Chit fund company must prove you used service for business, not you

A chit fund refused to refund a subscriber's deposits, claiming he wasn't a 'consumer' because he used the service for business. The Supreme Court just told them: prove it.

On a May morning in 2024, a bench of two judges looked at a chit fund company that had taken monthly payments from a subscriber for years, then shut its business and kept the money — and told the company that its defence was not a magic word. The company's lawyer read out the written statement, the paper rustling in the silent courtroom, but the bench waited for evidence that never came.

When the chit fund stopped paying

In 1996, Shriram Chits (India) Private Limited — a company running a chit business — simply stopped operations. A subscriber called Raghachand Associates had been putting in monthly contributions, its cheque stubs showing the steady payments. When the company closed shop, the subscriber asked for its deposits back. The company refused. It said the subscriber owed some dues, and it had adjusted the deposits against those dues.

The subscriber did not accept this. It went to the authorities under the Chit Funds Act (the law that governs how chit businesses must operate). The Assistant Registrar of Co-operative Societies in Bangalore ruled in favour of the subscriber, ordering the company to pay. The company appealed to the Additional Registrar, who dismissed the appeal and directed the company to pay, the award letter stamped and filed.

Then the company went to the Karnataka High Court. On 16 November 2015, the High Court said something unexpected: the proceedings under the Chit Funds Act were not maintainable. Instead, the court directed the subscriber to approach the Consumer Forum — the special court that handles complaints about defective goods and deficient services. The High Court's order redirected the entire dispute, sending the subscriber back to the start with a new forum.

Three consumer forums, three losses for the company

The subscriber filed a consumer complaint. It alleged "deficiency of service" — a legal term meaning the company failed to provide the service it promised. The company's defence was simple: the subscriber was not a 'consumer' under the law.

Under Section 2(7) of the Consumer Protection Act, 2019 (and the equivalent Section 2(1)(d) of the 1986 Act), a 'consumer' is someone who hires or avails of a service for a purpose other than a 'commercial purpose'. If the service was used for business or profit-making, the person is not a consumer and cannot use the Consumer Forum.

The company argued that Raghachand Associates — a business entity — had used the chit service for commercial purposes. Therefore, it fell outside the definition of 'consumer'. The company said this in its written response to the complaint. But it did not lead any evidence to prove it. The written statement sat in the file, a bare assertion on paper, without a single document or witness to back it up.

The District Consumer Forum in Bangalore Urban District did not accept this. It allowed the complaint and ordered the company to refund the deposits with 18% interest. The company appealed to the State Consumer Disputes Redressal Commission in Bangalore. The State Commission dismissed the appeal, the order sheet showing the company's arguments rejected. The company then went to the National Consumer Disputes Redressal Commission (NCDRC) in New Delhi. On 10 March 2021, the NCDRC dismissed the revision.

The company had lost at every consumer forum. It filed a Special Leave Petition in the Supreme Court.

The question the Supreme Court had to answer

The principal legal question was straightforward: who has to prove that the service was used for a 'commercial purpose' — the company that pleads it, or the subscriber who denies it?

The company argued that the subscriber, being a business entity, must automatically be excluded from the definition of 'consumer'. The subscriber said the law does not work that way. The burden of proving the 'commercial purpose' exclusion lies on the one who asserts it — the service provider.

The Supreme Court had to interpret the exclusion clause in Section 2(7) of the Consumer Protection Act, 2019. The provision defines a 'consumer' as someone who avails of a service "for a purpose other than the commercial purpose". But it also contains an Explanation (a): "commercial purpose" does not include services availed exclusively for the purpose of earning a livelihood by means of self-employment.

So the structure is this: the general rule is that a 'consumer' is someone who uses a service for a non-commercial purpose. The exclusion removes those who use it for commercial purposes. And the livelihood exception brings some commercial users back into the definition — if they use the service to earn a living through self-employment.

The court also considered the Chit Funds Act, 1982 — specifically Sections 28 and 29, which deal with the removal of defaulted non-prized subscribers. These provisions were part of the background law, though the court did not need to rule on them directly. The Assistant Registrar's earlier award under this Act had already been set aside by the High Court, sending the dispute to the consumer forum instead.

Why the burden matters

The court applied a basic principle of evidence law: he who asserts must prove. Sections 101 and 102 of the Indian Evidence Act, 1872, say that the burden of proof lies on the person who wants the court to believe a particular fact exists. If the company says the subscriber used the service for a commercial purpose, the company must prove it.

The court also noted that the Consumer Protection Act is a beneficial legislation — a law designed to protect consumers. Beneficial laws are interpreted in favour of the person they seek to protect. If the burden were placed on the consumer, it would defeat the purpose of the Act. A consumer would have to prove a negative — that they did NOT use the service for business — which is nearly impossible.

The court cited its own earlier decisions. In Laxmi Engineering Works v. P.S.G. Industrial Institute (1995), the court had held that the burden of proving the 'commercial purpose' exclusion lies on the party who pleads it. In National Insurance Co. Ltd. v. Harsolia Motors (2023), the court had reiterated that the service provider must first establish that the service was obtained for a commercial purpose. Only then does the burden shift to the consumer to show that the livelihood exception applies.

The court also referred to Leelavathi Kirtilal Medical Trust v. Unique Shanti Developers (2020), Cheema Engineering Services v. Workmen (1997), and Paramount Digital Lab (2018) — all of which stood for the same principle. The file of precedents grew thick as the bench worked through the law.

What the court held

The Supreme Court dismissed the appeals. It held that the onus of proving the 'commercial purpose' exclusion rests on the service provider — the chit fund company — on a preponderance of probabilities (meaning, it must show it is more likely than not). Only after the service provider discharges this burden does the onus shift to the complainant to prove the livelihood exception under Explanation (a).

The court was clear: a mere plea in a written response — a statement on paper that the service was used for commercial purpose — does not discharge the burden of proof. The company must lead evidence to probabilise its claim. Saying it on an affidavit is not enough. The company in this case had done nothing more than restate its plea. It had not produced a single document or witness to show that the subscriber used the chit service for business.

"A mere plea in a written version that services were obtained for commercial purpose, without leading any evidence to probabilise the claim beyond restating it on affidavit, does not discharge the burden of proof," the bench of Justice Aravind Kumar and Justice Pamidighantam Sri Narasimha observed.

The court upheld the concurrent findings of the District Forum, State Commission, and NCDRC that there was a deficiency of service — the company had illegally terminated the chit business and refused to refund the subscription amounts.

What this means for you

For businesses that provide services — chit funds, insurance companies, builders, banks — this judgment is a clear warning. If you want to argue that your customer is not a 'consumer' because they used your service for business, you must bring evidence. A paragraph in your written statement will not save you.

For consumers — including businesses that use services for their own operations — the judgment is a shield. You do not have to prove that you are a consumer. The person who denies your consumer status must prove it.

THE PLAY: If a service provider argues you are not a consumer because of 'commercial purpose', demand that they produce evidence — documents, contracts, invoices, witness testimony — to prove it. A bare allegation in a written response is not enough.

The chit fund company kept the subscriber's money for nearly three decades. It lost at every forum. The Supreme Court ended where the subscriber began: with a refund that was owed, and a company that could not prove its defence. The file, finally closed, carried the weight of a simple principle: he who asserts must prove.