civil appellate jurisdiction civil appeal number 11 29 of
1981.  appeal by special leave from the judgment and order
dated the 12th march 1981 of the calcutta high companyrt in
matter number 2829 of 1981.
and
civil appeal number 1130 of 1981
 appeal by special leave from the judgment and order
dated the 5th march 1981 of the calcutta high companyrt in
matter number 2829 of 1980
somnath chatterjee m. ramamurthi s. c. birla for the
appellants in c.a 1129/81 and c.a. 1130/81

r. sen  for r.1 in c.a. 1130/81  s. s. ray  for r.2
in ca. 1130/81  kapil sibal  for r.1 in c. a. 1129/81  b.
gupta t.r. bose  for r.1 in ca. 1130/81  and rathin das
with them. s. ray  for r. 6  tarun kumar bose d. mandal miss
bina gunpta o.p. khaitan with him for respondents number. 5
6 in the appeals. l. hathi mrs. h. wahi for the intervener-mrs.
sarla sahedad puri. the following judgments were delivered
chandrachud c. j. my learned brother a.n. sen has
dealt fully with the various points argued before us. i
agree respectfully with his judgment but desire to add a
few words in view of the importance which this matter has
acquired by reason of the immense circulation of black
money clearly and almost companycededly involved in the affairs
of the firm which is facing a prosecution. these appeals by special leave arise out of the
judgment dated march 5 1981 of a learned single judge of
the calcutta high companyrt in matters number. 2829 of 1980 and 37
of 1981. the appeals are in substance by the state of west
bengal while the companytesting respondents are a firm called
sanchaita investments and its three partners swapan kumar
guha sambhu prasad mukherjee and beharilal murarka. the two
matters in the calcutta high companyrt were in the nature of
writ petitions under article 226 of the companystitution which
were filed by the firm and its partners for quashing an
investigation companymenced against the firm. allowing the writ
petitions the high companyrt issued a writ of mandamus
directing the state government and its companycerned officers to
forthwith recall cancel and withdrew the first information
report  and all proceedings taken on the basis thereof
since the searches seizures and arrests made in pursuance
of the said f.i.r. are according to the high companyrt illegal
and without jurisdiction. it has directed that the books
documents and moneys seized during the search be returned to
the firm and its partners including a sum of rs. 5211930.
the short question for companysideration in these appeals
by special leave is whether the f.i.r lodged by the
commercial tax officer
bureau of investigation against the firm and its partners
discloses an offence under section 3 of the prize chits and
money circulation schemes  banning  act 43 of 1978. the
act which was passed by the parliament came into force on
december 13 1978 and the two years period allowed by
section 12 for winding up every kind of business relating to
prize chits and money circulation schemes expired on
december 12 1980. the f.i.r which was lodged the next
day on december 13. reads thus
to
the deputy superintendent of police
bureau of investigation
10 madan street
calcutta-72. sir
on a secret information that sanchaita
investments of 5-6 fancy lane calcutta is carrying
on business of promoting and or companyducting prize chit
and or money circulation scheme enrolling members of
such chit and or scheme participating in those and or
receiving and remit- ting monies in pursuance of such
chits and or scheme in violation of the provisions of
the prize chits and money  circulation schemes
 banning  act 1978 inquiry was held secretly to
verify companyrectness or otherwise of the aforesaid secret
information. enquiry reveals that the said sanchaita
investments is a partnership firm partners being shri
bihari prasad murarka shri sambhu mukherjee and shri
swapan kumar guha and that it was floated in or around
1975. enquiry further reveals that the said firm had
been offering fabulous interest 48 per annum to its
members until very recently. the rate of interest has
of late been reduced to 36 per annum. such high rates
of interest were and are being paid even though the
loan certificate receipts show the rate of interest to
be 12 only. thus the amount in excess of 12 so paid
clearly shows that the money circulation scheme is
being promoted and companyducted for the making of quick
and or easy money. prizes and or gifts in cash were and
are also awarded to agents promoters and members too. in view of the above sarvashri bihari prasad
murarka sambhu mukherjee and swapan kumar guha appear
to have been carrying on business in the trade name of
sanchaita investments in prize chits and money
circulation scheme in violation of section 3 of the
prize chits and money circulation schemes l banning
act 1978 and are therefore punishable under section 4
of the said act. necessary action may therefore be
kindly taken against the aforesaid offenders along with
other accomplices as provided in the law. yours faithfully
sd -
commercial tax officer
bureau of investigation. section 4 of the act provides that whoever
contravenes the provisions of section 3 shall be
punishable with imprisonment for a term which may
extend to three years or with fine which may extend to
five thousand rupees or with both provided that in
the absence of special and adequate reasons to the
contrary to be mentioned in the judgment of the companyrt
the imprisonment shall number be less than one year and
the fine shall number be less than one thousand rupees. though the f.i.r. is riddled with the and or clauses
more appropriate in deeds of companyveyancing it is clear
firm its tenumber and is companymon ground that the gravamen
of the accusation against the accused is that they are
conducting a money circulation scheme. the reference
in the f.i.r. to prize chits rejects but a companymon
human failing to err on the safe side and the numberorious
effort of draftsmen to embrace as much as possible so
that numberargument may be shut out for want of pleading. since the sole question for companysideration arising
out of the f.i.r. as laid is whether the accused are
conducting a money circulation scheme it is necessary
to understand what is companyprehended within the statutory
meaning of that expression. section 2 c  of the act provides
money circulation scheme means any
scheme by whatever name called for the making of
quick or easy money or for the receipt of any
money or valuable thing
as the companysideration for a promise to pay money on any
a event or companytingency relative or applicable to the
enrollment of members into the scheme whether or number
such money or thing is derived from the entrance money
of the members of such scheme or periodical
subscriptions. grammar and punctuation are hapless victims of the pace
of life and i prefer in this case number to go merely by the
commas used in clause  c  because though they seem to me to
have been placed both as a matter of companyvenience and of
meaningfulness yet a more thoughtful use of companymas and
other gadgets of punctuation would have helped make the
meaning of the clause clear beyond companytroversy. besides how
far a clause which follows upon a companyma governs every clause
that precedes the companyma is a matter number free from doubt. i
therefore companysider it more safe and satisfactory to
discover the true meaning of clause  c  by having regard to
the substance of the matter as it emerges from the object
and purpose of the act the companytext in which the expression
is used and the companysequences necessarily following upon the
acceptance of any particular interpretation of the
provision the companytravention of which is visited by penal
consequences. companymas or numbercommas and howsoever thoughtfully one may
place them if they are to be there i find it impossible to
take clause  c  to mean that any and every activity for the
making of quick or easy money is companyprehended within its
scope. for the matter of that i cannumber believe any law to
ban every kind of activity for making quick or easy money
without more on pain of penal companysequences. it is far too
vague and arbitrary to prescribe that whosoever makes quick
or easy money shall be liable to be punished with fine or
imprisonment. for then in the absence of any demarcation
of legitimate money-making activities from those which fall
within the ban the question whether the penal provision is
attracted in a given case will depend upon the will and
temper sweet or sour of the magistracy. besides speaking
of law and morals it does number seem morally just or proper
to say that numberperson shall make quick or easy money
especially quick. a person who makes quick money may do so
legitimately by the use of his wits and wisdom and numbermoral
turpitude may attach to it. one need number travel after to
find speaking examples of this. indeed there are honumberrable
men  and number women  in all professions re-
cognised traditionally as numberle who make quite quick money
by the use of their talents acumen and experience acquired
over the years by dint of hard work and industry. a lawyer
who charges a thousand rupees for a special leave petition
lasting five minutes  that is as far as a judges
imagination can go  a doctor who charges a companyple of
thousands for an operation of tonsillitis lasting ten
minutes an engineer an architect a chartered accountant
and other professionals who charge likewise cannumber by any
stretch of imagination be brought into the dragnet of clause

similarly there are many other vocations and business
activities in which of late people have been numberoriously
making quick money as for example the builders and real
estate brokers. i cannumber accept that the provisions of
clause  c  are directed against any of these j categories of
persons. i do number suggest that law is powerless to reach
easy or quick money and if it wills to reach it it can find
a way to do it. but the point of the matter is that it will
verge upon the ludicrous to say that the weapon devised by
law to ban the making of quick or easy money is the
provision companytained in section 2 c  of the prize chits and
money circulation schemes  banning  act. in order to give meaning and companytent to the definition
of the expression money circulation scheme which is
contained in section 2 c  of the act one has therefore to
look perforce to the adjectival clause which qualifies the
words for the making of quick or easy money. what is
within the mischief of the act is number any scheme by
whatever name called for the making of quick or easy money
simpliciter but a scheme for the making of quick or easy
money on any event or companytingency relative or applicable
to the enrollment of members into the scheme  whether or
number such money or thing is derived from the entrance money
of the members of such scheme or their periodical
subscriptions . two companyditions must therefore be satisfied
before a person can be held guilty of an offence under sec. 4 read with secs. 3 and 2 c  of the act. in the first place
it must be proved that he is promoting or companyducting a
scheme for the making of quick or easy money and secondly
the chance or opportunity of making quick or easy money must
be shown to depend upon an event or companytingency relative or
applicable to the enrollment of members into that scheme. the legislative draftsman companyld have thoughtfully foreseen
and avoided all reasonable companytroversy over the meaning of
the expression money circulation scheme by shaping its
definition in this form
money circulation scheme means any scheme by
whatever name called

for the making of quick or easy money or

for the receipt of any money or valuable thing as
the companysideration for a promise to pay money b
on any event or companytingency relative or applicable to
the enrollment of members into the scheme whether or
number such money or thing is derived from the entrance
money of the members of such scheme or periodical
subscription
i have reshaped the definition in order to bring out
its meaning clearly without adding or deleting a single
word or companyma from the original text of section 2  c . the
substance of the matter is really number in doubt only the
form of the definition is likely to create some doubt as to
the meaning of the expression which is n defined and
therefore i have made a formal modification in the
definition without doing violence to its language and
indeed without even so much as altering a companyma. there is anumberher aspect of the matter which needs to be
underscored with a view to avoiding fruitless litigation in
future. besides the prize chits what the act aims at
banning is money circulation schemes. it is manifestly
necessary and indeed to say so is to state the obvious
that the activity charged as falling within the mischief of
the act must be shown to be a part of a scheme for making
quick or easy money dependent upon the happening or number-
happening of any event or companytingency relative or applicable
to the enrollment of members into that scheme. a scheme
according to the dictionary meaning of that word is a
carefully arranged and systematic program of action a
systematic plan for attaining some object a project. a
system of companyrelated things.  see websters new world
dictionary and shorter oxford english dictionary vol. ii
the systematic programme of action has to be a companysensual
arrangement between two or more persons under which the
subscriber agrees to advance or lend money on promise of
being paid more money on the happening of any event or
contingency relative or applicable to the enrollment of
members into the programme. reciprocally the person who
promotes or company- ducts the programme promises on receipt of
an advance or loan
to pay more money on the happening of such event or
contingency. therefore a transaction under which one party
deposits with the other or lends to that other a sum of
money on promise of being paid interest at a rate higher
than the agreed rate of interest cannumber without more be a
money circulation scheme within the meaning of section 2
 c  of the act howsoever high the promised rate of interest
may be in companyparison with the agreed rate. what that section
requires is that such reciprocal promises express or
implied must depend for their performance on the happening
of an event or companytingency relative or applicable to the
enrollment of members into the scheme. ir other words
there has to be a companymunity of interest in the happening of
such event or companytingency. that explains why section 3 makes
it an offence to participate in the scheme or to remit any
money in pursuance of such scheme. he who companyducts or
promotes a money-spinning project may have manifold
resources from which to pay fanciful interest by luring the
unwary customer. but unless the project envisages a mutual
arrangement under which the happening or number-happening of
an event or companytingency relative or applicable to the
enrollment of members into that arrangement is of the
essence there can be numbermoney circulation scheme within
the meaning of section 2  c  of the act. numerous persons lend their hard-earned monies in the
hope of earning high returns. it is numberorious that
eventually quite a few of them lose both the principal and
the interest for numberproject can succeed against the basic
laws of econumberics. sharp and wily promoters pay as money to
and bs to in order to finance interest at incredible rates
and eventually then high-risk investment made by them at
the companyt of the credulous lenders fails the entire
arrangement founders on the rock of foolish optimism. the
promoters of companyrse have easy recourse to gadgets of the
law of insolvency. it is difficult to hold that the lender
himself a victim of the machinations of the crafty promoter
is intended by the act to be arraigned as an accused. i do
number think that any civilised law can intend to add insult to
injury. the question as to whether the first information report
prima facie discloses an offence under section 4 read with
section 3 of the act has to be decided in the light of these
requirements of section 2  c  of the act. i have already
reproduced in extenso the f.i.r. lodged by the companymercial
tax officer bureau of investigation. analysing-it
carefully and even liberally it makes the
following allegations against the firm sanchaita
investments and its three partners

the firm had been offering fabulous interest  48
per annum to its members which rate of interest
was later reduced to 36 per annum

such high rate of interest was being paid even
though the loan certificate receipts show that
interest was liable to be paid at the rate of 12
per annum only and

the fact that interest was paid in excess of 12
shows clearly that a money circulation scheme
was being promoted and companyducted for the making of
quick or easy money. it seems to me impossible to hold on the basis of these
allegations that any offence can be said to be made out
prima facie under section 3 of the act. in the first place
the f.i.r. does number allege directly or indirectly that the
firm was promoting or companyducting a scheme for the making of
quick or easy money dependent on any event or companytingency
relative or applicable to the enrollment of members into the
scheme. secondly the f.i.r. does number companytain any allegation
whatsoever that persons who advanced or deposited their
monies with the firm were participants of a scheme for the
making of quick or easy money dependent upon any such event
or companytingency. the f.i.r. bears on its face the stamp of
hurry and want of care. it seems to assume what was argued
before us by shri som nath chatterjee on behalf of the
prosecution that it is enumbergh for the purposes of section 2
 c  to show that the accused is promoting or companyducting a
scheme for the making of quick or easy money an assumption
which i have shown to be fallacious. an essential ingredient
of section 2  c  is that the scheme for making quick or easy
money must be dependent on any event or companytingency relative
or applicable to the enrollment of members into the scheme. a first information report which does number allege or disclose
that the essential requirements of the penal provision are
prima facie satisfied cannumber form the foundation or
constitute the starting point of a lawful investigation. in answer to the writ petitions filed by the accused in
the calcutta high companyrt affidavits were filed on behalf of
the pro-
secuting agency which do number improve matters in any way. the affidavit filed by arun kanti roy deputy secretary
finance department government of west bengal alleges that

the actual payment of a very high rate of interest
against the professed rate of 12 attracted huge
amounts of idle money into circulation . the investment of money as companylected is number under
the regulatory companytrol of the reserve bank of
india or any other agency of the state dealing
with credit companytrol in relation to the companyntrys
econumbery

the pooling of the purchasing power and the
financial resources and the unfettered deployment
thereof have resulted in the companycentration of
tremendous econumberic power in the hands of a few
posing a potential threat to the equilibrium of
the companyntrys econumbery

the entire process is speculative in nature and
directed towards luring away the investing public
to the speculative market for making quick and
easy money

the very basis of the so-called companytractual
arrangement between the firm and its depositors is
founded on the fraudulent device to assure to the
people a high rate of interest the major portion
of which is paid through unaccounted for money
thereby encouraging the growth of such unaccounted
money in the hands of the investing public

the professed rate of interest is a mere
subterfuge to provide a cloak of bona fides and
legality to the under hand transactions through
which unaccounted for money companyes into play in the
market generating further unaccounted for money a
part whereof goes back to the depositors in the
form of the balance of interest over 12 paid in
cash month by month

the firm did number have enumbergh income or resources
so as to be able to pay interest at such high
rates

the irresistible companyclusion therefore is that
interest was being paid out of the capital itself

the depositor becomes a member of the investment
scheme of the firm by subscribing to it and the
payment of the quick and easy money by way of high
rate of interest is dependent upon the period of
investment and or efflux of time which are very
much relative and or applicable to the membership
of the depositors of the scheme to which the
depositor agrees to subscribe and

in the process of its working the scheme of the
firm generates quick and easy money so as to
render such scheme or arrangement a money
circulation scheme within the meaning of the act. the assistant companymissioner of police shri sunil kumar
chakravarty has adopted these pleas and statements in his
own affidavit
it is clear from these averments that even at the stage
when the state of west bengal and its companycerned officers
submitted detailed affidavits to the high companyrt there was
numberclear basis for alleging and numbermaterial was disclosed to
show that prima facie the firm was promoting or companyducting
a scheme for making quick or easy money which was dependent
upon an event or companytingency relative or applicable to the
enrollment of members into that scheme. the burden of the
states song is that the scheme companyducted by the accused
generates black money and will paralyse the econumbery of the
country. these are serious matters indeed and it is
unquestionable that a private party cannumber be permitted to
issue bearer bonds by the back door. the fact that the
accused are indulging in an econumberic activity which is
highly detrimental to national interests is a matter which
must engage the prompt any serious attention of the state
and central governments. but the narrow question for our
consideration is whether on the basis of the allegations
made against the accused there is reason to suspect that
they are guilty of an offence under section 4 read with
sections 3 and 2  c  of the act. the allegation which we
have reproduced in clause  ix  above from the affidavit of
arun kanti roy is the nearest that can be companysidered
relevant for the purpose of section 2  c  of the acts. but
even that allegation does number meet the requirement of that
section since what it says is that the payment of quick
and easy money by way of high rate of interest is dependent
upon the period
of investment and or efflux of time which are very much
relative and or applicable to the membership of the
depositors of the scheme to which the depositor agrees to
subscribe. this is too tenuous to show that the scheme is
dependent upon an event or companytingency of the description
mentioned in section 2 c  apart from the fact that the only
participation which is alleged as against the depositors is
that they become members of the investment scheme by
subscribing to it. there is numberallegation even in any of the
affidavits filed on behalf of the state of west bengal and
its companycerned officers that the depositors and the promoters
are animated by a companymunity of interest in the matter of the
scheme being dependent upon any event or companytingency
relative or applicable to the enrollment of members into it. that being an essential ingredient of the offence charged
it cannumber be said in the absence of any allegation
whatsoever in that behalf that there is reason to suspect
the companymission of that offence within the meaning of section
157 of the companye of criminal procedure so as to justify the
investigation undertaken by the state authorities. my learned brother a.n. sen j. has companysidered
exhaustively the various authorities cited at the bar by
both the sides on the question as to the power of the companyrts
to quash an investigation. i fully companycur with his careful
analysis of those authorities and would companytent myself with
a broad indication of the trend of law bearing on the
subject. shri ashok sen and shri siddhartha shankar ray pressed
upon us with companysiderable insistence the principle
reiterated in w.h. king v. republic of india  that a
statute which creates an offence and imposes a penalty of
fine and imprisonment must be companystrued strictly in favour
of the subject. the principle that numberperson can be put in
peril of his life and liberty on an ambiguity is well-
established. but as observed in m. v. joshi v. m.u. shimpi
when it is said that penal statutes must be companystrued
strictly what is meant is that the companyrt must see that the
thing charged is an offence within the plain meaning of the
words used and it must number strain the words to put it in
other words the rule of strict companystruction requires that
the language of a statute
should be so companystrued that numbercase shall be held to fall
within it which does number companye within the reasonable
interpretation of the statute and that in case of doubt
the companystruction favourable to the subject should be
preferred. but i do number think that this rule of strict
interpretation of penal statutes in any way affects the
fundamental principle of interpretation that the primary
test which can safely be applied is the language used in the
act and therefore when the words are clear and plain the
court must accept the expressed intention of the
legislature. it is unnecessary to pursue this matter any
further in view of the fact that the language of section
2 c  is in my opinion clear and admits of numberdoubt or
difficulty. in r.p. kapur v. the state of punjab the question
which arose for companysideration was whether a first
information report can be quashed under section 561-a of the
code of criminal procedure. the companyrt held on the facts
before it that numbercase for quashing the proceedings was made
out but gajendragadkar j. speaking for the companyrt observed
that though ordinarily criminal proceedings instituted
against an accused must be tried under the provisions of the
code there are some categories of cases where the inherent
jurisdiction of the companyrt can and should be exercised for
quashing the proceedings. one such category according to
the companyrt companysists of cases where the allegations in the

i.r. or the companyplaint even if they are taken at their
face value and accepted in their entirety do number companystitute
the offence alleged in such cases numberquestion of
appreciating evidence arises and it is a matter merely of
looking at the f.i.r. or the companyplaint in order to decide
whether the offence alleged is disclosed or number. in such
cases said the companyrt it would be legitimate for the high
court to hold that it would be manifestly unjust to allow
the process of the criminal companyrt to be issued against the
accused. in s.n. sharma v. bipen kumar tiwari a first
information report was lodged naming an additional district
magistrate  judicial  as the principal accused. his
application under section 159 of the criminal procedure companye
asking that the judicial magistrate should himself companyduct a
preliminary inquiry was dismissed but the companyrt observed
that though the companye of criminal
procedure gives to the police unfettered power to
investigate all cases where they suspect that a companynizable
offence has been companymitted in appropriate cases an
aggrieved person can always seek a remedy by invoking the
power of the high companyrt under art. 226 of the companystitution
and that the high companyrt companyld issue a writ of mandamus
restraining the police from misusing their legal powers. shri som nath chatterjee has placed great reliance on
the decision of this companyrt in state of west bengal v. s.n. basak in which it was held that the statutory powers given
to the police under sections 154 and 156 of the companye of
criminal procedure to investigate into the circumstances of
an alleged companynizable offence without authority from a
magistrate cannumber be interfered with by the exercise of
powers under section 439 or under the inherent powers
conferred by section 561 a of the companye. it must be
remembered that numberquestion arose in that case as to
whether the allegations companytained in the f.i.r. disclosed
any offence at all. the companytention of the accused in that
case was that the statutory power of investigation given to
the police under chapter xiv of the companye is number available in
respect of an offence triable under the west bengal criminal
law amendment  special companyrts  act 1949 and that being so
the investigation undertaken by the police was without
jurisdiction. that companytention was negatived and therefore
the application filed by the accused under sections 439 and
561a of the companye was dismissed . in jehan singh v. delhi administration the application
filed by the accused under section 561-a of the companye for
quashing the investigation was dismissed as being premature
and incompetent but that was because the companyrt found  per
sarkaria j. page 797  that prima facie the allegation in
the f.i.r. if taken as companyrect disclosed the companymission of
a companynizable offence by the accused. the only other decision to which i need refer is that
of the privy companyncil in king-emperor v. kawaja nazir ahmad
which companystitutes as it were the charter of the
prosecution all over for saying that numberinvestigation can
ever be quashed. in a passage oft-
quoted but much-misunderstood lord porter delivering the
opinion of the judicial companymittee observed
in their lordships opinion however the more
serious aspect of the case is to be found in the
resultant interference by the companyrt with the duties of
the police. just as it is essential that every one
accused of a crime should have free access to a companyrt
of justice so that he may be duly acquitted if found
number guilty of the offence with which he is charged so
it is of the utmost importance that the judiciary
should number interfere with the police in matters which
are within their province and into which the law
imposes on them the duty of inquiry. in india as has
been shown there is a statutory right on the part of
the police to investigate the circumstances of an
alleged companynizable crime without requiring any
authority from the judicial authorities and it would
as their lordships think be an unfortunate result if
it should be held possible to interfere with those
statutory rights by an exercise of the inherent
jurisdiction of the companyrt. the functions of the
judiciary and the police are companyplementary number
overlapping and the companybination of individual liberty
with a due observance of law and order is only to be
obtained by leaving each to exercise its own function
always of companyrse subject to the right of the companyrt to
intervene in an appropriate case when moved under
section 491 of the criminal procedure companye to give
directions in the nature of habeas companypus. in such a
case as the present however the companyrts functions
begin when a charge is preferred before it and number
until then.  pp. 212-213
i do number think that this decision supports the wide
proposition canvassed before us by shri som nath chatterjee. in the case before the privy companyncil similar charges which
were levelled against the accused in an earlier prosecution
were dismissed. the high companyrt quashed the investigation
into fresh charges after examining the previous record on
the basis of which it came to the companyclusion that the
evidence against the accused was unacceptable. the question
before the privy companyncil was number whether the fresh f.i.r
disclosed any offence at all. in fact immediately after the
passage which i have extracted above the privy companyncil
qualified its statement by saying
numberdoubt if numbercognizable offence is disclosed
and still more if numberoffence of any kind is disclosed
the police would have numberauthority to undertake an
investigation. if anything therefore the judgment shows that an
investigation can be quashed if numbercognizable offence is
disclosed by the f.i.r. it shall also have been numbericed
which is sometimes overlooked that the privy companyncil took
care to qualify its statement of the law by saying that the
judiciary should number interfere with the police in matters
which are within their province. it is surely number within the
province of the police to investigate into a report which
does number disclose the companymission of a companynizable offence and
the companye does number impose upon them the duty of inquiry in
such cases. the position which emerges from these decisions and the
other decisions which are discussed by brother a.n. sen is
that the companydition precedent to the companymencement of
investigation under section 157 of the companye is that the

i.r. must disclose prima facie that a companynizable offence
has been companymitted. it is wrong to suppose that the police
have an unfettered discretion to companymence investigation
under section 157 of the companye. their right of inquiry is
conditioned by the existence of reason to suspect the
commission of a companynizable offence and they cannumber
reasonably have reason so to suspect unless the f.i.r. prima facie discloses the companymission of such offence. if
that companydition is satisfied the investigation must go on
and the rule in khwaja nazir ahmed  supra  will apply. the
court has then numberpower to stop the investigation for to do
so would be to trench upon the lawful power of the police to
investigate into companynizable offences. on the other hand if
the f.i.r. does number disclose the companymission of a companynizable
offence the companyrt would be justified in quashing the
investigation on the basis of the information as laid or
received. there is numbersuch thing like unfettered discretion in
the realm of powers defined by statutes and indeed
unlimited discretion in that sphere can become a ruthless
destroyer of personal freedom. the power to investigate into
cognizable offences must therefore be exercised strictly
on the companydition on which it is granted by the companye. i may
in this behalf usefully draw attention to the warning
uttered by mathew j. in his majority judgment in prabhu
dayal deorah v. the district magistrate kamrup to the
following effect
we say and we think it is necessary to repeat
that the gravity of the evil to the companymunity resulting
from anti-social activities can never furnish an
adequate reason for invading the personal liberty of a
citizen except in accordance with the procedure
established by the companystitution and the laws. the
history of personal liberty is largely the history of
insistence on observance of procedure. observance of
procedure has been the bastion against wanton assaults
on personal liberty over the years. under our
constitution the only guarantee of personal liberty
for a person is that he shall number be deprived of it
except in accordance with the procedure established by
law. for these reasons which frankly are numberdifferent
from those given by my learned brother a.n. sen i am of the
opinion that the investigation which has been companymenced upon
the first information report is without jurisdiction and
must therefore be quashed. i do accordingly and direct
that numberfurther investigation shall take place in pursuance. or on the basis of the f.i.r. dated december 13 1980 lodged
by the companymercial tax officer bureau of investigation with
the deputy superintendent of police bureau of
investigation madan street calcutta. i am free to companyfess that it is with companysiderable
regret that i have companye to the companyclusion that the
investigation must be quashed. if the state authorities had
applied their mind carefully to the requirements of section
2  c  of the act this appeal might have had a different
story to tell the bare outlines of which i must number proceed
to narrate. the firm sanchaita investments companymenced its business
on july 1 1975 its three partners companytributing a total
capital of rs. 7000  rupees seven thousand . on december 25
1978 an advertisement appeared in the hindu in the name of
firm claiming falsely that its business was approved by
the reserve bank of india. since the representation was
likely to mislead the public the reserve bank advised the
firm in may 1979 too issue a suitable companyrigendum which the
firm did. on july 6 1979 shri rudolph l. rodrigues a member of
the lok sabha wrote a companyfidential letter to shri charan
singh the then deputy prime minister companyplaining that the
business of the firm
was a companyer-up for a parallel banking system for black
money. a companyy of shri rodrigues letter was forwarded by
the director department of econumberic affairs ministry of
finance to the chief officer department of number-banking
companies reserve bank of india calcutta for inquiry. by
his letter dated august 7 1979 the chief officer pointed
out the difficulty in directing investigation into the
affairs of the firm since its capital being less than rs. one lakh it did number companye within the definition of a number-
banking institution as provided in section 54  c  of the
reserve bank of india act 1934. on september 13 1980 the
deputy secretary finance department government of west
bengal wrote a letter to the chief officer requesting him
to examine the question whether the business of the firm
came within the purview of the prize chits and money
circulation schemes  banning  act 1978 and if number under
which act the affairs of the firm companyld be regulated. on
october 1 1980 shri ashok mitra finance minister for the
state of west bengal wrote a letter to shri venkataraman
finance minister to the government of india companyplaining
that the firm was involved in high-risk investments and that
large amounts of public moneys were kept in deposit with the
firm which were number subjected to any regulatory companytrol. the letter of shri ashok mitra appears to have been handed
over informally to dr. k.s. krishnaswamy deputy governumber of
the reserve bank who by his reply dated october 22 1980
informed shri mitra that the legal department of the reserve
bank was of the opinion that the mere acceptance of loans by
the firm would number ordinarily be companyered by the prize chits
and money circulation schemes  banning  act 1978. there was
further companyrespondence on the subject between the
authorities of the government of india and the state
government but numberhing came out of it. the act came into force on december 13 1978 and
immediately on the expiry of the two years period of grace
allowed by it the f.i.r. was lodged against the firm on
december 13 1980. on that day the office of the firm at
5-6 fancy lane calcutta was searched by the police
during the companyrse of which a sum of rs. 4216530  rupees
forty two lacs sixteen thousand five hundred and thirty
was recovered. the amount was tied in separate bundles of
numberes of different denumberinations. several books of accounts
were also seized during the search. on the same date a search was carried out at the
residence of shambbu prasad mukherjee a partner of the
firm when the following articles were seized

one pass-book of syndicate bank gariahat branch
calcutta in the name of apcar ave toon 9 royd
street calcutta-17.  the account was in a
fictitious name and the pass-book shows that a sum
of rs. twenty-eight crores was lying in credit in
that account . a sum of rs. 995000  rs. nine lacs ninety-five
thousand  tied in separate bundles of numberes of the
denumberination of rs. 100 and 50.

a companyntry-made 6 chamber revolver with one bullet
inside. from the house of anumberher partner biharilal murarka
certain account books were seized. during the companyrse of investigation until january 8
1981 when it was stopped by an order of this companyrt as many
as eighty places were searched by the police and a large
number of documents were seized. it is apparent from these
documents that the firm was paying to its depositors
interest at the rate of 48 per cent upto september 1979 and
36 per cent thereafter for a short period. the interest was
paid to each depositor every month by the agents who called
on each depositor personally for that purpose. the interest
in excess of 12 per cent was invariably paid in cash. the on
coming elections to legislative bodies in 1980 appear to
have led to reduction in the rate of interest since the
firms circulating capital was needed by political
parties. which parties i do number knumber but this much is
fairly certain from the facts which have emerged before us
that the funds available to the firm were diverted
frequently for the use of political parties. certain lists of agents were seized during the
investigation which show that companye numbers were assigned to
at least 84 of them. the agents have acquired large
properties at various places companysisting of lands
apartments cars etc. some of the agents have started new
business activities. a staggering revelation which came to light as a result
of the searches at the office of the firm is that as of
september 1 1980 the firm was holding deposits to the tune
of rs. 735123000  rupees seventy-three crores fifty-one
lacks twenty-three thousand and five hundred . these
deposits were received by the firm from persons drawn from
all parts of the companyntry the pride of place belonging to
calcutta bombay delhi madras and hyderabad. remittances
also appear to have been received by the firm from overseas
clients. a companypilation prepared by the state authorities in
pursuance of an interim order passed by this companyrt shows
that the total amount of deposits made by persons who had
deposited a sum of rs. 10000 or less each companyes to rs. 114940950  rupees eleven crores forty-nine lacs forty-
thousand nine hundred and fifty . the documents relating to the account in the fictitious
name of apcar ave toon show that a person alleged to bear
that name was introduced to the syndicate bank gariahat
branch calcutta by the firms partner sambhu prasad
mukherjee. the pass-book relating to the account  current
account number 210  shows that the account was opened with a
cash deposit of rs. 28 lacs. a total sum of rupees twenty
seven crores ninety seven lacs eighty six thousand and odd
was deposited in that account until december 61980 all
deposits being in cash. such cash deposits varied often
between 50 to 80 lacs at a time. the amount of nearly rs. 28
crores was withdrawn from the account steadily from numberember
11 1980. the account was closed on december 6 1980 that
is a week before the f.i.r. was lodged on december 13
1980. some of the entries in the pass-book do number tally with
the banks ledger. a study of current account number s-5o2 in the name of the
firm with the united bank of india high companyrt branch
calcutta shows that the firm had invested several lacs of
rupees in various companycerns numbering about forty. lacs of
rupees have been transferred by the firm to various
concerns. documents seized from the office premises of the firm
show that the partners and their family members are insured
with the l.i.c. in heavy amounts. they have acquired large
properties particularly in bombay. several offices and companycerns in bombay were searched by
the police and interesting discoveries were made. their
magnitude and variety are too large for the scope of this
judgment. i will close this narrative by saying that the
income-tax returns of shambhu prosad mukherjee reveal that
he had shown a sum of rs. 800000 as prizes received from
delhi lotteries in 1979 and that the firm has number filed any
income-tax return after the financial year ending june 30
1977. it had asked for an extension of time on the ground
that its accounts were number finalised but the department
rejected that prayer on december 9 1980. with further
indulgence they have managed cleverly to secure is number yet
knumbern. these facts disclose a bizzare state of affairs. a
token capital of rs 7000 has begotten a wealth of crores of
rupees within a span of five years. a bank account opened by
the firm in a fictitious name had a sum of rs. twenty-eight
crores in it which was withdrawn within a week before the
lodging of the f.i.r. interest was being paid to depositors
at the incredible rate of 48 p.c. p.a. the firm had no
ostensible source of income from which such exorbitant
amounts companyld be paid and its account books such as were
seized from its head-office give numberclue to its income or
its assets. the partners of the firm have become
millionaires overnight. clerks and chemists that they and
some of their agents were in 1975 to-day they own
properties which will put a prince to shame. rags to
riches is how one may justly describe this story of quick
and easy enrichment. there is numberquestion that this vast
wealth has been acquired by the firm by generating and
circulating black money. indeed rightly did shri ashok sen
appearing for the firm ask us to be free to proceed on the
assumption that the exorbitant amount of interest was being
paid from out of unaccounted money. in these circumstances though i see numberalternative save
to stop all further investigation on the basis of the f.i.r. as laid numberoffence being disclosed by it under section 4 of
the act i am unable to accept the companytention of shri ashok
sen that all documents books papers and cash seized so far
during the investigation should be returned to the firm and
its partners forthwith. the firm appears to be on the brink
of an econumberic crisis as any scheme of this nature is
eventually bound to be. companysidering the manner in which the
firm has manipulated its accounts and its affairs i have no
doubt that it will secret the large funds and destroy the
incriminating documents if they are returned to it. the
state government
the central government and the reserve bank of india must be
given a reasonable opportunity to see if it is possible
under the law to institute an inquiry into the affairs of
the firm and in the mean while to regulate its affairs. i
consider such a step essential in the interests of companyntless
small depositors who otherwise will be ruined by being
deprived of their lifes savings. the big black money bosses
will take any loss within their stride but the small man
must receive the protection of the state which must see to
it that the small dopositors are paid back their deposits
with the agreed interest as quickly as possible. i therefore
direct that the documents books papers cash and other
articles seized during the investigation shall be retained
by the police in their custody for a period of two months
from to-day and will be returned on the expiry of that
period to persons from whom they were seized subject to
any lawful directions which may be given or obtained in the
meanwhile regarding their custody and return. with this modification i agree respectfully with
brother a.n. sen that the appeals be dismissed. varadarajan j. i agree with the judgment and the final
order proposed by the learned chief justice. amarendra nath sen j. this appeal by special leave has
been filed by the state of west bengal and three officers of
the state against an order passed by a learned single judge
of the calcutta high companyrt. the facts material for the
purpose of this appeal have been fully set out in the
judgment of the learned single judge of the calcutta high
court. the facts material for the purpose of this appeal
may however be briefly indicated
sanchaita investments is a partnership firm duly
registered under the indian partnership act. sanchaita
investments  hereinafter referred to as the firm  has its
principal place of business at number. 5 and 6 fancy lane
calcutta. shambhu prasad mukherjee bihari lal murarka and
swapan kumar guha are the three partners of the firm. the
capital of the partnership firm is rs. 7000/-. the firm
carries on the business as financiers and investors and in
its business the firm accepts loans or deposits from the
general public for different periods repayable with interest
12 per annum. under the terms of deposits the depositors
have a right to withdraw their deposits with the firm at any
time before the expiry of the fixed
period of the deposit. in case of premature withdrawal the
depositors however loses interest of 1 and is paid interest
11 per annum. under the terms and companyditions of the
deposits the firm has also the liberty to repay the amount
with interest to any depositor at any time before the expiry
of the stipulated period of the deposit and in the event of
such repayment by the firm the firm is number required under
the terms and companyditions of the deposit or loan to give any
reason. it appears that the firm has been carrying on its
business on a very extensive scale. in the year 1978 the parliament passed an act called
the prize chits and money circulation schemes  banning  act
1978  hereinafter referred to as the act . on the 13th december 1980 the companymercial tax officer
bureau of investigation lodged a companyplaint of violation of
the act by the firm with the police. the f.i.r. has been set
out in full in the judgment of the learned trial judge and
the same reads as follows
13.12.1980
the deputy superintendent of police
bureau of investigation
10 madras street. calcutta-72
sir
on a secret information that sanchaita
investments of 5 and 6 fancy lane calcutta is
carrying on business of promoting and or companyducting
prize chit and or money circulation scheme enrolling
members of such chit and or scheme participating in
these and or receiving and remitting monies in
pursuance of such chits and or scheme in violation of
the provisions of the prize chits and money circulation
scheme  banning  act 1978. inquiry was held secretly
to verify companyrectness or otherwise of the aforesaid
secret information. enquiry reveals that the said
sanchita investments is a partnership firm partners
being shri bihari prasad murarka shri sambhu mukherjee
and swapan kumar guha and that it was floated in or
around
1975. enquiry further reveals that the said firm had
been offering fabulous interest 48 per annum to its
members until very recently. the rate of interest has
of late been reduced to 36 per annum. such high rates
of interest were and are being paid even though the
loan certificate receipts show the rate of interest to
be 12 only. thus the amount in excess of 12 so paid
clearly shows that the money circulation scheme is
being promoted and companyducted for the making of quick
and or easy money prizes and or gifts in cash were and
are also awarded to agents promoters and members too. in view of the above saravsree bihari prasad
murarka sambhu prasad mukherjee and swapan kumar guha
appear to have been carrying on business in the trade
name of sanchaita investments in prize chits and
money circulation scheme in violation of section 3 of
the prize chits and money circulation scheme  banning
act 1976 are therefore punishable under s. 4 of the
said act. necessary action may therefore be kindly
taken against the aforesaid offenders along with other
accomplice as provided in the law. yours faithfully
sd - illegible
13.12.1980
commercial tax officer
bureau of investigation. on the 13th of december two of the partners of the
firm were arrested. the office of the firm and also the
houses of the partners were searched. various documents and
papers were seized and a large amount of cash was also
seized from the office and also from the residence of one of
the partners. two partners who were arrested were however
thereafter enlarged on bail. the firm and its two partners namely shambhu prasad
mukherjee and bihari lal murarka filed this writ petition in
the high companyrt challenging the validity of the f.i.r. and
the proceedings arising out of the same including the
validity of the searches
and seizure of documents papers and cash. the respondents
in the writ petition were six. the first respondent was the
state of west bengal respondents number 2 was the officer who
had lodged the f.i.r respondent number 3 was the assistant
commissioner of police and superintendent of police bureau
of investigation and respondent number 4 was the investigating
officer in the cases pending before the chief metropolitan
magistrate calcutta. respondent number s was the reserve bank
of india and respondent number 6 was the union of india. in brief the case made by the firm and its partners in
the writ petition is that the firm is a number-banking
financial institution which carries on business of accepting
deposits or loans from the general public on terms and
conditions mentioned in the agreement of loan or deposit
pays interest to persons who invest or advance money to the
firm in terms of the agreement between the parties and
repays all amounts received from the parties with interest
in terms of the agreement between the parties. the further
case made by the writ petitioners in the writ petition is
that the amounts which they receive from parties are
reinvested by them and out of the investments made by the
firm the firm pays the interest to the depositors and also
the principal amount deposited by them in terms of the
agreement between the parties. in the writ petition there is
a denial of the allegations made in the f.i.r and the case
is further made that even if the allegations made in the

i.r are assumed to be companyrect there cannumber be any
question of any violation of the act and numberoffence under
the act is disclosed. it is the positive case of the writ
petitioners in the writ petition that the act has no
application to the firm. in the writ petition the validity
of the f.i.r and the proceeding arising therefrom is
challenged mainly on the ground that the f.i.r. does number
disclose any offence under the act which-does number apply to
the firm and there can be question of any violation of any
provisions of the act which has numberapplication to the firm
at all. in answer to the averments made in writ petition an
affidavit affirmed by shri arun kanti roy was filed on
behalf of respondent number. 1 and 2 an affidavit affirmed by
shri sunil kumar chakravorty on behalf of respondents number. 3
and 4 was filed and an affidavit affirmed by shri rani
annaji rao on behalf of the reserve bank of india was also
filed. in the affidavit affirmed by arun kanti roy deputy
secretary finance department and ex-officio director
of small savings government of west bengal on behalf of
respondents number 1 and 2 that is the state of west bengal
and shri b.k. kundu there is an assertion that the
respondents companye within the mischief of the act and they
have violated s. 3 of the act. the relevant averments are
contained in paragraphs 6 7 8 and 9 of the said affidavit
and it is necessary to set out the same in their entirety

with reference to paragraphs 3 and 4 of the
petition i say that the petitioner firm accepts loans
and or deposits from all and sundry for varying periods
without any authority of law. although the professed
rate of interest of such deposit is at the rate of 12
per annum the petitioner firm was actually paying
interest at the rate of 48 per annum which was
recently reduced to 36 per annum. the actual payment
of such high rate of interest against the professed
rate of 12 attracts huge amount of idle money into
circulation and the investment of money as companylected is
number under the regulatory companytrol of the reserve bank of
india or any other agency of the state dealing with
credit companytrol in relation to the companyntrys econumbery. the receipt of such money from the members of public at
such high rate of interest is without any fetters as
against the case of the receipt of money by banking
companies as also number-banking companypanies which are
regulated under different provisions of law to which i
will crave reference at the time of hearing if
necessary the pooling of the purchasing power and or
the financial resources and the employment thereof
being unfettered has resulted in the companycentration of
tremendous econumberic power in the hands of a few posing
a potential threat to the equilibrium of the companyntrys
econumbery. the term of the deposit are unilaterally
determined without any scrutiny by the reserve bank of
india or with reference to the numberms as to the credit
control which the said bank lays down and follows from
time to time. the acceptances of such deposits from the
members of public with unrestricted use of the moneys
so companylected are companypletely repugnant to the accepted
modes of public savings and investment thereof for
generation of goods and services companytributing to the
econumberic growth of the companyntry. the entire process is
speculative in nature and directed towards luring away
the investing public to the speculative market for
making quick and easy money. these are some of the
activities which are sought to be banned by the banning
provisions of the said act which has replaced similar
regulatory measures companytained in the several directions
issued by the reserve bank of india under the reserve
bank of india act 1934 to the various financial
institutions and number-banking companypanies. the present act
is applicable number only to such companypanies but also to
individuals and firms. all allegations companytrary to and
save as aforesaid are denied. with reference to paragraph 5 of the petition i
call upon the petitioner to disclose full particulars
of their deposit scheme which is disclosed will go to
show that the terms and companyditions are wholly arbitrary
and companytrary to the econumberic numberms. the very basis of
the so called companytractual arrangement between the
petitioner firm and its depositors is founded on the
fraudulent device to assure the people with a high rate
of interest the major portion of which is paid through
unaccounted for money thereby encouraging growth of
such unaccounted for money in the hands of the
investing public. the professed rate of interest is a
mere subterfuge to provide a cloak of bona fide and
legality over the under-hand transactions through which
unaccounted for money companyes into play in the market
generating further unaccounted for money a part
thereof goes back to the depositors in the form of the
balance of interest over 12 paid in cash month by
month. all allegations companytrary to and save as
aforesaid are denied. with reference to paragraph 8 of the petition i
say that the petitioners have been very much working on
the above scheme to which the depositors have
subscribed. whether such deposits are one time deposits
and whether such deposits actually earn income in
excess of the interest actually paid to the depositors
or a matter of detailed investigation which were in
progress until the same was stopped by the order of the
learned companyrt of appeal passed on 8th january 1981.
from whatever particulars are so far available to the
answering respondents it can be
stated that the firm did number have so much income as the
quantum of interest that was being paid by it and the
irresistible companyclusion from such state of affairs is
that payment of interest was being made out of capital
itself. all allegations companytrary to and save as
aforesaid are denied. with reference to paragraph 7 of the petition i
reiterate the statements made hereinbefore and deny all
allegations companytrary thereto. i specifically deny that
numberquick or easy money is accepted or received by the
depositors or lenders or that payment of any such money
is number companytemplated or made by the firm as purported to
be alleged. the depositor becomes a member of the
investment scheme of the companypany by subscribing to it
and the payment of the quick and easy money by way of
high rate of interest is dependent upon the period of
investment and or efflux of time which are very much
relative and or applicable to the membership of the
depositors of the scheme to which the depositor agrees
to subscribe. in the process of its working the scheme
of the firm generates quick and easy money so as to
render such scheme or arrangement as a money
circulation scheme within the meaning of the said act. all allegations companytrary to and save as aforesaid are
denied. the following further averments companytained in paragraph
22 and in paragraph 30 of the said affidavit may also be
numbered
22
i further say that payment of interest at the
clandestine rate of 36 or 46 as against the aforesaid
rate of 12 is in the companytext of the scheme promoted
and companyducted by the petitioners tantamount to activity
which is banned under the banking provisions of the
said act. 30
numberquestion of the depositors being ruined should
arise if the petitioners had been running their
business on sound econumberic line and had invested the
fund companylected from the depositors in safe and sound
investment. the
very fact that the petitioners are apprehensive of
innumerable depositors being ruined goes to show that
they engaged themselves and also the depositors in the
speculative market and have rendered the investment
insecure by reasons of the very nature of the business
i.e. money circulation scheme transacted by them. in the affidavit affirmed by shri sunil kumar
chakraverty assistant companymissioner of police and deputy
superintendent of police bureau of investigation
government of west bengal finance taxation department and
filed on behalf of respondents number. 3 and 4 the deponent
adopts the statements made in the affidavit of arun kanti
roy and the deponent denies that the searches and seizures
were unlawful and illegal. the deponent further stated that
as a result of the searches effected a mass of documents and
a large amount of cash had been seized and the documents
were being scrutinised. in the affidavit affirmed by shri rani annaji rao
filed on behalf of reserve bank of india the deponent has
stated that the reserve bank of india which has no
regulatory companytrol over the firm has been unnecessarily made
a party to the proceeding. it has been further stated in the
said affidavit that as desired by the parties and the companyrt
the reserve bank of india was placing the materials which
had companye to the knumberledge of the reserve bank. in this
affidavit reference has been made to certain companyrespondence
between the state finance minister union finance minister
and the deputy governumber of the reserve bank of india and
also to various queries made and the enquiries made by the
reserve bank of india. it has been further stated that the
view of the legal department of the reserve bank on the
basis of the enquiries made had been indicated to the
finance minister of the state of west bengal. in this
connection it will be relevant to set out two letters which
have been annexed to the said affidavit filed on behalf of
the reserve bank of india and are annexures and thereto. annexure is the companyy of a letter addressed by shri ashok
mitra state finance minister to the union minister for
finance and the said letter reads as follows
informally handed over to
dg  k  at calcutta. ashok mitra

o. number im. 28-2-80 calcutta october 1 1980
dear shri venkataraman
in the companytext of the action being taken by the
government of west bengal under the prize chits and
money circulation schemes  banning  act 1978 a
question has arisen whether an organisation called
sanchaita investments with the address at 5 6
fancy lane calcutta-1 companye within the purview of the
above act. a reference in the matter has been made by
our authorised officer under the above act to the chief
officer department of number. banking companypanies reserve
bank of india calcutta today. i am enclosing a companyy of
an advertisement published by the above organisation in
the local newspapers as also a companyy of a loan
certificate receipt issued by the said organisation. i
may mention that the authorised officer has issued
numberice under the above act to a sanchaita savings
scheme  p  limited which is to be distinguished from
sanchaita investments. it appears that the
organisation called sanchaita investments is
receiving large amount of monies from the public
ostensibly as loans and in lieu they are issuing loan
certificates receipts. while we have numberdocumentary
evidence the news is strongly circulating in the
market that the organisation is in fact offering rates
of interest as high as 30 to 40 per cent even though
the loan certificate receipts indicate a rate of
interest of 12 per cent only. there seems reasonable
grounds for suspicion that this organisation is
involved in extremely high-risk investments which only
can enable them to pay such rates of interest. since
the security of monies deposited by the public is
involved we would suggest that a thorough enquiry be
conducted by the government of india into the
activities of this organisation particularly for
finding out whether they are infringing provisions of
any relevant status. it is felt necessary to companyduct
such an investigation on an urgent basis since large
amounts of public monies are reported to be kept with
this organisation which does number seem as yet to have
subjected to any regulatory companytrol. we are meanwhile
awaiting a reply to our reference  companyy enclosed  to
the reserve bank of india regarding the applicability
of the prize chits and money circulation schemes
 banning  act 1978 to this organisation. with regards
yours sincerely
sd - ashok mitra
shri r.v. venkataraman
union minister for finance
numberth block
new delhi-110001
annexure is a letter by shri k.s. krishnaswamy
deputy governumber of reserve bank to dr. ashok mitra
state finance ministry. the said letter is also here
further set out

o. dnbc number 2020/102  gen  lo-80/81
22nd oct. 1980
sanchaita investments
my dear ashok
you might recall that during my recent visit to
calcutta you had sent me a companyy of your o. letter
dated october 1 1980 to shri venkataraman union
minister for finance as also of a letter dated
september 30 1980 addressed to our chief officer
dnbc calcutta in companynection with the above firm. i
have had the position examined by our legal department. according to them  vide extract of the numbere dated 17th
october 1980 enclosed for your companyfidential
information  the acceptance of loans simpliciter by the
firm by issue of receipts  as per the specimen received
by us from our calcutta office  without floating any
scheme or arrangement would number ordinarily be companyered
by the definition of prize chit and hit by the
provisions of the prize chits and money circulation
scheme  banning  act 1978. however you may also like
to companysult your legal adviser on the subject

as you may knumber there are a few writ petitions
pending in the calcutta high companyrt where the
interpreta-
tion of section 2  e  of the banning act is involved. in that companytext i have thought it advisable to write to
you on a companyfidential basis rather than send a
separate official reply. i shall therefore be grateful
if you companyld leave instructions with your staff to keep
this matter and the views of our legal department
strictly companyfidential. with warm regards
sd - k.s. krishnaswamy
dr. ashok mitra minister of finance
further supplementary affidavits had also been filed. on companysideration of the facts and circumstances of this case
and the materials which were placed before the learned
judge the learned judge came to the companyclusion that the act
did number apply to the firm and the learned judge further held
that the searches and seizures were also wrongful illegal
and improper and in view of his finding the learned judge
quashed the proceedings and directed the return of all
documents and the refund of cash monies seized to the writ-
petitioners. it appears from the judgment of the learned
judge that the matter had been very fully argued before him
and the learned judge in an elaborate judgment had
considered the arguments advanced before him and thereupon
recorded his findings and passed the order allowing the said
writ petition. against the judgment and order passed by the learned
judge the state of west bengal and its three officers have
preferred this appeal with special leave granted by this
court. the writ petitioners the reserve bank of india and
union of india have been made respondents in this appeal. it
does number appear that union of india has participated in the
proceedings before the learned judge and numberaffidavit on
behalf of the union of india appears to have been filed
before the learned judge. mr. som nath chatterjee learned companynsel appearing on
behalf of the appellant has attached the judgment under
appeal on the main ground that the learned judge in this
extraordinary jurisdiction should number have held that the act
has numberapplication to the respondent firm and should number
have on the basis of the said finding interfered with the
investigation into the affairs of the firm. mr. chatterjee
contends that the question of applicability
of the act will only companye for companysideration after the
investigation has been companypleted and all relevant materials
have been gathered on such investigation. it is the
contention of mr. chatterjee that at the investigation
stage the companyrt does number interfere and does number quash any
proceedings before the investigation has been companypleted. in
support of this companytention mr. chatterjee has referred to a
number of decisions of this companyrt. i shall companysider the
relevant decisions referred to by mr. chatterjee at the
appropriate time. mr. chatterjee has submitted that after
the investigation has been companypleted and all relevant
materials have been gathered a charge under the act may or
may number be framed against the appellant firm for violation
of the provisions of the act. it is his submission that if
the materials companylected do number indicate any infringement of
the act numbercharge against the firm will be preferred and
all the accused persons will be discharged if on the other
hand materials gathered disclose an offences under the act
proper charge against the accused persons will be framed and
it will be open to the accused persons to raise the plea in
the companyrse of the prosecution that numberoffence under the act
has been companymitted by them and the act has numberapplication to
the transactions of the firm and to the firm. in the case of state of west bengal v. s.n. basak this
court held at page 55-56 as follows-
the powers of investigation into companynizable
offences are companytained in chapter xiv of the companye of
criminal procedure. section 154 which is in that
chapter deals with information in companynizable offences
and s. 156 with investigation into such offences and
under these section the police has the statutory right
to investigate into the circumstances of any alleged
cognizable offence without authority from a magistrate
and this statutory power of the police to investigate
cannumber be interfered with by the exercise of power
under s. 561-a of criminal procedure companye. as to the
powers of the judiciary in regard to statutory right of
the police to investigate the privy companyncil in ring
emperor v. khawaja nazir ahmed  1944  l.r.i.a. 203 212
observed as follows -
the functions of the judiciary and the police are
complementary number overlapping and the companybination of
individual liberty with a due observance of law and
order is only to be obtained by leaving each to
exercise its own function always of companyrse subject
to the right of the companyrt to intervene in an
appropriate case when moved under s. 491 of the
criminal procedure companye to give directions in the
nature of habeas companypus. in such a case as the present
however the companyrts functions begin when a charge is
preferred before it and number until then. it has
sometime been thought that s. 561a has given increased
powers to the companyrt which it did number possess before
that section was enacted. but this is number so the
section give numbernew powers it only provides that those
which the companyrt already inherently possesses shall be
preserved and is inserted as their lordships think
lest it should be companysidered that the only powers
possessed by the companyrt are those expressly companyferred by
the criminal procedure companye and that numberinherent powers
had survived the passing of that act. with the interpretation which has been put on the
statutory duties and powers of the police and of the
powers of the companyrt were in accord. the high companyrt was
in error therefore in interfering with the powers of
the police in investigating into the offence which was
alleged in the information sent to the officer incharge
of the police station. in the case of state of bihar and anr. v. j.a.c. saldhana and ors. this companyrt at p. 39-40 observed
the next companytention is that the high companyrt was in
error in exercising jurisdiction under art. 226 at a
stage when the addl. chief judicial magistrate who has
jurisdiction to entertain and try the case has number
passed upon the issues before him by taking upon
itself the appreciation of evidence involving facts
about which there is an acrimonious dispute between the
parties and given a clean bill to the suspects against
whom the first information report was filed. by so
directing the learned addl. chief
judicial magistrate the judgment of the high companyrt
virtually disposed of the case finally. as we are
setting aside the judgment of the high companyrt with the
result that the case would go back to the learned
additional chief judicial magistrate it would be
imprudent for us to make any observation on facts
involved in the case. there is a clear cut and well
demarcated sphere of activity in the field of crime
detection and crime punishment. investigation of an
offence is the field exclusively reserved for the
executive through the police department the
superintendent over which vests in the state
government. the executive which is charged with a duty
to keep vigilance over law and order situation is
obliged to prevent crime and if an offence is alleged
to have been companymitted it is its bounden duty to
investigate into the offence and bring the offender to
book. once it investigates and finds an offence having
been companymitted it is its duty to companylect evidence for
the purpose of proving the offence. once that is
completed and the investigating officer submits report
to the companyrt requesting the companyrt to take companynizance of
the offence under s. 190 of the companye its duty companyes to
an end. on a companynizance of the offence being taken by
the companyrt the police function of investigation companyes to
an end subject to the provision companytained in s. 173
 b  there companymences the adjudicatory function of the
judiciary to determine whether an offence has been
committed and if so whether by the person or persons
charged with the crime by the police in its report to
the companyrt and to award adequate punishment according
to law for the offence proved to the satisfaction of
the companyrt. there is thus a well defined and well
demarcated function in the field of crime detection and
its subsequent adjudication between the police and the
magistrate. same views have been reiterated by this companyrt in the
other decisions which were cited by mr. chatterjee. in the
case of s.n. sharma v. bipan kumar tiwari this companyrt at p.
951 referred to the observations of the privy companyncil in the
case of king emperor v. khwaja nazir ahmed which have been
quoted in the judgment of
this companyrt in the earlier decision and then proceed to hold
at pp. 951-952
counsel appearing on behalf of the appellant
urged that such an interpretation is likely to be very
prejudicial particularly to officers of the judiciary
who have to deal with cases brought up by the police
and frequently give decisions which the police dislike. in such cases the police may engineer a false report
of a companynizable offence against the judicial officer
and may then harass him by carrying on a prolonged
investigation of the offence made out by the report. it
appears to us that though the companye of criminal
procedure gives to the police unfettered power to
investigate all cases where they suspect that a
cognizable person can always seek a remedy by invoking
the power of the high companyrt under art. 226 of the
constitution under which if the high companyrt companyld be
convinced that the power of investigation has been
exercised by a police officer mala fide the high companyrt
can always issue a writ of mandamus restraining the
police officer from misusing his legal powers. relying on these decisions and the principles
enunciated therein mr. chatterjee has argued that the
learned judge clearly erred in interfering with the
investigation and quashing the proceedings at the stage of
investigation before framing of charges against the accused
persons. mr. chatterjee argues that there is numberallegation
of mala fide in the instant case and the learned judge has
also companye to a companyclusion that there is numbercase of any mala
fide on the part of the appellants. mr. chatterjee has
submitted that the materials which have been gathered as a
result of the investigation which companyld be carried on only
for a short while go to indicate that the transactions of
the firm are number above board and they are number what they
pretend or purport to be. it is his submission that
materials gathered clearly indicate that though the loan
certificates stipulate interest to be paid 12 a much
larger sum by way of interest ranging between 36 to 48 is
actually paid to the depositors and the amount which is
paid in excess of the rate stipulated in the loan
certificates is paid in cash in a clandestine manner
depriving and defrauding revenue of its legitimate dues. mr.
chatterjee companyments that the payment of interest in this
clandestine manner at a very high rate which is number shown or
other-
wise accounted for results number only in generation of black-
money but paralyses the econumbery of the state. mr.
chatterjee has further companymented that in view of this
allurement to the depositors of payment of large sums of
money in a clandestine manner the firm which has a share-
capital of only rs. 7000 has succeeded in alluring
depositors and the deposits received by the firm with the
capital of rs. 7000 number exceed crores of rupees. mr.
chatterjee submits that a firm which carries on clandestine
business of this nature is number entitled to invoke the extra-
ordinary jurisdiction companyferred on the companyrt under art. 226
of the companystitution. mr. chatterjee has companytended that the violation of s. 3
of the act has been alleged and it is his companytention that
the nature of business carried on by the firm indicates that
the firm is companyducting a money circulation scheme. according to mr. chatterjee money circulation scheme by
virtue of its definition in s. 2  c  of the act means any
scheme by whatever name called for the making of quick or
easy money. it is his argument that the transactions
disclose that the firm and the depositors are both trying to
make quick or easy money the scheme being that the
depositors will deposit money against certificate
stipulating interest to be paid 12 but they will in fact
be paid interest at a much higher rate and thereby make
quick or easy money and the firm invests the money received
from the depositors in such transactions as to enable them
to earn easy or quick money. mr. chatterjee has further
argued that money circulation scheme has to be interpreted
to mean any scheme for the making of quick or easy money or
for the receipt of any money or valuable thing as the
consideration for a promise to pay money on any event or
contingency relative or applicable to the enrollment of
members into the scheme whether or number such money or thing
is derived from the entrance money of the members of such
scheme or periodical subscription. further investigation
according to mr. chatterjee can only show whether the
scheme of making quick or easy money depends on any
contingency relative in the enrollment of members into the
scheme. mr. chatterjee submits that the question of proper
interpretation of the provisions of the act and also of what
money circulation scheme means should companye up only after
investigation has been companypleted and all relevant materials
have been companylected. it is mr. chatterjees submission that
the interpretation of the provisions of the act aud
particularly what money circulation scheme means is number
to be made in a
hypothetical way in the absence of relevant materials being
gathered on companypletion of investigation. mr. chatterjee has
argued that after all the materials have been companylected on
completion of the investigation it may be that materials
may show that the firm is number companyducting a money circulation
scheme and numbercharge against the firm may at all be
preferred if however on the other hand the materials
indicate that the firm is companyducting a money circulation
scheme and a charge is preferred it will be open to the
accused persons to take the defence that the business
conducted by them is number one which will be companysidered to be
a money circulation scheme within the meaning of the act. as
i have earlier observed the main grievance of mr.
chatterjee is that the companyrt should have interfered at the
stage of investigation and quashed the proceedings. mr. chatterjee has next companytended that s. 7 of the act
clearly empowers a police officer number below the rank of an
officer-in-charge of a police station to enter search and
seize in the manner provided in the said section. it is mr.
chatterjees companytention that the searches have been carried
out duly in terms of the provisions companytained in the said
section and cash money and other books and documents have
been lawfully seized in terms of the provisions companytained in
the said section. mr. chatterjee has further submitted that
even if there had been any irregularity in the matter of
searches and seizure the searches and seizure are number
rendered illegal and void as a result thereof. various
decisions were also referred to by mr. chatterjee in support
of his submissions. mr. a.k. sen learned companynsel appearing on behalf of
the firm has submitted that the learned judge on a proper
consideration of all the relevant materials and the
provisions of the act has companyrectly companye to the companyclusion
that numberoffence under the act is disclosed and the act has
numberapplication to the firm and in that view of the matter
the learned judge was perfectly justified in quashing the
proceeding against the firm and in directing the return of
the documents and cash money seized by the police to the
firm. mr. sen has argued that investigation has to be done
when an offence is disclosed for companylecting materials for
establishing an offence. it is the argument of mr. sen that
if numberoffence is disclosed there cannumber be any investigation
and any investigation when numberoffence is disclosed by the

i.r. and the other materials
means unnecessary harassment for the firm and its partners
and illegal and improper deprivation of their liberty and
property. mr. sen submits that it is numberdoubt true that when
an offence is disclosed the companyrt numbermally does number
interfere with the investigation into an offence. he
however companytends that when numberoffence is disclosed it
indeed becomes the duty of the companyrt to interfere with any
investigation which is improperly and illegally carried on
to the serious prejudice of the persons. in support of this
contention mr. sen has referred to the decision of the
judicial companymittee in the case of king emperor v. khwaja
nazir ahmed  supra  and has relied on the following
observations at p. 213
numberdoubt if numbercognizable offence is disclosed
and still more if numberoffence of any kind is
disclosed the police would have numberauthority to
undertake investigation. in this companynection mr. sen also referred to the
decision of this companyrt in the case of r.p. kapur v. state of
punjab and has placed very strong reliance on the following
observations at p. 393
cases may also arise where the allegations in the
first information report or the companyplaint even if
they are taken at their face value and accepted in
their entirety do number companystitute the offence
alleged in such cases numberquestion of appreciating
evidence arises it is a matter merely of looking
at the companyplaint or the first information report
to decide whether the offence alleged is disclosed
or number. in such cases it would be legitimate for
the high companyrt to hold that it would be manifestly
unjust to allow the process of the criminal companyrt
to be issued against the accused person. mr. sen has also referred to the decision of this companyrt in
jehan singh v. delhi administration in which the aforesaid
observations made by gajendragadkar j. in the case of r.p. kapur v. state of punjab  supra  have been reproduced and
reiterated. mr. sen
further points out that in the case of s.n. sharma v. bipin
kumar tiwari  supra  this companyrt at p. 951 recognises that
in appropriate cases the aggrieved person can always seek
remedy by invoking powers of the high companyrt under art. 226
of the companystitution under which if the high companyrt companyld be
convinced that the power of investigation has been exercised
by a police officer mala fide the high companyrt can always
issue a writ of mandamus restraining the police officer from
misusing his legal powers. mr. sen has argued that the learned judge having
properly appreciated the legal position has made the companyrect
approach to the companysideration of the present case. it is his
argument that the learned judge has carefully companysidered the
materials which have been placed before him including the

i.r. and he has properly analysed the provisions of the
act and on a proper interpretation of the act and on a
proper appreciation of the materials which were there before
the learned judge the learned judge has companye to the
conclusion that numberoffence under the act is disclosed and
the act has numberapplication to the firm. mr. sen argues that
for a proper appreciation of the question whether the
materials disclose any offence under the act it is
imperative to interpret the act. he companytends that it will
number be a proper approach to leave the question of
interpretation to the stage after the investigation is
complete as according to mr. sen there can be no
investigation unless an offence has been disclosed. mr. sen
argues that if the materials do number disclose any offence no
investigation can be permitted to find out whether as result
of the investigation an offence may be disclosed or number. mr.
sen submits that investigation can legitimately go on once
an offence is disclosed for companylecting materials for
establishing and proving the offence. it is the companytention
of mr. sen that the case of the-appellants is that the firm
is companyducting money circulation scheme which is banned by
the act. mr. sen argues that to find out whether the firm is
conducting a money circulation scheme it is necessary to
consider what a money circulation scheme is within the
meaning of the act and to find out whether on the materials
alleged in the f.i.r and also in the affidavits it can be
said that the business carried on by the firm is one in the
nature of companyducting a money circulation scheme. mr. sen has
argued that the learned judge in his judgment has companyrectly
interpreted what companystitutes money circulation scheme
within the meaning of the act and it is the argument of mr.
sen that such interpretation is absolutely essential to find
out whether the allegations made in the f.i.r. make out
a case that the firm is companyducting a money circulation
scheme. mr. sen submits that the materials on record
including the allegations made in the f.i.r. even if they
are all assumed to be companyrect do number go to show that the
firm is companyducting a money circulation scheme and in that
view of the matter there can be numberinvestigation if no
offence under the act is disclosed. analysiag the f.i.r. and
the other materials which have been placed before the companyrt
mr. sen submits that the materials go to indicate- 1  that
the firm is accepting deposits or loans from the public for
a term against loan certificates which stipulate payment of
interest 12  2  though interest is stipulated to be paid
12 the firm in fact is paying interest at a much
higher rate. it used to pay interest 48 previously and is
number paying interest 36. the amount of interest paid in
excess of the stipulated rate of 12 is paid in cash in a
clandestine manner to the depositors. the excess amount of
interest paid is number accounted for and results in
accumulation of black-money  3  the firm invests the monies
received from the depositors in high risk investments
earning huge amount of unaccounted profits. the investments
made by the firm and the earnings from the investments made
also result in generation of black-money  4  because of the
allurement of high rate of interest offered to the
depositors a major part of which is given in unaccounted
black-money the firm which has a share-capital of about rs. 7000 only has received deposits over crores of rupees. it is the companytention of mr. sen that even if all these
allegations which are there in the f.i.r. and also in the
other materials which have been placed before the companyrt are
accepted to be companyrect the said allegations do number go to
show that the firm is companyducting a money circulation scheme
and do number disclose any offence under the act. mr. sen in
this companynection has companymented that though in the f.i.r. it
has been alleged that the firm is carrying on business of
promoting prize chits numbersuch case was sought to be made
out before the learned judge or before this companyrt and there
are numberallegations or materials to show that the firm is
carrying on business of promoting prize chit and the only
case that has been sought to be made before the trial companyrt
and also this companyrt is that the firm is carrying on business
of companyducting or promoting money circulation scheme. mr. sen
has argued that the money circulation scheme has been
defined in s. 2  c  of the act to mean any scheme by
whatever name called for the making of quick or easy money
or for the receipt of any money or valuable thing as the
considera-
tion for a promise to pay money on any event or companytingency
relative or applicable to the enrollment of members into the
scheme whether or number such money or thing is derived from
the entrance money of the members of such scheme or
periodical subscription. according to mr. sen the
essential requirements of a money circulation scheme are  1
there must be a scheme for the making of quick or easy money
on any event of companytingency relative or applicable to the
enrollment of members into the scheme whether or number such
money is derived from the entrance money of the members of
such scheme or periodical subscription or  2  there must be
a scheme for the receipt of any money or valuable thing as
the companysideration for promise to pay money on any event or
contingency relative or applicable to the enrollment of
members into a scheme whether or number such money or thing is
derived from the entrance money of the members of such
scheme or from periodical subscription. mr. sen submits that
neither f.i.r. number any of the other materials go to show
that the business carried on by the firm is in any way in
the nature of companyducting or promoting a money circulation
scheme. in this companynection mr. sen has drawn our attention
to the statement of objects for the passing of this
enactment. mr. sen has further submitted that this enactment
which is in the nature of penal one has to be companystrued in
the event of doubt or ambiguity in a manner beneficial to
the party against whom any accusations is made. mr. sen has further argued that the rules framed under
the act can also be taken into companysideration for proper
interpretation of the act and the learned judge in the
instant case was justified in referring to the rules in
construing the provisions of the act. in this companynection mr.
sen has referred to the decision in ex parte wier in re wier
and has relied upon the following observations at p. 879
we do number think that any other section of the act
throws any material light upon the proper companystruction
of this section and if the question had depended upon
the act alone we should have had great doubt what the
pro per companystruction was but we are of opinion that
where the companystruction of the act is ambiguous and
doubtful on any point recourse may be had to the rules
which have been
made by the lord chancellor under the authority of the
act and if we find that in the rules any particular
construction has been put on the act that it is our
duty to adopt and follow that companystruction. mr. sen in this companynection has drawn our attention to the
relevant rules and he has argued that the rules leave no
room for doubt that the act has numberapplication to the firm
and numberoffence under the act has been disclosed by the firm. mr. sen has submitted that the companystruction of the act by
the learned judge is companyrect and it is his submission. that
in view of the provisions of the act properly interpreted
there cannumber be any doubt that the act has numberapplication to
the interest case and there can be numberquestion of any
violation of the said act by the firm. it is the submission
of mr. sen that the approach and the reasoning of the
learned judge are both sound. mr. sen has next companytended
that the search and seizure carried on in the instant case
are also illegal and unjustified. it is the argument of mr.
sen that if numberoffence under the act is disclosed and the
act has numberapplication there cannumber be any question of any
search or seizure under the act. mr. sen has argued that the
search and seizure. done in the instant case have also number
been done in companyfirmity with the provisions of law. mr. sen
has submitted that learned judge has companyrectly companye to the
conclusion that the search and seizure in the instant case
were also illegal. in this companynection mr. sen referred to a
number of decisions. mr. ray and mr. sibal who followed mr. sen mainly
adopted the submissions made by mr. sen. mr. ray further
contended that to be a chit fund or to be a money
circulation scheme an element of uncertainty or luck is
essential. it is the argument of mr. ray that in so far as
the transactions carried on by the firm in the instant case
are companycerned the said element is numberwhere there. mr. ray
in this companynection referred to the definition of
conventional chit and has argued that the companyventional chits
have number been brought within the purview of this act. mr.
ray has drawn our attention to the decision of this companyrt in
the case of srinivasa enterprises v. union of india in which
the validity of the act came to be challenged in this companyrt
and was upheld by this companyrt. the appeal before us has been argued at great length. a
number of decisions have also been cited from the bar. i
have already referred to some of the decisions which were
cited before us. i do number propose to companysider all the case
which were referred to in the companyrse of argument by the
learned companynsel appearing on behalf of the parties as i do
number companysider the same to be necessary. as i have already
stated that the matter appears to have been elaborately
argued before the learned trial judge who in his judgment
has fully set out the relevant facts and circumstances of
the case has numbered the arguments which were advanced before
him and the learned judge has also referred to a number of
decisions. i may however numbere that mr. chatterjee
appearing on behalf of the appellants has made a grievance
before us that some of the decisions cited by him have number
been companysidered by the learned judge. though the matter has
been argued at great length yet to my mind the case
appears to rest in a fairly short companypass. in my opinion the legal position is well-settled. the
legal position appears to be that if an offence is
disclosed the companyrt will number numbermally interfere with an
investigation into the case and will permit investigation
into the offence alleged to be companypleted if however the
materials do number disclose an offence numberinvestigation
should numbermally be permitted. the observations of the
judicial companymittee and the observations of this companyrt in the
various decisions which i have earlier quoted make this
position abundantly clear. the prepositions enunciated by
the judicial companymittee and this companyrt in the various
decisions which i have earlier numbered are based on sound
principles of justice. once an offence is disclosed an
investigation into the offence must necessarily follow in
the interests of justice. if however numberoffence is
disclosed an investigation cannumber be permitted as any
investigation in the absence of any offence being
disclosed will result in unnecessary harrassment to a
party whose liberty and property may be put to jeopardy for
numberhing. the liberty and property of any individual are
sacred and sacrosanct and the companyrt zealously guards them
and protects them. an investigation is carried on for the
purpose of gathering necessary materials for establishing
and proving an offence which is disclosed. when an offence
is disclosed a proper investigation in the interest of
justice becomes necessary to companylect materials for
establishing the offence and for bringing the offender to
book. in the absence of a proper investigation in a case
where an offence is disclosed the offender may succeed in
escaping from the companysequen-
ces and the offender may go unpunished to the deteriment of
the cause of justice and the society at large. justice
requires that a person who companymits an offence has to be
brought to book and must be punished for the same. if the
court interferes with the proper investigation in a case
where an offence has been disclosed the offence will go
unpunished to the serious deteriment of the welfare of the
society and the cause of the justice suffers. it is on the
basis of this principle that the companyrt numbermally does number
interfere with the investigation of a case where an offence
has been disclosed. the decision on which mr. chatterjee has
relied are based on this sound principle and in all these
cases an offence had been disclosed. relying on the well-
settled and sound principle that the companyrt should number
interfere with an investigation into an offence at the stage
of investigation and should allow the investigation to be
completed this companyrt had made the observations in the said
decisions which i have earlier quoted reiterating and
reaffirming the sound principles of justice. the decisions
relied on by mr. chatterjee do number lay down as it cannumber
possibly be laid down as a broad proposition of law that an
investigation must necessarily be permitted to companytinue and
will number be prevented by the companyrt at the stage of
investigation even if numberoffence is disclosed. while
adverting to this specific question as to whether an
investigation can go on even if numberoffence is disclosed the
judicial companymittee in the case of king emperor v. khwaja
nizam ahmed  supra  and this companyrt in r.p. kapur v. state of
punjab  supra  jehan singh v. delhi administration  supra

n. sharma v. bipin kumar tiwari  supra  have clearly laid
down that numberinvestigation can be permitted and have made
the observations which i have earlier quoted and which were
relied on by mr. sen. as i have earlier observed this
proposition is number only based on sound logic but is also
based on fundamental principles of justice as a person
against whom numberoffence is disclosed cannumber be put to any
harassment by the process of investigation which is likely
to put his personal liberty and also property which are
considered sacred and sacrosanct into peril and jeopardy. whether an offence has been disclosed or number must
necessarily depend on the facts and circumstances of each
particular case. in companysidering whether an offence into
which an investigation is made or to be made is disclosed
or number the companyrt has mainly to take into companysideration the
complaint or the f.i.r. and the companyrt may in appropriate
cases take into companysideration the relevant facts and
circumstances of the case. on a companysideration of all the
relevant
materials the companyrt has to companye to the companyclusion whether
an offence is disclosed or number. if on a companysideration of the
relevant materials the companyrt is satisfied that an offence
is disclosed the companyrt will numbermally number interfere with the
investigation into the offence and will generally allow the
investigation into the offence to be companypleted for
collecting materials for proving the offence. if on the
other hand the companyrt on a companysideration of the relevant
materials is satisfied that numberoffence is disclosed it will
be the duty of the companyrt to interfere with any investigation
and to stop the same to prevent any kind of uncalled for and
unnecessary harassment to an individual. in the instant case the offence companyplained of is
violation of the act. for a proper adjudication of the case
and for a proper appreciation of the question it
therefore becomes necessary to companysider the relevant
materials and also the provisions of the act for being
satisfied as to whether the relevant materials go to
indicate any violation of the act and disclose any offence
under the act. the materials are mainly companytained in the

i.r. which has been earlier set out in its entirety. an
analysis of the f.i.r. mentions the following allegations on
the basis of which the said f.i.r. has been lodged -

sanchaita investments is a partnership firm. its
partners are behari prasad murarka sri sambhu
mukherjee and sri swapan kumar guha the firm was
started in and around 1975.

the firm had been offering fabulous interest 48
to its members until very recently. the rate of
interest has of late been reduced to 36 per
annum. such high rate of interest were and are being paid
even though the loan certificate receipts show
rate of interest to be 12 only. thus the amount in excess of 12 so paid clearly
shows that money circulation scheme is being
promoted and companyducted for the making of quick
and or easy money prizes and or gifts

prizes or gifts in cash are also being awarded to
agents promoters and members too. in view of the above sarvshri behari prasad
murarka sambhu mukherjee and swapan kumar guha
appears to have been carrying on the business in
the trade name of sanchaita investments in prize
chits and money circulation scheme in violation of
s. 2 of the prize chits and money circulation
scheme  banning  act 1978.
the other materials are companytained in paragraphs 6 7
8 9 22 27 and 30 of the affidavit and the two documents
namely the article published in the newspaper business
standard dated 1611.1980 and the documents seized in the
course of searches. i have earlier set out in extenso the
statement made in the said paragraphs of the affidavit filed
on behalf of the state. a companyy of the article has been
enclosed to the affidavit filed on behalf of the state. the
document seized in the companyrse of searches and handed over to
court in the companyrse of the arguments was a letter addressed
by an officer of the air force to the firm in which the
officer makes a grievance that the firm which was paying
interest 48 has number reduced the same to 36 in view of
advances made to political parties. the letter further
records the fact that the firm hopes to pay the enhanced
rate of interest of 48 in the near future. an analysis of
these materials suggest that the firm is carrying on
activities of accepting deposits from the members promising
to pay them interest on such deposits at an agreed rate of
12 as stipulated in the loan certificate but in fact it
has been paying interest to them at much higher rate of
interest the materials further indicate that the firm is
making high risk investments of the monies received from the
depositors and has also been advancing monies to political
parties. the crux of question is whether these allegations
disclose an offence under the act namely violation of s. 3
of the act even if all these allegations are deemed to be
correct. the question whether these allegations disclose an
offence under the act and can be the basis for any suspicion
that an offence under s. 3 of the act has been companymitted or
number must necessarily depend on the provisions of the act
and its proper interpretation. the act has been enacted for implementing the
recommendations of a study group of the reserve bank of
india under the
chairmanship of shri james s. raj the then chairman of the
unit trust of india companystituted for examining in depth the
provisions of chapter iiib of the reserve bank of india act
1934 and the directions issued thereunder to number-banking
companies in order to assess their adequacy in the companytext
of ensuring the efficacy of the monetary and credit policies
of the companyntry and affording a degree of protection to the
interests of the depositors who place their savings with
such companypanies. paragraph 2 of the statement of objects and
reasons of the act states
prize chits would companyer any kind of arrangement
under which moneys are companylected by way of
subscriptions companytributions etc. and prizes gifts
are awarded. the prize chit is really a form of
lottery. its basic feature is that the foreman or
promoter who ostensibly charges numbercommission companylects
regular subscriptions from the members. once a member
gets the prize he is very often number required to pay
further instalments and his name is dropped from
further lots. the institutions companyducting prize chits
are private limited companypanies with a very low capital
base companytributed by the promoters directors or their
close relatives. such schemes companyfer monetary benefit
only on a few members and on the promoter companypanies. the group had therefore recommended that prize chits
or money circulation schemes by whatever name called
should be totally banned in the larger interests of the
public and suitable legislative measures should be
undertaken for purpose. the relevant portion of paragraph 3 of the statement of
objects and reasons reads as follows-
the bill proposes to implement the above
recommendation of the group by providing for the
banning of the promotion or companyduct of any prize chit
or money circulation scheme by whatever name called
and of the participation of any person in such chit or
scheme. the bill provides for a period of two years
within which the existing units carrying on the
business of prize chits or money circulation schemes
may be wound up and provides for penalties and other
incidental matters. it is therefore clear that the main object of the act is
to ban promotion or companyduct of any prize chit or money
circulation scheme by whatever name called and of the
participation of any person in such chit or scheme. s. 2 of
the act deals with definitions. money circulation scheme is
defined in s. 2  c  in the following words-
money circulation scheme means any scheme by
whatever name called. for the making of quick or easy
money or for the receipt of any money or valuable
thing as the companysideration for a promise to pay money
on any event or companytingency relative or applicable to
the enrollment of members into the scheme whether or
number such money or thing is derived from the entrance
money of the members of such scheme or periodical
subscriptions. prize chit is defined in s. 2  e  in the following
terms-
prize chit includes any transaction or
arrangement by whatever name called under which a
person companylects whether as a promoter foreman agent
or in any other capacity monies in one lump sum or in
instalments by way of companytributions or subscriptions or
by sale of unit certificates or other instruments or
in any other manner or as membership fees or admission
fees or service charges to or in respect of any
savings mutual benefits thrift or any other scheme or
arrangement by whatever name called and utilises the
monies so companylected or any part thereof cr the income
accruing from investment or other use of such monies
for all or any of the following purposes namely-

giving or awarding periodically or otherwise to a
specified number of subscribers as determined by
lot draw or in any other manner prizes or gifts
in cash or in kind whether or number the recipient
of the prize or gift is under a liability to make
any further payment in respect of such scheme or
arrangement

refunding to the subscribers or such of them as
have number won any prize or gift the whole or part
of the subscriptions companytributions or other
monies companylected with or without any bonus
premium interest or other advantage by whatever
name called on the termina-
tion of the scheme or arrangement or on or after
the expiry of the period stipulated therein but
does number include a companyventional chit. a companyventional chit which is specifically excluded in
the definition of prize chits in s. 2  c   ii  is defined in
s. 2  a  as follows -
conventional chit means a transaction whether
called chit chit fund kuri or by any other name by or
under which a person responsible for the companyduct of the
chit enters into an agreement with a specified number
of persons that every one of them shall subscribe a
certain sum of money  or certain quantity of grain
instead  by way of periodical instalments for a
definite period and that each subscriber shall in his
turn as determined by lot or by auction or by tender
or in such other manner as may be provided for in the
chit agreement be entitled to a prize amount. s. 3 of the act the violation of which alleged reads-
numberperson shall promote or companyduct any prize chit
or money circulation scheme or enrol as a member to
any such chit or scheme or participate in it
otherwise or receive or remit any money in pursuance
of such chit or scheme. s. 7 of the act provides

it shall be lawful for any police officer number
below the rank of an officer in charge of a police
station
 a  to enter if necessary by force whether by day or
night with such assistance as he companysiders
necessary any premises which he has reason to
suspect are being used for purposes companynected
with the promotion or companyduct of any prize chit or
money circulation scheme in companytravention of the
provisions of this act
 b  to search the said premises and the persons whom
he may find therein
 c  to take into custody and produce before any
judicial magistrate all such persons as are
concerned or against whom a companyplaint has been
made or credible information has been received or
a reasonable suspicion exists of their having been
concerned with the use of the said premises for
purposes companynected with or with the promotion or
conduct of any such prize chit or money
circulation scheme as aforesaid
 d  to seize all things found in the said premises
which are intended to be used or reasonably
suspected to have been used in companynection with
any such prize or money circulation scheme as
aforesaid. any officer authorised by the state government
may-
 a  at all reasonable times eater into and search any
premises which he has reason to suspect are being
used for the purposes companynected with or companyduct
of any prize chit or money circulation scheme in
contravention of the provisions of this act
 b  examine any person having the companytrol of or
employed in companynection with any such prize chit
or money circulation scheme
 c  order the production of any documents books or
records in the possession or power of any person
having the companytrol of or employed in companynection
with any such prize chit or money circulation
scheme and

all searches under this section shall be made
in accordance with the provisions of the companye of
criminal procedure 1973.
s. 13 companyfers necessary powers to make rules and reads
as under-

the state government may by numberification in
the official gazette and in companysultation with the
reserve bank make rules for the purpose of carrying
out the provisions of the act. in particular and without prejudice to the
generality of the foregoing power such rules may
provide for-
 a  the office of the reserve bank to whom full
information regarding any prize chit or money
circulation scheme may be furnished under the
first proviso to sub section  1  of section 12
and the form in which and the period within which
such information may be furnished
 b  the particulars relating to the winding up plan of
the business relating to prize chits or money
circulation schemes. the companyplaint alleges violation of s. 3 of the act. in
other words the companyplaint is that the firm is promoting or
conducting a prize chit or a money circulation scheme. the
definition of prize chit has been earlier set out. i have
also earlier analysed the f.i.r. and the other materials on
the basis of which the companyplaint is made and the materials
which have been placed before the companyrt. the materials do
number indicate any thing to disclose that the firm is
promoting or companyducting any prize chit. i may also here numbere
that numberarguments have been advanced on behalf of the
appellants that the firm is promoting or companyducting any
prize chit and in my opinion rightly as the allegations
do number give any indication whatsoever of any case of a prize
chit being promoted or companyducted by the firm. the argument
on behalf of the appellants has been that the firm is
promoting or companyducting a money circulation scheme. though
the statement of objects and reasons of the act may suggest
that the prize chit and a money circulation scheme are more
or less of like nature yet in view of the separate
definitions of these two being given in cl. 2 of the act and
in view of the further fact that s. 3 speaks of prize chit
or money circulation scheme each of the aforesaid must be
considered to be separate and distinct for the purposes of
the act and promoting or companyducting either prize chit or
any money circulation scheme or both must be held to he an
offence under the act. i shall number proceed to companysider whether the materials
disclose that the firm is promoting or companyducting a money
circulation scheme i have already set out the definition of
money circulation scheme
as given in s. 2  c  of the act. on a plain reading of the
said definition the requirements of a money circulation
scheme are

there must be a scheme

there must be members of the scheme

the scheme must be for the making of quick or easy
money on any event or companytingency 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 companytingency relative or applicable to
enrollment of members into the scheme

the event of companytingency relative or applicable to
the enrollment of members into the scheme will
however number he in any way affected by the fact
whether or number such money or thing is derived from
the entrance money of the members of such scheme
or periodical subscription. on a proper interpretation of this definition it
clearly appears that the companydition in the said definition
on any event or companytingency relative or applicable to the
enrollment of members into the scheme whether or number such
money or thing is derived from the entrance money of the
members of such scheme or periodical subscription qualifies
both the provisions companytained therein namely  i  money
circulation scheme means a scheme by whatever name called
for the making of quick or easy money  ii  or money
circulation scheme means any scheme for the receipt of any
money or valuable thing as the companysideration for the promise
to pay money. taking into companysideration the language used in
the section and particularly the two companymas one after the
words easy money and the other after the words pay
money it becomes clear that this stipulation is intended
to companyer both and the interpretation companytended for by mr.
chatterjee that the further provision in the definition
namely on any event or companytingency relative or applicable
to the enrollment of members into the scheme whether or number
such money or thing is derived from entrance money of such
scheme or periodical subscription applies only to the
second part namely money circulation scheme means any
scheme by whatever name called for the receipt
of any money or valuable thing as the companysideration for a
promise to pay money is number sound . on this
interpretation of mr. chatterjee the provision in the
definition namely money circulation scheme means any
scheme by whatever dame called for the making of quick or
easy money will indeed become vague and meaningless. for properly appreciating whether the offence of
promoting or companyducting a money circulation scheme is
disclosed or number it becomes necessary to companysider whether
the materials even if they are all accepted to be companyrect
indicate that the business carried on by the firm satisfies
the requirements of money circulation scheme and disclose an
offence under the act. the materials show that the firm accepts loans or
deposits from general public for a term against loan
certificates which stipulate payment of interest 12.
materials also indicate that the firm pays stipulated amount
of interest and further pays a much larger amount of
interest in a clandestine manner to the persons who invest
their monies in the firm against loan certificates. the
materials further indicate that the persons who have
invested their monies with the firm against loan
certificates used to receive in fact the stipulated amount
of interest 12 and also used to receive an additional sum
as further interest 36 in a clandestine manner. the
materials also indicate that this further rate of interest
36 paid clandestinely in additional to the stipulated rate
of 12 has been reduced number to 24 because of investments
by the firm with political parties. in other words the
materials go to show that though the rate of interest
stipulated in the loan certificate was 12 the firm used to
pay altogether interest 48 previously and is number paying
interest 36 inclusive of payment of interest stipulated
in the loan certificate. the materials also indicate that
the firm invest the deposits or loans received from the
general public in high risk investments. the materials
however do number show that the payment of interest at the
stipulated rate of 12 or at any enhanced rate in excess of
the stipulated rate depends on any event or companytingency or
relative or applicable to the enrollment of any new
depositors. the materials also do number indicate that the firm
makes any discrimination in the matter of payment of
interest to its depositors. the materials also do number
indicate that the payment of interest to the depositors
whether at the stipulated rate or at the enhanced rate is
dependent on any element of chance and the
materials do number indicate that any kind of gifts is made by
the firm to the depositors in addition to the payment of
interest. the first question that requires to be companysidered is
whether these materials go to indicate that there is any
scheme the word scheme has number been defined in the act. the word scheme however has been defined in the rules
in cl. 2  g  thereof. cl. 2  g  of the rules state that a
scheme means a money circulation scheme or as the case may
be a prize chit as defined in cl.  c  and  e  respectively
of s. 2. the word scheme as companytemplated in s. 2  c  of
the act is therefore to be money circulation scheme within
the meaning of the act. to be a money circulation scheme a
scheme must be for the making of quick or easy money on any
event or companytingency relative or applicable to the
enrollment of the members into the scheme. the scheme has
necessarily to be judged as a whole both from the view point
of the promoters and also of the members. even if it be
assumed that the firm may be companysidered to be the promoter
and the persons who invest their monies in the firm are
members the question has still to be companysidered whether
investments of the monies with the firm in expectation of
getting interest 48 and a big part of it in black in
clandestine manner can be said from the view point of the
depositors that the investment is for the making of quick or
easy money. if any individual invests is money in
expectation of getting a high return say 50 or more and
there is numberhing clandestine in the transaction which is
above board can it be said that the investment is for
making easy money or quick money ? various individuals may
invest their monies in their business which may yield very
high profits. many individuals also may indulge in
speculative business in expectation of high return of their
money and may succeed or may number succeed in speculative
transactions. if such transactions are made openly and number
in violation of any law i have numberdoubt in my mind that it
can never be said that such investment has been made for
making quick or easy money and such transactions can never
come within the scheme for making easy or quick money as
enumerated in the act. the further question that however
arises for companysideration is whether the position will be any
different if a part of the transaction is number above board
and is secretive in nature. to my mind that will number make
any difference and the transaction cannumber be companysidered to
be a scheme for the making of quick or easy money though
the transaction may offend against revenue laws or any other
law. transactions in black money do number companye within the
mischief of this act. judged from the point of view of the
depositors it cannumber therefore be said that their
investment in the firm for high return by way of interest
part of which is above board and a part of which is
clandestine will form any part of a scheme for making easy
or quick money. it is further to be numbered that this return
on investment by way of interest is number dependent on any
event or companytingency whatsoever and has numberhing to do with
any event or companytingency relative or applicable to the
enrollment of any new members even if the depositors be
assumed to be members. judged from the point of view of the firm there is
numberhing to indicate that the firm makes any investment in
consultation with its depositors. the materials only
indicate that the firm indulges in high risk investments and
also advances monies to political parties. neither of these
acts appears to be illegal and they do number go to show that
the firm makes easy or quick money. lt is numberdoubt true that
the materials go to show that the firm plays a larger amount
by way of interest than payable on the basis of the rates
stipulated in the loan certificate and the firm pays the
excess amount of interest to the depositors in a clandestine
manner. the clandestine manner of payment of interest in
excess of the stipulated rate does number in any way indicate
the existence of any scheme for making quick or easy money. it is again to be pointed out that in any event the mate
rials do number indicate that the payment of interest by the
firm in excess of the stipulated rate is in any way
dependent on any event or companytingency. there is numberhing to
indicate any scheme for the receipt of the money by the firm
from its depositors as a companysideration for promise to pay
the interest in excess of the stipulated rate and also to
pay back principal amount on the expiry of the term
dependent in any way on any event or companytingency relative or
applicable to the enrollment of new depositors companysidering
the depositors to be members. i am therefore of the
opinion that number any of the requirements of a money
circulation scheme is satisfied in the instant case. as
there is numbermoney circulation scheme there can be numberscheme
as companytemplated in the act in view of the definition of
scheme in the rules. the materials appear to disclose
violation of revenue laws. they however do number disclose
any violation of the act. the materials do number disclose that
the firm is promoting or companyducting money circulation scheme
and the question therefore of
any violation of s. 3 of the act does number arise in the
instant case. as the firm is number companyducting or promoting a
money circulation scheme and as numbercase is made that the
firm is companyducting or promoting a chit fund the act cannumber
be said to be applicable to the firm. in my opinion it does
number become necessary to refer to the rules for companying to the
conclusion. i may however add that a companysideration of the
rules also clearly lends support to the companyclusion to which
l have companye. i find that the learned judge has very
carefully and elaborately companysidered all the aspects in his
judgment and in the companyrse of elaborate discussion he has
numbered all the companytentions raised by the parties and has
carefully companysidered them. the learned judge on a careful
consideration of all aspects and on a proper interpretation
of the act has expressed the view that numberoffence under the
act is disclosed against the firm which does number companyduct or
promote money circulation scheme or a chit fund and the act
has numberapplication to the firm. it may also be numbered that
the learned judge has also in his judgment referred to the
report of the reserve bank and the opinion of the learned
advocate general of the state which lent support to the view
taken by the learned judge. the view expressed by the
learned judge that the materials do number disclose that the
firm is promoting or companyducting a money circulation scheme
and the act has therefore numberapplication to the firm meets
with my approval and i agree with the same. before companycluding it will be proper to refer to the
decision of this companyrt in the case of srinivas enterprises

union of india which were relied on before the learned
judge and has been companysidered by me. in this case the
validity of the act was challenged before this companyrt while
upholding the validity of the act for reasons stated in the
judgment krishna iyer j. who spoke for the bench observed
at p. 514 as follows-
in many situations the poor and unwary have to
be saved the seducing processes resorted by
unscrupulous racketeers who glamourize and prey upon
the gambling instinct to get rich quick through prizes. so long as there is the restless spell of a chance
though small of securing a prize though on paper
people change. the prospect by
subscribing to the speculative scheme only to lose what
they had. can you save moths from the fire except by
putting out the fatal flow ? once this prize facet of
the chit scheme is given up it becomes substantially a
conventional chit and the ban of the law ceases to
operate. we are unable to persuade ourselves that the
state is wrong in its assertion based upon expert
opinions that a companyplete ban of prize chits is an
overall or excessive blow. therefore we decline to
strike down the legislation on the score of article 19
 1   f   and  g  of the companystitution. as i have earlier numbericed the materials in the instant
case do number disclose any element of chance in the matter of
business carried on by the firm. it may however be said
that these observations which were made while dealing with a
case of chit fund are number of very great assistance while
considering what may be a money circulation scheme within
the meaning of the act. as numberoffence under the act is at all disclosed it
will be manifestly unjust to allow the process of criminal
code to be issued or companytinued against the firm and to allow
any investigation which will be clearly without any
authority. in the view that i have taken i do number companysider it
necessary to deal with other aspects namely as to whether
the searches and seizures were lawfully and properly done. i therefore hold that the proceedings against the
firm and its partners arising out of the f.i.r. must be
quashed as the f.i.r. and the other materials do number
disclose any offence under the act and as such no
investigation into the affairs of the firm under the act can
be permitted or allowed to be companytinued. i accordingly
quash the proceedings against that firm and its partners and
order that numberinvestigation under the act into affairs of
the firm is to be carried on or companytinued.