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12. The submission of Union of India before the High Court was that the legislation in question falls in Entry 7 of List III (Concurrent List) of VIIth Schedule to the Constitution of India. Union of India also relied on the aforesaid reports of various Study Groups. The High Court accepted the contentions of the Union of India about the legislative competence of the Parliament to enact the impugned Act and dismissed the writ petitions. The point raised in the Civil Appeals inter alia is that the Parliament has no legislative competence on the subject matter as according to the appellants, the Act deals with the money lending and the same falls within Entry 30 of List II (State List) of VIIth Schedule to the Constitution of India. It was, however, submitted in reply by the Union of India that the Act falls within Entry 7 of List III of VIIth Schedule to the Constitution of India Section 2(b), 2(c), 2(d), 2(e) and 2(j) defines 'chit', 'chit agreement', 'chit amount', 'chit business' and 'foreman' respectively which read as follows:

14. The question as to the nature of chit agreement came up for consideration before a Full Bench of five Judges of the Kerala High Court in Janardhana Mallan and Ors. v. Gangadharan and Ors.. The Full Bench there was concerned with the chit agreement under the Kerala Chitties Act (Act 23 of 1975) where the Kerala High Court speaking through Poti, Acting Chief Justice, took the view that on entering into the chitty agreement a debt is not incurred by the subscriber for the amount of all the future instalments and in respect of such amount there is no debtor-creditor realationship. The chitty variola only embodies a promise to pay on future dates. That is not a promise to repay an existing debt, but to pay in discharge of a contractual obligation. For similar reasons neither the prizing of the chitty nor the execution of the security bond would give rise to a debt, for , the prize amount is not received as a loan, but as of right by virtue of the terms of the contract between the parties. Therefore, no debt due to the foreman arises by reason of the receipt of the price amount or of the execution of the security bond for securing future subscriptions. The Full Bench in this decision over-ruled its earlier decision in the case of P.K Achutan v. State Bank of Travancore,Calicut: . While rendering the decision in Janardhana Mallan and Ors. (supra) the Full Bench of the Kerala High Court considered a catena of decisions starting from 1937 in the matter of Ramanatha Iyyar v. Narayanaswami . The Andhra Pradesh High Court also, while dealing with the transaction of a chit fund organisation, in the matter of Dhoosa Narsimloo v. Yelala Rajanna and Anr. I.L.R. (1958) Andhra Pradesh 409, where the petitioner had filed a suit in the Court of the District Judge against the respondents on a promissory note executed by them for the amount they drew in a pool from a chit fund organisation and where the District Judge had dismissed the suit for want of a licence under Section 9(2) of the Hyderabad Money Lenders Act (Act V of 1349 F.) and on revision, the question that came for consideration was whether the chit fund organisation could be regarded as a money lender within the meaning of the said Act and whether its transaction partake the nature of a loan. Srinivasachari, J. speaking for the Court held that the amount drawn by a member of a chit fund who bid at the periodical auction giving the largest discount could not come within the definition of a loan within the meaning of the Money Lenders Act nor could such a transaction be regarded as a money lending transaction be and in the circumstances Section 9 of the Hyderabad Money Lenders Act (V of 1349 F.) could have no application to such a case. At page 415 of the aforesaid report it has been observed "in our opinion there is nothing in the chit fund transaction which could be called the business of money lending. It is in essence an organisation for mutual benefit." It approved the decision of the Madras High Court in Raghavan v. Armugham: (1934) 38 M.L..I. 283. That was also a case of chit fund transaction and the question for decision was whether a provision in the bond for payment of the whole amount in default of any one instalment was in the nature of a penalty coming within Section 74, Illustration (g) of the Contract Act. The learned Judges ruled that a chit fund transaction was not a case of borrowing at all and it was entirely different from a loan transaction. The learned Judges further held that "a loan envisages the relationship of a creditor and debtor in so tar as the lender and the borrower are concerned. There cannot be the relationship of a creditor and debtor between the stake holder and a subscriber, in a chit fund transaction. If the stake-holder advances any amount he advances only to one of the members, the funds of the whole body of the chit fund, as the funds belong to the whole lot of subscribers, the members, borrower is as much a creditor as a debtor. The amounts are in deposit with the stake-holder only as a trustee for the benefit of the members of the fund." Srinivasachari, J. noticed the observations of Srinivasa Iyengar, J. in Tim-marsa Pai v. Subba Rao : AIR (1928) Madras 256 where Srinivasa lyengar, J. regarded the position of the Manager of a kuri chit as a trustee for all the subscribers of the chit fund.

Clause 4 : The period of 12 months was substituted for the period of six months in the proviso to the said clause since the Committee felt that the period of 6 months was not sufficient, for registering the chit from the date of sanction. Under Clause 6(i)(c) the words 'interest or penalty' were included for any default in the payment of instalments. Likewise, in Clause 6(i)(d) amendment was proposed to specify the probable date of commencement of the chit agreement. Clause .7(3) : The words 'within a period of three months' were incorporated with a view to ensure that the foreman did not take unduly long time to start the chit and did not misappropriate the subscribers' money. Clause 8 : Instead of the figure 20 percent, 10 percent was suggested as the amount to be transferred to the Reserve Fund Clause 11(2) : A period of one year was incorporated for complying with the requirements of Clause 11(1) to avoid any hardship being caused to such persons carrying on business on the commencement of the proposed legislation. Clause 13 : The Committee considered the aggregate amount of chit to be conducted by an individual foreman, partnership foreman and foreman-Company. The Committee felt that in order to ensure that the foreman has sufficient stake in the chit business conducted by him, recommended an increase of the amount from Rs. 10,000 to Rs. 25,000 in the case of individual foreman, from Rs. 40,000 to Rs. 1 lakh in case of partnership foreman. As regards the foreman-Company, the Committee recommended for the words 'net assets' the words 'net owned funds' to be substituted and that should be made applicable also to co-operative Societies. This recommendation was because of the fact (hat the concept of net owned funds will be in tune with the Reserve Bank of India directions to financial Companies which would mean the aggregate of the paid-up capital and free reserves reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as per the latest audited balance sheet of the Company. Clause 14 : The representation for extension of the period of 2 years was rejected as the Committee felt that the period of three years was sufficient for securing the money invested by the person carrying on chit business in any other business. The Committee was also of the view that the State Government's power to extend the period of two years should be limited to one year only and proviso to Sub-clause (2) was accordingly amended. Clause 15 : by substitution of a new clause it was provided that chit agreement shall not be altered, added to or cancelled except with the consent in writing of the foreman and all the subscribers in the chit. The Committee felt that since the foreman was a party to the agreement, his consent must be obtained before altering the agreement. Clause 16 was suitably amended by the Committee in order to ensure that there was no mischief in conducting the chits by making it obligatory for the Chairman to issue notices to all the subscribers and the draw should be held in the presence of at least two subscribers. Clause 18 : 21 days' time was granted to the foreman to file the returns instead of 14 days. Clause 19 : A new Sub-clause (3) was added to enable the subscribers to know the State where the new business is opened by approaching the Registrar of that State instead of the Registrar of that State where the main office is situated for making any complaints with regard to the conduct of chit business at the new place of business. Clause 20 : Sub-clause (1) was amended as the committee was of the view that in order to ensure that the foreman docs not utilise the subscriptions so collected for the purpose of depositing the security and also to ensure further that the financial position of the foreman is sound to conduct the chit, he should be required to furnish security before he applies for previous sanction of the State Government under Clause (4) of the Bill. Clause 21: The provisions of Sub-clause (1)(a) was amended since the Committee was of the view that where a foreman has subscribed to more than one ticket, he should be allowed to get more than one chit amount in a chit without discount. Clause 22 : Sub-clause (2) was amended since the Committee felt that the existing clause would cause hardship to the foreman and therefore, he may be required to make deposit of the Prize money in respect of the drawn only if it remains unpaid before the date of the next succeeding instalment in a separate account in an approved Bank. A new proviso to Sub-clause (2) was added to avoid any hardship to the foreman by such contingencies by allowing the foreman to hold another draw in respect of the instalment if the prize amount is not drawn by the prized subscriber for a period of two months from the date of draw. Clause 23 : The Committee made the necessary amendment, on the representation that inspection of records of the foreman by the Registrar should be made permissible not only at the registered office of business but also at the place where the foreman is carrying on business, so that the Registrar in such cases will be able to exercise proper control and supervision over the business carried on by the foreman. Clause 40 : Clause (b) of this clause was amended by the Committee since the Committee was of the view that termination of a particular chit, as contemplated in Part (b) of this clause, should be with the consent of all the non-prized, unpaid prized subscribers and the foreman who is also a party to the chit. Clause 66 : The Committee was of the view that allowing the disputes to be taken to the Civil Courts will cause considerable delay in the settlement of dispute because of the long procedure in the Courts and this would particularly go against the interest of the subscribers and hence, Sub-clause (3) of the Bill was omitted. Clause 77 : The Committee felt that a provision for punishing the commission of second and subsequent offences should be included and the penalty of imprisonment and fine should be provided for. Accordingly, a new Clause 77 was added. These clauses in the Bill correspond to the respective sections in the Act. The other amendments proposed by the Committee are of a clarificatory nature and are only consequential, therefore, there is no need to refer to them. This Report of the Select Committee but for a lone dissenting member who was totally opposed to the continuance of chit business, was unanimous.

Provided that in a case where the foreman has subscribed to more than one ticket, he shall not be eligible to obtain more than one chit amount in a chit without discount;

(b) to such amount not exceeding five per cent of the chit amount as may be fixed in the chit agreement, by way of commission, remuneration or for meeting the expenses of running the chit:

(c) to interest and penalty, if any, payable on any default in the payment of instalments and to such other amounts as may be payable to him under the provisions of the chit agreement;