Section 14 of the Chit Funds Act, 1982 - Utilisation of Funds

Section 14 restricts how money collected in a chit business may be used. Subject to the exclusions stated in the section, chit collections may be applied only to the purposes specifically permitted by law.

What does Section 14 regulate?

The Chit Funds Act, 1982 is the Central law regulating chit funds and connected matters. Section 14 forms part of Chapter II, which deals with registration, commencement and conduct of chit business. It places a statutory restriction on diversion of money collected in respect of chit business.

Section 14 - Utilisation of funds

Sub-section (1): A person carrying on chit business cannot utilise money collected in respect of that business, other than commission or remuneration payable to that person and interest or penalty received from a defaulting subscriber, except for the following permitted purposes:

carrying on chit business;
giving loans and advances to non-prized subscribers on the security of subscriptions paid by them;
investing in trustee securities within the meaning of Section 20 of the Indian Trusts Act, 1882; or
making deposits with approved banks mentioned in the chit agreement.

Sub-section (2): It addresses money that had been utilised, before commencement of the Act, for purposes other than those specified in sub-section (1). Such unrealised money was required to be realised within three years from commencement, subject to the State Government's power, in the public interest or to avoid hardship, to extend that period by further period or periods not exceeding one year in the aggregate.

Meaning and practical effect of Section 14

The provision is designed to keep subscriber-related chit money within a limited set of legally recognised uses. A chit operator cannot treat collections as unrestricted business funds. The permitted uses are linked either directly to chit operations, secured advances to non-prized subscribers, prescribed trustee securities, or deposits with approved banks identified in the chit agreement.

A non-prized subscriber is, broadly, a subscriber who has not yet received the prize amount in the chit. Section 14(1)(b) permits loans or advances to such subscribers only against the security of subscriptions already paid by them.

The expression trustee securities in Section 14(1)(c) refers to investments falling within Section 20 of the Indian Trusts Act, 1882. Because the Chit Funds Act expressly incorporates that statutory concept, the current text of Section 20 of the Indian Trusts Act should be checked when considering whether a proposed investment qualifies.

Permitted uses at a glance

Chit business: funds may be used for carrying on the chit business itself.
Secured subscriber advances: loans and advances may be made to non-prized subscribers against subscriptions paid by them.
Trustee securities: money may be invested in securities recognised under Section 20 of the Indian Trusts Act, 1882.
Approved bank deposits: deposits may be made with approved banks mentioned in the chit agreement.

Compliance point: Section 14 is a restrictive provision. Before deploying chit collections for an investment, loan or deposit, the operator should verify that the proposed use falls squarely within one of the statutory categories and is consistent with the registered chit agreement and applicable State rules.

Penalty for contravention

Section 76(1) of the Chit Funds Act includes Section 14 among the provisions whose contravention or abetment of contravention may attract criminal punishment. Accordingly, compliance with the statutory limits on utilisation of chit funds is not merely an accounting requirement.

Official legal sources

India Code - Chit Funds Act, 1982

India Code - Indian Trusts Act, 1882

Related provisions

For the surrounding statutory scheme, see Section 13 - Aggregate amount of chits, Section 15 - Alteration of chit agreement, and Section 20 - Security to be given by foreman.