.GGHP- as per the plan found in the brochure. +he very same brochure
contains the (!P of the kit as !s.K>NP-, ,hich is rounded o@ to !s.GHHP- and a service charge of
!s.GHP- is collected ,hen a kit is sold. +he contention that no service charge is collected also does
not appear to be correct in vie, of the fact that every person ,ho purchases a kit has to pay a
service charge of rs.GHP- for each kit. .ervice charges are collected by governmental institutions like
"lectricity Board and +elephones as they are authorized by the .tatutory !ules *o individual can
collect any charge has service charges. +he collection of service charge is therefore, not legal.
=O. As submitted by the learned counsel for the petitioners, the petitioners-Company originally ,as
giving KG? of sale price as commission and no, that is increased to IG?. #rom the very fact that
IG? is earmarked for paying as commission to the distributors, it is clear that the value of the
product is only FG ? of the sale price. +hat is, ,hen the goods are sold at !s. GGHP-, the actual value
of the goods that are sold is only !s.=OOP- calculated at FG ?9. #or the value of goods ,orth
!s.=OOP-, the purchaser pays !s.GGHP-. But ,selling the goods at higher price that is 2)ed by the
seller, does not o@end any la,. +o get commission one has to purchase starter kits. &f the distributor
,ants to get more commission through a member of Esub-distributor under him, he shall purchase
more number of such starter kits. +here is no authority to collect !s.GHP- as service charges for one
kit. &f it is purely a sale of goods, no service charges are permissible under any la,.
=>.+he progress of the chain of customers, at some point of time, ,ould get saturated and the
distributor, ,ho purchases the goods, ,ill not 2nd any purchaserPsub-distributor to sell or enroll
afresh. At that time, due to the progress of the chain, in the manner stated above, such persons
,ho ,ould not 2ne ne, members may be in lakhs or even millions. +herefore, lakhs or even
millions of people are bound to lose their entire money of !s.GGHPH 8value of one starter kit9. At the
same time, ma;or portion of IG? of the amount ,ould be a gain to the petitioners-company since
there ,ould be no one share that money.
CH..ection C8c9 of the Prize Chits and (oney Circulation .chemes8Banning9 Act, de2nes E(oney
Circulation .cheme, as follo,sL
Q(oney circulation schemeR means any scheme, by ,hatever name called, for the
making of 5uick 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, ,hether or not such money or thing is derived
from the entrance money of the members of such scheme or periodical subscriptions.R
+he above de2nition makes it clear that any scheme by ,hatever name it is called ,hereby
on a promise that one ,ould receive or ,ould make 5uick or easy money by enrolment as members
into the scheme is Emoney circulation scheme. &n this case, there is enrolment of members into the
schemeT there is also a promise made that on such enrolment of large number of persons into the
scheme, one ,ould make 5uick money or easy money. +here cannot be any doubt that by enrolling
ne, members and by the process of selling the goods to ne, distributors this chain progressesT the
person ,ho became such members earlier get commission ,ithout doing any ,orkT getting such a
commission is nothing but getting 5uick or easy money. +herefore, such schemes the so called
E(ultilevel (arketing, de2nitely falls ,ithin the de2nition of Emoney circulation scheme.
C=.+he learned counsel for the petitioner submitted that 0nion of &ndia has made a clari2cation in
an ans,er to a 5uestion in Parliament that (ulti-level (arketing does not violate or o@end the
provisions of the Prize Chits and (oney Circulation .chemes 8Banning9 Act. &t is suDce to say that it
is not for 0nion of &ndia or any (ember of Parliament to interpret the provisions of any (ember of
Parliament. +he act has been passed by the Parliament, but the po,er to interpret the Act is only
vested in ;udiciary and that po,er is not given to the ")ecutive. +he statement given by the 0nion
of &ndia or its 7Dcers that (ulti-level (arketing does not attract the provisions of the Act cannot
legalise an illegal act.
CC.&t is true that several companies including (ultinational Companies carry on the business of the
Prepared by ' 'ayanath &P. , .P, <ayanad =O
Q(ultilevel (arketingR and it is also true that the e)ecutive and the la, enforcing authorities keep a
blind eye on such activities. +his also does not make an illegal act legal. &t is al,ays a fact that the
la, enforcing authority ,ould try to close the stable only after the horse had escaped.R +hat is the
la, enforcing authority ,ould realize that this scheme ,ould ultimately leave a large number of
persons cheated. +hereafter, after losing their money, they ,ould approach the e)ecutive
complaining that they ,ere cheated. +ill such time, the la, enforcing authorities do not act. +hey
do not take preventive action to enforce the provisions of the e)isting la,.
CF. +he learned counsel for the petitioner placed reliance upon the ;udgment of the .upreme Court
in !eserve Bank of &ndia vs. Peerless $.#. S & Co. /td 8A&! =>ON .C =HCF9 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. &n the Peerlesss case the .upreme Court had an occasion to interpret .ec.C 8e9 of the Act
and held that the endo,ment scheme of the Peerless Company ,as not a prize chit on the ground
that there ,as no element of chance in that scheme. &t also held that .ection C e9 does not
contemplate a scheme ,ithout a prize and therefore the "ndo,ment Certi2cate .cheme of the
Peerless Company ,as outside the Prize Chits and (oney Circulation .cheme 8Banning9 Act. &n this
case .ection C 8e9 has not been considered by the .upreme Court.
CK. +he learned counsel also referred to another ;udgment in .tate of <et Bengal v.. .anchaita
&nvestments 8A&! =>OC .C >K>9. &n this case sec. C 8c9 has been considered. +he .upreme Court has
held that.
Q+o be a money circulation scheme, a scheme must be for the making of 5uick or easy
money on any event or contingency relative or applicable to the enrolment of the members
into the schemeR.
&n this case, the .upreme Court has held that ,hen a 2rm indulging in high risk investments. &t ,as
not illegal. #urther, payment of interest in e)cess of stipulated rate ,as not a scheme for marking
easy or 5uick money. +he .upreme Court further held that a scheme has necessarily to be ;udged
as a ,hole, both from the vie,point of the promoters and also of the members. +he .upreme Court
in that case had considered only one aspect namely, ,hether promise of giving more interest
attracts money circulation schemeX <hile deciding that issue, the .upreme Court held that if such
transactions are made openly and not in violation of any la,, it ,ould amount to violations of the
Act. &n that case, promise to give KO? of interest ,as not a promise of getting 5uick money since
the promise ,as given openly. &n that case, the materials placed before the Court ,ent to sho, that
though the rate of interest stipulated in the loan certi2cate ,as =C ? the 2rm used to pay
altogether interest at FI? to KO? in all, ,hich ,as held not a money circulation scheme. #urther,
the .upreme Court held that the materials did not indicate that the payment of interest to the
depositors ,hether at the stipulated rate or at the enhanced rate is dependent on any element of
chance.
CG.+herefore, the t,o ;udgments relied upon by the learned counsel for the petitioners, are not on
the point ,hether the so-called (ulti-level (arketing ,ould attract the provisions of the Prize Chits
and (oney Circulation 8Banning9 Act. +herefore, the argument of the learned counsel for the
petitioner that the Prize Chits and (oney Circulation .chemes 8Banning9 Act does not attract the
scheme, is not correct. +here is no decision by the .upreme Court on this issue.
CI.As stated above, this scheme called (ulti-level (arketing creates a chain of customers and the
long and unbroken chain ,ould ensure larger amount of 5uick or easy money. +he shorter and
missed links in the chain ,ould result in earning lesser commission. +herefore, there should be
unbroken chain or customers. .econdly, the person does not get the value of the money he paysT
thirdly the companies are collecting service charges as stated above in a sale of goods. *o service
charges can be collected ,hile the goods are sold.
CN.#or all these reasons the scheme of so called (ulti-level (arketing cannot be said not to violate
Prepared by ' 'ayanath &P. , .P, <ayanad =>
the provisions of .ec. C 8c9 of the Act.
CO.Apart from that this (ulti-level (arketing results in e)ploitation of the personal in6uence of each
and every distributor or his close relative. As stated already, a superior 7Dcer or his ,ard ,hen he
involves in this (ulti-level (arketing, the subordinates are forced to become members in the chain.
+hough it may not amount to violation of this Act, it ,ould attract some other la,sT it may result in
undue in6uence, e)traction, coercion, etc.
C>.#or the reasons stated above, the petitioners are not entitled for the declaration as prayed for.
+hat apart, such a blanket and omnibus prayer that the scheme is not in contravention of the
provisions of the Prize Chits and (oney Circulation .chemes 8Banning9 Act, =>NO or any other la, in
force cannot be granted by any Court.
FH.&t is, indeed, appreciable that the Chief .ecretary and the irector $eneral 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 ,ould
de2nitely take action against the petitioners. +hat sho,s that they are alive to the situation.
F=.&t is true that the petitioners are comparatively a small 2sh in the business of the so called (ulti-
level (arketing. +here are other comparatively bigger associations or institutions or companies
,hich adopt similar schemes. &t is for the irector $eneral of Police and other la, enforcing
authorities to have a ,atchful eye on all such activities and to take timely action as and ,hen it is
called for.
FC.+he 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. +his intimidate
people ,ho come to attend their seminars and lecturesT and this ,ould amount to violation of the
petitioners fundamental rights under Articles =>8=9 8a9 and => 8=9 8g9 of the Constitution of &ndia.
+his argument is not acceptable. &t is true that they have the right to freedom of speech and
e)pression and also to the freedom to carry on business. But, both the rights are sub;ect to
reasonable restrictions as contemplated and Articles =>8C9 and =>8g9. +he right to freedom of
speech is sub;ect to reasonable restriction on the ground of public order and the right to freedom to
carry on business is sub;ect to reasonable restriction in the interest of Egeneral public. +herefore,
,hen the police keeps ,atch over any seminars or lectures. &t is in the interest of maintenance of
public order and also it is ,ith a vie, to protect the interest of general public. +herefore such acts
cannot be complained of by any person including the petitioners ,ho conduct any seminar or
lecture for promoting their business.
FF.&n this part of &ndia, people are gullible and fall an easy prey to the tall promises made through
the media. +hat ,as the reason ,hy the lottery tickets ,ere sold in large numbers in this .tate.
(any companies ,ant to e)ploit this attitude of people and 6oat many schemes and lure the people
to ;oin the schemes. 7nly ,hen they ultimately lost the money, they realize that they ,ere misledL
by that time it becomes too late. +hereafter, they approach the la, enforcing authorities and
5uestion them ho, did they permit such schemes. +hat is the reason ,hy the police keep a ,atch
over such activities. +he petitioner is not entitled for direction for prohibiting the authorities from
keeping surveillance over any meeting. .ec. N of the Act confers the right on the police oDcer to
enter any premises, ,here he has got a reason to suspect that the premises are being used for
purposes connected ,ith the promotion or conduct of any prize chit or money circulation scheme in
contravention of the provisions of the Act.
FK.According to the Prize Chits and (oney Circulation .chemes 8Banning9 Act, Q(oney Circulation
.chemeR means-
.. any scheme, by ,hatever name called-
8 i 9 for making 5uick or easy money T or
8ii9 for the receipt of any money or valuable thing as the consideration 8or a promise to pay
Prepared by ' 'ayanath &P. , .P, <ayanad CH
money9 on any event or contingency relative to the enrolment of members into the scheme.
+hus the de2nition covers t,o aspects-
8i9 A scheme for making 5uick or easy moneyT
8ii9 #or receipt or any money or a promise to pay moneyL on an event relative to the
enrolment in the scheme.
&t is applicable to both- the sponserer and the participants or subscribers.
FG. &n the present case, as seen from the materials placed-
8i9 +he petitioner company gets an e)tra amount of !s.F-P by rounding o@ 8!s. K>N as !s.GHH9. &t
also gets !s. GHP- as service charge, ,hile selling the product. +hus, the company 8petitioner9 gets
5uick or easy money, as per the above de2nition.
8ii9 &t enables the receipt of money 8by ,ay of commission9 by the so-called distributor also on his
enrolling ne, members.
FI.+he event is enrolment of ne, membersT the commission received is relative to such enrolment
of ne, members into scheme. +herefore, the argument of the learned counsel for the petitioners
that there is no promise of 5uick or easy money is not correct for the reasons stated above. +hus,
the so-called (ulti-level (arketing, though called by a very attractive name s5uarely falls ,ithin the
de2nition of E(oney Circulation .cheme under the Act. %ence, it is prohibited by the Act. &t is for
the la, enforcing authorities to take appropriate action.
FN. &n the result, the ,rit petition is dismissed. *o costs. Conse5uently <P(P *o.CNK== of CHHK is
dismissed.
]]]]]]]
Prepared by ' 'ayanath &P. , .P, <ayanad C=
%&$% C70!+ 7# 1A!*A+A1A
Coram L %. /. A++0, A. .. B7PA**A
CP< &+!C GG 7f =>>> 8'A*0A!Y F=, CHHI9
C7((&..&7*"! 7# &*C7(" +A4 M.. A(A!'""+ 1A0!
%. &. '$TT(, )
8=9 &* all these reference cases, the 5uestion of la, and the facts referred by the &ncome +a)
appellate +ribunal, 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.
8C9 +%" facts in &+!C *o. KOP=>>> is noticed in this ;udgment for disposal of these reference cases.
+he assessee has her o,n proprietary business 3mis (an;og %ome3 and also gets share income
from 2rms. #or the assessment year =>OG-OI, the assessee is assessed in the status of 3individual3.
(Ps. (an;og %ome ,as dealing in home appliances like refrigerators, television sets, electric and
electronic goods, etc. +he assessee as a proprietri) of (Ps. (an;og %ome had launched a sales
promotion scheme kno,n as 3deposit /inked &ncentive .cheme3 for the purpose of raising
additional funds to e)tend her business. 0nder the .cheme, as noticed by the 2rst appellate
authority, the public are invited to become members by making deposits ,ith the assessee and on
the making of such deposits, goods dealt by the assessee of the value of about NG? of the deposit
,ould be given free to the members as incentivePgift. +he deposit so made by the members ,ere
returnable to the members ,ithout interest after the e)piry of G to =H years depending on the
nature of the goods involved. Based on this .cheme, deposits ,ere accepted from the members
and goods and articles of the members choice ,as given to them as gift or incentive. +he price of
the article ,as credited as and ,hen the issues ,ere made in the .cheme and a like amount ,as
debited as incentive in the pro2t and loss account.
8F9 +%" assessee debited the value of the goods supplied to the customers in a sum of rs.
CN,CN,=>=P- for the relevant assessment year in her pro2t and loss account and claimed the same
as e)penses to,ards 3deposit /inked &ncentive .chemes3 and the same amount ,as also credited
by the assessee to the sales account increasing the amount of sales thereby. By this modus
operandi, the assessee ,as able to mobilise deposit to the e)tent of !s. K=,>C,>CHP-during the
accounting period relevant to the assessment year under this .cheme. &n the return of income 2led
for the relevant assessment year, the assessee had claimed allo,ance of the above mentioned
amount as revenue e)penditure for the purpose of income chargeable to ta). +he same ,as
disallo,ed by the assessing authority on various grounds. &n sum and substance, the vie, of the
assessing authority appears to be, that the e)penses to,ards mobilising deposit cannot be allo,ed
Page = under .ection FN of the &ncome +a) Act, =>I= 8[act[ for short9, as revenue e)penditure.
8K9 &* the appeal 2led by the assessee, the 2rst appellate authority has allo,ed the appeal in part
and ,hile doing so, has observed in his orderL
3O. <ith regard to the 2rst issue, & have no diDculty in holding that the e)penditures incurred
are ,holly and e)clusively for business. +he /earned &ncome +a) 7Dcer[s observation that
there ,as no trading ,ith reference to the articles given as incentive is incorrectT +he only
articles given as incentives are articles dealt ,ith by the appellant as a trader. +he other
Prepared by ' 'ayanath &P. , .P, <ayanad CC
observation of the &. +. 7. that the collection of deposits ,as not a business activity is again
incorrect. +he appellant needed money for e)panding the turnoverT the appellant had
several methods of obtaining this 2nance ego from borro,als etc. +he appellant ho,ever
chose to obtain deposits and to lure these deposits, o@ered the articles tree to the gullible
public on condition that by taking a,ay of these articles ,orth NG? of the deposit, the
depositor has been suDciently recompensed for making the deposit tree of interest. & ,ould
observe that by setting out !s. CN lakhs of incentives, the appellant ,as able to mobilise
deposits of !s. KC lakhs. & ,ould also observe that these incentives of !s. CN lakhs are but a
small traction of the total turnover in this case of !s. =KF lakhs
>. %ad the deposits been taken for interest, the appellant ,ould have been had to pay
interest every year on the deposits. 7n the other hand, instead of making this annual
payment of interest, the appellant has incurred a one time e)penditure of !s. CN lakhs. Can
this setting out of e)penditure of !s. CN lakhs, be then said to be not for the purposes of
business & think not. +he e)penditure has clearly been set out ,holly and e)clusively for the
purposes of business. 3
8G9 #""/&*$ aggrieved by the aforesaid order passed by the 2rst appellate authority, the assessee
as ,ell as the revenue had 2led separate appeals before the &ncome +a) Appellate +ribunal. +he
+ribunal by its common order dated G-F-=>>I has allo,ed the assessee[s appeal and has re;ected
the revenue[s appeal, holding that the entire e)penditure claimed by the assessee is in the nature
of business e)penditure and re5uires to be allo,ed in computing the income chargeable under the
head 3pro2ts and gains of business or profession3 .
8I9 +%70$% the revenue in its application 2led under .ection CGI 8=9 of the Act had re5uested the
tribunal to state the case and refer four 5uestions of la,, the +ribunal has thought it 2t to refer only
one 5uestion of la, said to be arising out of the orders passed by the +ribunal in &+A no. =IGKP=>O>
dated G-F-=>>I for the assessment year =>OG-=>OI for our consideration and decision, +he same is
as underL
3,hether on the facts and in the circumstances of the case, the &+A+ is right in la, in holding
that the e)penditure being[ the cost of goods given to the depositors at the time of
accepting deposits received under /&P .cheme, being deferred revenue e)penditure
8claimed by the assessee also as such9 as revenue e)penditure relating to the previous year
assessable for the assessment year =>OG-OIX3
8N9 A+ the time of hearing of these reference cases, .ri .eshachala, /earned Counsel for the
revenue ,ould contend, that in vie, of insertion of ")planation to .ection FN of the Act by 2nance
8*o. C9 Act, =>>O ,ith e@ect from =-K-=>IC, the e)penditure claimed by the assessee as allo,able
e)penditure, is an e)penditure incurred in a .cheme ,hich is prohibited by la, and therefore, the
e)penditure claimed cannot be deemed to have been incurred for the purpose of business or
profession and therefore, no deduction or allo,ance can be made in respect of such e)penditure. &t
is further contended by the /earned Counsel that this plea could not be raised by the revenue
before the +ribunal ,hen the appeal 2led by the assessee ,as disposed of on G-F-=>>I, since the
")planation to .ection FN of the Act ,as inserted by #inance 8*o. C9Act, =>>O, ,ith e@ect from =-K-
=>IC. Proceeding further, the /earned Counsel ,ould contend, that the matter need not be
remanded by this Court to the &ncome +a) Appellate +ribunal, since the legal issue referred for
consideration and decisions by the +ribunal can be decided by this court ,ith reference to the
amended provision, namely, insertion of ")planation to .ection FN of the Act ,ith retrospective
Prepared by ' 'ayanath &P. , .P, <ayanad CF
e@ect i. e. ,ith e@ect from =-K-=>IC. &n aid of this submission, the learned Counsel for the revenue
relies on the observations made by this Court in the case of sterling #oods Ms Commissioner of
&ncome +a) 8=>>=9 =>H &+! CNG, ,herein this Court by relying on the observations made by the
Ape) Court in the case 7f C.+ vs. Bi;li Cotton (ills 8=>IK9 =G .+C IGI 8.C9 has concluded that
3,hen the la, has been amended ,ith retrospective operation, it should be the duty of the %igh
Court to apply the la, so amended if it applies3. &n our vie,, the la, declared by the Ape) Court in
Bi;li Cotton (ill[s Case 8.upra9 and the la, declared by this Court in .terling #ood[s Case 8.upra9
follo,ing the vie, e)pressed by the Ape) Court in the aforesaid decision re5uires to be noticed.
+herefore, they are e)tracted and they are as underL in Bi;li Cotton (ill[s Case 8.upra9, the Ape)
Court has stated as underL
3mr. esai, /earned Counsel for the respondent, ob;ects to this 7rder being relied on by (r.
.astri on various grounds. %e further says that on a true interpretation of the 7rder, it does
not apply to the case of the assessee. +he 5uestion then arises ,hether ,e are entitled to
take into consideration the =>IC 7rder. /earned Counsel has cited various cases and has
argued that this being an appeal by special leave from a reference, ,e should not take the
order into consideration. &t is unnecessary to refer to the cases because the point is
concluded by a ;udgment of this Court in C.+ vs. Bi;li 8.upra9 as follo,s 8pp IIK, IIG9T
[undoubtedly the tribunal called upon to decide a ta)ing dispute must apply the relevant la,
applicable to a particular transaction to ,hich the problem relates, and that la, normally is
the la, applicable as on the date on ,hich the transaction in dispute has taken place. &f the
la, ,hich the +ribunal seeks to apply to the dispute is amended, so as to make the la,
applicable to the transaction in dispute, it ,ould be bound to decide the 5uestion in the light
of the la, so amended. .imilarly, ,hen the 5uestion has been referred to the %igh Court and
in the mean,hile, the la, has been amended ,ith retrospective operation, it ,ould be the
duty of the %igh Court to apply the la, so amended if it applies. By taking notice of the la,
,hich has been substituted for the original provision, the %igh Court is giving e@ect to
legislative intent and does no more than ,hat must be deemed to be necessarily implicit in
the 5uestion referred by the +ribunal, provided the 5uestion is couched in terms of suDcient
amplitude to cover an en5uiry into the 5uestion in the light of the amended la,, and the
en5uiry does not necessitate investigation of fresh facts. &f the 5uestion is not so couched as
to invite the %igh Court to decide the 5uestion in the light of the la, as amended or if it
necessitates investigation of facts ,hich have not been investigated, the high Court may
refuse to ans,er the 5uestion Application of the relevant la, to a problem raised by the
reference before the %igh Court is not normally e)cluded merely because at the date ,hen
the +ribunal decided the 5uestion the relevant la, ,as not or could not be brought to its
notice[. +herefore, follo,ing this ;udgment, ,e must hold that (r. .astri is entitled to rely on
the =>IC order and it is our duty to ans,er the reference in accordance ,ith the amendment
made by the 7rder, unless the 5uestion referred is not couched in terms of suDcient
amplitude to cover an en5uiry into the 5uestion in the light of the amended la,. 3
&n .terling #ood[s Case 8.upra9, this Court has stated as underL
3,hen a 5uestion has been referred to the %igh Court and, in the mean,hile, the la, has
been amended ,ith retrospective operation, it ,ould be the duty of the %igh Court to apply
the la, so amended if it applies. Application of the relevant la, to a problem raised by
reference before the high Court is not normally e)cluded merely because at the date ,hen
the +ribunal decided the 5uestion, the relevant la, ,as not or could not be brought to its
notice. 3
Prepared by ' 'ayanath &P. , .P, <ayanad CK
8O9 .!& Parthasarathy, /earned Counsel for the assessee ,ould submit, that the .cheme 6oated by
the assessee ,as for her business purpose and that by no stretch of imagination, it could be
characterised as a .cheme ,hich is prohibited by la, and therefore, the e)penditure incurred by
the assessee is purely for business purpose and therefore, the allo,ance or deduction claimed in
respect of such e)penditure re5uires to be allo,ed as revenue e)penditure inspite of insertion of
")planation to .ection FN of the Act by #inance 8*o. C9 Act, =>>O ,ith e@ect from =-K-=>IC
8>9 &* reply, the /earned Counsel for the revenue ,ould submit, that the 3deposit /inked incentive
.cheme3, ,hich the assessee had 6oated for the purpose of her business activities is nothing but
[[money Circulation .cheme3, ,hich ,as not only deprecated by the Ape) Court in the case of
!egistrar of #irms, .ocieties And Chits, 0ttar Pradesh Ms (Ps. .ecured &nvestment co. , /uckno, and
Another. A&! =>OO .C K>C, but also had declared that such .chemes are prohibited by la, and
therefore, the assessee in vie, of the ")planation inserted by #inance 8*o. C9 Act, =>>O is not
eligible and entitled to claim deduction or allo,ance of such e)penditure as an e)penditure for the
purpose of business or profession
8=H9 A#+"! hearing the /earned Counsel for the parties to the lis, the 5uestion of la, referred by
the &ncome +a) Appellate +ribunal re5uires to be re- framed as underL
3i. <hether the business carried on by the assessee is prohibited by la, and thereby the
e)penditure incurred by the assessee is deemed not to have been incurred for the purpose
of business or profession and no deduction or allo,ance shall be made in respect of such
e)penditureX &&. <hether in the facts and circumstances of the case, the matter re5uires to
be remanded to the +ribunal for a fresh disposal in vie, of insertion of ")planation to .ection
FN of the Act by 2nance 8*o. C9 Act, =>>O, ,ith e@ect from =-K-=>ICX3
8==9 <" ,ill take up the second issue 2rst for our consideration. +he +ribunal ,hile disposing of the
assessee[s appeal for the assessment year =>OG-=>OI, has concluded, that the e)penditure
incurred by the assessee being the cost of the goods given to the depositors at the time of
accepting deposits received under 3deposit /inked &ncentive .cheme3, is a revenue e)penditure
relating to the previous year assessable for the assessment year =>OG-=>OI. +he 5uestion so
referred covers the issue, ,hether the e)penditure incurred by the assessee for her business or
profession is allo,able deduction in computing the income chargeable under the head 3pro2ts and
gains for business or profession3X +his 5uestion of la, no, re5uires to be decided in vie, of the
")planation inserted retrospectively by #inance 8*o. C9 Act, =>>O, ,ith e@ect from =-K-=>IC.
<hether this can be done by this Court ,ithout remanding the matter to the +ribunal is no, ,ell
settled by the decision of the Ape) Court in Bi;li Cotton (ill[s Case 8.upra9, ,hich vie, is adopted
by this Court in the case of .terling #ood[s Case 8.upra9. +herefore, ,e are of the opinion that these
reference cases need not be remanded to the &ncome +a) Appellate +ribunal for determination of
the legal issue canvassed by the /earned Counsel for the revenue
8=C9 +%" ne)t 5uestion that falls for our consideration is ,hether the amounts collected by the
assessee from depositors under the 3deposit /inked &ncentive .cheme3 is allo,able e)penditure in
computing the income chargeable under the head 3pro2ts and gains of business or profession3X +he
/earned Counsel for the revenue placing heavy reliance on the observations made by the Ape)
Court in the case of (Ps. .ecured &nvestment Co. , /uckno, and Another 8.upra9, contends that the
.cheme evolved by the assessee is nothing but 3money circulation .cheme3 ,hich is prohibited by
la, and therefore, in vie, of the language employed in the .cheme, the e)penditure is deemed to
Prepared by ' 'ayanath &P. , .P, <ayanad CG
have been incurred for a purpose ,hich is prohibited by la, and therefore, no deduction or
allo,ance could be made in respect of such e)penditure.
8=F9 &* our vie,, the reliance placed by the /earned Counsel for the revenue may not assist him
much in the fact situation of the present case, for the reason, in (Ps .ecured and &nvestment co. [s
Case 8.upra9, the .upreme Court ,as considering a case of [prize Chit[ and ,hat are the
ingredients, ,hich constitutes a [prize Chit[ for the purpose of .ection C 8e9 of the Prize Chits and
(oney Circulation .cheme 8Banning9 Act, =>NO
8=K9 &* our vie,, the case la, ,hich is nearer to the issue ,hich has fallen for our consideration, is
the decision of the Ape) Court in the case of .tate of <est Bengal Ms .,apan 1umar $uha and
7thers A&! =>OC .C >K>. &n this case, the e)pression 3money Circulation .cheme3 on ,hich heavy
reliance is placed by the /earned Counsel for the revenue came up for consideration. <hile
e)plaining the concept of 3money Circulation .cheme3 and the test or tests for determination
,hether a particular .cheme 6oated by a business house or promoter ,ould fall ,ithin the meaning
of the e)pression 3money Circulation .cheme3, ,hich is banned under the provisions of the Prize
Chits and (oney Circulation .chemes 8Banning9 Act, =>NO, etc. , the court has statedL
3N. &n order to give meaning and content to the de2nition of the e)pression [money
circulation scheme[ ,hich is contained in .ection C 8c9 of the Act, one has, therefore, to look
perforce to the ad;ectival clause ,hich 5uali2es the ,ords 3for the making of 5uick or easy
money3. <hat is ,ithin the mischief of the Act is not 3any scheme, by ,hatever name called,
for the making of 5uick or easy money3 simpliciter, but a scheme for the making of 5uick or
easy money, 3on any event or contingency relative or applicable to the enrolment of
members into the .cheme3, 8,hether or not such money or thing is derived from the
entrance money of the members of such scheme or their periodical subscriptions9. +,o
conditions must, therefore, be satis2ed before a person can be held guilty of an o@ence
under .ection K read ,ith .ections F and C 8c9 of the Act. &n the 2rst place, it must be proved
that he is promoting or conducting a scheme for the making of 5uick or easy money and
secondly, the chance or opportunity of making 5uick or easy money must be sho,n to
depend upon an event or contingency relative or applicable to the enrolment of members
into that scheme. +he legislative draftsman could have thoughtfully foreseen and avoided all
reasonable controversy over the meaning of the e)pression 3money circulation scheme3 by
shaping its de2nition in this formL [money circulation scheme[ means any scheme, by
,hatever name called, 8i9 for the making of 5uick or easy money, or 8ii9 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, ,hether or
not such money or thing is derived from the entrance money of the members of such
scheme or periodical subscriptionsT & have reshaped the de2nition, in order to bring out its
meaning clearly, ,ithout adding or deleting a single ,ord or comma from the original te)t of
.ection C 8c9. +he substance or the matter is really not in doubtL only the form of the
de2nition is likely to create some doubt as to the meaning of the e)pression ,hich is de2ned
and, therefore, & have made a formal modi2cation in the de2nition ,ithout doing violence to
its language and indeed, ,ithout even so much as altering a comma.
O. +here is another aspect of the matter ,hich needs to be underscored, ,ith a vie, to
avoiding fruitless litigation in future. Besides the prize chits, ,hat the Act aims at banning is
money circulation schemes. &t is manifestly necessary and indeed, to say so is to state the
obvious, that the activity charged as falling ,ithin the mischief of the Act must be sho,n to
Prepared by ' 'ayanath &P. , .P, <ayanad CI
be a part of a scheme for making 5uick 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 ,ord, is
[a carefully arranged and systematic programme of action[, a [systematic plan for attaining
some ob;ect[, [a pro;ect[, [a system of correlated things[. 8.ee <ebster[s *e, <orld
ictionary, and .horter 7)ford "nglish dictionary, Mol &&9. +he systematic programme of
action has to be a consensual arrangement bet,een t,o or more persons under ,hich, 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. !eciprocally, the person ,ho 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. . 3
Proceeding further, the Court has observedL
3O. . &n other ,ords, there has to be a community of interest in the happening of such event
or contingency. +hat e)plains ,hy .ection F makes it an o@ence to 3participate3 in the
scheme or to remit any money 3in pursuance of such scheme3. %e ,ho conducts or
promotes a money spinning pro;ect may have manifold resources from ,hich to pay fanciful
interest by luring the un,ary customer. But, unless the pro;ect envisages a mutual
arrangement under ,hich, 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 3money circulation scheme3 ,ithin the meaning of .ection C 8c9 of the Act. 3
8=G9 *7< coming to the .cheme 6oated by the assessee in these proceedings, ,e had the
advantage of seeing the application form issued by the assessee that re5uires to be 2lled and 2led
by any person interested in becoming a member under the .cheme. <e are told by .ri
parthasarathy, /earned Counsel, ,ho appears for all the assessees in these reference cases, that
similar application forms had been issued by all the assessees ,hile 6oating the 3deposit linked
&ncentive .cheme3.+he nomenclature that the assessee has given to her .cheme is 3guru Credit
Card $oods /inked &ncentive .chemes3. According to the promoters of the scheme, it is a double
bene2t .cheme and to avail the bene2ts 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 .cheme, he can terminate his membership only after 2ve years
and the security deposit ,ould be refunded to him ,ithout interest after ad;usting any dues from
the member. +he security deposit can also be paid in monthly installments and in such cases,
member is re5uired to provide t,o guarantors preferably by $overnmentPbankPpublic .ector
employees. +he free present item ,ould be given only after acceptance of membership and the
security deposit. &f for any reason, the item as per the choice of the member cannot be supplied
,ithin a reasonable period, the security amount ,ould be refunded in full less !s. =HP- as processing
charges.
8=I9 *7< the 5uestion is, ,hether such a .cheme 6oated by the assessee is a .cheme ,hich is
prohibited by la, as envisaged under the provisions of [the Prize Chits and (oney Circulation
schemes 8Banning9 Act, =>NO[X +he preamble of the Act makes clear the ob;ect of the Act. &t is an
Act to ban the promotion or conduct of prize chits and money circulation schemes and for matters
connected there,ith or incidental thereto. .ection C of the Act is the interpretation clause. Clause
8c9 of .ection C of the Act de2nes 3money Circulation .cheme3 to mean any scheme, by ,hatever
name called for making of 5uick or easy money, or for the receipt of any money or valuable thing as
Prepared by ' 'ayanath &P. , .P, <ayanad CN
the consideration for a promise to pay money, on any event or contingency relative or applicable to
the enrollment of members into the .cheme, ,hether or not such money or thing is derived from
the entrance money of the member of such .cheme or periodical subscriptions. .ection F of the Act
imposes ban of prize chits and money circulation schemes or enrolment as members or
participating therein. .ection K of the Act provides penalty for contravention of .ection F of the Act.
A reading of these .ections ,ould reveal as observed by the Ape) Court in the case of .,apan
1umar $uha and 7thers 8.upra9, that t,o conditions must be satis2ed before a person can be held
guilty of an o@ence under .ection K read ,ith .ections F and C 8c9 of the Act. &n the 2rst place, it
must be proved that promoter of the scheme is promoting or conducting a .cheme for making of
5uick or easy money and secondly, the chance or opportunity of making 5uick or easy money must
be sho,n to depend upon an event or contingency relative or applicable to the enrollment of
members into that .cheme.
8=N9 +%" basic features of the .cheme in the present case is that the assessee collects deposits
from its subscribers, gives them free present item of the value of about NG? of the deposit amount
and refunds the deposit after 2ve years ,ithout interest. #or instance, a subscriber, ,ho enrolls
himself as a member, makes a deposit of !s. GCGP-, he is given a free present itemPgift of the value
of !s. KHHP- and thereby a sum of !s. =CGP- of such deposit ,ould be retained by the promoter for a
period of 2ve years, but it ,ould not earn any interest to the member and after the e)piry of period
of 2ve years, the deposit of !s. GCGP- is refunded to the depositor. +he assessee as promoter of the
.cheme has promoted a .cheme ,here she can make a 5uick and easy money. +he .cheme so
promoted by the assessee ,ould include a person to invest hisPher money by ,ay of deposit to get
an incentive or gift ,orth NG? of the amount deposited. +he remaining CG? of the amount is
retained by the assessee not for a short term but for a period of 2ve years and sometimes more
and after the e)piry of the stipulated period, ,hat the member gets is ,hat is deposited by himPher
,ithout interest. +his .cheme, in our vie,, ans,ers the re5uirements of de2nition of 3money
Circulation .cheme3, ,hich is banned under the, provisions of the Prize Chits and (oney Circulation
.chemes 8Banning9 Act, =>NO. *o, coming back to the facts of this case, in the previous year
relevant to the assessment year, the assessee had received deposit of !s K=,>C,>CHP- from its
members and as against this, the assessee had distributed articles ,orth of !s. CN,CN,=>=P- by ,ay
of giftPfree present item and under this .cheme, the assessee could retain a sum of !s. =K,IG,NC>P-
for a period of 2ve years, use it the ,ay she ,ants it, and return thereafter the depositors money
,ithout any interest. &n our vie,, this .cheme has all the basic ingredients of money circulation
scheme, ,hich is banned under .ection F of the Prize Chits and (oney Circulation .chemes
8Banning9 Act, =>NO, and therefore, the e)penditure incurred by the assessee is an e)penditure
prohibited by la, and therefore, in vie, of ")planation inserted by #inance 8*o. C9 Act, =>>O to
.ection FN 8=9of the Act, ,hich has come into force ,ith e@ect from =-K-=>IC, the e)penditure shall
not be deemed to have been incurred for the purpose of business and therefore, no deduction or
allo,ance can be made in respect of such e)penditure in computing the income chargeable under
the head 3pro2ts and gains of business or profession3.+his amendment is given retrospective e@ect
from =-K-=>IC and ,ill accordingly, apply in relation to assessment year =>IC-=>IF and
subse5uent years. &t is relevant to note that in the ")planation inserted, the legislature has
speci2cally employed the deeming provision for the purpose of creating a 2ction. +he purpose of
introduction of a deeming provision is e)plained by the .upreme Court in the case of Consolidated
Co@ee /imited Ms Co@ee Board 8A&! =>OH .C =KIO9, ,herein the court has stated that 3a deeming
provision might to be made to include ,hat is obvious or ,hat is uncertain or to impose for the
purpose of a statute, an arti2cial construction of a ,ord or phrase that ,ould not other,ise prevail
but ill such cases, the motive of the legislature ,ould be relevant3. +he .peech of the #inance
Prepared by ' 'ayanath &P. , .P, <ayanad CO
(inister on the 6oor of the Parliament does not provide any clue for insertion of the ")planation
,ith retrospective e@ect. +o our mind, it appears, it could be to overcome the pronouncement of
decisions by various %igh Courts, ,herein it is stated that in considering the allo,ability of an
e)penditure under .ection =H 8C9 8)v9 of the income +a), Act =>CC, and the corresponding provision,
namely, .ection FN of the &ncome +a) act, =>I=, one cannot travel outside the provisions of the
&ncome +a) Act and deny the bene2t of deduction under that .ection on the ground that the
payment is unauthorised or has been prohibited by some statute.
8=O9 &* vie, of our above discussions, the 5uestion of la,, ,hich ,e have re-framed, re5uires to be
ans,ered in the aDrmative i. e. in favour of the revenue and against the assessee. Accordingly,
reference proceedings are disposed of *o order as to costs. 7rdered accordingly
]]]
Prepared by ' 'ayanath &P. , .P, <ayanad C>
&* +%" %&$% C70!+ 7# '0&CA+0!", A*%!A P!A".% A+ %Y"!ABA
%7*B/" .%!& $....&*$%M&, C%&"# '0.+&C"
A*
%7*B/" .%!& '0.+&C" C.M.*A$A!'0*A !"Y
<!&+ P"+&+&7* *os. CHKNH A* CHKN= 7# CHHI : "C&" 7* =>-HN-CHHN.
Bet,eenL
Am,ay &ndia "nterprises, 8a Private Company ,ith unlimited liability9,
+hrough (r.Yoginder .ingh, Authorised .ignatory and another \ Petitioners
Ms.
0nion of &ndia, rep., by .ecretary, (inistry of %ome, *e, elhi and others. \ !espondents
8Per C.M.*agar;una !eddy, '9
=.<hether the business activities being carried on by the petitioners attract the provisions of Prize
Chits and (oney Circulation .chemes 8Banning9 Act =>NO 8for short Qthe ActR9 and ,hether the
action of respondents F to I in interfering ,ith the activities of the petitioners by invoking the
provisions of the Act is arbitrary, are the 5uestions ,hich fall for consideration in these t,o ,rit
petitions.
+he resume of facts in <.P.*os.CHKNH and CHKN= of CHHIL
C.Petitioner *o.= is a private company ,ith unlimited liability registered under the Companies Act
=>GI having its registered oDce at C-F, ^uatab &nstitutional Area, *e, elhi. &t is the ,holly o,ned
subsidiary of Am,ay Corporation, 0nited .tates of America and is engaged in
manufacturePmarketing of its various products through a net,ork of distributors. Petitioner *o.C in
<.P.*o.CHKNH of CHHI and all the three petitioners in <.P.*o.CHKN= of CHHI are distributors of the
=
st
petitioner. +he =
st
petitioner approached $overnment of &ndia, (inistry of &ndustry, epartment
of &ndustrial evelopment ,ith an application dated C.I.=>>K to convey approval of $overnment of
&ndia for setting up a ,holly o,ned subsidiary of Am,ay Corporation of 0nited .tates of America in
&ndia for the purpose of establishing and developing a direct selling business of products. +he
$overnment of &ndia, (inistry of &ndustry, epartment of &ndustrial evelopment, .ecretariat for
&ndustrial Approval, #oreign Collaboration-&& .ection conveyed to the Am,ay Corporation, its
approval of the said proposal, namely, to set up the ,holly o,ned subsidiary in &ndia, to establish
and develop a direct selling business of products ,hich shall be sourced from local independent
&ndian manufacturers particularly small scale units by providing technology support to products of
international standard, vide its letter dated CI.O.=>>K. +he approval ,as sub;ect to certain
conditions ,hich inter alia include the condition that the proposed &ndian subsidiary does not
envisage any manufacture by itself and that if it decides to take up the manufacturing also, it shall
Prepared by ' 'ayanath &P. , .P, <ayanad FH
obtain prior approval from $overnment of &ndia 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
e)ecuted bet,een the Am,ay Corporation of 0.A and the &ndian Company and that the approval is
valid for a period of t,o years from the date of issue ,ithin ,hich period Am,ay Corporation ,as
re5uired to 2le agreement ,ith the !eserve Bank of &ndiaPAuthorised #oreign ")change dealer.
Condition *o.=F of the approval stipulated that the company shall not manufacture the items
reserved in the small scale sector ,ithout prior approval of the $overnment.
F.+he conditions contained in the original approval dated CI.O.=>>K ,ere amended from time to
time on the applications made either by Am,ay Corporation, 0.A or by the =
st
petitioner on issues
such as foreign e5uity participation, rescheduling of fresh marketing period etc. A signi2cant
amendment to the initial approval ,as the amendment dated K.O.CHHK ,hereby the =
st
petitioner
,as permitted to set up its o,n units for manufacturing a number of personal care and cosmetic
products, home care range of products, nutrition and ,ellness range of products and surfactants.
By the same proceedings the $overnment of &ndia permitted the =
st
petitioner to import products
such as fragrance, deodorants, shampoos, conditioners, cleansers etc.
K.7ne A.M....atyanarayana, irector of Altus .ystems Private /imited, Basheerbagh, %yderabad
8!espondent *o.O in <.P.*o.CHKN= of CHHI9 lodged a complaint in the C& Police .tation, %yderabad
,hich ,as registered as #&! *o.=H of CHHI dated CK.>.=>>I. &n his complaint, (r.
A.M....atyanarayana stated that he ,as approached by .mt.(.Padmavathi and .ri (.!amu
introducing themselves as Am,ay istributorsT that they informed (r..atyanarayana that if he ;oins
the scheme by paying !s.K,HHHP- and sponsor G to I persons per month into the scheme he ,ill get
money not only through sale of products but also ,ith the e@orts of do,nline distributorsT that the
said t,o persons by visiting his house several times tried to induce him to ;oin in the schemeT
unable to bear the mental agony and harassment caused by the said t,o persons, he ;oined the
scheme on C>.O.CHHG by paying !s.G,CHHP- to the =
st
petitionerT that the said Padmavathi and !amu
informed him that if he introduces ne, members and sell the products to them, he ,ill become a
silver producer in lessthan four months time. %e further mentioned that he ,as e)plained about
the money circulation scheme and product selling scheme. #or the sake of convenient reference,
the complaint of (r. A.M... .atyanarayana is reproduced belo,L
Q7ne of the schemes ,hich involves enrolment of further members is called as >-I-F.
0nder this scheme, & have to enroll > members 2rst and then those members ,ill enroll I
members each and further each such person ,ill enroll three members. +hus under me there
,ill be CCG members and from ,hose sales, & ,as told that & ,ill be earning lakhs S lakhs of
rupees ,ithout doing anything. +hey also further told that if & enroll C members per month
then at the end of > months, there ,ill be G=C persons under me and & ,ill be getting =H,HHH
PM 8K,HH,HHH BM9 and it is also called as = leg ,hich is C=?. +hus the scheme & felt ,as
nothing but a chain, ,here each one ,ere asked to enroll further.
&t is further stated in the complaintL
Q +he Am,ay &ndia "nterprises is luring the public including me to introduce
ne, distributors by sho,ing the bait in the name of commission on sale of products
to make 5uick money. +he Am,ay &ndia "nterprises is instigating the distributors like
Padmavathi and !amu to ;oin the ne, distributors to sell the products in a large ,ay,
,hich is causing mental agony. &t is nothing but money circulation ,hich is illegal
and also cheated me on the premise that they ,ill return the money and commission
Prepared by ' 'ayanath &P. , .P, <ayanad F=
according to company (ulti-level .cheme 8pyramid9. & came to kno, that Am,ay
&ndia "nterprises, %yderabad opened its branches all over Andhra Pradesh and
e)ploiting youth like me and their families for their further gains.R
G.+he C& police registered a case for the o@ences under .ection FOG and KOH of the &ndian Penal
Code and .ections K, G, and I of the Act on CK.>.CHHI. <ithin three days of registration of the
crime, the petitioners 2led these t,o ,rit petitions for issue of a ,rit of (andamus to declare that
the provisions of the Act have no application to the scheme run by petitioner *o.= and to restrain
the respondents from interfering ,ith the business carried by the petitioners.
ContentionsL
I..ri B.Adinarayana !ao, assisted by .ri C..udesh Anand, appearing for the petitioners in
<.P.*o.CHKNH of CHHI contended that the =
st
petitioner company has been carrying on its business
activity in &ndia ,ith the approval of $overnment of &ndia and that the $overnment of &ndia had
neither ,ithdra,n the approval nor interdicted the petitioners business activities ,hich are being
carried on in accordance ,ith the approved scheme. %e further submitted that the registration of
criminal case by the C& police and their interference ,ith the petitioners business on the ground
that it is hit by the provisions of the Act is highly illegal, arbitrary and unconstitutional. %e argued
that none of the ingredients of .ection C8c9 of the Act e)ists in the business carried on by the
petitioners as there is neither 5uick 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 ne,
members into the scheme. /earned counsel further argued that the registration of the crime and
interference ,ith the petitioners business activities by the .tate and its authorities is patently
illegal, highhanded, arbitrary and unauthorized. According to the learned counsel, the 2rst
petitioners holding company, namely, Am,ay Corporation, 0.A is carrying on the direct selling
business of products by avoiding middlemen 8,holesale and retail traders9 in more than OH
countries all over the ,orld and that the petitioner ,hich is incorporated as a ,holly o,ned
company of the Am,ay Corporation of 0.A has introduced the said method in &ndia 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 .ection F of the Act is not attracted. &n support of his
contention, the learned counsel relied upon the ;udgment of the .upreme Court in .tate of <est
Bengal Ms. .,apan 1umar $uha
=_=`
. +he learned counsel ,hile making copious reference to
various portions of the said ;udgment e)plained the scheme under ,hich the petitioners are
carrying on business and submitted that the ratio laid do,n therein is s5uarely attracted to the
cases on hand.
N..ri ..!.Ashok, .enior Counsel appearing for the petitioners in <.P.*o.CHFN= of CHHI supported the
arguments of .ri B.Adinarayana !ao and submitted that the scheme under ,hich the petitioners are
carrying on the business is not comprehended by the provisions of .ection C8c9 of the Act. %e
argued that no distributor ,ill 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 ,hom he sponsored. +he 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 ,hich alone attracts the de2nition of
.ection C8c9 of the Act. +he scheme therefore, according to the learned counsel, cannot by any
stretch of imagination be termed as Qmoney circulation schemeR ,ithin the de2nition of .ection
C8c9 of the Act.
1[1]
(1982) 1 SCC 561
Prepared by ' 'ayanath &P. , .P, <ayanad FC
O.Per contra, learned Advocate $eneral submitted that the business activity of the petitioners
s5uarely falls ,ithin the de2nition of Qmoney circulation schemeR and is, therefore, hit by the
provisions of .ection F of the Act. /earned Advocate $eneral invited the Courts attention to
brochure at Page-FC of the material papers 2led in <.P.*o.CGNK> of CHHI 8a Public &nterest /itigation
2led by one of the alleged victims of the petitioners business9 to e)plain ho, a person on his
becoming a member is credited ,ith points value 8PM9 and on his sponsoring other distributors ho,
he is bene2ted on their business volume 8BM9. +he learned Advocate $eneral referred to diagram
contained in the said brochure and pointed out that the ,hole scheme is evolved in such a manner
that a person ,ho ;oins as distributor is re5uired to enroll si) persons and each of the si) persons
,ould enroll four persons ,ho in turn ,ould enroll three persons each and, in this manner, the
strength of the entire group becomes =HF. %e 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 ,hich, the other
=HC persons, ,ho are directly or indirectly sponsored by the 2rst member, pay either to,ards
subscriptions 8initialPrene,al9 or by selling products. +he learned Advocate $eneral argued that
there are reciprocal promises involved in the scheme. %e submitted that ,hile 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 ne, members, the
members earn easy or 5uick money in redemption of the promise so made by the promoter. %e
controverted the arguments of the learned counsel for the petitioners that there is no compulsion or
coercion to sponsor the members. +he learned Advocate $eneral then argued that petitioner *o.=
evolved a mechanism ,here introduction of ne, members is made so attractive and luring that
every distributor strives for sponsoring others in order to earn more and more money conse5uent
on the enrollment of ne, members. %e also submitted that the scheme as is being implemented
,as not the one ,hich ,as placed before the $overnment of &ndia or the one ,hich is pleaded in
the ,rit petition.
>.&n order to fortify his contention that easyP5uick money is involved, the learned Advocate $eneral
referred to para-== of the counter aDdavit of the eputy .uperintendent of Police, "conomic
7@ences <ing, C&, %yderabad 8!espondent *o.I9. &t ,ould be convenient to e)tract para-==
herein belo,L
Q ==."asyP5uick money and it being dependent on enrollment of membersL
a9 A substantial sum of !s.=,OHHP- out of !s.K,KHHP- is credited direct to the account of
QAm,ayR. &t is stated on behalf of the company in the <rit Petition that it enrolled K,GH,HHH
distributors all over &ndia. +aking this as correct, a sum of !s.O=,HH,HH,HHHP- 8!upees "ighty
7ne Crore9 is appropriated by the company at the time of enrollment of the members itself.
+his cannot but be stated QeasyP5uick moneyR got by it from the so called
distributorsPmember de hors any service.
b9 +he terms and conditions of Qistribution !ene,al fromR, supplied by QAm,ayR sho,n as
Anne)ure-F read as follo,sL
Condition *o.FL Q+he distributorship agreement if not rene,ed by Am,ay shall stand
terminated on F= ecember or on e)piry of one year from the date of distributorship, as the
case may be.R
Prepared by ' 'ayanath &P. , .P, <ayanad FF
Condition *o.=CL Q+he !ene,al of subscription fee including Block !ene,al subscription fee
is non-refundable.R
Condition *o.=KL Q!ene,al of subscription fee is mandatory to continue ,ith business and
maintain your position in line of sponsorshipR
+hus, from K,GH,HHHP- distributors the company ,ould get a sum of !s.KG,HH,HH,HHHP-
8rupees forty 2ve crores9 8K,GH,HHH ) >>G9 per annum on completion of every year ,hich can
only be stated to be QeasyP5uick moneyR sans any service to the distributorsPmembers.
c9 +o enable him to get the so called commission a F? every month, the AB7 has to
distributePpurchasePsell products ,orth !s.C,HHHP- of QAm,ayR every month or else he ,ill
not be eligible to get any commission or continue as member in the scheme. +hus, each
member is forcedPinducedPlured to purchase the products ,orth !s.C,HHHP- every month to
keep his chance of getting commission alive. +hus, QAm,ayR ,ould automatically get a
business of the 5uantum of !s.=HOHP- crores 8K,GH,HHH ) C,HHH ) =C8months9 9 per annum
,hich ,ould yield an astronomical pro2t and it cannot but be stated as QeasyP5uick moneyR
,ithout any service to the distributorsPmembers irrespective of ,hether they sell the
products or not, though the company may conveniently refer it as Qturnover by sale of
productsR.
=H.+he learned Advocate $eneral also e)plained ho, the scheme ensures payment of money on
any event or contingency relative or applicable to the enrollment of members into the scheme. %e
submitted that a person ,ho ;oins the scheme and becomes a distributor earns money in di@erent
,ays. +he learned Advocate $eneral e)plained the mechanism of the scheme in the follo,ing
mannerL
=9 !etail Pro2t (arginL 7n his becoming a member products are purchased or delivered to him.
<hen he sells the product at a price not e)ceeding the (!P printed on the pack, he ,ill get retail
pro2t margin calculated as the di@erence bet,een the distributors price and the (!P printed on
the pack.
C9 Performance Based &ncentiveL %e ,ill get incentives by ,ay of 2)ed business volume 8BM9 and
point value 8PM9 upon achieving a minimum PM for the month, i.e., if he reaches the level of the sale
of products by earning minimum PM of =HH, he becomes entitled to receive additional incentives on
a graded scale depending upon the PM achieved for the month. +he percentage of incentives
depends upon the percentage of PM and the incentive is paid at the relevant percentage on the BM.
All this is e)plained from the =
st
petitioners scheme 8Anne)ure-A at page-N= on,ards in
<.P.*o.CHKNH of CHHI9.
F9 7n enrollment of other distributors sponsored by him, the sponsor distributor ,ill get incentives
under as many as =H heads ,hich are solely related to the PM and BM achievement of the
sponsored distributors. +he learned Advocate $eneral referred to page-FF of the <.P.*o.CGNK> of
CHHI ,hich contains the =
st
petitioners scheme ,herein the various incentives ,hich the e)isting
member gets on completion of the sponsoring of the entire group comprising =HF members.
==.+he learned Advocate $eneral distinguished the ;udgment of the .upreme Court in .,apan
1umar $uha 8= supra9. %e pointed out that after interpreting .ection C8c9 of the Act, the .upreme
Court held that the complaint lodged by the .tate in that case failed to satisfy the ingredients of the
said provision and 5uashed the registration of criminal case and argued that the ratio of that
Prepared by ' 'ayanath &P. , .P, <ayanad FK
;udgment has no application to the facts of the present case in ,hich the allegations contained in
the #irst &nformation !eport taken on their face value constitute an o@ence under the provisions of
the Act.
=C..ri A.!a;asekhar !eddy, learned Assistant .olicitor $eneral appearing for 0nion of &ndia
submitted that the scheme approved by the $overnment of &ndia is di@erent from the scheme
,hich the =
st
petitioner company is e)ecuting and, therefore, the approval given by the $overnment
of &ndia cannot be used as a shield by the petitioners for carrying unla,ful business. %e referred to
the letters dated F=.F.CHHF and CF.>.CHHF addressed by the .ecretary, $overnment of &ndia,
(inistry of Consumer A@airs and submitted that though in the 2rst letter a reference ,as made to
the 'udgment in .,apan kumar $uha 8= supra9 and the .ecretary opined that the companies
dealing ,ith directP net,orkPmiddlemen marketing do not fall ,ithin the provisions of the Act, later
on, he clari2ed that the unla,ful activities are prohibited in the Act. .hri !a;asekhar !eddy
submitted that as per letter dated C>.F.CHHF, the pyramid structured marketing schemes fall ,ithin
the provisions of the Act and the people running those schemes cannot claim the bene2t of the
approvals granted by the $overnment of &ndia. +he learned counsel further argued that having
regard to the serious allegations ,hich prima facie sho, 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 other,ise of the allegations made in the criminal case should be allo,ed to be
revealed and this Court cannot issue ,rit to stultify the investigation.
=F.(r...heshadri *aidu, ,ho appeared for respondent *o.O in <.P.*o.CHKN= of CHHI argued that
the business being carried on by the petitioners attracts the de2nition of .ection C8c9 of the Act. %e
submitted that the sale of product envisaged in the scheme is only a camou6age for the money
circulation business. %e referred to certain passages of $.P..ingh on &nterpretation of .tatutes and
submitted that even though the scheme evolved by the =
st
petitioner and being implemented does
not overtly replicate a scheme prohibited under the provisions of the Act, a dynamic interpretation
is re5uired to be given to the provisions of the Act in order to prevent social evil being perpetrated
by the petitioners.
=K.&n his re;oinder, .hri B. Adinarayana !ao reiterated that the $overnment of &ndia has not taken a
speci2c stand that the business activity of petitioner *o.= is hit by the provisions of the Act. %e
submitted that the main ingredient of 5uick or easy money envisaged under .ection C8c9 of the Act
does not e)ist in the petitioners scheme. %e further submitted that the =
st
petitioner has an annual
business turnover of NHH crores and even assuming that all the K,GH,HHH subscribers paid the
annual rene,al fees of !s.>>GP-, the =
st
petitioner gets only about !s.KH crores and by no stretch of
imagination it can be said that the =
st
petitioner is getting 5uick or easy money on this count. %e
referred to the instance pertaining to Accused *o.K 8!a;a *aren9 in Crime *o.=H of CHHI narrated in
the counter aDdavit ,herein it is stated that the said person became a diamond member of the =
st
petitioner company in the month of August CHHI and that he has not purchased goods ,orth a
single rupee, but still he has credited ,ith points ,orth !s.N,I=,=KHP- during that year and
submitted that even if these 2gures are correct, the provisions of .ection C8c9 of the Act are not
attracted because making of such a pro2t by a person is not forbidden by any la,. +he learned
counsel submitted that the commission credited to a sponsor on the purchases made by the
do,nline distributors is only one of the components of the payments received by the sponsor
members. +he learned counsel then submitted that even if the Court comes to the conclusion that
.ection C 8c9 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 e@ected
by the police should be declared illegal and nulli2ed.
Prepared by ' 'ayanath &P. , .P, <ayanad FG
=G.<e have given serious thought to the respective arguments. %o,ever, before dealing ,ith the
same, ,e may notice the background in ,hich the Act ,as enacted and the salient features thereof.
AnalysisL
=I.A study group constituted by the !eserve Bank of &ndia made an in-depth e)amination of the
provisions of Chapter-&&&-B of the !eserve Bank of &ndia Act, =>FK and submitted its report ,ith the
recommendations that prize chits or money circulation scheme, by ,hatever name called, should
be banned in the larger interest of public and suitable legislative measures should be undertaken.
&n order to implement these recommendations, the Parliament enacted Prize Chits and (oney
Circulation 8Banning9 Act =>NO. .ection C 8c9 of the Act de2nes money circulation scheme asL
Qmoney circulation schemeR means any scheme, by ,hatever name called, for the
making of 5uick 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, ,hether or not such money
or thing is derived from the entrance money of the members of such scheme or
periodical subscriptionsR
=N..ection F 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
other,ise or receive or remit any money in pursuance of any chit or scheme. .ection K of the Act
postulates that ,hoever contravenes the provisions of .ection F shall be punishable ,ith
imprisonment for a term ,hich may e)tend to three years or ,ith 2ne ,hich may e)tend to
!s.G,HHHP- or ,ith both. Proviso to .ection K prescribed minimum sentence of imprisonment of one
year and 2ne of !s.=,HHHP- in the absence of special and ade5uate reasons to the contrary to be
mentioned in the ;udgment. &f a person in promotion or conduct of any prize chit involves himself in
the acts enumerated in section G 8a9 to 8f9 of the Act, he shall be punishable ,ith imprisonment for
a term ,hich may e)tend to three years or 2ne ,hich may e)tend to !s.F,HHHP- or both. A
minimum sentence of one year and a 2ne of !s.=,HHHP- is also prescribed in respect of those
o@ences. 0nder .ection I of the Act ,here an o@ence has been committed by a company every
person ,ho at the time of the commission of o@ence ,as incharge of and ,as responsible to the
company for the conduct of the business of the company as ,ell as the company shall be deemed
to be guilty of the o@ence. .ection N of the Act empo,ers any police oDcer not belo, the rank of
an oDcer in charge of a police station inter alia to enter, if necessary, by force any premises ,hich
he has reason to suspect or being used for purposes connected ,ith 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 'udicial (agistrate all such persons against ,hom a complaint has
been made etc., and to seize all things found in the said premises ,hich are intended to be used or
reasonably suspected to have been used in connection ,ith any prize chit or money circulation
scheme. 0nder .ection =H of the Act the o@ences are made cognizable.
=O.&n the light of the above, it has to be considered ,hether the business activity of the petitioners
falls ,ithin the de2nition of money circulation scheme.
Prepared by ' 'ayanath &P. , .P, <ayanad FI
=>.&n .,apan 1umar $uha 8= supra9 the .upreme Court made an in-depth analysis of .ection C8c9
of the Act. A.*..en, ' ,ho rendered the leading ;udgment interpreted and analyzed the said
provision as underL
Q 8i9 there must be a schemeT
8ii9 there must be members of the schemeT
8iii9 the scheme must be for the making of 5uick 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 schemeT
8iv9 the event of contingency relative or applicable to the enrollment of members
into the scheme ,ill ho,ever not be in any ,ay a@ected by the fact ,hether or not
such money or thing is derived from the entrance money of the members of such
scheme or periodical subscription.R
CH.+he learned 'udge held that the ,ords Qon any event or contingency relative or applicable to the
enrollments of members into the scheme ,hether or not such money or thing is derived from the
entrance money of the members of such scheme or periodical subscriptionR applies to, a9 5uick or
easy money, and b9 for the receipt of any money or valuable thing as consideration for promise to
pay money and not merely to the latter.
C=.Chandrachud, C' ,hile agreeing ,ith A.*..en, ' held that any and every activity for the making
of 5uick or easy money by itself ,ould not fall ,ithin clause 8c9 of .ection C of the Act and that
making of such 5uick or easy money must depend upon any event or contingency relative or
applicable to the enrollment of members into the scheme. &t ,as held that to hold a person to be
guilty of an o@ence under .ection K read ,ith .ection F and C8c9 of the Act, t,o conditions must be
satis2ed, they are, =9 it must be proved that he is promoting or conducting a scheme for the
making of 5uick or easy moneyT and C9 the chance or opportunity of making 5uick or easy money
must be sho,n to depend upon an event or contingency relative or applicable to the enrollment of
members into that scheme.
CC.<e shall no, e)amine ,hether on the admitted facts and the material available on record, the
scheme envisaged by petitioner *o.= attracts the aforementioned ingredients of clause 8c9 of
.ection C of the Act.
+he .chemeL
CF.+he purported theme behind the scheme appears to be direct selling ,hich means sale of
products to the customers by the distributors of the company ,ithout there being any ,holesaler or
retailer. &t is e)plained in the aDdavit 2led in support of the ,rit petition that a person becomes a
distributor by purchasing a business kit at a cost of !s.K,KHHP- comprisingT a9 !s.C,IHHP- to,ards the
products and other material 8sales aid and literature9 and b9 !s.=,OHHP- to,ards product literature
and subscription fee. &n this process, the distributors are provided ,ith incentives. Anne)ure-N
8brochure9 to the reply aDdavit 2led by the petitioner titled QAm,ay .ales and (arketing Plan in
&ndiaR unfolds the entire scheme. &t is e)plained therein that distributors can generate income in
Prepared by ' 'ayanath &P. , .P, <ayanad FN
t,o ,ays, namelyT =9 by earning retail sales pro2t, and C9 through performance incentiveT that the
distributors purchase products from Am,ay at distributors cost and then sell these products at
higher price 8not more than printed (!P9 ,hich is the retail sales pro2t. As regards performance
incentive, it is appropriate to e)tract the relevant portion of the brochureL
Q Performance &ncentiveL
Your performance incentives are based on monthly calculation of your individual and group
PMPBM. +his incentive is based on a slab system that ranges from F? to C=a depending on your
business volume. Your earnings ,ould be proportionate to your e@orts.
PM 8Point Malue9 is a unit amount assigned to each product. &t is an e@ort inde), ,hich puts
emphasis on the units sold and not the selling price. "ach month the PM is totaled in order to
determine the performance incentive bracket. +hese brackets range from F? to C=?.
BM 8Business Molume9 is a monetary 2gure assigned to each product. &n order to calculate
the Performance &ncentive, the percentage amount determined by total PM is applied to the total BM
for the month. +he ratio of PM to BM in &ndia is = PM V KG BM.
Performance &ncentive table
&f +otal (onthly PM is BM is Performance
incentive is
=H,HHH K,GH,HHH C=? of Your BM
N,HHH F,=G,HHH =O?
K,HHH =,OH,HHH =G?
C,HHH >H,HHH =C?
=,HHH KG,HHH >?
GHH CC,GHH I?
=HH K,GHH F?
CK.#rom the above reproduced information furnished by the petitioner it is clear that the
performance incentive increases ,ith the increase in the PM 8points value9 and BM 8business
volume9.
CG.+he table given above sho,s that A ,ho became the member and introduced B invested
!s.K,GHHP- on ,hich =HH PM and K,GHH BM are credited to him. +he income he earned consists of
t,o components, i.e., =9 retail margin ,orked out at CH? of KGHH BM ,hich comes to !s.>HHP- and
C9 commission comprising group turnover of !s.>,HHHP- valued at >HHH BM and CHH PM. &t is
signi2cant to note here that in calculating the commission not only As business turnover of
!s.K,GHHP- is taken into account but also the business turnover of !s.K,GHHP- of B is included. .ince
PM earned by A by sponsoring B alone ,as at the lo,est slab, namely CHH, the lo,est commission
of F? is applied by taking BM of both A and B into consideration. +he amount of !s.CNH to,ards
Prepared by ' 'ayanath &P. , .P, <ayanad FO
commission ,as distributed in e5ual proportions among A and B. A person by sponsoring more
number of distributors ,ill be credited ,ith the business turnover of all other members of the group
sponsored by him is illustrated in the table given under e)ample-C ,hich is reproduced
hereinbelo,L
CI.&n the above table, EA directly sponsored B and B in turn sponsored C, , and ". <hile As retail
margin ,as calculated on the basis of the products sold by him, his commission ,as calculated on
the total group turnover of B, C, and " a =O,HHH BM V KHH PM ,hich are ,orth !s.=O,HHHP-. As
the sponsor distributor enrolls more members, his earning gets increased. +his is evident from one
of the do,nloaded copies of the brochure ,ith the title QAm,ay .uccess .eminars and Positrim
/aunchR, a copy of ,hich is 2led by the petitioner in <.P.*o.CGNK> of CHHI and the authenticity of
,hich is not disputed by the petitioners. #or proper appreciation, the same is e)tracted herein
belo,L
CN.&n the above given diagram dra,n to a =-I-K-F pattern, the 2rst member sponsors si) members.
"ach of the si) members in turn sponsors four members and each of the t,enty four members
sponsors three members. +hus the strength of the total group becomes =HF. At the minimum level
of PM and BM, the pro2t margin and the commission the person heading the group, by taking his
personal PM and BM gets is !s.=C,KCHP-, from the PM and BM of the si) persons he sponsored he gets
!s.CF,NIHP-, from the PM and BM of the CK distributors ,ho ,ere sponsored by si) distributors he
gets !s.=,=K,KOHP- and from the PM and BM of NC distributors ,hom the CK distributors sponsored he
,ill get !s.I,OF,FHHP. +his is the admitted position under the scheme.
CO.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 5uick or easy money involved in the scheme and
that the money ,hich 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 e)plained above, it is 5uite apparent that one of the
components of the income earned by a sponsor member is the commission ,hich is calculated not
only on the personal PM of the sponsor member, but also from the PM earned by all the remaining
=HC members falling ,ithin his group. +here is, therefore, no gainsaying that a substantial part of
the income ,hich the 2rst sponsor member of the group gets depends on the event or contingency
relative or applicable to the enrollment of members into the scheme. +his conclusion can be tested
by a further analysis of the income 2gures given in the earlier paragraph. .upposing 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 !s.=C,KCHP-. &f he sponsors only si) people and they in turn do not
sponsor any member, then he ,ill get an additional income of !s.CF,NIHP-. &f those si) members
,hom he sponsored again sponsor four members each, he ,ill get a further income of !s.=,=K,KOHP-
and if the CK members sponsor three members each, he ,ill get a further sum of !s.I,OF,FHHP-.
+hus the money ,hich the member at the top of the line gets depends upon the members ,hom he
enrolls or the members enrolled by him enroll.
C>.&n Para C= of the counter aDdavit of respondent *o.I the e)ample of !a;a *aren is cited and the
petitioner did not dispute the averment relating to the income he earned in a year. +he said
instance is illustrative of a person earning fabulous income ,ithout doing anything after he
accomplishes his task of enrolling the re5uired number of persons as members into the scheme.
FH.#rom the aforementioned discussion, it is proved that the scheme provides for easyP5uick money
to its distributors. +he 2rst ingredient is thus satis2ed.
Prepared by ' 'ayanath &P. , .P, <ayanad F>
F=.<hether second ingredient is also satis2ed or not is to be considered no,. As seen above, each
member on his enrollment pays !s.K,KHHP-. Payment of !s.K,KHHP- by a member on his enrollment
and his future earnings through marketingPenrolling other members constitutes event or
contingency relative to his enrollment. +he distributor gets all this money as a consideration for
promise made by the sponsor at the time of his enrollment. +hus as far as the member ;oining the
scheme is concerned, both the ingredients of .ection C8c9 of the Act, i.e., a9 making of 5uick or easy
money, and b9 the chance or opportunity of making 5uick or easy money depending on an event or
contingency relative or applicable to the enrollment of members into the scheme are satis2ed.
FC.<hether these t,o ingredients are satis2ed 5ua the promoter of the scheme ,ho is the =
st
petitioner in this case is re5uired to be e)amined no,.
FF.As pleaded by the petitioners themselves, out of !s.K,KHHP- a substantial part, namely !s.=,OHHP-
is collected as subscription fee, license fee, business kit etc. +o 5ualify for earning commission a
member has to earn the minimum monthly PM of GH ,hich he ,ill get by selling products ,orth
!s.C,HHHP-. !espondent *o.I in para-==8c9 of his counter aDdavit speci2cally pleaded as underL
Q+o enable him to get the so called commission a F? every month, the AB7 has to
distributePpurchasePsell products ,orth !s.C,HHHP- of QAm,ayR every month or else he ,ill not be
eligible to get any commission or continue as member in the scheme. +hus, each member is
forcedPinducedPlured to purchase the products ,orth !s.C,HHHP- every month to keep his chance of
getting commission alive. +hus, QAm,ayR ,ould automatically get a business of the 5uantum of
!s.=HOHP- crores 8K,GH,HHH ) C,HHH ) =C8months9 9 per annum ,hich ,ould yield an astronomical
pro2t and it cannot but be stated as QeasyP5uick moneyR ,ithout any service to the
distributorsPmembers irrespective of ,hether they sell the products or not, though the company
may conveniently refer it as Qturnover by sale of productsR.
.igni2cantly, this assertion made in the counter aDdavit is not denied in the re;oinder of the
petitioners. +hey have merely tried to e)plain the said allegation by o@ering certain ;usti2cations.
+he petitioners have not speci2cally denied that the 2rst petitioner ,ould get a sum of !s.=,HOHP-
crores by ensuring that each distributor maintains the minimum sales level. "ven though the
scheme per se does not stipulate that each distributor has to maintain the minimum re5uired
business level, prescription of minimum level of GH PM to 5ualify for getting commission is suDcient
inducement for the members to relentlessly strive for maintaining the PM level at or above the said
minimum levels.
FK.&t is, thus, evident that the ,hole scheme is so ingeniously conceived that the inducement for
aggressive enrollment of ne, members to earn more and more commission is inherent in the
scheme. By holding out attractive commission on the business turned out by the do,nline
members, the scheme provides for suDcient inducements for its members to chase for the ne,
members in their hot pursuit to make 5uickPeasy money. 7n the part of the promoter by pushing
each member to achieve the minimum sales ,orth !s.C,HHHP- per month, 8this sale includes
enrollment of ne, members9 he is assured of about =HHH crores per annum. All this s5uarely
satisfy the description of 5uickPeasy money. &n addition to this, it is an admitted fact that each
person in order to continue to be the distributor, shall pay rene,al subscription fee of !s.>>GP- per
annum. &n para-==8b9 of the counter aDdavit on the admitted number of distributors of K,GH,HHH
this amount is calculated at about !s.KG crores per annum. +hese 2gures are not denied by the
2rst petitioner in its re;oinder. +he plea of the 2rst petitioner that there is no compulsion that a
member shall rene, his distributorship looks to us to be specious. 7nce a person becomes a
Prepared by ' 'ayanath &P. , .P, <ayanad KH
distributor in a scheme of this nature ,here the sops in the shape of commission are so luring, it
,ould be very diDcult for a member to ,ithdra, from their membership to avoid payment of the
annual rene,al subscription fee.
FG.#rom the ,hole analysis of the scheme and the ,ay in ,hich it is structured it is 5uite apparent
that once a person gets into this scheme he ,ill 2nd it diDcult to come out of the ,eb and it
becomes a vicious circle for him. &n any event the petitioners have not speci2cally denied the
turnover they are achieving and the income they are earning to,ards the initial enrollment of the
distributors, the rene,al subscription fee and the minimum sales being achieved by the distributors
as alleged in the counter aDdavit. By no means can it be said that the money ,hich the 2rst
petitioner is earning is not the 5uickPeasy money. By promising payment of commission on the
business turned out by the do,n-line members sponsored either directly or indirectly by the up-line
members 8,hich constitutes an event or contingency relative to enrollment of members9, the 2rst
petitioner is earning 5uickPeasy money from its distributors, apart from ensuring its distributor earn
5uickPeasy money. +hus the t,o ingredients are satis2ed in the case of promoter too. <e are,
therefore, of the considered vie, that the scheme run by the petitioners s5uarely attracts the
de2nition of Q(oney Circulation .chemeR as provided in .ection C8c9 of the Act.
FI.<e may no, deal ,ith the petitioners plea that the $overnment of &ndia has not cancelled the
scheme and, therefore, the respondents cannot prosecute them. #rom the record produced by the
learned Advocate $eneral and the Assistant .olicitor $eneral, ,e 2nd that none of the brochures as
referred to and discussed above ,ere placed before the $overnment of &ndia. &t is also clear from
the record that the details of the scheme ,ere not discussed by the committee ,hich
recommended for grant of approval to the scheme of the petitioners. As already noted above, in
his letter dated C>.F.CHHF, the .ecretary, $overnment of &ndia, (inistry of Consumer A@airs, had
clari2ed that the pyramid structured marketing scheme fall ,ithin the provisions of the Act.
+herefore, the mere fact that the approval accorded by the $overnment of &ndia has not been
cancelled or ,ithdra,n is not suDcient to stultify the investigation of the case registered against
the petitioners. At any rate, ,hether the $overnment of &ndia has taken any action or not or ,hat
vie, it takes on the schemes run by the =
st
petitioner have no relevance in the ad;udication of the
issues raised by the petitioners in the cases before us.
FN.+he stage is no, set for detailed consideration of the ;udgment of the .upreme Court in .,apan
1umar $uha 8= supra9. Both .ri B.Adinarayana !ao and .ri ..!.Ashok learned counsel appearing for
the petitioners made strenuous e@orts to convince us that the ;udgment in .,apan 1umar $uha 8=
supra9 applies to the present cases and therefore, the petitioners are entitled to the relief sought for
in the ,rit petitions. &n order to appreciate this contention, it ,ill be appropriate to notice the facts
in .,apan 1umar $uha 8= supra9. 7ne .anchita &nvestments is a registered partnership 2rm
consisting of three partners ,ith a share capital of !s.N,HHHP-. &n the year =>NG the said 2rm
started its business in 2nance and investments. 7n a report given by the Commercial +a) 7Dcer
concerned, #&! ,as registered ,ith the allegations that the 2rm had been o@ering KO? interest
,hich ,as later reduced to FI ? and that therefore it ,as involved in money circulation scheme for
making of 5uick or easy money. +he 2rm and its partners 2led t,o ,rit petitions in the Calcutta
%igh Court under Article CCI of the Constitution of &ndia for 5uashing the #&!. +he %igh Court
allo,ed the ,rit petition and 5uashed the #&! and the .tate of <est Bengal 2led appeal by .pecial
/eave in the .upreme Court. After an in depth analysis of the de2nition of Qmoney circulation
schemeR in .ection C8c9 of the Act, the .upreme Court ,ent into the 5uestion as to ,hether the #&!
prima facie discloses an o@ence under .ection K read ,ith .ection F of the Act in the light of the
Prepared by ' 'ayanath &P. , .P, <ayanad K=
re5uirements of .ection C8c9 of the Act. +he .upreme Court mentioned the gist of the allegations in
the leading opinion of A.*..en, ' ,hich is e)tracted belo,L
Q=. .anchaita &nvestments is a partnership 2rm. &ts partners are .ri Bihari /al (urarka, .ri
.hambhu Prasad (ukher;ee and .ri .,apan 1umar $uha. +he 2rm ,as started in or around
=>NG.
C. +he 2rm had been o@ering fabulous interest at the rate of KO per cent to its members
until very recently. +he rate of interest has of late been reduced to FI per cent per annum.
F. .uch high rates of interest ,ere and are being paid even though the loan certi2cate
receipts sho, rate of interest to be =C per cent only.
K. +hus, the amount in e)cess of =C per cent so paid clearly sho,s that [money circulation
scheme[ is being promoted and conducted for the making of 5uick andPor easy money,
prizes andPor gifts.
G. Prizes or gifts in cash are also being a,arded to agents, promoters and members too.
I. &n vie, of the above, .arvashri Bihari /al (urarka, .hambhu Prasad (ukher;ee and
.,apan 1umar $uha appear to have been carrying on the business in the trade name of
[sanchaita &nvestments[ in prize chits and money circulation scheme in violation of .. F of
the Prize Chits and (oney Circulation .chemes 8Banning9 Act, =>NO.R
&n para-II of the 'udgment, it is heldL
Q <hether an o@ence has been disclosed or riot must necessarily depend on the facts and
circumstances of each particular case. &n considering ,hether an o@ence into ,hich an
investigation is made or to be made, is disclosed or not, the court has mainly to take into
consideration the complaint or the #.. !. and the court may in appropriate cases take into
consideration the relevant facts and circumstances of the case. 7n a consideration of all the
relevant materials, the court has to come to the conclusion ,hether an o@ence is disclosed
or not. &f on a consideration of the relevant materials, the court is satis2ed that an o@ence is
disclosed, the court ,ill normally not interfere ,ith the investigation into the o@ence and ,ill
generally allo, the investigation into the o@ence to be completed for collecting materials for
proving the o@ence. &f, on the other hand, the court on a consideration of the relevant
materials is satis2ed that no o@ence is disclosed, it ,ill be the duty of the court to interfere
,ith any investigation and to stop the same to prevent any kind of uncalled for and
unnecessary harassment to an individual.R
&n para-IO it is heldL
QAn analysis of these materials suggests that the 2rm is carrying on activities of accepting
deposits from the members promising to pay them interest on such deposits at an agreed
rate of =C per cent as stipulated in the loan certi2cateT but, in fact, it has been paying
interest to them at much higher rate of interest. +he materials further indicate that the 2rm
is making high-risk investments of the monies received from the depositors and has also
been advancing monies to political parties.R
&n paras-I> and NH of the 'udgment the .upreme Court framed the 5uestions ,hich readL
Prepared by ' 'ayanath &P. , .P, <ayanad KC
QI>. +he cru) of 5uestion is ,hether these allegations disclose an o@ence under the Act
namely, violation of .. F of the Act even if all these allegations are deemed to be correct.
NH. +he 5uestion ,hether these allegations disclose an o@ence under the Act and can be the
basis for any suspicion that an o@ence under .. F of the Act has been committed or not,
must necessarily depend on the provisions of the Act and its proper interpretation.R
<hile holding that there ,as no allegation that .anchita Chit #und is conducting prize chit, the
.upreme Court ,ent on considering ,hether the business carried on by .anchita Chit #unds
attracted the de2nition of money circulation under .ection C8c9 of the Act. &n para-NK, the
re5uirements of money circulation scheme are mentioned ,hich ,ere already e)tracted in the
earlier part of this ;udgment. &n para-NG the .upreme Court held that the condition in the de2nition
Qon any event or contingency relative or applicable to the enrollment of members into the scheme
,hether or not such money or thing is derived from the entrance money of the members of such
scheme or periodical subscriptionsR 5uali2es both the provisions contained therein, namelyT i9 a
scheme for making of 5uickPeasy money, or ii9 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. &n other
,ords the .upreme Court held that in order to attract the de2nition of .ection C8c9 of the Act it
must be sho,n that not only that the scheme envisages making of 5uickPeasy money but it must
also be sho,n that such 5uickPeasy money is earned on any event or contingency relative or
applicable to the enrollment of members into the scheme. %aving so analyzed the de2nition of
Qmoney circulation schemeR, the .upreme Court applied the said de2nition to the allegations made
in the #&! and negatived the contention that the scheme attracted the provisions of .ection C8c9 of
the Act. +he reasoning of the .upreme Court in coming to the said conclusion is discernible from
para-N>, ,hich is e)tracted hereunderL
QN>. 'udged from the point of vie, of the 2rm, there is nothing to indicate that the 2rm
makes any investment in consultation ,ith its depositors. +he materials only indicate that
the 2rm indulges in high-risk investments and also advances monies to political parties.
*either of these acts appears to be illegal and they do not go to sho, that the 2rm makes
easy or 5uick money. &t is no doubt true that the materials go to sho, that the 2rm pays a
larger amount by ,ay of interest than payable on the basis of the rates stipulated in the loan
certi2cate and the 2rm pays the e)cess amount of interest to the depositors in a clandestine
manner. +he clandestine manner of payment of interest in e)cess of the stipulated rate does
not, in any ,ay, indicate the e)istence of any scheme for making 5uick or easy money. &t is
again to be pointed out that in any event the materials do not indicate that the payment of
interest by the 2rm in e)cess of the stipulated rate is in any ,ay dependent on any event or
contingency. +here is nothing to indicate any scheme for the receipt of the money by the
2rm from its depositors as a consideration for promise to pay the interest in e)cess of the
stipulated rate and also to pay back principal amount on the e)piry of the term dependent in
any ,ay on any event or contingency relative or applicable to the enrolment of ne,
depositors, considering the depositors to be members. & am, therefore, of the opinion, that
not any of the re5uirements of a money circulation scheme is satis2ed in the instant case.
As there is no money circulation scheme, there can be no scheme as contemplated in the
Act in vie, of the de2nition of [scheme[ in the !ules. +he material, appear to disclose
violation of revenue la,s. +hey, ho,ever, do not disclose any violation of the Act. +he
materials do not disclose that the 2rm is promoting or conducting money circulation scheme
and the 5uestion, therefore, of any violation of .. F of the Act does not arise in the instant
case. As the 2rm is not conducting or promoting a money circulation scheme, and as no case
Prepared by ' 'ayanath &P. , .P, <ayanad KF
is made that the 2rm is conducting or promoting a chit fund, the Act cannot be said to be
applicable to the 2rm. &n my opinion, it does not become necessary to refer to the !ules for
coming to the conclusion. & may, ho,ever, add that a consideration of the !ules also clearly
lends support to the conclusion to ,hich & have come. & 2nd that the learned 'udge has very
carefully and elaborately considered all the aspects in his ;udgment and in the course of
elaborate discussion, he has noted all the contentions raised by the parties and has carefully
considered them. +he learned 'udge on a careful consideration of all aspects and on a proper
interpretation of the Act, has e)pressed the vie, that no o@ence under the Act is[ disclosed
against the 2rm ,hich does not conduct or promote money circulation scheme or a chit fund
and the Act has no application to the 2rm. &t may also be noted that the learned 'udge has
also in his ;udgment referred to the report of the !eserve Bank and the opinion of the
learned Advocate $eneral of the .tate ,hich lent support to the vie, taken by the learned
'udge. +he vie, e)pressed by the learned 'udge that the materials do not disclose that the
2rm is promoting or conducting a money circulation scheme and the Act has, therefore, no
application to the 2rm meets ,ith my approval and & agree ,ith the same.R
F>.#rom the above analysis of the scheme, and the allegations in the #&! relating to the scheme
carried on by .anchita Chit #unds, the .upreme Court found that the allegations contained in the
#&! and the materials produced before the court do not disclose that the 2rm ,as conducting or
promoting money circulation scheme to attract the provisions of .ection F of the Act. As the facts
in the said case bear no similarity ,hatever ,ith the facts involved in the present case, the said
;udgment is of no help at all to the petitioners to claim relief.
KH.0nlike in the case of .,apan 1umar $uha 8= supra9, though the petitioners herein have not
speci2cally sought for 5uashing of #&! and it is stated in para-CN of the ,rit aDdavit that the
petitioners are reserving their right to initiate appropriate action for annulment of the action of
respondents G and I in registering the case against the petitioners, in reality granting of relief
claimed in these ,rit petitions ,ould virtually have the e@ect of 5uashing the criminal proceedings
initiated against the =
st
petitioner. +herefore it is necessary for us to consider the contents of the
complaint in the light of the la, laid do,n by the .upreme Court on the scope of interference by
the %igh Courts in criminal investigationPtrial ,hile e)ercising po,er under Article CCI of the
Constitution or .ection KOC of the Code of Criminal Procedure.
K=.+he complaint submitted to the C& Police, %yderabad in this case is e)haustive. +he
complainant graphically described ho, the scheme run by petitioner *o.= through the other
petitioners and various distributors in the country constitutes money circulation scheme. +he gist
of the complaint has already been e)tracted herein before. #rom the conclusion arrived at by us on
the analysis of the admitted material available before us concerning the scheme, ,e have no doubt
,hatsoever that if the allegations contained in the report of C.*o.=KNKPC-CNPC&PCHHI dated
CK.>.CHHI are taken on their face value they make out an o@ence punishable under the provisions
of .ections K, G and I of the Act.
KC./a, ,ith regard to interference ,ith the criminal investigation and 5uashing of criminal
proceedings is ,ell settled. &n .tate of %aryana S 7thers Ms. Bha;an /al S 7thers
C_C`
the .upreme
Court laid do,n broad guidelines mentioned to be illustrative rather than e)haustive for the %igh
Courts to e)ercise their e)traordinary po,ers under Article CCI of the Constitution of &ndia or
inherent po,ers under .ection KOC of the Code of Criminal Procedure either to prevent abuse of the
process of court or other,ise to secure the ends of ;ustice. +hey are as follo,sL
2[2]
1992 Suppl (1) SCC 335
Prepared by ' 'ayanath &P. , .P, <ayanad KK
Q=9 <here the allegations made in the 2rst 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
o@ence or make out a case against the accused.
C9 <here the allegations in the 2rst information report and other materials, if any,
accompanying the #&! do not disclose a cognizable o@ence, ;ustifying an investigation by
police oDcers under .. =GI 8=9 of the Code e)cept under an order of a (agistrate ,ithin the
purvie, of .. =GG 8C9 of the Code.
F9 <here the uncontroverted allegations made in the #&! or complaint and the
evidence collected in support of the same do not disclose the commission of any o@ence and
make out a case against the accused.
K9 <here, the allegations in the #&! do not constitute a cognizable o@ence but
constitute only a non-cognizable o@ence, no investigation is permitted by a police oDcer
,ithout an order of a (agistrate as contemplated under .. =GG 8C9 of the Code.
G9 <here the allegations made in the #&! or complaint are so absurd and inherently
improbable on the basis of ,hich no prudent person can ever reach a ;ust conclusion that
there is suDcient ground for proceeding against the accused.
I9 <here there is an e)press legal bar engrafted in any of the provisions of the Code
or the concerned Act 8under ,hich a criminal proceeding is instituted9 to the institution and
continuance of the proceedings andPor ,here there is a speci2c provision in the Code or the
concerned Act, providing eDcacious redress for the grievance of the aggrieved party.
N9 <here a criminal proceeding is manifestly attended ,ith mala 2de andPor ,here
the proceeding is maliciously instituted ,ith an ulterior motive for ,reaking vengeance on
the accused and ,ith a vie, to spite him due to private and personal grudge.
KF.&n .tate of Bihar Ms. P.P..harma, &A. S Another
F_F`
the .upreme Court revie,ed the case la, on
this aspect including the ;udgment of .upreme Court in .,apan 1umar $uhas case 8= supra9.
<hile referring to the said ;udgment on ,hich reliance ,as placed on behalf of the accused for the
5uashing of the criminal proceedings, !amas,amy, ' observed as underL
Q +he decision of this Court, strongly relied on namely, .tate of <est Bengal v.
.,aran 1umar, 8=>OC9 F .C! =C=, is of no assistance to the respondents. &n that case
it ,as found that the #irst &nformation !eport did not disclose the facts constituting
the o@ence.R
KK.&n .tate of 7rissa v. .aro; 1umar .ahoo
K_K`
the .upreme Court revie,ed various ;udicial
precedents and laid do,n the follo,ing propositionsL
Q=9 +he e)ercise of po,er under .ection KOC CrPC is the e)ception and not the rule. +he
section does not confer any ne, po,ers on the %igh Court. &t only saves the inherent po,er
,hich the Court possessed before the enactment of CrPC. &t envisages three circumstances
under ,hich the inherent ;urisdiction may be e)ercised, namely, 8i9 to give e@ect to an order
3[3]
1992 Supp (1) SCC 222

4[4]
(2005) 13 SCC 540
Prepared by ' 'ayanath &P. , .P, <ayanad KG
under CrPC, 8ii9 to prevent abuse of the process of court, and 8iii9 to other,ise secure the
ends of ;ustice. &t is neither possible nor desirable to lay do,n any in6e)ible rule ,hich
,ould govern the e)ercise of inherent ;urisdiction. *o legislative enactment dealing ,ith
procedure can provide for all cases that may possibly arise.
C9 <hile e)ercising the po,ers under .ection KOC Cr.P.C., the %igh Court does not function
as a court of appeal or revision. &nherent ;urisdiction under the section, though ,ide, has to
be e)ercised sparingly, carefully and ,ith caution and only ,hen such e)ercise is ;usti2ed by
the tests speci2cally laid do,n in the section itself. &t is to be e)ercised e) debito ;ustitiae to
do real and substantial ;ustice for the administration of ,hich alone the courts e)ist.
Authority of the court e)ists for advancement of ;ustice and if any attempt is made to abuse
that authority so as to produce in;ustice, the court has the po,er to prevent abuse. &t ,ould
be an abuse of process of the court to allo, any action ,hich ,ould result in in;ustice and
prevent promotion of ;ustice. &n e)ercise of the po,ers the court ,ould be ;usti2ed to 5uash
any proceeding if it 2nds that initiationPcontinuance of it amounts to abuse of the process of
court or 5uashing of these proceedings ,ould other,ise serve the ends of ;ustice.
F9 +he inherent po,er should not be e)ercised to sti6e a legitimate prosecution. +he %igh
Court being the highest court of a .tate should normally refrain from giving a prima facie
decision in a case ,here the entire facts are incomplete and hazy, more so ,hen the
evidence has not been collected and produced before the Court and the issues involved,
,hether factual or legal, are of magnitude and cannot be seen in their true perspective
,ithout suDcient material. 7f course, no hard-and-fast rule can be laid do,n in regard to
cases in ,hich such po,er can be e)ercised can be laid do,n.R
KG.&n A.M. (ohan !ao v. (. 1ishan !ao
G_G`
the .upreme Court considered the correctness of order
passed by this Court refusing to 5uash the summons issued against the appellants by the .pecial
'udge for "conomic 7@ences, %yderabad. +he facts of that case sho,s that respondent *o.= 2led a
complaint in the Court of .pecial 'udge, "conomic 7@ences at %yderabad ,ith 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 Po,er CompanyT raised
millions of dollars from *on-!esident &ndians 8*!&s9T siphoned of the money into bogus companies
e)clusively o,ned by them and purchased shares of the Po,er Company in &ndia in the names of
bogus o@shore companies o,ned and controlled by them. According to the complainant, all this
came to his notice ,hen some of the prospective *!& investors made correspondence ,ith the
Po,er Company demanding share certi2cates for ,hich they had paid substantial amounts to the
accused. +he complainant alleged that the accused had committed fraud on the Po,er Company in
,hose name they collected money and invested the same in their o,n companies. +he .pecial
'udge for "conomic 7@ences, %yderabad issued summons to the accused persons re5uiring them to
appear before the Court. 7n receipt of the summons, the appellants 2led petition under .ection
KOC Cr.P.C. +his Court refused to 5uash the proceedings. <hile approving the order of the %igh
Court, the .upreme Court referred to the earlier ;udgments in .tate of Bihar v. (urad Ali 1han
I_I`
,
.tate of %aryana v. Bha;an /al 8supra9, (ahavir Prasad $upta v. .tate of *ational Capital +erritory of
elhi
N_N`
and heldL
5[5]
(2002) 6 SCC 174
6[6]
(1988) 4 SCC 655
7[7]
(2000) 8 SCC 115
Prepared by ' 'ayanath &P. , .P, <ayanad KI
Q!eading of the complaint petition and the materials produced by the complainant ,ith 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
o@ences alleged in the complaint petition. <e refrain from discussing the merits of the case
further since any observation in that regard may a@ect one party or the other. +he
allegations made are serious in nature and relate to the Po,er Company registered under
the Act having its head oDce in this country. <hether the appellants ,ere or ,ere not
citizens of &ndia at the time of commission of the o@ences alleged and ,hether the o@ences
alleged ,ere or ,ere not committed in this country, are 5uestions to be considered on the
basis of the evidence to be placed before the Court at the trial of the case. +he 5uestions
raised are of involved nature, determination of ,hich re5uires en5uiry into facts. .uch
5uestions cannot be considered at the preliminary stage for the purpose of 5uashing the
complaint and the proceeding initiated on its basis.R
KI.&n .tate of 1arnataka v. (.evendrappa
O_O`
8supra9, the .upreme Court referred to some of the
earlier ;udgments and laid do,n the follo,ing propositionsL
Q=9 &t is important to bear in mind the distinction bet,een a case ,here there is no legal
evidence or ,here there is evidence ,hich is clearly inconsistent ,ith the accusations made,
and a case ,here there is legal evidence ,hich, on appreciation, may or may not support the
accusations. <hen e)ercising ;urisdiction under .ection KOC of the Code, the %igh Court ,ould
not ordinarily embark upon an en5uiry ,hether the evidence in 5uestion is reliable or not or
,hether on a reasonable appreciation of it accusation ,ould not be sustained. +hat is the
function of the trial 'udge. 'udicial process should not be an instrument of oppression, or,
needless harassment. Court should be circumspect and ;udicious in e)ercising discretion and
should take all relevant facts and circumstances into consideration before issuing process, lest it
,ould 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. +he inherent po,er should not
be e)ercised to sti6e a legitimate prosecution.
C9 +he %igh Court being the highest court of a .tate should normally refrain from giving a
prima facie decision in a case ,here the entire facts are incomplete and hazy, more so ,hen the
evidence has not been collected and produced before the Court and the issues involved,
,hether factual or legal, are of magnitude and cannot be seen in their true perspective ,ithout
suDcient material. 7f course, no hard-and-fast rule can be laid do,n in regard to cases in ,hich
the %igh Court ,ill e)ercise its e)traordinary ;urisdiction of 5uashing the proceeding at any
stage. Court must be careful to see that its decision in e)ercise of this po,er is based on sound
principles. &t ,ould not be proper for the %igh Court to analyse the case of the complainant in
the light of all probabilities in order to determine ,hether a conviction ,ould be sustainable and
on such premises arrive at a conclusion that the proceedings are to be 5uashed. &t ,ould be
erroneous to assess the material before it and conclude that the complaint cannot be proceeded
,ith.
F9 &n a proceeding instituted on complaint, e)ercise of the inherent po,ers to 5uash the
proceedings is called for only in a case ,here the complaint does not disclose any o@ence or is
frivolous, ve)atious or oppressive. &f the allegations set out in the complaint do not constitute
the o@ence of ,hich cognizance has been taken by the (agistrate, it is open to the %igh Court
8[8]
(2002) 3 SCC 89
Prepared by ' 'ayanath &P. , .P, <ayanad KN
to 5uash the same in e)ercise of the inherent po,ers under .ection KOC of the Code. &t is not,
ho,ever, necessary that there should be meticulous analysis of the case before the trial to 2nd
out ,hether the case ,ould end in conviction or ac5uittal. +he complaint has to be read as a
,hole. &f 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 o@ence or o@ences are disclosed and
there is no material to sho, that the complaint is mala2de, frivolous or ve)atious, in that event
there ,ould be no ;usti2cation for interference by the %igh Court.
K9 <hen an information is lodged at the police station and an o@ence is registered, then the
mala2des of the informant ,ould be of secondary importance. &t is the material collected during
the investigation and evidence led in court ,hich decides the fate of the accused person. +he
allegation of mala2des against the informant is of no conse5uence and cannot by itself be the
basis for 5uashing the proceedings.R
KN.&n .tate of (aharashtra v. &sh,ar Pira;i 1alpatri
>_>`
the .upreme Court held that if a prima
facie case is made out on the basis of allegations made in the complaint then the %igh Court
cannot 5uash the proceedings on the ground of mala2des or animus of the complainant or
prosecution.
KO.By applying the principles set out in the aforementioned ;udgments, ,e hold that there is no
,arrant for us to restrain the investigating agency from proceeding ,ith the criminal case.
K>..ri B.Adinarayana !ao ne)t contended that even assuming that the police are satis2ed that the
petitioners are indulging in money circulation scheme, they cannot high- handedly interfere ,ith
the business of the petitioners till the criminal court after a full 6edged trial holds the petitioners
guilty of the o@ence alleged against them. <e have carefully considered this submission of the
learned counsel. &t is a ,ell settled principle of criminal ;urisprudence that no person shall be
presumed to be guilty until his guilt is proved, but ,e 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 po,er to interfere ,ith the business activities of the petitioners. .ection N of the Act empo,ers
the police oDcer not belo, the rank of an oDcer in charge of a police station to e)ercise all or any
of the po,ers enumerated therein. &t is relevant to e)tract the said provision ,hich reads as underL
QN.Po,er to enter, search and seizeL- 8=9 &t shall be la,ful for any police oDcer not belo, the
rank of an oDcer-in-charge of a police station,-
8a9 to enter, if necessary by force, ,hether by day or night ,ith such assistance as he
considers necessary, any premises, ,hich he has reason to suspect, are being used for
purposes connected ,ith the promotion or conduct of any prize chit or money circulation
scheme in contravention of the provisions of this ActT
8b9 to search the said premises and the persons ,hom he may 2nd therein,
8c9 to take into custody and produce before any 'udicial (agistrate all such persons as are
concerned or against ,hom a complaint has been made or credible information has been
received or a reasonable suspicion e)ists of their having been concerned ,ith the use of the
said premises for purposes connected ,ith, or ,ith the promotion or conduct of, any such
prize chit or money circulation scheme as aforesaidT
9[9]
(1996) 1 SCC 542
Prepared by ' 'ayanath &P. , .P, <ayanad KO
8d9 to seize all things found in the said premises ,hich are intended to be used. or
reasonably suspected to have been used, in connection ,ith any such prize chit or money
circulation scheme as aforesaid.
8C9 Any oDcer authorized by the .tate $overnment in this behalf may-
8a9 at all reasonable times, enter into and search any premises ,hich he has reason to
suspect, are being used for the purposes connected ,ith or conduct of, any prize chit or
money circulation scheme in contravention of the provisions of this ActL
8b9 e)amine any person having the control of, or employed in connection ,ith any such
prize chit or money circulation schemeL
8c9 order the production of any documents, books or records in the possession or po,er of
any person having the control of. or employed in connection ,ith. Any such prize chit or
money circulation schemeT and
8d9 inspect and seize any register, books of accounts, documents or any other literature
found in the said premises.
8F9 All searches under this section shall be made in accordance ,ith the provisions of Code
of Criminal Procedure, =>NF.R
GH.&n para-CO of the aDdavit 2led in support of the ,rit petition it is averred that after registering
the crime respondents G and I have conducted simultaneous raids on the petitioners branches at >
centers in Andhra Pradesh and sealed the various oDce premises of the petitioners. +he action
complained of in the ,rit petition falls ,ell ,ithin the po,ers of the police vested in them by
.ection N of the Act. %o,ever, ,e ,ould like to observe that if in the process of e)ercising such
po,ers the police e)ceed their po,ers, it is al,ays open to the petitioners to approach the
competent court of la, for redressal of their grievance.
G=. #or the reasons aforementioned, the ,rit petitions are liable to be dismissed.
GC. &n the result, the t,o ,rit petitions i.e., <rit Petition *os.CHKNH and CHKN= of CHHI are
dismissed.
GF.As regards <rit Petition *os. CKN>> of CHHH, NG=G of CHHF, CC>=K, CC>=G, CC>=I, CC>=F, C==CO,
CHI=I, CFNFN, CI=K> of CHHI, FCHC, CKIC, >F>N and >F>O of CHHN, ,hich ,ere listed for hearing
along ,ith these petitions, it is appropriate to observe that the Court did not have the bene2t of the
arguments of the learned counsel appearing for the petitioners. &t is, therefore, appropriate that all
these petitions be listed for hearing on CK.O.CHHN.
]]]]]]]]
Prepared by ' 'ayanath &P. , .P, <ayanad K>
.0P!"(" C70!+ 7# &*&A
8C.1. +hakker A* .1. 'A&*. ''.9
10!&AC%A* C%AC17 A* 7+%"!. ..*ersus .+A+" 7# 1"!A/A
A* 7+%"!.,
decided on 'uly =H.CHHO
=. /eave granted.
C. +he present appeals have been instituted by the appellants against the ;udgment and order
dated =>th 'uly, CHHN passed by the %igh Court of 1erala in Criminal !evision Petition *o. K=CI of
CHHI and companion matters. By the impugned order, the %igh Court dismissed revision petitions
2led by the appellants herein as also by the .tate of 1erala.
F. +o understand the issue raised in the present appeals, fe, relevant facts may be statedL
K. +he appellants are partners of (Ps /&., "rnakulam, a partnership 2rm engaged in the business of
sale of lotteries and magazines after collecting advance money. +hey 6oated a scheme kno,n as
3/&. eepasthambham .cheme3.+he scheme ,as simple in its conception. A person has to pay
!s.ICGP- and purchase one F unit of lotteries from the promoters. +he promoters ,ill make use of
!s.FGHP- to purchase FG lottery tickets of the 1erala .tate $overnment each of !s.=HP- for the unit
holder for the ne)t FG ,eeks. &f the unit holder ,ins any prize up to !s.G,HHHP- in the FG dra,s, the
promoters shall collect the amount and pay the same to the unit holder. &f the unit holder ,ins any
prize above !s.G,HHHP-, the ticket shall be handed over to the unit holder for collection of the
amount. +he balance of !s.CNGP- 8!s.ICG - !s.FGH9 ,ill be used to make the unit holder a subscriber
of a magazine by name b+hrikalam[ for one year. +he said magazine ,ould reproduce relevant and
important materials from other magazines. &t ,ould also furnish necessary information about the
lottery tickets ,hich have ,on prizes.
G. +he unit holder ,ill be returned 8paid9 not only !s.ICGP- ,hich he had initially invested, but t,ice
his investment i.e. !s.=,CGHP- 8less !s.=HHP- as service charges K for the promoters and legal
deduction for ta), etc.9 on an early date. As per the scheme, on sale of three tickets of !s.=HP- each,
the $overnment ,ould pay commission of CO? of ,hich the promoters ,ould share CG? ,ith the
unit holders. /ike,ise, the publisher of the magazine ,ould give commission of FH? to the
promoters and promoters ,ould share CG? ,ith the unit holders. All these amounts are available to
the unit-holders. 0nder the scheme, in order of strict seniority, the senior most unit holder ,ould be
paid !s.=,CGHP- as soon as the re5uisite amounts are available as commission ,ith the promoters.
+he promoters, in addition to CO? commission for the lottery tickets, and FH? commission for the
magazines, ,ould also get commission for the prizes ,on by the tickets sold through them from the
$overnment. +hose amounts also ,ould be entirely made available for payment to unit holders. &f a
unit holder is paid !s.=,CGHP- before the e)piry of FG ,eeks, no lottery G tickets ,ill be purchased
on his behalf thereafter. &t is because he had already been paid the re5uisite amount. 7n the same
reasoning, if the amount of !s.=,CGHP- is paid to the subscriber before the e)piry of one year,
b+hrikalam[ magazine ,ould also not be sent to the subscriber thereafter. +he price of unpurchased
lottery tickets and unused magazines thereafter ,ill be used by the promoters to,ards the
payment of amount of !s.=,CGHP- to other unit holders. According to the promoters, the scheme ,as
viable as ,ell as ,orkable. All persons ,ould be able to double their investment at the earliest. *o
speci2c time, ho,ever, ,as given but it ,as assured that the amount ,ould be doubled at the
Prepared by ' 'ayanath &P. , .P, <ayanad GH
earliest and it ,ould be paid on the basis of seniority. 0nder the scheme, the amount of !s.=,CGHP-
8double the investment by the unit holder9 ,ill be paid as soon as =K more members are enrolled.
+he advantage of technology ,as borro,ed. Pass,ords could be chosen. +here ,as a ,eb site for
promoters. +he unit holder could use his pass,ord and the site ,ould reveal all details about the
tickets purchased on behalf of the unit holder by the promoters. +he unit holders thus ,ould be
able kno, the details of the tickets purchased for them by the promoters and ,ould also able to
ascertain ,hether any prizes had been ,on by any ticket purchased on their behalf by the
promoters.
I. +he idea appeared to be very attractive. .everal persons participated and invested money. +he
membership collection during a short period of time reached to almost !s.GHH crores. Amounts
,ere being paid to the unit holders initially very promptly--on many occasions even before the
e)piry of FG ,eeks.
(ore and more subscribers ;oined the 5ueue.
+here ,as aggressive publicity and marketing through visual 8+M9 and printed media 8pamphlets
and ne,spapers9. +he scheme ,as proceeding very happily. (ore and more amounts ,ere coming
into the kitty of the promoters from unit holders.
N. .uddenly, ho,ever, there ,as a ;olt to the scheme. Police Authorities registered a crime against
the promoters for an o@ence punishable under .ection KCH of &ndian Penal Code 8&PC9, under the
Prize, Chits S (oney Circulation .cheme 8Banning9 Act, =>NO 8hereinafter referred to as bthe Act[9
and also under the !eserve Bank of &ndia Act, =>FK.
Certain proceedings ,ere initiated even earlier ,ith ,hich ,e are not concerned in the present
proceedings. +he learned Chief 'udicial (agistrate, "rnakulam by an order, dated *ovember =K,
CHHI, framed charge against the appellants herein for o@ences punishable under .ection KCH read
,ith .ection FK, &PC and under .ections K and G read ,ith .ection C8c9 and F of the Act. %e,
ho,ever, discharged all the accused for the o@ences punishable under .ections K and G read ,ith
.ections C8e9 and 8F9 of the Act and also under .ections KG&8bb9, O KG. and GOB of the !eserve
Bank of &ndia Act, =>FK.
O. Being aggrieved by the order passed by the trial Court, the accused as ,ell as the .tate 2led
revision petitions in the %igh Court of 1erala. <hereas the accused ,ere aggrieved by the order of
the trial Court framing charge against them, the .tate ,as aggrieved by the order discharging the
accused for certain o@ences under the Act and under the !eserve Bank of &ndia Act, =>FK.
>. A .ingle 'udge of the %igh Court considered rival contentions of the parties and noted that the
learned Additional Advocate $eneralP.pecial Public Prosecutor fairly submitted that on the facts of
the case .ection C8e9 of the Act ,as not attracted. .imilarly, there ,as no error on the part of the
trial Court in not framing charge against the accused for o@ences punishable under the !eserve
Bank of &ndia Act, =>FK. +he %igh Court observed that though no e)press concession ,as made by
the .tate, it ,as not seriously challenged by the prosecution that the trial Court had committed any
error in discharging the accused.
=H. +he accused, on the other hand, strenuously contended that the trial Court ,as ,holly ,rong in
framing charge against the accused for an o@ence punishable under .ection KCH read ,ith .ection
FK, &PC as also under .ections K and G read ,ith .ections C8c9 and F of the Act and the said order
,as liable to be set aside ordering discharge of the accused in respect of all o@ences.
Prepared by ' 'ayanath &P. , .P, <ayanad G=
==. +he %igh Court, after considering the rival contentions of the parties and referring to the
relevant decisions on the point, held that the trial Court ,as right in discharging the accused for
o@ences punishable under .ections K and G read ,ith .ections C8e9 and F of the Act and also under
the !eserve Bank of &ndia Act, =>FK. +he %igh Court held that the trial Court ,as also right in
framing the charge against the accused for o@ences =H punishable under .ections K and G read
,ith .ections C8c9 and F of the Act and also under .ection KCH read ,ith .ection FK, &PC. +he %igh
Court, therefore, con2rmed the order passed by the trial Court and dismissed revisions of both the
parties. +he said order is challenged by the appellants-accused in present appeals.
=C. 7n .eptember N, CHHN, notice ,as issued by this Court. 7n #ebruary CC, CHHO, the matters ,ere
ordered to be posted for 2nal hearing on a non-miscellaneous day. +hat is ho, they are before us.
=F. <e have heard learned counsel for the parties.
=K. +he learned counsel for the appellants submitted that the trial Court and the %igh Court ,ere
right in discharging the accused for certain o@ences punishable under the Act and also under the
!eserve Bank of &ndia Act, =>FK.
+he .tate has not preferred appeal against the said order and the decision has become 2nal.
%e, ho,ever, contended that both the Courts ,ere ,rong in not discharging the accused for
o@ences punishable under .ections K and G read ,ith .ections C8c9 and F of the Act as also for an
o@ence punishable under .ection KCH read ,ith .ection FK, &PC.
=G. &t ,as submitted that the scheme formulated by the appellants could not fall ,ithin the mischief
of b(oney Circulation .cheme[ as de2ned in clause 8c9 of .ection C of the Act. &f it is so, ban
envisaged by .ection F ,ould not apply. Conse5uently, penal provisions of .ections K and G cannot
be invoked. +he Courts belo, ,ere ,rong in observing that prima facie, the provisions of the Act
got attracted and appellants could not be discharged. (oreover, for application of .ection K=G, &PC,
there must be fraudulent and dishonest intention ,hich ,as not present in the instant case. Penalty
provision of .ection KCH, &PC had, therefore, no application. "ven there, the Courts ,ere ,rong in
framing charge against the accused.
=I. +he learned counsel for the respondents, on the other hand, supported the order passed by the
trial Court and con2rmed by the %igh Court. &t ,as submitted that both the Courts considered the
relevant provisions of la,, re5uisite ingredients under the Act and formed a prima facie opinion that
the scheme in 5uestion ,as covered by de2nition clause C8c9 8(oney Circulation .cheme9 and the
case ,as re5uired to be gone into by a competent Court.
/ike,ise, the Courts belo, observed that there ,as bcheating[ as de2ned in .ection K=G, &PC and
the accused could not be discharged. *o fault can be found against the approach adopted by both
the Courts and the appeals deserve to be dismissed.
=N. Before ,e deal ,ith the merits of the matter and reasoning of the Courts belo,, it ,ould be
appropriate if ,e refer to the relevant provisions of the Act.
=O. +he Preamble of =>NO Act declares that it has been enacted 3to ban the promotion or conduct of
prize chits and money circulation schemes and for matters connected there,ith and incidental
thereto3.
Prepared by ' 'ayanath &P. , .P, <ayanad GC
=>. .ection C is legislative dictionary and de2nes certain terms. +he phrase b(oney Circulation
.cheme[ is de2ned in clause 8c9 ,hich reads as underT
8c9 3money circulation scheme3 means any scheme, by ,hatever name called, for the
making of 5uick 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, ,hether or not such money or
thing is derived from the entrance money of the members of such scheme or periodical
subscriptionsT
CH. +he de2nition is not simple. 'udicial notice thereof had been taken in the leading decision of this
Court in .tate of <est Bengal v. .,apan 1umar $uha, 8=>OC9 = .CC GI=.
Chandrachud, C.'. after taking note of legislative drafting, reshaped and rearranged .ection C8c9
thusT
[money circulation scheme[ means any scheme, by ,hatever name called, 8i9 for the making of
5uick or easy money, or 8ii9 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, ,hether or not such money or thing is derived from the entrance money
of the members of such scheme or periodical subscriptionsT
C=. .ection F bans money circulation schemes or enrolment as member to any such scheme or
participation in such scheme.
.ections K and G are penal provisions and prescribe punishment. .ection I deals ,ith o@ences
committed by Companies. .ection N authorizes Police 7Dcer not belo, the rank of oDcer in charge
of a police station to e)ercise po,er to enter and search premises and to seize things used for such
scheme. .ection O provides for forfeiture of ne,spaper and publication containing money
circulation scheme. .ection > declares that no Court inferior to the Court of Chief (etropolitan
(agistrate or Chief 'udicial (agistrate shall try any o@ence punishable under the Act. All o@ences
punishable under the Act have been made cognizable under .ection =H. .ection == grants
e)emption from the operation of the Act to certain money circulation schemes.
CC. #rom the perusal of the above provisions, it is clear that the Act prohibits bmoney circulation
scheme[. +he main 5uestion, therefore, is ,hether the scheme in 5uestion is a bmoney circulation
scheme[ covered by the ActX CF. &n .,apan 1umar $uha, this Court had an occasion to consider the
provisions of the Act. &nterpreting the connotation b(oney Circulation .cheme[ and speaking for the
ma;ority, Chandrachud, C.'. observedL 3Commas or no commas, and ho,soever thoughtfully one
may place them if they are to be there, & 2nd it impossible to take Clause 8c9 to mean that any and
every activity 3for the making of 5uick or easy money3 is comprehended ,ithin its scope. #or the
matter of that, & cannot believe any la, to ban every kind of activity for making 5uick or easy
money, ,ithout more, on pain of penal conse5uences. &t is far too vague and arbitrary to prescribe
that 3,hosoever makes 5uick or easy money shall be liable to be punished ,ith 2ne or
imprisonment3. #or then, in the absence of any demarcation of legitimate money making activities
from those ,hich fall ,ithin the ban, the 5uestion ,hether the penal provision is attracted in a
given case ,ill depend upon the ,ill and temper, s,eet or sour, of the magistracy. Besides,
speaking of la, and morals, it does not seem morally ;ust or proper to say that no person shall
make 5uick or easy money, especially 5uick. A person ,ho makes 5uick money may do so
legitimately by the use of his ,its and ,isdom and no moral turpitude may attach to it. 7ne need
Prepared by ' 'ayanath &P. , .P, <ayanad GF
not travel after to 2nd speaking e)amples of this. &ndeed, there are honourable men 8and no,
,omen9 in all professions recognised traditionally as noble, ,ho make 5uite 5uick money by the use
of their talents, acumen and e)perience ac5uired over the years by dint of hard ,ork and industry.
A la,yer ,ho charges a thousand rupees for a .pecial /eave Petition lasting 2ve minutes 8that is as
far as a 'udge[s imagination can go9, a doctor ,ho charges a couple of thousands for an operation
of tonsillitis lasting ten minutes, an engineer, an architect, a chartered accountant and other
professionals ,ho charge like,ise, cannot by any stretch of imagination be brought into the drag-
net of Clause 8c9. .imilarly, there are many other vocations and business activities in ,hich, of late,
people have been notoriously making 5uick money as, for e)ample, the builders and real estate
brokers. & cannot accept that the provisions of Clause 8c9 are directed against any of these
categories of persons. & do not suggest that la, is po,erless to reach easy or 5uick money and if it
,ills to reach it, it can 2nd a ,ay to do it. But the point of the matter is that it ,ill verge upon the
ludicrous to say that the ,eapon devised by la, to ban the making of 5uick or easy money is the
provision contained in .ection C 8c9 of the Prize Chits and (oney Circulation .chemes 8Banning9
Act3.
CK. ")plaining the ambit and scope of the e)pression b(oney Circulation .cheme[, the Court
proceeded to stateT
3&n order to give meaning and content to the de2nition of the e)pression [money circulation
scheme[ ,hich is contained in .ection C8c9 of the Act, one has, therefore, to look perforce to the
ad;ectival Clause ,hich 5uali2es the ,ords 3for the making of 5uick or easy money3. <hat is ,ithin
the mischief of the Act is not 3any scheme, by ,hatever name called, for the making of 5uick or
easy money3 simpliciter, but a scheme for the making of 5uick or easy money, 3on any event or
contingency relative or applicable to the enrolment of members into the scheme3, 8,hether or not
such money or thing is derived from the entrance money of the members of such scheme or their
periodical subscriptions9. +,o conditions must, therefore, be satis2ed before a person can be held
guilty of an o@ence under .ection K read ,ith .ections F and C8c9 of the Act. &n the 2rst place, it
must be proved that he is promoting or conducting a scheme for the making of 5uick or easy
money and secondly, the chance or opportunity of making 5uick or easy money must be sho,n to
depend upon an event or contingency relative or applicable to the enrolment of members into that
scheme. +he legislative draftsman could have thoughtfully foreseen and avoided all reasonable
controversy over the meaning of the e)pression [money circulation scheme[ by shaping its
de2nition in this formT
[money circulation scheme[ means any scheme, by ,hatever name called, 8i9 for the making of
5uick or easy money, or 8ii9 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, ,hether or not such money or thing is derived from the entrance money
of the members of such scheme or periodical subscriptionsT
& have reshaped the de2nition, in order to bring out its meaning clearly, ,ithout adding or deleting
a single ,ord or comma from the original te)t of .ection C8c9. +he substance of the matter is really
not in doubt L only the form of the de2nition is likely to create some doubt as to the meaning of the
e)pression ,hich is de2ned and, therefore, & have made a formal modi2cation in the de2nition
,ithout doing violence to its language and indeed, ,ithout even so much as altering a comma3.
CG. +he Court observed that besides the prize chits, the Act aims at banning b(oney Circulation
.cheme[. &t is, therefore, necessary that the activity charged as falling ,ithin the mischief of the
Prepared by ' 'ayanath &P. , .P, <ayanad GK
Act, must be sho,n to be a part of the scheme for making 5uick 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.
CI. !eferring to dictionary meanings, this Court proceeded to stateT
3+herefore, a transaction under ,hich, one party deposits ,ith 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, ,ithout more, be a [money circulation scheme[ ,ithin the meaning of .ection C8c9 of the
Act, ho,soever high the promised rate of interest may be in comparison ,ith the agreed rate. <hat
that section re5uires is that such reciprocal promises, e)press 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. &n other ,ords, there has to be a community of interest in the happening
of such event or contingency3.8emphasis supplied9
CN. 7n the facts of the case, the Court held that it ,as not a b(oney Circulation .cheme[ and
proceedings initiated against the accused ,ere liable to be dropped.
CO. .trongly relying on .,apan 1umar $uha 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
belo, ,ere not right in distinguishing it and in not discharging the accused.
C>. <e are unable to uphold the contention. <e have closely gone through .,apan 1umar $uha
and in our opinion, the case is clearly distinguishable. +his Court, in that case, reproduced #irst
&nformation !eport 8#&!9 in toto. +he Court then considered ,hether #&! prima facie disclosed an
o@ence under the Act.
+he Court analyzed #&! bcarefully, and even liberally[ and came to the conclusion that the #&!
against b.anchaita &nvestments[ and its partners 8baccused[ in that case9 made in respect of
follo,ing allegationsT
8=9+he 2rm had been o@ering fabulous interest a KO? per annum to its members, ,hich rate of
interest ,as later reduced to FI? per annumT
8C9.uch high rate of interest ,as being paid even though the loan certi2cate receipts sho, that
interest ,as liable to be paid at the rate of =C? per annum onlyT and 8F9+he fact that interest ,as
paid in e)cess of =C? sho,s clearly that a [(oney Circulation .cheme[ ,as being promoted and
conducted for the making of 5uick or easy money.
FH. +he 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 2rm ,as promoting or conducting a scheme for the making of 5uick or easy money,
dependent on any event or contingency relative or applicable to the enrolment of members into the
scheme. .econdly, the #&! did not contain any allegation ,hatsoever that the persons ,ho
advanced or deposited their monies ,ith the 2rm ,ere participants of a scheme for the making of
5uick or easy money, dependent upon any such event or contingency. +he Court noted the
contention of the learned counsel for the prosecution that the accused ,ere promoting or
conducting a scheme for making 5uick or easy money. According to the Court, ho,ever, such
argument could not be upheld since it ,as fallacious. &t ,as observed in the paragraph ,e have
reproduced hereinabove that it ,ould be arbitrary to hold that ,hoever makes b5uick or easy
Prepared by ' 'ayanath &P. , .P, <ayanad GG
money[ should be punished. +he Court noted some illustrative cases in ,hich a person may be able
to make b5uick or easy money[T for instance, a la,yer ,ho charges a thousand rupees 8in early
eighties, not no,9 for a .pecial /eave Petition lasting 2ve minutes, a doctor ,ho charges a couple
of thousands for an operation of tonsillitis lasting ten minutes, an engineer, an architect, a
chartered accountant and other professionals ,ho charge like,ise. +here are many other vocations
and business activities in ,hich people notoriously make 5uick money, e.g. builders and real estate
brokers. #rom that, ho,ever, one cannot ;ump to the conclusion that they are all liable to be
punished under .ections K and G of the Act.
F=. +he Court also took into account, apart from #&!, a detailed aDdavit in reply 2led in the %igh
Court. "ven in the said aDdavit, there ,as no clear basis in respect of allegations, nor material ,as
disclosed to sho, that prima facie, the 2rm ,as promoting or conducting a scheme for making
5uick or easy money ,hich ,as dependent on any event or contingency relative or applicable to
the enrolment of members into the scheme. +he bsong[ of the .tate ,as that the scheme
conducted by the accused ,ould generate black money and ,ould paralyze economy of the
country. +he Court ,as conscious and alive of seriousness of the problem and observed that
un5uestionably a private party could not be allo,ed to issue bbearer bonds[ by a back door.
At the same time, ho,ever, such activities should be curbed by the $overnment by taking
appropriate action in accordance ,ith la,. But if the activity does not fall ,ithin the de2nition of
bmoney circulation scheme[ ,ithin the meaning of .ection C8c9 of the Act, no prosecution can be
launched against them. +hus, the second ingredient of .ection C8c9 of the Act, according to the
Court, ,as totally absent.
FC. &n the instant case, both the essentials of .ection C8c9 are present. +he scheme provides for 8i9
making of 5uick or easy money, and 8ii9 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 ,ould be
entitled to double amount only after his enrolment, additional =K members are enrolled in the
scheme. +he second ingredient, namely, such payment of money is dependant on the 3event or
contingency relative or applicable to the CI enrolment of members into the scheme3 is thus very
much present. .,apan 1umar $uha, therefore, in our considered opinion, does not apply and carry
the case of the accused further.
FF. &t ,as ne)t contended that there is no obligation on the part of the unit holder to enlistPenroll
more members into the scheme and, therefore, the scheme does not attract .ection C8c9. +he
contention has no force. .ection C8c9 no ,here provides that a member of the scheme must himself
enroll other members and only in that eventuality, the provision of the Act ,ould apply. +he section
does not provide for positive or dominant role to be played by a member of the scheme. &n our
opinion, the re5uirement of la, is 3an event or contingency relative or applicable to the enrolment
of members into the scheme3 and nothing more. +he plain language of the section does not insist
that such enrolment of members must be by the CN members already enrolled. &t is impossible to
read into the statutory provision such re5uirement ,hich is not stipulated by Parliament. 0pholding
of the argument of the learned counsel ,ould result in re-,riting of the section, ,hich is certainly
not permissible in our constitutional system. +he event or contingency on the happening of ,hich
the amount ,ould become payable must be relative or applicable to the enrolment of the members
into the scheme. &t is immaterial by ,hom such members are enrolled. &t may be by members, by
promoters or their agents or by gullible sections of the society suo motu 8by themselves9. +he sole
consideration is that payment of money must be dependent on an event or contingency relative or
Prepared by ' 'ayanath &P. , .P, <ayanad GI
applicable to the enrolment of more persons into the scheme, nothing more, though nothing less. &n
the present case, the second ingredient is very much present.
FK. &t ,as then contended by the learned counsel for the appellants that in the present case, all the
promises have been ful2lled by the promoters and contract ,as complete inasmuch as for payment
of !s.ICGP- by the unit holder, he ,as given FG lottery tickets each of !s.=HP- and thus an amount of
!s.FGHP- gets appropriated. /ike,ise, for the balance amount of !s.CNGP- 8!s.ICGP- - !s.FGHP-9, he
has been made subscriber of a magazine b+hrikalam[ for one year. *othing, therefore, remains to
be done thereafter by the promoters e)cept the bene2t ,hich is likely to accrue in future..uch a
scheme cannot be termed as a scheme for the making 5uick or easy money on any event or
contingency relative or applicable to the enrolment of the members of the scheme.
FG. <e are unable to agree ,ith the learned counsel. +he Courts belo, rightly held that prima facie
case had been made out against the accused. Both the ingredients necessary for application of
.ection C8c9 of the Act are present in the case on hand. +he trial Court, for coming to that
conclusion, referred to certain documents. +he advertisement clearly declared that a member
,ould get double the amount ,hen after his enrolment, t,o members ,ere enrolled under him and
thereafter, K other persons ,ere enrolled and after the rolled K persons, O persons ,ere enrolled
under them. +hus, only after =K persons under the 2rst enrolled person become members under the
scheme, the 2rst person ,ould get !s.=,CGHP- i.e., double the amount of !s.ICGP- 8=ZCZKZO9. +he
trial Court also noted that 1uriachan Chacko 8Accused *o.=9 ,ho proposed the pro;ect for
implementation, described ho, the pro;ect ,ould ,ork from ,hich also it is clear that the double
amount ,ill be given to a person ,ho purchases a unit only after =K persons are enrolled
subse5uent to him.
FI. &n the aDdavit in reply 2led in this Court, respondent .tate has relied upon a letter ,ritten to
the !eserve Bank of &ndia by FH the accused on 7ctober >, CHHK ,herein the scheme has been
e)plained. +he relevant part reads thusL
=. <e are collecting !s.ICG from a person to be considered as a member of the
eepasthambham pro;ect.
C. +he !s.ICG is intended as follo,s !s.=H ,orth 1erala /ottery +icket per ,eek for FG ,eeks
L !s.FGHP- !s.=H ,orth +hrikalam +ri-(onthly Collage (agazine one year subscription L !s.
CNGP- F. As such, ,e are collecting money in advance for the 1erala /ottery ticket and
subscription of the +hrikalam magazine and not as "P7.&+ at all.
K. <e are giving membership in a particular style--adopting the principle of (ulti /evel
(arketing method.
=st .tage #irst 7ne member ;oins
Cnd .tage Belo, him +,o members ;oin
Frd .tage Belo, them #our members ;oin
Kth .tage Belo, them "ight members ;oin
+hus =K members ;oin belo, the 2rst one.
Prepared by ' 'ayanath &P. , .P, <ayanad GN
G. #rom one membership ,e take CN? commission to be distributed in the three stages in
the above manner.
7n collecting such commissions, ,e get !s.==GHP- from the members belo, him. 7ther,ise,
,hen the =Kth member ;oins, the commission reserved for the 2rst member is paid.
I. +he !s.==GH paid to the 2rst member is claimed by us as payment of double the amount
he had entrusted and ,e e)plain it as 3!efund and Commission3 less our service charge.
i.e. !efund !s.ICG
Commission !s.ICG
-------
!s.=CGH
/ess .ervice Charge !s. =HH
-------
!s.==GH
N. 7nce the !s.==GH is paid to the member, the membership is ceased, and no more ticket
or +hrikalam ,ill be given to him, even if the promised FG tickets and one year +hrikalam are
not yet over.
O. +o ;ustify this stand of ours, though the !s.==GH paid is actually the commission, ,e term
it as !efund and Commission so that the member shall not make any claim for the remaining
tickets or +hrikalam.
>. &f the member ,ish to get lottery ticket and +hrikalam again he has to ;oin again by taking
ne, membership.
=H. +he lottery commission available to us on 1erala $overnment /ottery is CO? alone. As
the commission ,e are paying to the member is CN?, the margin for us is only =?.But then
there ,ill be a lot of other commissions on prizes bagged by the members ,hich ,ill add to
our gain.At the beginning, ,e o@ered the .uperlotto and +hunderball online tickets also. But
,e stopped that since C months and no, ,e are issuing only 1erala $ovt. tickets. By
7ctober end, ,e ,ill be purchasing a minimum of = lakh tickets every ,eek i.e. =H lakh
rupees ,orth tickets in a ,eek from 1erala $overnment.
FN. +he %igh Court also upheld the argument of the prosecution that the scheme ,as a
bmathematical impossibility[. +he promoters of the scheme very ,ell kne, that it is certain that the
scheme ,as impracticable and un,orkable making tall promises ,hich the makers of the promises
kne, fully ,ell that it could not ,ork successfully. &t could ,ork for some time in that bPaul can be
robbed to pay Peter[ but ultimately ,hen there is a large mass of Peters, they ,ill be left in the
lurch ,ithout any remedy as they ,ould by then have been deceived and deprived of their money.
FO. +he Court, taking into account the scheme as a ,hole, recorded a 2nding thusL
Prepared by ' 'ayanath &P. , .P, <ayanad GO
3+he 5uestion therefore is very important as to ,hether the .cheme is a possibility or is only
a tall false claim made to fraudulently induce persons to part ,ith their money. &n this
conte)t, it has to be seen that the pro2table ,orking of the .cheme is impossible from the
very nature of the .cheme o@ered. .imple arithmetics reveal that utilising the amount of !s.
ICGP-, only an amount of !s. =OH.GH ,ill be available as commission of ,hich !s. CK.CG is
claimed by the promoter and !s. =GI.CG is o@ered for payment to the unit holders.+he
details of the same are given belo,L
&f the amount of !s. ICGP- ,ere to be returned, there ,ill be a de2cit of !s. KIO.NG. &f double
the amount i.e., !s. =,CGHP- ,ere to be returned, there ,ill be a de2cit of !s. =,H>F.NG.
+herefore for every person for ,hom double payment is made, the promoter ,ill have to
make !s. =,H>F.NG and this obviously is paid to him from the money ,hich subse5uent
subscribers pay as the price of the unit. 7f course, & have not taken note of the uncertain
commission ,hich ,ould be receivable by the promoter for prizes ,on by the unit holders
through them. & have also not taken speci2c 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 FG months. &t must be evident for any
discerning mind that this .cheme cannot ,ork unless more and more subscribers ;oin and
the amount paid by them as unit price is made use of to pay the previous subscribers. +he
system is an inherently fragile system ,hich is un,orkable. #oolish, gullible and stupid
persons alone may fall for the .cheme ,ithout carefully analysing the stipulations of the
.cheme. &t ,ould be totally erroneous to assume that the o@ence of cheating ,ould not lie if
the persons deceived are gullible, unintelligent and stupid persons. +he system and the la,
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 ,ithout any culpable motive on the honest assumption that the tickets sold through
them ,ill ,in prizes and suDcient commission ,ill be available to pay double the amount to
all the unit holders3.
F>. +he Court also statedT
3& take note of the fact that inherently there is merit in the allegation of the prosecution that
the .cheme is so grossly un,orkable that the persons ,ho made representations to that
e@ect and induced persons to part ,ith money did entertain the contumacious intention.
+hey kne, fully ,ell that un,orkable false representations ,ere being made. +he obvious
attempt, it can be presumed at this stage, ,as to induce persons by such false un,orkable
representations to part ,ith money. &nitially some subscribers can be kept satis2ed to induce
them and others similarly placed to ;oin the long 5ueue. But inevitably and inescapably later
Prepared by ' 'ayanath &P. , .P, <ayanad G>
subscribers are bound to su@er un;ust loss ,hen they s,allo, the false promises and make
payments3.
KH. +he ratio laid do,n by this Court in .tate 7f (adhya Pradesh v. (ir Basit Ali 1han S 7rs.,
8=>N=9 C .CC >I has no application. &n that case, the Court ,as considering the provisions of
.ection KCH, &PC read ,ith .ection =CHB. 7bviously, it ,as not a case under =>NO Act.
K=. 7n the facts and in the circumstances of the case, in our opinion, the Courts belo, ,ere right in
not interfering ,ith the prosecution at the stage of framing of charge.
<e see no reason to interfere ,ith the order.
KC. .o far as the o@ence punishable under .ection KCH read ,ith .ection FK, &PC is concerned, it is
true that for application of penal provision of .ection KCH, &PC, there must be bcheating[ as de2ned
in .ection K=G, &PC.
KF. +he said .ection reads thusL
K=G. Cheating <hoever, 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 ,hich he ,ould not do or omit if he ,ere not so deceived, and ,hich act or
omission causes or is likely to cause damage or harm to that person in body, mind,
reputation or property, is said to 3cheat3.
KK. (ere reading of the .ection makes it clear that it re5uires the follo,ing ingredients to be
satis2edT
=. eception of any personT
C.8a9 #raudulently or dishonestly inducing that personT
8i9 to deliver any property to any person, or
8ii9 to consent that any person shall retain any property, or
8b9 intentionally inducing that person to do or omit to do anything ,hich he ,ould not do or
omit if he ,ere not so deceived, and ,hich act or omission causes or is likely to cause
damage or harm to that person in body, mind, reputation or property.
_vide !am 'as, 8=>NH9 C .CC NKHT %ridaya !an;an Prasad Merma v. .tate of Bihar, 8CHHH9 K
.CC =IOT ..<.Palamitkar v. .tate of Bihar, 8CHHC9 = .CC CK=`.
KG. +he trial Court as ,ell as the %igh Court considered the facts of the case and held that there is
element of cheating inasmuch as a representation ,as made by the accused that every unit
holder ,ill get double the amount invested by himT the representation ,as false, the maker of the
representation ,as a,are that the representation ,as 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. +he promoters induced common public to part ,ith money on the lure of doubling
the amount.
Prepared by ' 'ayanath &P. , .P, <ayanad IH
Prima facie, the Courts ,ere satis2ed that but for such representation and the bene2t sought to be
given under the scheme, the victims ,ould not have acted on such representation. &t ,as,
therefore, a case of application of .ection K=G, &PC. Prima facie case had been made out in absence
of better e)planation by the accused.&f it is so, it could be said to be a case for application of
.ection KCH read ,ith .ection FK, &PC, of course, at this stage.
KI. &n our opinion, the Courts belo, 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.
KN. #or the foregoing reasons, in our opinion, both the Courts belo, ,ere right in framing the
charge against the appellants and no illegality has been committed by them in coming to such
conclusion. &t is no doubt, true, that the above orders do not mean that the accused have
committed such o@ences. &t only means that a prima facie case has been made out to frame charge
and at that stage, no interference is called for. <e are, therefore, not inclined to interfere ,ith the
said order.
+he appeals deserve to be dismissed and are hereby dismissed.
KO. Before parting ,ith the matter, ,e may clarify that ,e may not be understood to have
e)pressed any opinion on the merits on the matter one ,ay or the other. All the observations made
by the trial Court, by the %igh Court as ,ell as by us in this ;udgment, must be construed as limited
to the framing of charge and nothing more than that. As and ,hen the main matter ,ill come up
before the Court for hearing, the Court ,ill decide it on merits ,ithout being inhibited or in6uenced
by the above observations.
K>. 7rdered accordingly.
Prepared by ' 'ayanath &P. , .P, <ayanad I=
&* +%" %&$% C70!+ 7# '0&CA+0!" A*%!A P!A".% A+ %Y"!ABA
<!&+ P"+&+&7* *o. CC>=K, CC>=I, CFNFN A* CGNK> 7# CHHI
+%" %7*[B/" .!& '0.+&C" $7A !A$%0!A( A*
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C7((7* 7!"!L 8Per %onble .ri 'ustice !amesh !anganathan9
<.P. *o.CC>=K of CHHIL
+his <rit Petition is 2led by (Ps. $emini +echno (arketing Private /imited seeking a declaration
from this Court that the provisions of the Prize Chits and (oney Circulation .cheme 8Banning9 Act,
=>NO 8hereinafter referred to as the QActR9 has no application to the business carried on by the
petitioner and its distributors. +he petitioner seeks a conse5uential direction to the respondents not
to apply or enforce the provisions of the Act to the petitioners business, and to restrain them from
interfering ,ith their la,ful business.
<.P. *o.CC>=I of CHHIL
+he relief sought for in this <rit Petition 8<in <in Martaka Pvt /td9 is to declare that the provisions
of the QActR have no application to the business carried on by the petitioner, and the action of the
respondents, in interfering ,ith the business carried on by the petitioner and its distributors, is
arbitrary and illegal. +he petitioner seeks a conse5uential direction to the respondents not to apply
or enforce the provisions of the Act to their business, and to restrain the respondents from
interfering ,ith their la,ful business.
<.P. *o.CFNFN of CHHIL
(Ps. e,soft 7verseas Private /imited, and their franchisees, have 2led this <rit 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 ,ith their business activities, is illegal and arbitrary.
+hey seek a conse5uential direction to restrain the respondents from interfering ,ith their la,ful
business and that of their associatesPfranchisees.
<.P. *o.CGNK> of CHHIL
+his petition is 2led by 8(r ! 0ma (ahes,ara !ao9 a retired scientist of the *ational $eo-physics
!esearch &nstitute in public interest to declare the action of respondents = to =C, in permitting (Ps
Am,ay &ndia "nterprises to run its business in &ndia, as arbitrary and illegal and in violation of the
provisions of the Act.
&t ,ould suDce for the disposal of this batch of ,rit petitions if the facts, in <.P. *o.CC>=K of CHHI,
are noted. +he petitioner is a private limited company registered under the Companies Act, =>GI. &t
claims to be engaged in the marketing of its products through a net,ork of distributorsT to be
providing accident insurance of !s.=.HH lakh to its distributors in collaboration ,ith Ba;a; Allianz /ife
&nsurance Company limitedT and to have provided employment to thousands of unemployed
individuals, more particularly in rural areas.
+he petitioner ,ould submit that it is an income ta) assesseeT it is registered under the .ales +a)
ActsT it provides accident insurance of !s.=.HH lakh to each distributor in collaboration ,ith Ba;a;
AllianzT no easy and 5uick money circulation is involved in its marketingT there is no element of
deception in its marketing businessT it is a member of the &ndian irect .elling AssociationT the
members of the association are strictly product sales companies ,hich do not indulge in 5uick or
easy money makingPmoney circulation schemesT the distributors have a separate and independent
legal identity from that of the petitionerT the relationship bet,een the petitioner and its distributors
is strictly at arms lengthT the distributors are solely responsible for the overall management of their
business including sales, income, pro2t or loss, accounting, ta)ation etcT the petitioners business is
not a money circulation scheme under the ActT the petitioners sales and marketing plans do not
Prepared by ' 'ayanath &P. , .P, <ayanad IC
envisage promoting or conducting a scheme for the making of 5uick or easy moneyT it is identical
for every distributorT each distributors success is dependent on the time, e@ort and commitment
put in by him, and the sales and marketing of the products of the petitioner ,hich results in his
earning commission on the personal purchase of products for sale to the end consumers amongst
the publicT the commission earned is on the group turnover of product purchases, for sale to the
consumers amongst the public, made by the distributor and hisPher group distributorsT there is no
compulsion for a person to continue as a distributorT ,ithin the >H days trial period he can return
the business kit and obtain full refund of the money paid by himT free product training sessions are
held for training of distributorsT the distributors go to the consumers amongst the general public,
receive orders and place purchase orders ,ith the petitioner at the distributor price, and sell
products to the end consumer at a price not e)ceeding the (!P printed on the productT the
petitioners sale and marketing plan does not envisage making 5uick or easy moneyT distributors do
not earn money by enrolling ne, distributorsT the focus is only on the sale of productsT none of the
conditions precedent for attracting .ections C8c9, F and K of the Act are attractedT and the
incentives given by the petitioner to,ards distribution is for the e@orts put in by them.
+he petitioner ,ould assert that, ,ithout recognizing the factual and legal position, the respondents
,ere interfering ,ith their la,ful business by taking action against them under the ActT respondents
G and I had conducted simultaneous raids on their branchesT had caused ,ide publicity regarding
the arrest of some of their distributorsT had registered cases against the petitioner and its
distributorsT had sealed various oDce premises of the petitionerT and had thereby created panic in
the minds of the petitioners distributors and consumers ,ith malicious intent.
+he C
nd
respondent ,ould submit that implementation of the Act falls ,ithin the purvie, of the
.tate $overnmentT in case there are fraudulent schemes being carried on in the name of
irectP*et,orkP(ultilevel (arketing companies, ,ith the ob;ect of making 5uick and easy money,
such schemes should be investigated by the .tate $overnmentT the !eserve Bank of &ndia issued a
clari2cation in its letter dated G.C.CHHFT and it is for the .tate $overnment to decide ,hether or not
any given scheme attracts the provisions of the Act.
+he N
th
respondent 8Corporate #rauds <atch9 ,ould submit that the petitioners scheme is a binary
scheme ,hich means one person has to sponsor or enroll t,o persons each, and again these t,o
persons are re5uired to enroll or sponsor t,o persons each to ;oin into the schemeT the ne,
member must be sponsored or enrolled by the already enrolled members in the schemeT the ne,
member ie., those sponsored are called the do,nline ,orkers and the sponsor is called the upline
memberT the entrance fee is !s.CI>>P-T ,hen a ne, member ;oins the scheme, all upline members
in the same net,ork or chain get commission irrespective of their e@ortsT as soon as ne, members
are sponsored either directly, or by the e@orts of his do,nliners, all the upliners in the group get
points and, on the basis of points, commission is paid and distributedT as money circulation is based
on the contingency relative or applicable to enrolment of members, and on the e@orts of the do,n
line members, it is nothing but easy moneyT the petitioner is promoting an illegal money circulation
scheme under the guise of sale of productsT the amount of commission paid by the company is
directly dependant on the sponsoring of ne, members into the scheme, not only on his personal
e@orts but also on the event of contingency relative or applicable to the enrolment of ne, members
by their do,nline members ,ithout e@ecting any salesT and the scheme s5uarely falls ,ithin the
de2nition of .ection C8c9 of the Act. !eference is made to the ;udgment of the .upreme Court in
+uriachan hac,o v. State of +erala in this regard.
+he N
th
respondent 8Corporate #rauds <atch9 gives a graphical representation, of the enrolment
scheme of the petitioner, in the form of a chart.
&t is contended on behalf of the respondents that the petitioners scheme re5uires enrolled
members to sponsor ne, members called independent business associatesT the members so
enrolled are re5uired to pay !s.=H,HHHP- as entrance fee for ,hich the company claims that it ,ould
allot ,eb space ,hich is completely intangible in natureT subse5uently the ne, members are
re5uired to sponsor more members for ,hich attractive incentives are provided to them by the
companyT the sponsoring scheme is a binary system ,here each member sponsors t,o membersT
additional incentives are given for sponsoring of ne, members in addition to the normal
Prepared by ' 'ayanath &P. , .P, <ayanad IF
merchandiseT the sponsored member is treated as a do,n liner to the sponsorer and his upline
membersT this scheme of enrolment of ne, members, attracting them in the form of commission
,hich is relative to the enrolment of ne, members into the scheme, falls ,ithin the de2nition of
Q(oney Circulation .chemeR under the ActT these (oney Circulation .chemes are pyramid schemes
,herein the levels gro, ,ith induction of ne, members at every levelT the scheme ,orks to bene2t
those in the 2rst level, and the vast ma;ority of participants ,ho ;oin at lateral levels lose their
original investmentsT ,hile these companies could challenge their prosecution and contend in the
criminal cases 2led 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
,rit petition.
+he Prize Chits and (oney Circulation .cheme 8Banning9 Act, =>NO, 8hereinafter called the Act9, is
an Act to ban the promotion or conduct of prize chits and money circulation schemes, and for
matters connected there,ith or incidental thereto. .ection C8c9 of the said Act de2nes money
circulation scheme to mean any scheme, by ,hatever name called, for making of 5uick or easy
moneyT 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
schemeT ,hether or not such money or thing is derived from the entrance money of the members
of such scheme or periodical subscriptions. .ection C8e9 of the Act de2nes prize chit as underL
Qpri-e chitR includes transaction or arrangement by ,hatever name called under ,hich a
person collects ,hether as a promoter, foreman, agent or in any other capacity, moneys in one
lumpsum or in instalments by ,ay of contributions or subscriptions or by sale of units, certi2cates
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 bene2t, thrift or any other scheme or arrangement
by ,hatever 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 follo,ing purposes,
namelyL-
i. giving or a,arding periodically or other,ise to a speci2ed number of subscribers as
determined by lot, dra, or in any other manner, prizes or gifts in cash or kind, ,hether
or not the recipient of the prize or gift is under liability to make any further payment in
respect of such scheme or arrangementT
ii. refunding to the subscribers or such of them as have not ,on any prize or gift, the ,hole or
part of the subscriptions, contributions or other monies collected, ,ith or ,ithout any
bonus, premium, interest or other advantage by ,hatever name called, on the
termination of the scheme or arrangement, or on or after the e)piry of the period
stipulated therein, but does not include a conventional chit.
0nder .ection F, 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 other,ise, or receive or remit any
money in pursuance of such chit or scheme. 0nder .ection K, ,hoever contravenes the provisions
of .ection F shall be punishable ,ith imprisonment for a term ,hich may e)tend to three years, or
,ith 2ne ,hich may e)tend to 2ve thousand rupees or ,ith both. .ection N 8=9 of the Act confers
po,ers on a police oDcer to enter any premises ,hich he has reason to suspect is being used for
purposes connected ,ith the promotion or conduct of any prize chit or money circulation scheme in
contravention of the provisions of the ActT to search the said premises and the persons he may 2nd
thereinT to take into custody and produce before any 'udicial (agistrate all such persons against
,hom a complaint has been received or a reasonable suspicion e)ists of their being concerned ,ith
the use of the said premises for purposes connected ,ith, or ,ith the promotion or conduct of any
such prize chit or money circulation schemeT to seize all things found in the said premises ,hich are
intended to be used, or reasonably suspected to have been used, in connection ,ith any such prize
chit or money circulation scheme.
<hat is ,ithin the mischief of the Act is not Qany scheme, by ,hatever name called, for the
making of 5uick or easy moneyR simpliciter, but a scheme for the making of 5uick or easy money,
Qon any event or contingency relative or applicable to the enrolment of members into the schemeR,
Prepared by ' 'ayanath &P. , .P, <ayanad IK
8,hether or not such money or thing is derived from the entrance money of the members of such
scheme or their periodical subscriptions9. +,o conditions must be satis2ed before a person can be
held guilty of an o@ence under .ection K read ,ith .ections F and C8c9 of the Act. &n the 2rst place,
it must be proved that he is promoting or conducting a scheme for the making of 5uick or easy
money and secondly, the chance or opportunity of making 5uick or easy money must be sho,n to
depend upon an event or contingency relative or applicable to the enrolment of members into that
scheme. &t is necessary that the activity, charged as falling ,ithin the mischief of the Act, must be
sho,n to be a part of a scheme for making 5uick 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. +he systematic programme of action has to be a consensual arrangement bet,een
t,o or more persons under ,hich 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. !eciprocally, the person ,ho 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. 8State of W... v. Swapan +umar /uha9
+he event or contingency on the happening of ,hich the amount ,ould become payable
must be relative or applicable to the enrolment of members into the .cheme. &t is immaterial by
,hom such members are enrolled. &t may be by members, by promoters or their agents or by
gullible sections of the society suo motu 8by themselves9. +he 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 .cheme, nothing more, though nothing less. 81uriachan Chacko9.
+he petitioner sells its products through individuals called distributors in terms of a
distributorship agreement. 0nder the terms of the agreement of distributorship, the company has
reserved to itself the right to con2rm the independent business associates only after receipt of full
paymentT all distributorsP&BAs are advised to sponsor ne, distributorP&BA in their do,nline only after
their personal distributorP&BA is con2rmedT the terms and conditions also stipulate that the company
,ould distribute >H? of its total revenuesT the application form, for registration as a distributor,
sho,s that !s.C,IOOP- is re5uired to be paid as agency feePdistributor feePmembership fee for ,hich
free gifts of a dinner set, an idly cooker set, and a kadai F pieces set, are given to the applicantT in
addition !s.=H,HHHP- is re5uired to be paid for ,hich the distributor is insured under the Ba;a; Allianz
unit gain policy, and he receives as free gifts a dinner set, an idly cooker set and a kadai F pieces
setT the application for registration also re5uires the applicant to disclose ,ho his sponsor
&BAPdistributor isT his position, and ,hether it is to the left or to the right. &t is this scheme ,hich the
respondents contend attracts the provisions of the Act.
&t is evident from the facts aforementioned that a person can become a Qso called
distributorR of the petitioner company, only if he is sponsored by another independent business
associatePdistributor. +he incentives to ,hich a ne,ly enrolled distributor is entitled to is based on
the number of distributorsPindependent business associates he sponsors. +he petitioner company
claims to distribute >H? of its total revenues among its distributorsP&BAs. A substantial part of the
income ,hich the distributorsP&BAs get, therefore, depends on an event or contingency relative or
applicable to the enrollment of ne, distributorsP&BAs into the scheme. +he scheme is formulated as
an inducement for enrollment of ne, distributorsP&BAs to earn higher incentives. +he lure of more
incentives is the inducement for e)isting distributorsP&BAs to aggressively pursue enrollment of ne,
members, as distributorsP&BAs, ,ith a vie, to make 5uickPeasy money. +he petitioner company
promises payment of incentives to the sponsorer distributorsP&BAs, on the business turned out by
the ne,ly sponsored and enrolled distributorsP&BAs, ,hich constitutes an event or contingency
relative to the enrollment of such members. +he petitioner not only earns 5uickPeasy money from
its distributors, but it also provides attractive inducements to its distributors to earn 5uickPeasy
money. +he ingredients of .ection C8c9 of the Act, i.e., 8a9 making of 5uick or easy moneyT and 8b9
the chance or opportunity of making 5uick or easy money depending on an event or contingency
relative or applicable to the enrollment of members into the scheme, are satis2ed in the cases on
hand. As the provisions of the Act are attracted, .ection N of the Act empo,ers the respondents to
enter into the petitioners business premises, and take into custody the persons involved in the
scheme. +he action of the respondents in initiating criminal proceedings against the petitioners,
Prepared by ' 'ayanath &P. , .P, <ayanad IG
,ho have promoted such schemes, does not, therefore, necessitate interference in proceedings
under Article CCI of the Constitution of &ndia.
&n more or less similar circumstances the ivision Bench of this Court, in Am,ay &ndia
"nterprises v. 0nion of &ndia, observedL-
Q\\But on a careful analysis of the true nature of the scheme as e)plained above, it is
5uite apparent that one of the components of the income earned by a sponsor member is
the commission ,hich is calculated not only on the personal PM of the sponsor member, but
also from the PM earned by the remaining =HC members falling ,ithin his group. There is,
therefore, no gainsaying that a substantial part of the income which the frst sponsor
member of the group gets depends on the event or contingency relative or applicable to the
enrollment of members into the scheme00.. 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 enroll00..1
Q\\\<hether second ingredient is also satis2ed or not is to be considered no,. As seen
above, each member on his enrollment pays !s. K,KHHP -. Payment of !s. K,KHHP- by a
member on his enrollment and his future earnings through marketingPenrolling 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
+hus as far as the member ;oining the scheme is concerned, both the ingredients of .ection
C 8c9 of the Act, i. e. , a9making of 5uick or easy money, and b9 the chance or opportunity of
making 5uick or easy money depending on an event or contingency relative or applicable to
the enrollment of members into the scheme are satis2ed. \\.R
00 .2t 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. .y holding out attractive commission on the business turned out
by the downline members, the scheme provides for su3cient inducements for its members
to chase for the new members in their hot pursuit to ma,e quic,4easy money. 7n the part of
the promoter by pushing each member to achieve the minimum sates ,orth !s. C,HHHP- per
month, 8this sale includes enrollment of ne, members9 he is assured of about =HHH crores
per annum. All this s5uarely satisfy the description of 5uickPeasy money\.. +he plea of the
2rst petitioner that there is no compulsion that a member shall rene, his distributorship
looks to us to be specious. 7nce a person becomes a distributor in a scheme of this nature
,here the sops in the shape of commission are so luring, it ,ould be very diDcult for a
member to ,ithdra, from their membership to avoid payment of the annual rene,al
subscription fee. \\R
Q\..#!7( the ,hole analysis of the scheme and the ,ay in ,hich it is structured it is 5uite
apparent that once a person gets into this scheme he ,ill 2nd it diDcult to come out of the
,eb and it becomes a vicious circle for him\.. .y no means can it be said that the money
which the frst petitioner is earning is not the quic,4easy money. .y promising payment of
commission on the business turned out by the down5line members sponsored either directly
or indirectly by the up5line members "which constitutes an event or contingency relative to
enrollment of members#, "the frst petitioner is earning quic,4easy money from its
distributors, apart from ensuring its distributor earn quic,4easy money. Thus the two
ingredients are satisfed in the case of promoter too. We are, therefore, of the considered
view that the scheme run by the petitioners squarely attracts the defnition of "money
irculation scheme" as provided in Section ! "c# of the $ct0..1 8emphasis supplied9
+he petitioners in <.P. *o.CC>=K of CHHI, CC>=I of CHHI and CFNFN of CHHI are not entitled to the
relief sought for in the ,rit petitions 2led by them. +hese ,rit petitions fail and are, accordingly,
dismissed. <rit Petition *o.CGNK> of CHHI is disposed of accordingly. %o,ever, in the
circumstances, ,ithout costs.
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Prepared by ' 'ayanath &P. , .P, <ayanad II
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=. Q(7*"Y C&!C0/A+&7* .C%"(".-8(C.9R throughout the nation, particularly in the state of
A.P. and ad;oining southern states viz. 1arnataka, 1erala and +amilnadu are progressing, post
haste eating a,ay monies of the gullible public by luring them to become rich overnight
through money circulation schemes. +his kind of cheating under various attractive captions
have taken a ma;or section of people from di@erent ,alks of life to fall prey bene2ting a
section of people and huge loss of money to larger section of people. &t is said that people
are being cheated of Crores of !upees by these companies all over &ndia. +his menace
committed against the society is going unchecked.
C. &t is brought to our notice that 5uite a fe, money circulation schemes in various parts of A.P.
.tate are thriving as Q(0/+& /"M"/ (A!1"+&*$-8(/(9R Q*"+<7!1 (A!1"+&*$-8*<(9R
involving hundreds of crores of rupees. 7@ late, many small companies have mushroomed
themselves in every nook and corner of the state. +he promoters of the money circulation
schemes through high pro2le campaign have entrapped middle class people ,ho ,ould be
eagar to become rich overnight. By enrollment into such scheme one ,ould be getting back
the initial paid investment and keep gaining 2nancially by enrolling ne, members. .o also,
the second set of enrollers keep multiplying and gain 2nancially, fascinating every onlooker
to get engrossed into such dubious money circulation schemes. .uch a system of chain to
,ork endlessly to provide pro2t to everyone concerned ,ould ultimately breakdo,n at some
stage, resulting the 2nancial bene2t to some ,ho ;oined the scheme at initial stages 8they
,ill be none other than the promoters of the scheme9, resulting in big 2nancial loss to those
,ho ;oined at a later stage. <hen a person fails to get his re5uired clients or enrollers, the
promoters of the scheme does not tell about the non-viability of the scheme but blame it as
ones personal failure. +he gullible people are taken una,are ,hen the real picture of the
money circulation schemes emerges. By the time the people realize that they ,ere taken
for a ride and cheated, it ,ould be too late.
F. +he promoters of such schemes 6oat companies ,ith attractive names like viz. Q<onder
<orld Co.R Q(iracle CoR Q'apan /ife &ndiaR QBig,ayR Qiamond ^uestR QAyerveda /ifeR Q%erb
/ifeR Q%appy /ife CoR Q$lory CoR Q(agic Co.R Q*ice Co.R Q(ega Co.R etc., to start ,ith in a
particular area and keep shifting over to ne, key areas on attaining saturation of member
enrollments. +he names of these companies itself speaks about their mensrea. <hile
promoting the schemes they induce the #ilm stars, Politicians, Bureaucrats, .portspersons,
"ngineers, octors etc., and honor them by organizing indoor and outdoor partiesPfunctions
,ith big fanfare to make the general public believe genuinity of schemes, ,hile enrolling
other members in the chain ,ith attractive and stylish titles to the enrolled members as
Q.ilver member, $old member, iamond member, Platinum member, so on and so forth.
+hey also call them as Q(aster istributor, .uper istributor, ouble .uper istributor etc.R,
Prepared by ' 'ayanath &P. , .P, <ayanad IO
etc. +hey also use attractive slogans like Q"arn in rupees or dollars. <ork from homeR Q
<ork four hours and earn !s.GH,HHH per monthR Q 0 ! the boss of your business, so enroll
immediatelyR Q"arn up to !s.FG,HHHP- Z (onthly by ;ust ,orking C hours at homeR Qo u
,ant to earn e)tra by sitting at %omeX +hen contact usR Qo u ,ant to lose your ,eight,
then contact usR QYour path,ay to %eavenR Q"nroll ,ith us for %ealthy and <ealthy lifeR Qo
u ,ant to travel in Benz Car ,ithin one year then enroll ,ith usR Q.ky is the limit ,ith us, so
enroll immediately, before u miss the busR Q"arn ,hile you earnR etc. (any of these
companies are taking promotional trips to Bangkok, Pataya, .ingapore, .rilanka and other
countries in the name of Conferences, (eetings etc. /ocally also they conduct meetings,
conferences in G star hotels, in Posh 1alyan (antapams etc. +hese dubious companies do
,hatever possible to attract gullible public. 0ltimately 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. <orst su@erers in such schemes are none other than poor
middle class ,omen, retired persons, educated youth, unemployed men and ,omen ,ho
lose their health, ,ealth in the chase of ,ild goose and dreams. .uch schemes ultimately
have destroyed the families and friendships.

K. +he losers of such schemes ,ould not like to complain of cheating against such o,ners of
dubious money circulation schemes, multi level marketing, net,ork marketing schemes etc.,
as the induced members or su@erers struggle to ,riggle out of the situation atleast to save
their initial investments. +hese companies ,in over con2dence of the victims and maintain
their image as charitable and benevolent, by o@ering donations to charitable, social and
service oriented institutions by attracting publications, photographs of MM&Ps donating
che5ues. /ike,ise they boost their image in a corporate style and try to gain mileage.
G. &n early nineties, money circulation schemes ,ere 6oated involving cash gains. /ater they
have infringed into marketing goods, services, drugs and health care products. 0nder the
guise of money circulation scheme these companies are camou6aging themselves ,ith
various consumer products. (any 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 ,ill launch many sister companies to fool public as if to sho, that they are
big group of companies. A single company renamed many a time attracts people of
di@erent places, takes its chameleon stride through colourful gifts, brochures, calanders,
diaries ,ith messages of MM&Ps, hardly get booked under case of cheating. /ike,ise, all
innovative methods are put action to successfully gro, them ,ell and make money
for themselves causing irrepairable 2nancial loss to the general public and society. +he
agitating point in issue, is that such unscrupulous promoters and companies go
unchecked and are gro,ing day by day ,ith their shady acts causing a big blo, to
peace and tran5uility of society and to the life and property of the constituents of
society ,hich is at stake .
I. +he speci2c provisions under Prize Chits and (oney Circulation .chemes 8Banning9 Act
=>NO read ,ith relevant sections under cheating .ection KCH of &PC, rugs and Cosmetics
Act =>KH, rugs and (agic !emedies 7b;ectionable 8Advertisement9 Act, =>GK, A.P.
#inancial epositors Protection Act =>>> etc, are abundantly available to be invoked and
e@ectively check and prevent progress of such dubious 6oated companies. #urther it is
important to note that Andhra Pradesh is the 2rst state to Ban (oney Circulation .chemes in
the year =>IG. (uch later on Central $overnment bought the Central Act in the year =>NO
banning (oney circulation .chemes in &ndia through an act called Prize Chits and (oney
Circulation .chemes 8Banning9 Act =>NO.
Prepared by ' 'ayanath &P. , .P, <ayanad I>
N. !ecently, +he %onble %igh Court of (adras dismissing the petition 2led by #(C$
(arketing Pvt. /td. vPs 0nion of &ndia, Chief .ecretary and irector $eneral of Police $ovt. of
+amilnadu 8<rit Petition9,ith reference to conte)t observed in its landmark ;udgment that
under promise or e)pectation of getting huge commission 8easy or 5uick money9 the
public is lured to invest more money in such schemes and that it is only an imaginary pro2t.
#urther, the %onble %igh Court observed that the event is enrollment of ne, members, the
commission received is relative to such enrollment of ne, members into the scheme. +hus
the so-called (ulti-level marketing, though called by a very attractive name s5uarely falls
,ithin the de2nition of Q(oney Circulation .chemeR under the Act. %ence it is prohibited by
the ActR. +he %igh Court came heavily on the Pricing policy of these companies. &t further
observed that Qthis (/( scheme creates a chain of customers and the long and unbroken
chain ensures a large amount of easy money. +he shorter and missing links in the chain
results in earning lesser commission. .econdly, the person concerned does not get the
value of money he pays. +hirdly, the companies collect service charges on the sale of goods.
*o service charge can be collected ,hile the goods are sold. Apart from that, the (/(
results in e)ploitation of personal in6uence of each and every distributor or his close
relative. &f a .uperior oDcer or his ,ard involved in (/(, the subordinates are forced to
become members in the chainR. &t is important to note that the stand hitherto taken by
$overnment 7Dcers regarding non-application of Prize Chits and (oney circulation .chemes
to (ulti-/evel (arketing is found to be not valid in the ,ake of ;udgment of (adras %igh
Court.
APP"A/ +7 P0B/&C
O. +herefore, ,e appeal to public not to enroll themselves into (ulti /evel (arketing
Companies, (oney Circulation .chemes, *et,ork (arketing Companies and other such
Companies and such schemes and get cheated. &t is an appeal seeking your co-operation
,ith the &nvestigating Agencies to curb such menace and nip it in the bud before it engulfs
the gullible Public. &t 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 2scal system of our nation.
(ore damaging is that (/( schemes destroy the ,ell knitted social fabric of our &ndian
society and make your house as ,ell as your neighborhood a market.
>. <e also re5uest the public to pass on information about such companies and schemes to the
nearest Police .tation and concerned .uperintendents of Police of the concerned districts
and to Addl. $P, C& %yderabad for taking necessary and prompt legal action. <e also
re5uest the (edia, *$7s and all right thinking intellectuals to create a,areness about such
schemes and con companies and help the public and investigating agencies in saving from
cheating of con companies like (/(, *<( and (C.. <e also re5uest the public not to
associate ,ith such con companies.
+el. *oL HKH- CFCFCOO>
e.mailLspeo,acidap.gov.in
#a)L HKH- CFCFNKNK
HKH- CFCFNGNG
M.C. .A''A*A!, &P..,
.uperintendent of Police,
"conomic 7@ences <ing,
C&, AP, %yderabad
Prepared by ' 'ayanath &P. , .P, <ayanad NH
B&-A!!"
Bizarre is a lifestyle that creates a man Bold, &ntelligent, -ealous, Ambitious, !esponsible, !ich and
"Dcient.
$erms and condition
=. e2nitions.
a. &n this agreement the company means Bizarre $lobal marketing .ystems /td.
b. +he member means the person named in this agreement.
c. +he products means tangible or intangible products or services provided by the company in
accordance ,ith membership !egistration or in accordance ,ith terms and conditions
applied by the company in its course of business
d. +erms and conditions mean interactions produce by the company in time to time.
C. +he company reserves the right to change and modify any administration, service, processing,
for,arding or terms and conditions regarding its business or membership distribution or its business
,ith members.
F. +erms and Conditions.
=. +he Applicant or member must be a citizen of &ndia and completed =Oyears of age at the
terms of application.
C. +he Applicant or member should have the responsibility to prove hisPher identity if re5uired.
F. +he Applicant or member should have the responsibility to produce PA* card and related
documents on re5uires and of re5uest.
K. Company should not be responsible for any losses or damages or delays in transactions on
re5uest.
G. +he company reserves the right to re;ect or deny application for membership ,ithout
sho,ing any reasons.
I. +he member ,ill be responsible for hisPher decision and e)penditure in carried by himPher on
the products of the company.
N. +he member ,ill not entitle to any payment for training or aid given by himPher to any other
members or persons.
O. +he members not at any time manner suggest or imply that he or she is in employments or
in pint venture or in partnership or a legal representatives of the company.
>. +he members are not entitled to collect cash or monetary materials on behalf of the
company or are not entitled to do such and related transactions on behalf of the company.
=H. +he applicant for memberships or members are re5uested to pay membership fee or any
other payments to the company through Bank account transaction or either by .
==. ealing is encouraged by the company.
=C. Any member at any time of point shall not collect cash from any other members or
applicants on behalf of the company.
=F. Cash or payment collected by members is on hisPher responsibility and company should not
be responsible for any damages or losses incurred by such transactions.
Prepared by ' 'ayanath &P. , .P, <ayanad N=
=K. An applicant is directed to submit hisPher application fee or any payments through Bank aPc
or only.
=G. At any time of point if found violating the terms and condition of the company, any members
found doing misconduct of business terms and conditions or instruction given by the
company in time, hisPher membership ,ill be canceled or terminated or suspended by the
company.
=I. Any membership in suspension or termination should not be eligible any kind of authority to
be in business on behalf of company and company reserve the right to do any actions it
including the follo,ing ones. *ot release of payments of commissionc incentive c
performance bonus, re,ards etc. *ot allo, himPher to attend conference or meetings etc,.
Prevent himPher from doing any business or transaction ,ith the company.
=N. A suspended or terminated member can appeal to the e)ecutive committee of the company
for hisPher re-registration or re-entry as the member of company.
=O. All decisions of e)ecutive committee ,ill be e@ective from immediate point of time
(embers cannot change their 2rst team node ,ithout proper permission from their team leaders
and company e)ecutive board. &f found any member changed their team node ,ithout permission
company ,ill take action against the member including freezing their membership accounts and ,ill
stop all transactions.
All members are allo,ed to participate in any company programs ,ith their team identity and team
label only.
Prepared by ' 'ayanath &P. , .P, <ayanad NC
,otice ssued by Manipur #overnment
=.+his is to inform to all the general public, $overnment oDcials and other concerned that the
speci2c provisions under Prize Chits and (oney Circulation .chemes 8Banning9 8(anipur9 !ules,
=>NO, relevant sections under cheating .ection KCH of &PC, rugs and Cosmetics Act =>KH by the
(inistry of %ealth and #amily <elfare, rugs and (agic !emedies 87b;ectionable Advertisement9
Act, =>GK are abundantly available to be invoked and e@ectively check and prevent progress of
such dubious 6oated companies.
C..ection F of Prize Chits and (oney Circulation .chemes 8Banning9 Act, =>NO bans prize chit and
money circulation schemes or enrolment as members to any such schemes or participation in such
schemes. .ection K and G are penal provisions and prescribe punishment. .ection I deals ,ith
o@ences committed by Companies. .ection N authorizes Police 7Dcer not belo, the rank of 7Dcer
in charge of a police station to e)ercise po,er to enter and search premises and to seize things
used for such scheme. .ection O provides for forfeiture of ne,spaper and publication containing
money circulation scheme. +he Preamble of =>NO Act declares that it has been enacted Qto ban the
promotion or conduct of prize chits and money circulation schemes and for matters connected
there,ith and incidental theretoR.
F. +he %onble .upreme Court and various %onble %igh Courts have issued ;udgments against
(ulti- /evel (arketing 8(/(9- a camou6aged illegal money circulation scheme. +he Andhra Pradesh
%igh Court 8Am,ay Ms, .tate of A.P S others9, (adras %igh Court 8Apple #(C$ Ms. .tate of +,* S
others9, 1arnataka %igh Court 8Commissioner of &ncome +a) Ms. Amar;eet 1aur9 and .upreme Court
of &ndia 81uria Chan Chako Ms, .tate of 1erala9 in their ;udgments on the above cases have clearly
stated that these types of schemes are pre;udicial to the public interest and are also adversely
a@ect the eDcacy of 2scal and monetary policy as siphoning of crores and crores of money takes
place ,ithout accountability. epartment of #inancial .ervices, (inistry of #inance, $overnment of
&ndia have directed irectorate of "nforcement and Central "conomic &ntelligence Bureau for
Qtaking up appropriate action against these ma;or #inancial .cam : .iphoning of money ,ithout
accountability and check in the guise of (ulti-/evel marketing, Chain Business, *et,ork Business
etc. +he Central "conomic &ntelligence Bureau, in turn, has directed .tate $overnments for taking
up appropriate action.
K. +herefore, $overnment of (anipur hereby informs that Prize chits or bene2t schemes bene2t
primarily the promoters and do not serve any social purpose. +hus, the so-called (ulti-level
marketing 8(/(9, though called by a very attractive name s5uarely falls ,ithin the de2nition of
Q(oney Circulation .chemeR under the Act and hence prohibited by the Prize Chits and (oney
Circulation .chemes 8Banning9 8(anipur9 !ules, =>NO. +he general public should avoid and not
enroll themselves into these schemes as they not only destroy the economic fabric of our
.tatePcountry, but also the 2scal system of the country. &t is also to inform that (/( schemes
destroy the ,ell knitted social fabric of our society and therefore, general public should not
associate ,ith such con companies.
Prepared by ' 'ayanath &P. , .P, <ayanad NF
+he follo,ing hotels among others, ,ere regularly hosting (oney chain programmes
A/APP0-%A A!CA&A !"$"*CY
A/APP0-%A PA$7A !".7!+.
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1A/P"++A +!&"*+ A!CA"
1A/P"++A (A1A!A 'Y7+%& 1A/YA*A(A*APA(
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17-%&17" +%" %A(/"+
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PAYYA*0! 1.1.!".&"*CY
P"!&*+%A/(A**A %7+"/ !7YA/ P/A-A
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+"//&C%"!Y %7+"/ .%A!A!A
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+%&!0MA//A %7+"/ A.71 &*+"!*A+&7*A/
+%&!0MA*A*+%AP0!A
(
1"!A/A +!A*.P7!+ "M"/7P("*+
#&*A*C" C7!P7!A+&7* /&(&+"
+%&!0MA*A*+%AP0!A
( +%" ."M"* %&//.
+%70P0-%A 'C& +%70P0-%A
+%!&..0! CA.&*7 %7+"/
+&!0MA//A +%" Y*A.+Y
MA+A1A!A A/A11A/ !".&"*CY
Prepared by ' 'ayanath &P. , .P, <ayanad NK
"%,o% .//0..1/$/.22/
#overnment of ndia
Ministry of Consumer &3airs( "ood 4 Public Distribution
Dept of Consumer &3airs
.hastri Bhavan, *e, elhi
ated CF.H>.CHHF
+o
(s. .unitha 1alla,
y irector $eneral S 'oint .ecretary
(inistry of #inance, ept of !evenue,
Central "conomic &ntelligence Bureau
Ith #loor, B <ing 'anpath Bhavan
'anpath, *e, elhi
Sub5ect: Applicability of the Provisions of the Prize Chits S (oney Circulation
.chemes 8Banning9 Act, =>NO to pyramid marketing structurePschemes - !egarding.
(adam,
& am directed to refer to your .7. /etter *o. FH=P=GPCHH-C"&B 8Pt-&&9 dated CCnd .eptember
CHHF addressed to .hri <a;ahat %abibullah, .ecretary 8Consumer A@airs9 on the sub;ect mentioned
above and to say that this department ,as considering the issue of direct sellingPnet,orkPmulti-
level marketing as an alternative form of marketing of goods and the entire issue ,as looked from
that angle. %o,ever, subse5uent feedbackPresponse have sho,ed that companies using pyramid
structured marketing techni5ues to sell their products putting forth their schemes based on the
clari2cation issued vide .7. letter of even no dated the F=st (arch, CHHF claiming
that their activities also do not fall ,ithin the provisions of the Prize Chits and (oney Circulation
.chemes 8Banning9 Act, =>NO. &t is clari2ed that this epartment[s clari2cation of even number
dated F=st (arch, CHHF does not cover pyramid structured marketing schemes. +hat area
also does not fall ,ithin the purvie, of this epartment.
+his is issued ,ith the approval of .ecretary 8CA9.
Yours faithfully
8.d9
Alice Chacko
0nder .ecretary of $ovt of &ndia
Copy to L Chief .ecretaries of all .tates and 0nion +erritories.
Prepared by ' 'ayanath &P. , .P, <ayanad NG