Sree Murugan Financing Corporation Chit Promoters and Financiers and Others vs The State of Tamil Nadu and Others

Sathiadev, J.—Petitioners in these writ petitions conduct chit funds on securing registration u/s 3 of the Tamil Nadu Chit Funds Act, 1961

(T.N. Act 24 of 1961)(hereinafter referred to as the Act). They seek for a declaration that the amendments effected to Article 1 and insertion of

Article 8-A to Appendix II of the Tamil Nadu Chit Funds Rules, 1964 (hereinafter referred to as the Rules) are unconstitutional and illegal. The

amendments were made in exercise of the powers conferred u/s 63 of the Act. These amendments came into force with effect from 21.10.1981

consequent to its publication in the Fort St. George Gazette : of G.O.Ms. No. 1075, Commerical Taxes and Religious Endowments, dated

23.9.1981. The amendments are to the following effect.

ANNEXURE.

Notification

In exercise of the powers conferred by Section 63 of the Tamil Nadu Chit Funds Act, 1961 (Tamil Nadu Act 24 of 1961) the Governor of Tamil

Nadu hereby makes the following amendments to the Tamil Nadu Chit Funds Rules, 1964.

AMENDMENT

In the said Rules, in Appendix II, in the Table of Fees (1) for Article 1 and the countries relating thereto the following Article and entries shall be

substituted, namely:

Rate of Fees

a) for chits for a term of less than Per subscriber or instalment whichever

one year Re. 1 is higher subject to a minimum of Rs. 50.

b) For chits for a term of one year Per subscriber or instalment whichever

and above Rs. 2.50 is higher subject to a minimum of Rs. 50.

i) for chit amount of value upto Rs. 5,000 Per subscriber or instalment whichever

- Rs. 5. is higher subject to a minimum of Rs. 50.

ii) for chit amount of value between Per subscriber or instalment whichever

Rs. 5,001 and Rs. 10,000 - Rs. 5. is higher subject to a minimum of Rs. 50.

iii) for chit amount of value between Per subscriber or instalment whichever

Rs. 10,001 and Rs. 20,000 - Rs. 5. is higher subject to a minimum of Rs. 50.

iv) for chit amount of value between Per subscriber - or instalment whichever

Rs. 20,001 and Rs. 30,000 - Rs. 10. is higher subject to a minimum of Rs. 50.

v) for chit amount of value between Per subscriber or instalment whichever

Rs. 30,001 and Rs. 40,000 - Rs. 12. is higher subject to a minimum of Rs. 50.

vi) for chit amount of value between Per subscriber or instalment whichever

Rs. 40,001 and Rs. 50,000 - Rs. 15. is higher subject to a minimum of Rs. 50.

vii) for chit amount of value exceeding Per subscriber or instalment whichever

Rs. 50,000 - Rs. 20. is higher subject to a minimum of Rs. 50.

(2) In Article 8, in Clause (b) for the letters and figures Rs. 50 ""occurring in two places, the letters and figures ""Rs. 250"" shall be substituted;

(3) after Article 8, as so amended, the following Article and entries shall be inserted, namely:

8A. For filing Balance-sheets audited and certified by Chartered Accountant.

(a) Where the chit amount does not exceed Rs. 500 - Rs. 10.00.

(b) When the chit amount exceeds Rs. 500 for the first Rs. 500 as under Sub-clause (a) and for every Rs. 500 or part thereof in excess of Rs. 500

subject to the maximum of Rs. 250. The fee leviable under this clause ''shall not exceed Rs. 250.

Petitioners state that to start or conduct any chit, u/s 3, they will have to apply to the Registrar for registration of the by-laws of the chit, and as

per Rule 4, such application for registration has to be made by the Foreman under Form II and it shall be accompanied by the fees set out in

Appendix II. Section 53(a) provides that Government may from time to time prescribe the fee that shall be paid to the Registrar for the registration

of the by-laws of the chit u/s 3. Rule 42 states that fees payable to the Registrar for matters specified in Section 53 shall be as set out in the

Appendix II and shall be paid in cash. Article No. 1 in Appendix II as originally framed provided only Rs. 25 for the registration of the by-laws,

and an amendment was made on 2.11.1979 revising the rates of registration as follows:

Chlt amount Fees levied

Upto Rs. 5,000 50

Above Rs. 5,000 and

upto Rs. 10,000 100

Above Rs. 10,000 and

upto Rs. 20,000 150

Above Rs. 20,000 200

It is by virtue of the amendment made in G.O.Ms. No. 1075, Commercial Taxes and Religious Endowments, dated 23.9.1981 (hereinafter

referred to as G.O), the fees payable are charged on the basis of number of subscribers or instalments of the Chit whichever is higher. This

imposition being disproportionate to the, services rendered and having no nexus to the object of regulating the chits, it is illegal, unconstitutional and

ultra vires of the provisions of the Act.

For the first time, for balance sheets audited by a Chartered Accountant a fee is imposed under Article 8-A. The rate of fee is the same fee

which is charged when audited by chit auditors, having no nexus to the extent of service rendered by the Department. As for the increase made

under Article 8, it is not challenged in these petitions. As Section 53 does not authorise imposition of fees for balance-sheets filed u/s 16 of the Act,

and Section 63 alone having been invoked in carrying out the amendments, it is ultra vires of the Act. No service is rendered by the Registrar on

receiving the balance-sheets and preserving them. The essential element of quid pro quo in the imposition of these fees is absent. So far as the

Foremen are concerned, the Registrars do not render any special service in furtherance of his business and the fee collected has no correlation to

the expenses incurred in rendering service, if any. The only ground relied upon in the impugned G.O. is that, to bring about rationalisation in rates,

the fee for registration has been revised, taking into account the number of subscribers or the instalments whichever is higher, instead of the slab

system which was prevailing prior to 21.10.1981. If whatever done by the Registrar at the time of registration are looked into the basis now

adopted is highly irrational and unreasonable, and the imposition is disproportionate and not at all commensurate to the nature of service claimed to

be rendered. Merely because in the neighbouring State of Kerala, a higher levy is imposed, the respondents have chosen to rely upon it so as to

augment the general revenues of the State, and hence it is not a fee but a tax, which is not authorised under the Act.

On behalf of the respondents, in the counter-affidavit filed in W.P. Nos. 10552 of 1981 and 1333 of 1982, it is contended that the levy of fees

formerly prescribed had no relation to the duration of chit5 and in respect of chits of longer duration and larger number of instalments, greater

amount of services had to be rendered, in that, more minutes were filed and hence, it is equitable and fair to fix the fee for registration of by laws

taking into account the number of instalments or duration of a chit whichever is higher. While revising rates, these facts were taken into

consideration. The Registrar of Chits has to check up whether the Foremen have taken proper surety for future payment of subscriptions from the

prized subscribers; whether proper receipts were obtained by due dates; and whether the prized amounts have been deposited into the bank etc.,

The extracts filed in respect of removal, substitution and assignment, etc., have to be verified and when chits are for longer duration, the

transactions will be more, and therefore, the verification process would impose greater responsibility on the Registrar of Chits. Considerable time is

taken in watching the filing of various documents by the Foremen on due dates in proper form. The balance-sheet u/s 16 when filed requires to be

verified for its correctness with relevant records such as bylaws, chit agreements, commencement certificates, minutes etc., It is only on being fully

satisfied that the procedures prescribed under the Act and the Rules have been complied with, the Chit Register will be in a position to release

security to the Foreman. All these are done not only in the interests of the subscribers but also in the interests of the Foreman as well, and if these

requirements have not been complied with; he would be liable to be punished by being prosecuted as provided under Chapter XI of the Act,

which would disentitle him from securing registration of other chits. All these scrutinies are to benefit him to continue to be Foreman for chits

registered by him under the Act. The cost incurred in extending services to the Foremen and subscribers being commensurate as furnished in the

counter affidavit, there is an element of quid pro quo as enunciated in more than one Supreme Court decision.

Section 16 directs every Foreman to prepare and file with the Registrar a balance-sheet regarding every chit. Rule 26 prescribes the form of the

balance-sheet which should be in Form X, and Rule 27 contemplates that it should be filed once in a year and also at the expiry of the period of

the termination of chits. The fees levied are approximately equal to the amount spent for the services rendered. The staff who are engaged is

disclosed in para 8 of counter-affidavit in W.P. No. 1333 of 1982, and the receipts and expenditures during the years mentioned therein would

only show that it was not done to augment the revenue. The State had to provide at considerable expense, receptacles and iron safes for the

preservation of records and securities, and this revision has taken place nearly after two decades, and intended to cover the reasonable expenses

incurred for rendering services.

u/s 16, a balance-sheet can be duly audited either by auditors duly qualified to act as auditors of companies under the Companies Act, 1956 or

by a chit auditor appointed u/s 51(2). Merely because a balance sheet is prepared by a Chartered Accountant, it does not mean that the Registrar

is bound to act upon it as a conclusive document and that there is no need for him to verify the correctness of the balance-sheet with other

documents. A balance-sheet is a very important document to find out whether the Foremen have conducted the chit according to the rules and

whether the prized winners have been paid the amounts, and other relevant details has to be looked into to know the financial stability and

credibility of1 the Company. Hence, the Registrar has to scrutinise it with connected records to find out the correctness of the balance-sheet

prepared by a Chartered Accountant. If any deviations are disclosed in the balance-sheet, then the Chit Registrar has to take further action. Before

ordering release of security deposits to Foremen, the Registrar has to satisfy himself that the requirements of Section 12(3)(i) to (iii) are complied

with. The whole matter has got to be thoroughly examined to see whether a particular year''s transactions fully reflect the scope of each chit and

whether the collections and disbursements including the commission retained by the Foreman, have all been done in conformity with the Act and

the Rules. Therefore, it cannot be contended by petitioners that the Registrar does not extend any service commensurate to the fee imposed when

audited balance-sheets are filed. Hence, the enhancement of fees in respect of two items which are challenged in these writ petitions is

commensurate with the services extended, and not intended to augment the general ''revenue of the State. Inspite of Chit Funds Act, 1982 (Central

Act 40 of 1982) coming into force in so far as Tamil Nadu is concerned on 13.4.1984, the provisions of Tamil Nadu Act 24 of 1961 and the

Rules framed thereunder continue to apply to the chits in operation on the commencement of the ''Act and hence, the levy of fees for balance-

sheets filed subsequent to 13.4.1984 for chits already registered is valid. Hence, none of the contentions raised by the petitioners could invalidate

the imposition and collection of fees on the basis of revised rates.

A reply-affidavit is filed stating that the shift from slab basis to number of subscribers or instalments whichever is higher basis is irrational,

because it does not increase the services rendered to Foreman and in no manner increases the work of Chit Registrar at the time of registration,

because thereafter fees are levied'' for each and every stage of the conduct of the chits. Petitioners are only aggrieved regarding the increase in fees

for registration of the by-laws and for balance-sheets on ad valorem basis when filed with the certificate of a Chartered Accountant. The expenses

incurred and the amount collected as disclosed in the counter - affidavit only shows that the revisions were made to augment the revenue of the

State.

When minutes for every instalment are being filed, they disclose the required particulars. What are looked at in balance-sheets is to find out the

total amount collected and the commission received and no other. They do not refer to all the receipts and expenditures of each chit. It is like

insisting the Banking Company to file a balance-sheet for each account, which is an impossibility of performance. From the balance-sheet,

Registrar cannot ascertain the expenditure for each chit as the firm engages and spends for the whole work of all the chits. In practice, Registrar

does not insist all the columns to be filled in the balance-sheet and they relate only to the amount collected in one year and the amount of

commission deducted. Even the Chit Auditor does only these things. As for other particular, they are to be culled out from the minutes filed for

every instalment, for which separate fees are collected. The present basis adopted results in highly disproportionate amounts being collected as

indicated in para 5 of the reply-affidavit, which is incommensurate with the services rendered by the Registrar. In the absence of break-up figures

for the amounts claimed to be spent, it would not be safe to act upon them, when Sub-Registrar does all the functions of Chit Registrar in some

places. As for providing iron safe and receptacles, they cannot form part of any services rendered for the benefit of Foreman from whom the fee is

collected. Hence, as claimed, they are entitled to the writs of declaration.

By the time these petitions have been argued out, advocates appearing for the petitioners and learned Additional Government Pleader have

adverted to the under mentioned decisions for comprehending as to whether the impugned levy is a fee or not.

In AIR 1954 S.C. volume there are three decisions reported at pages 282, 388 and 400. In the first one known as Shirur Mutt case 1954

S.C.3. 335 : (1954) S.C.R. 1005 : (1954) 1 M.L.J. 596 : (1954)67 L.W. 1220 : AIR 1954 S.C. 282 it was held that a fee is generally defined to

be a charge for a special service rendered to individuals by some governmental agency and that the fee so is taken for the varying abilities of

different recipitionts to pay. It was further held that it is not possible to formulate a definition that would be applicable to all cases, and that the

element of compulsion or coerciveness is present in all kinds of impositions and that fee is no exception, and the primary distinction between a tax

and a fee is that a tax is levied as a part of a common burden, while a fee is a payment for a special benefit or privilege, and that public interest is

the basis of all impositions, but in a fee it is some special benefit which the individual receives. Hence it was held that a fee is regarded as a sort of

return or consideration for services rendered, and it is absolutely necessary that there must be a correlation to the expenses incurred by the

Government in rendering the said services. One more factor taken into account was that if the money so collected is appropriated specifically for

the performance of such work and is not. merged in the public revenues for the benefit of the general public, then it could be counted as fees and

not as tax.

In the second case known as Ratilal Panachand Gandhi Vs. The State of Bombay and Others, analysing the provisions of the Bombay Public

Trusts Act, reported at page 388, it was pointed out that though primarily fee is imposed in public interest, it is for some special service rendered

or some special work done for the benefit of those from whom the payments are demanded and that quid pro quo is always an element which is

present in fees, but absent when tax is imposed. It was further held that there are two essential elements to find out whether the payment is a fee or

not. They being:

(1) It must be in consideration of certain services which the individuals accepted either willingly or unwillingly.

(2) It must be earmarked to meet the expenses of rendering such services and shall not go to the general revenue of the State to be spent for

general public purposes.

In the third decision reported at page 400 Mahant Sri Jagannath Ramanuj Das and Another Vs. The State of Orissa and Another, the same

principles have been reiterated.

In The Hingir-rampur Coal Co. Ltd. and Others Vs. The State of Orissa and Others, , four out of five learned Judges of the Supreme Court

have laid down the following essential features between a tax and fee.

(1) Tax and fee are compulsory extractions of money by public authorities and there is no generic difference between them.

(2) A fee levied is essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the

public authority which imposes it.

(3) Services rendered may be to a specific area or to a specific class of persons or trade or business in any local area and as a condition precedent

for the same, a fee could be collected.

(4) Fee so collected is earmarked and set apart for the purpose of services for which it is levied and does not become a part of the consolidated

fund. When a fee is imposed for services rendered, the payer has no right to opt out of it.

(5) In the absence of co-relation between the fees collected and the services extended, it loses the characteristics of fee.

(6) Whether the demand made is a fee or a tax is always a question of fact to be determined in the circumstances of each case.

(7) In extending services to a specified class'', if indirectly other members of the public are also benefited, it would not detract from the character of

the levy as a fee.

(8) The truer test in determing its character is to find out what is the primary object of levy and the essential purpose hich it is intended to achieve.

It is in Corporation of Calcutta and Another Vs. Liberty Cinema, , three of the five learned Judges of the Supreme Court held that what was

levied as licence fee under Calcutta Municipal Act was only a tax. Learned Counsel for the petitioners relied upon it to contend that unless the

State is able to justify that the levy is for services rendered and intended to confer a special benefit on the person on whom it is imposed, and that

in the instant case, the Foreman does not derive any of the benefits under the impugned levy therefore, the demand is illegal.

Learned Additional Government Pleader would refer to para 6 of the judgment in Corporation of Calcutta and Another Vs. Liberty Cinema, ,

wherein it is stated that Corporation of Calcutta itself contended that the levy was only a tax and not a fee and further did not dispute that if the levy

was a fee in the sense mentioned, then it would be invalid. The concluding sentence in the said paragraph is to the following offect:

...A discussion of these aspects of fees, will be unprofitable and will only cloud the point really in issue.

Hence his submission is that, whatever had been discussed in the judgment as to what would be a fee cannot be understood as at variance with

what had been held in The Hingir-rampur Coal Co. Ltd. and Others Vs. The State of Orissa and Others, . In the light of the subsequent decisions

of the Supreme Court, his further submission is that the services rendered by the State need not be confined only to the persons on whom it is

imposed, but when the primary object and the essential purpose have to be looked into, it would take within its fold the benefits derived by

subscribers as well.

On what is a fee, it was held in Corporation of Calcutta and Another Vs. Liberty Cinema, that:

(1) nothing turns on the actual word used as there is no rigid technical meaning in English language for ''fee'' indicating that levy is only in return for

service.

(2) Articles 110(2) and 199(2) of the Constitution of India go to show that fee for licence and fee for services rendered are different kinds of levy

and that the former is not intended to be a fee for services rendered

(3) The provisions of the Act must be looked into to determine the correct character of the imposition.

(4) It must confer a special benefit on the person on whom it is imposed.

In The Delhi Cloth and General Mills Co. Ltd. Vs. The Chief Commissioner, Delhi and Others, , the factors taken into account, to ascertain

the nature of levy of fees are:

(i) the entire scheme of the Act, obligation and nature of work done by authorities are to be looked into.

(ii) The expenses incurred for maintaining the personnel for supervising, controlling and, regulation of the trade can be taken into account to find out

the reasonable relationship between the levy and expenses incurred for rendering such services.

It was a case wherein the statistics furnished disclosed that 50% of the amount of licence fee collected was being actually spent on services

rendered to factory owners and this was considered to be sufficient correlation to uphold the levy as a fee.

In dealing with the payment of Court - fees, in The Secretary, Government of Madras, Home Department and Another Vs. Zenith Lamp and

Electrical Ltd., the two factors that were taken into account are:

(1) Whether there is broad co-relationship, and that

(2) each case has to be considered on a reasonable and practical view point rather than on a pedantic approach.

In dealing with the levy of permission fee for construction of buildings under Andhra Pradesh Gram Panchayats Act, the Supreme Court after

referring to Shirur Mutt Case 1954 S.C.J. 335 points out that, if there is total absence of any data regarding the essential features of co-

relationship, then the levy is illegal; and that the expenses incurred in discharging the obligatory functions under the Act have to be met from and out

of the taxes collected and that the fees collected could be only with reference to the services rendered or intended to be rendered to particular

persons from whom the fee is collected.

In Kewal Krishan Puri and Others Vs. State of Punjab and Another, , decided by five learned Judges of the Supreme Court seven salient tests

have been laid down to ascertain as to whether the demand is a fee or not.

(1) A good and substantial portion of the amount collected must be expended for the purpose for which it is collected.

(2) The services rendered by the authorities to the licensee must be in relation to the activity carried on by him.

(3) It is not necessary to confer the whole of the benefit on the licenses alone, but it would suffice if some Benefits are conferred on them and

which have a direct, close and reasonable correlation between the licensees and the transactions.

(4) In conferring the special benefits on the licensees it could take within its fold services rendered by the authority in the general interest of all

concerned with the transactions in question.

(5) Any direct and remote benefits cannot in any sense be a special benefit to the licensee.

(6) Quid pro quo with arithmetical exactitude is not required and authorities must broadly establish that a reasonable amount is spent for rendering

services to those on whom falls the burden of paying fees.

(7) At least a good and substantial portion of the amount collected on account of fees, may be in the neighbourhood of two-thirds or three-fourths,

must be shown with reasonable certainty as being spent for rendering services.

Immediately following this pronouncement, four of the five learned Judges of the Supreme Court in H.H. Shri Swamiji of Shri Amar Mutt and

Others Vs. Commissioner, Hindu Religious and Charitable Endowments Department and Others, .I. have stated that the necessity for establishing

quid pro quo between the fee and the cost of services rendered is a matter which is no longer in doubt or to be debated in view of the principles

enunciated in the decisions. rendered by the Supreme Court from Shirur Mutt Case 1954 S.C.J. 335 upto Kewal Krishan Puri and Others Vs.

State of Punjab and Another, .

As'' to what has been laid down in Kewal Krishan Puri and Others Vs. State of Punjab and Another, in Southern Pharmaceuticals and

Chemicals, Trichur and Others Vs. State of Kerala and Others, . It was held that the observations contained therein pertaining to quid pro quo are

not intended and meant as laying down a rule of universal application and that this concept is undergoing a transformation. It was further observed

that the element of quid pro quo stricto. sensu is not always a sine quo non of a fee. The Constitution of India did not contemplate crediting it to a

separate, fund and not to the consolidated fund. Article 266 of the Constitution of India was relied upon to show that unnecessary exaggeration

need not be applied to the aspect of how the collections made had been credited. The levy of fee'' may be in consideration for a privilege or

licence or for service. To secure the privilege, the licensee has to comply with certain prescribed conditions. When supervision is contemplated

under the provisions of the Act, there could be no denying of the fact that the licensee receives services from the authority. If a broad correlation

between the fee collected and the expenses on establishment is disclosed, it would be valid, because the personnel of the establishment extend

services to the licensee in complying with the provisions of the Act.

Even if the benefit of advantage derived by the payer of the fee is secondary, if it be shown that the primary motive of regulation was in public

interest, then the imposition of fee is valid, is the view expressed in Municipal Corporation of Delhi and Others Vs. Mohd. Yasin, . The Court

further held that in finding out correlation, the Court should not assume the role of a Cost Accountant, as quid pro quo is not in the strict sense the

one and the only true index to find out whether it is a fee or not. By referring to Article 110 of the Constitution of India, it was held that there are

two classes of cases where fees could be imposed;

(i) where the Government simply granted a permission or privilege to a person to do something which otherwise that person would not be

competent to do and extracted from him, in return, heavy or moderate fees.

(ii) Where the Government did some positive work for the benefit of the person and money was taken as a return for the work done and services

rendered, such money not being merged in the public revenues for the benefit of general public.

As to what is meant by the phrase ""prayer of the fee"" used in the earlier decisions, is explained in Sreenivasa General Traders and Others Vs.

State of Andhra Pradesh and Others, as follows:

It is obvious that the phrase ''payer of the fee'' used by this Court in the authorities referred to above represents collectively the class of persons to

whom the benefit --- is directly intended by the establishment of a regulated market in notified agricultural produce, live stock or product of

livestocks and not the actual individual who belongs to that class i.e., the trader...

It was then held that what was stated in Kewal Krishan Puri and Others Vs. State of Punjab and Another, must be understood as meaning services

to the users of the market as well. As for the view in Kewal Krishan''s case about two-thirds or three-fourths of collection being spent on payers of

fees, it was also held that it does not lay down a rule of universal application and it was decision confined to the special facts of that case and that it

was an obiter.

As pointed out in these decisions, as to whether a particular levy is a fee or a tax, it is a question of fact to be determined in the circumstances

of each case by reference to the entire scheme of the Act. The duties, obligations and nature of work done by the authority to those connected

with the transaction which is subjected to the imposition of fees and ear-marking the funds collected for that specific purpose and several factors

indicated in the aforesaid judgment, are to be taken into account, and if the State justifies the levy as a fee based on such tests, then alone it will be

valid.

The first point taken by petitioners is that, there is no power in the State to increase the fees. Amendments were issued by invoking Section 63

of the Act. Learned Counsel for the petitioners submits that when Section 53 specifically provides as to when and under what what circumstances

fees could be levied, and Section 16 which deals with balance-sheet, not being enumerated therein, the demand of fees on balance-sheets is ultra

vires of the Act. On behalf of the State, it is stated that though Section 63 is mistakenly mentioned in the notification, the power exercised, falls

within Section 53(1)(a) and (g). Section 53 enables the Government to prescribe fees in respect of such of those categories listed in Clauses (a) to

(f) and other matters as may appear necessary to give effect to the purposes of the Act. Clause (a) deals with the registration of the by-laws of a

chit u/s 3. Hence, the enhancement of the rate of fees or revised basis that could be adopted for imposition of registration fee, could be done by

invoking Section 53(1)(a). As for balance-sheets, Section 16 is not one of the Sections mentioned in Section 53(1)(a) to (f). But Clause (g) states:

Such other matters as may appear necessary to give effect to the purposes of this Act.

The Act is made to provide for the regulation of Chit Funds in the State of Tamil Nadu. Section 16(2) refers to what a balance-sheet should

contain. Rule 26 says that it shall be in Form No. X. When such balance-sheets are filed in the prescribed form, it calls for scrutiny, so that the

interests of the subscribers may be safeguarded. This being one of the essential purposes envisaged under the Act, merely because Section 16 is

not enumerated in Clauses (a) to (f), it cannot be held that the fee now imposed, relating to balance-sheets would not come within the aforesaid

Clause (g). Such power being available u/s 53(1)(g), inclusion of balance-sheets as one of the items in Appendix II is within the ambit of the

enabling power u/s 53. As stipulated u/s 53(2), it has been duly published. Though Section 63 is mentioned Section 53(1)(a) and (g) would have

been the proper Section to be mentioned therein. Once the power is traceable, an erroneous, indication of Section would not invalidate the valid

exercise of power. Such mistakes are avoidable, if proper care is taken.

The next point taken is that the object in the impugned G.O. is totally irrelevant to the purposes of the Act. After referring to the then existing

rates of registration fee which was on slab basis, the Director of Chits had stated that the said levy has no relation to the duration of the chit or the

number of subscribers benefited, and therefore, it will be equitable and fair to fix the fees by taking into account the number of instalments or

duration as well as the number of subscribers benefited under the Chit. Hence, taking rates, he had proposed an amendment to the rules.

Accepting this claim made by him, the impugned G.O was passed. As to what was the rationalisation claimed at in paragraph 4 of the counter-

affidavit in W.P. No. 1333 of 1982, it stated as hereunder:

...Considering that in respect of chits of longer duration and larger number of instalments, greater amount of service had to be rendered in that,

more minutes etc., were filed, it is equitable and fair to fix the fees for registration of by-laws with regard to number of instalments or duration of

chits. The fees were revised taking these facts into consideration. It has also to be verified whether the foreman has taken proper security for future

payment of subscriptions from the prized subscriber, whether proper receipts were obtained for the payment of prize moneys and on due dates, if

not whether the prize amount has been deposited in a bank as required by the Act by verifying receipts of deposit etc., The extracts filed in respect

of removal substitution and assignment etc., have also to be verified and in respect of higher Chit'' amounts in long term chits for longer duration

these transactions will be more and they impose greater responsibility on the chit Registrar. The work connected with watching the filing of various

documents by the Foreman on the due dates and in proper form also takes considerable time....

The rest of the portion in paragraph k deals with its justification regarding fees for filing a balance-sheet. At the time when an application is made

for registration u/s 3, none of those factors mentioned therein requires to be done by the Registrar. In paragraph 20, it is stated, I submit that the

registration fee has nothing to do with the fee levied for filing of the balance-sheet. They operate in different fields"". When more minutes the filed in

respect of chits of longer duration and larger number of instalments, separate fees are collected for ""each minute. Section 10 states that minutes of

the proceedings on every drawing shall be drawn up and entered in a book kept for that purpose; It must contain the particulars mentioned in

Section 10(2). u/s 11, every Foreman shall within 15 days of the succeeding month in which one or more instalment of the same chit or one or

more instalment of any other chit is drawn, file with the Registrar a copy of the minutes. Rule 14 stipulates some more particulars apart from what

are contained in Section 10(2) to be included in the minutes. Section 53(1)(c) authorises the Government to prescribe tees for filing all minutes.

Article 4 in Appendix II stipulates the fees for filing a copy of the minutes of proceedings referred to in Section 10 and u/s 11 at Rs. 2. For each

minute filed, fee being collected, at the time of registration, as to whether the longer duration or larger number of instalments calls for increase in

services to rendered, than what was done when the slab system was in force, is not explained at all. As for the expression ''etc,'' no particulars are

forth coming. All other aspects referred to more or less are covered separately u/s 53(1)(c) and (f). The impugned G.O except to point out that the

Director of Chits felt that the adoption of a different basis would bring about rationalisation of rates, the respondent - State had not placed before

Court either in the form of an affidavit or by producing records EJS to what were the equitable factors which were taken into account for. change

of basis or in imposing higher rate.

When a Foreman starts a chit, u/s 3 he has to apply for registration of the by-laws. It is only thereafter, he can approach"" the subscriber and

get the chit agreements, as prescribed u/s 5 executed, and file, them u/s 6. He cannot commence the business till he -secures the certificates u/s

7(2). Therefore, when an application is made for registration of by-laws, at that stage, Section 3(3) authorises the Registrar to find out as to

whether the by-laws, are in accord with the provisions of the Act or the rules made thereunder. As to what the by-laws should provide, Rule 3

enumerates them. An application for registration is to be in form No. 1 accompanied by fees set out in Appendix II. Hence, the number of the

subscribers or the instalments, has no nexus with what are required to be done u/s 3(3) by the Registrar. Whether they are more or less'' it was

only a question of furnishing particulars and recording them and no more. If for the entire period of the chit except the registration fee, no other fee

is demanded and the entire services rendered is covered by this demand alone, then the correlation claimed could be available. Section 53 enables

imposition of fees in respect of almost each one of the subsequent stages of the conduct of the chit whenever the authorities are to be approached

or they are to exercise their powers. In the context of such provisions having been made in the Act, the registration fees claimed have to be

restricted to what are required to be done u/s 3(3). Realising this predicament, the State has not placed before Court as to how and in what

manner, the revision effected has brought about rationalisation. As to how and to what extent a chit with a longer duration or instalment could call

for increased services so rendered compared with another of lesser duration or instalment, for the purposes mentioned u/s 3 is not exemplified. The

only attempt made is to show that later on during the conduct of the chit, it would call for increased services, but this has no relevance in a case of

this nature, where for each and every subsequent step taken, chit operator has to pay out fees enumerated in Appendix II. The limited justification

spelt out in pare 4 of the counter-affidavit being practically no justification at all and the so-called rationalisation having no nexus with what requires

to be done at the stage of registration, the adoption of a'' revised basis"" in the impugned G.O. is illegal.

Learned Additional Government pleaded would then submit that when it is a registration fee, the test of quid pro quo need not be satisfied as it

is a regulatory measure, and hence, the extent of services at the stage of registration whether existing or not, cannot be high - lighted.

In Kewal Krishan Puri and Others Vs. State of Punjab and Another, , on referring to The Chief Commissioner, Delhi and Another Vs. The

Delhi Cloth and General Mills Co. Ltd. and Others, , it is stated as follows:

Rendering some service, however remote the service may be, cannot strictly speaking satisfy the element of quid pro quo required to be

established in cases of the impost of fee. But then, as pointed out, in some of the cases noticed earlier the registration fee has been taken to stand

on a different footing altogether. In the case of such a fee the test of quid pro quo is not to be satisfied with such direct close or proximate

correlation-ship as in the case of many other kinds of fees. By and large registration fee is charged as a regulatory measure.

It is not held that the aspect of services to be rendered is absolved from consideration when registration fee is charged, and what has been pointed

out is that the same ""close or proximate correlationship which will have to be established for other categories of fees may not be required when

justification is put forth regarding registration fee. In the reply-affidavit, the petitioners have shown that there is a highly disproportionate and

irrational increase in registration fees. In spite of the maximum amount of Rs. 200 which was prevailing for a chit of value exceeding Rs. 50,000

and for a term of one year and above, it will be Rs. 1,000, which means fivefold increase. Merely because it is held that registration fee is a

regulatory measure, it would not mean that any rate can be fixed having no nexus to what services are contemplated for that purpose under the

Act. Furthermore, the increased levy is not due to any amendment effected relating to registration of by-laws calling for nature of services to be

extended than what were obtaining prior to the G.O. When the nature and extent of service envisaged u/s 3(3) having remained the same, unless it

be shown that for extending the same services, the expenses had increased, the demand made partakes the character of a tax. It is claimed by

State that the revision has been made only after two decades. In 1964 it was Rs. 25 for registration of by-laws. It was enhanced in 1969 on slab

system which was minimum of Rs. 50 and the maximum at1 200. Hence, it would not be correct on the part of the State to claim that for two

decades there had been no revision. Hardly within two years of 1979, the rates having been revised, it is the bounden duty of the State to disclose

as to how within a period of two years, the expenditure had increased to such an extent'' as to result in such high rates being fixed. As to what are

the expenditure incurred and collections made will be dealt with later on. The figures furnished by State go to show that during the relevant years,

the income derived is nearly double and more.

As for Article 8-A in Appendix II relating to filing of balance-sheets audited and certified by Chartered Accountants are concerned, it is

submitted by petitioners that there is a hostile discrimination and it acts as an unreasonable restriction on their trade and it is violative of Articles 14,

19(1)(g) and 301 of the Constitution. Section 16(1) prescribes that every Foreman shall prepare and file with the Registrar a balance sheet duly

audited either by auditors duly qualified to act as auditors of companies under the Companies Act, 1956 or by a chit auditor appointed u/s 51(2)

of the Act and that it shall contain a summary of the assets and liabilities of the chit and furnish such other particulars as will disclose the nature of

the assets and liabilities and how the value of the assets has been arrived at. Rule 26 states that a balance-sheet shall be prepared by the Foreman

when the duration of the chit does not exceed one year on the termination of the chit and if it exceeds one year, then on the expiry of every period

of 12 months and also on the termination of the chits, it should be filed within two months from the date of the said period. Form No. X catalogues

the particulars to be furnished relating to (1) Receipts and Expenditure, (2) Statement of Assets and Liabilities, (3) Details of investments, (4)

Assessment of value of investment, and (5) Profit and loss account. The Foreman has to, certify regarding the correctness and also the auditor has

to certify stating that the balance-sheet is drawn up in conformity with the provisions of the Act and the Rules framed thereunder. An option is

given to a Foreman either to file the balance-sheet audited by a Chartered Accountant or by a Chit Auditor. u/s 51(2), a Chit Auditor is appointed

by the Director of Chits. It is stated by the learned Additional Government Pleader that the Chit Auditors belong to the Department who are not

qualified Chartered Accountants, but they are trained to scrutinise chit accounts. The fee charged when a Chit Auditor is approached is the same

as charged when a balance-sheet certified by a Chartered Accountant is filed. It is strenuously pleaded by petitioners that when distinctly different

services are contemplated as between them, the imposition of the same rate of levy of fees is hostile discrimination and an unreasonable restriction

on ''the petitioners'' trade. As to what requires to be done by a Chit Auditor call for consideration vis-a-vis what is done when a balance-sheet

certified by Chartered Accountant --- is filed before the Registrar. Rule 28 deals with what requires to be done-when a Chit Auditor is

approached for certifying balance-sheet and profit and loss account. If a Foreman desires to have the balance-sheet and profit and loss account

audited by. a Chit Auditor, after the preparation of the balance-sheet, he must make an application under Rule 28 (1) to the Registrar for such

audit to be done specifying whether it shall be at the premises of the Foreman or not and the application is to be accompanied by fees prescribed

under Articles 8 of Appendix II. Thereafter, the Registrar will forward the application to the Inspecting Officer, who shall cause the balance-sheet

and profit and loss account to be audited by the Chit Auditor, and in turn, he would send it to the Chit Auditor who shall thereupon require the

Foreman to produce the chit records on such date, time and place as he may fix and it would then be the duty of the Foreman to produce ""all

registers, books of accounts and other records relating to the chit accordingly and furnish such information and give such facilities as may be

necessary or required for the proper audit of the balance-sheet and profit and loss account at the time and place fixed by the Chit Auditor"". A

notice of not less than seven days shall be given to the Foreman as to the date of audit at the premi(sic) of the Foreman or for the production of

registers, books of accounts and other records relating to the chit as the case may be. After scrutiny of all these documents, under Rule 29, the

Chit Auditor will prepare his report and issue the certificate in quadruple and send one copy to the Foreman, the second to the Registrar and the

third to the Inspecting Officer and keep the last copy for his own file. Rule 30(1) enjoins upon the Foreman to file with the Registrar a copy of the

balance-sheet and profit and loss account together with the audit certificate and the auditor''s report within one month from the date of the receipt

from the Chit Auditor or within four months from the last date of the period covered by the balance-sheet whichever is earlier whereas, when a

certificate is secured from a Chartered Accountant, Rule 30(2) directs the Foreman ""to file"" with the Registrar the documents which are referred to

in Sub-rule (1) of Rule 30 within three months of the expiry of the period with reference to which, the balance-sheet is prepared under Rule 27.

Hence, when a balance-sheet certified by a Chartered Accountant is produced, the Registrar would be concerning himself only with regard to

the particulars incorporated in the balance-sheet, profit and loss account, the auditor''s certificate and the report of the Auditor. Under the rules as

framed, there is no need at all for the Foreman to produce before the Registrar ""all registers, books of accounts and other records relating to the

chit accordingly and furnish such information and give such facilities as may be necessary or required...."" for verifying the correctness of the

certificate issued by the Chartered Accountant. Respondents submit that, even when a balance-sheet prepared by a Chartered Accountant is filed,

it has to be scrutinised by the Department along with all records and that the expenditure incurred is equal to the amount spent for the services

rendered when a Chit Auditor does it. While scrutinising if the Registrar finds that it is not in accordance with the provisions of the Act and the

Rules framed thereunder he would have to take suitable action and in appropriate cases before ordering release of the security, they will have to be

scrutinised. In conclusion, it is stated as follows:

...I submit that pursuant to the filing of the balance-sheet, records have to be verified. The balance-sheet has also got to be examined in detail, to

find out whether it is in conformity with the objects of the chit and also whether the figures tally with regard to the collections and payments of prize

amounts and whether the prize amount also correctly reflects the scope of each chit and whether the commission of -the Foreman has been

correctly worked out. In short, the whole matter has got to be thoroughly examined to see whether that particular year''s, transactions fully reflects

the scope of each chit and whether the collections and disbursements including the commission retained by the Foreman have all been done in

conformity with the Act and the Rules, since it is the subscriber''s interest which is paramount. I submit that all these involve the services of the staff

of the office of the Registrar.

This claim made is not in accord with what is found in Rule 30(2). Under the Rules only when a Chit Auditor prepares, a balance-sheet, registers,

books of accounts and other records and other information have to be furnished under Rule 30(2), they are not required to be submitted. When a

Chartered Accountant''s certificate is filed, it cannot be said that in all those cases where such certificates are filed, once over the same work done

by a Chit Auditor is carried out justifying the same rate of fee being charged. It may be that whenever any irregularities are found, it may call for a

fresh clarification from the Foreman, but that would not mean that for all the chits without exception, the Registrar discharges, the same kind of

services as done when a Chit Auditor is requisitioned. It must be pointed out that, when fee is collected under Article 8, it includes the services

rendered by the Chit Auditor and also the services of scrutiny by the Registrar, who acts upon such certificate; whereas for the same fee paid when

a Chit Auditor''s certificate is filed, it results only in scrutiny by the Registrar and nothing more. Hence, to treat unlike situations as one and the

same and impose same rate of fee, is arbitrary and illegal. When rules themselves do not comtemplate production of registers, books of accounts

and other records, the claim made that pursuant to the filing of the balance-sheet, records have to be verified and that the whole matter has got to

be thoroughly examined, is. unacceptable. In such of those matters where irregularities are noticed, the Registrar can call for all the records and

scrutinise them and thereafter initiate prosecution or take such other action. Such instances would arise in both categories. Hence,

when the rules themselves contemplate a different type of services to be rendered when Chartered, Accountant''s certificates are filed, the fee

imposable under Article 8-A cannot be the same as in Articles 8 which contemplates more comprehensive services to be rendered. Therefore, as

rightly pleaded by the petitioners, the necessary element of quid pro quo is not existing., and furthermore this is an unreasonable restriction on right

of trade and the rate fixed is aimed at increasing general revenues. It is of pointed interest to note that right from inception of the Act, such a fee

was never contemplated, and that the Director of Chits drew inspiration from what is obtaining in Kerala and his proposals have been just

accepted by the Government without any analysis made of what rates could be fixed on conditions prevailing governing the Act in force in Kerala

and what nature of services are rendered by those authorities, are not spelt out. These conclusions ''arrived at are not to be understood that the

State is disentitled from imposing any fee for filing of such balance-sheets under Article 8-A. A rate which would be commensurate to the nature of

services extended by departmental personnel could be fixed, but what is now charged being identical to the fee imposed under Article 8, it is an

illegal imposition.

Lastly, on behalf of State, it is pleaded that when fee is imposed under an enactment, the entirety of the collections made under different heads

must be taken into account as a whole for totality of services rendered, and in the light of the decisions of the Supreme Court if it be disclosed that

a good and substantial portion of the amounts recovered, is spent towards all the specific purposes/services contemplated under the Act, then the

impugned levies are only fees and not otherwise. By referring to the decision in Kewal Krishan Puri and Others Vs. State of Punjab and Another, ,

it is poined out that, if the demand made is of a regulatory nature, there is no need to look fo quid pro quo regarding registration fee and it can be

any rate as State may choose to fix. As for the nature of services extended, as held in Kewal Krishan Puri and Others Vs. State of Punjab and

Another, , Southern Pharmaceuticals and Chemicals, Trichur and Others Vs. State of Kerala and Others, and Sreenivasa General Traders and

Others Vs. State of Andhra Pradesh and Others, , the benefits accruing to the payer alone cannot be taken into account, and that benefits accruing

to those connected and interwoven with the activities of the payer and who would be benefited by supervisions made over the payer, would also

be relevant. The rights of subscribers have to be safeguarded because they are the active participants in the chits, which got registered through the

Foreman. Provisions having been made in the Act for penalties to be imposed etc., to safeguard the rights of subscribers, the expenditure incurred

in supervision, control and regulation by the constituted authorities under the Act, forms part of the expenditure incurred in extending the special

benefits to all of them. In dealing with what benefits accrue to subscribers as well under this Act, in Tuticorin T & C Corporation (P) Ltd. v. State

of Madras (1966) 1 M.L.J. 313 it was pointed out that the Act is intended to provide a measure of safety to subscribers. A similar Act enacted for

Pondicherry was also held to benefit subscribers Chockanathan Chit Fund and Finance (P) Ltd., Pondicherry and Others Vs. Union Territory of

Pondicherry and Others, . Hence, the concept of levy in relation to payer of fees spelt out in Corporation of Calcutta and Another Vs. Liberty

Cinema, and The Government of Andhra Pradesh and Another Vs. Hindustan Machine Tools Ltd., cannot assist the petitioners, because the

traditional concept of quid pro quo is undergoing a sea of transformation as pointed out in Southern Pharmaceuticals and Chemicals, Trichur and

Others Vs. State of Kerala and Others, .

Resting on these contentions, the statement of receipts and expenditure for the period from 1976-77 to 1983-84 as found in page 6 of the

counter-affidavit in W.P. No. 1333 of 1982, and the supplemental statement filed later on, are relied upon to plead that quid pro quo is established

to a broad and reasonable extent.

It is claimed that special staff is employed for discharging the functions and duties under the Act. The hierarchy in the services are furnished in

para 8 of the counter-affidavit. Apart from the expenses incurred on them, the Government has spent on receptacles and iron safes for the

preservation of records and securities. It has been repeatedly pointed out by the Supreme Court that it is unnecessary for the State to prove with

arithmetical exactitude, and that Court need net be called upon to function like a Chartered Accountant, and what is required is to find out whether

a broad and reasonable relationship exists between the levy imposed and the services extended.

In The Delhi Cloth and General Mills Co. Ltd. Vs. The Chief Commissioner, Delhi and Others, , it was indicated that if 60% of the amount is

spent on the specific purposes, it should be a satisfactory proof. In Kewal Krishan Puri and Others Vs. State of Punjab and Another, , one of the

seven tests is that at least a good and substantial portion of the amount collected which may be in the neighbourhood of two-thirds and three-

fourths must be shown as being spent for the earmarked specific purposes and then it can be taken as a reasonable percentage spent for rendering

the services of the kind relied upon by the State. But learned Government Pleader refers to Sreenivasa General Traders and Others Vs. State of

Andhra Pradesh and Others, : Southern Pharmaceuticals and Chemicals, Trichur and Others Vs. State of Kerala and Others, to contend that the

sixth and seventh tests in Kewal Krishan Puri''s Case cannot be understood as laying down rules of universal application and must be confined to

the facts of that case.

Percentages indicated cannot be relevant indices, but the aspect of quid pro quo is a relevant test to be applied to find out whether there is a

broad relationship between the funds recovered and the amounts expended for carrying out the special services contemplated under the Act. As

pointed out in H.H. Shri Swamiji of Shri Amar Mutt and Others Vs. Commissioner, Hindu Religious and Charitable Endowments Department and

Others, whether there is fair correspondence or proximation to justify the demand has to be proved by State. In this perspective, even on taking

into account totality of income and expenditure for all services rendered under the Act, it transpires that after the increased fee was imposed in

1980-81, in spite of the deficit which was experienced in the earlier years, the excess collected in 1981-82 itself was Rs. 7,95, 519..03. This is

nearly 70% more than expenditure. Subsequent years'' figures go to show that surplus on hand was more than the amount spent. In the following

year also, the same has happened. Now that the Central Act has come into force on 13.4.1984, these figures are apposite. The learned Additional

Government Pleader contends that the recoveries hitherto made immediately after the impugned levies cannot alone be taken into account, because

in future the situation may change. Since the Act has come to an end, this plea is without substance. As and when the expenditure increases for the

services rendered, nothing precludes the State from periodically increasing the fees, so as to be commensurate with the services extended. The

totality of recoveries made over a reasonable period of years could certainly be looked into to find out whether the increase is justified or not. Loss

was incurred preceding the impugned G.O. is made out. It called for a revision, but that by'' itself would not justify a disproportionate increase

unrelated to anticipated expenditure, now that the period is circumscribed, the amounts recovered during relevant years subsequent to the

impugned levies, can be looked into to find out whether the tests laid down by the Supreme Court are satisfied or not. The income derived by the

State, subsequent to the enforcement of the Central Act, is not taken into account. Thus it is quite apparent on particulars furnished by State that

the rates fixed were disproportionately high having no nexus to nature of services rendered and is intended to augment revenues partaking the

character of tax. Hence, the impugned levies suffer from the vice of arbitrariness, hostile discrimination and unreasonable restriction on trade.

For all the reasons above stated, Articles 1 and 8-A in Appendix II to the Tamil Nadu Chit Fund Rules, 1964 are struck down, as invalid,

resulting in the writ petitions being allowed with costs. Counsel fee Rs. 250 in each petition.