“Though the Trial Court, in its judgment, mentioned that the accused availed a loan by Indian Bank, it has not considered the same as income. Therefore, the Trial Court has erred in not considering the loans as income.”
That was Justice Kumaraswamy of the Karnataka High Court, on page 916 of his judgment, while ruling that former Tamil Nadu Chief Minister Jayalalitha had not amassed assets disproportionate to her known sources of income.
Are loans income, then? That seems to go against every canon of Double Entry Book Keeping — the bedrock of modern accounting theory. Of course, a borrower who has no intention of repaying a loan has every reason to regard the loan as free money, or ‘income’. The promoters of Saradha Chit Scheme, and many others before it, certainly didn’t worry too much about such accounting niceties as ‘Capital’ and ‘Revenue’ in classifying financial transactions. But a High Court judgment is a different matter altogether.
Whatever may be the legal merits or otherwise of the Justice Kumaraswamy order, this much can be safely said. It cannot be accused of getting accounting concepts all mixed up. To understand the connection between loans and income in the context of disproportionate assets, it is necessary to first understand the linkage between income and wealth.
Profits over a period
Imagine that you are setting up a paan and cigarette shop, with an investment of ₹1,000. Let us assume you don’t need to invest in constructing a shed or buying utensils for storing various ingredients (betel nuts, scented calcium, crushed rose petals, etc.) used in different types of paan.
So, at the beginning of day 1, you start with ₹1,000. You go to the market buy betel leaves, zarda, and other cartons of cigarettes costing exactly ₹1,000. Soon, customers come to you to buy Banarasi meetha paan, Kolkata special with zarda and packets of Wills Gold Flake. You are a conservative businessman and mark up your products by 20 per cent as profits. By evening you have exhausted all your supplies. You did not extend credit to any of your customers. Remember the old dictum, ‘In God we trust, Rest strictly cash’?
Not surprisingly, therefore, you find that the cash in your box totals ₹1,200. Common sense tells us that your business has generated a profit of ₹200. Your sales were ₹1,200 and cost of goods sold is ₹1,000 giving you a profit of ₹200. It so happens that the net change in your wealth is also ₹200.
The moral of the story is this. Profits in any particular period in a business represent the net change in the wealth of the business between the starting and end points of time in that period.
The above example is, no doubt, a highly simplified model. But the underlying concept is robust enough to validate businesses involving huge investment in plant and machinery, selling goods on credit as opposed to cash, and so on.
Income and assets
Extend the idea to individuals and the incomes earned by them in a given period of time and one could say that a person’s income in any given period is the net difference in his/her wealth between start of that period and the close of that period. Now, how is this particularly relevant in the context of the law on prevention of corruption?
Here, we must distinguish between ‘petty corruption’ of the kind indulged in by a clerk in the RTO office (something all of us are quite familiar with) and that indulged in by politicians and high-ranking members of the bureaucracy or the judiciary.
Now, if the clerk in the RTO office demands ₹5,000 to change the registration of your motor car from, say, Karnataka to Tamil Nadu, and you don’t want to pay the bribe, you could approach the vigilance and anti-corruption wing of the police and lodge your complaint. The latter would organise what, in police parlance, is called ‘a trap’. They would give you currency notes marked for this purpose to hand over to the clerk in the RTO’s office and apprehend him in the act of receiving the cash. Since these are specially marked notes the guilty act stands established in the eyes of the law.
Establishing the link
It is often quite easy to trap a petty corrupt official in the act of indulging in ‘corruption’. But when it comes to people in high places it is next to impossible to trap them at the exact point when they are earning some income from corrupt means. But if that income is the obverse of asset, which is enduring, you can go after such a person on the basis of assets that he possesses.
In other words, you don’t have to be present when a suitcase full of cash is exchanged for the grant of a liquor bottling licence in the State. But when that cash is converted into a tea estate in the high ranges of Munnar, Kerala, and you can establish a link between the entity under whose name that the tea estate now stands and the person who is a ‘public servant’ then it is ‘game, set and match’ as far as the corruption case against the public servant goes.
So, the methodology is to ascertain what the wealth of the person was at the start of some period and the wealth that he/she owns at the end of that period. It is not necessary that this period should conform to the entire period of public service. It could be any block of time. The only requirement is that during that entire period the person so accused, must have been a public servant.
The ‘Check Period’
In the Prevention of Corruption Act terminology, this period is referred to as the ‘Check Period’. The incremental wealth accumulated during the ‘Check period’ is first computed. This is then compared with the cumulative sum that the person (public servant) has earned by way of income, from known and legal means. If the net change in wealth in the ‘Check Period’ exceeds the sum total of known sources of income the difference must necessarily represent incomes earned from corrupt/illegal means.
Of course, not all the monies earned through corrupt means remain as wealth. If this corrupt official is in the habit of polishing off a bottle of the finest blend of Scotch whisky every day, then it can burn a huge hole in that income over a ‘check period’ which can be an extended one. So, further refinement is called for.
The law therefore requires that to the net difference between the two figures (incremental wealth and aggregate legal sources of income) be added, the verified and established figure of expenditure during that period to arrive at the true extent of incomes earned through corrupt/illegal means. Expenditures are to assets, what loans are to incomes in the context of a notion of ‘disproportionate assets’ from a corruption perspective.
In the case of the former Chief Minister of Tamil Nadu, the figure of disproportionate assets incorporated the expenditure incurred in celebrating her foster son’s wedding, besides purchase of jewellery and lifestyle accessories.
Two calculations
The methodology for arriving at this figure, is, however, not complete. We need to take into account any legitimate borrowings that may have contributed to the acquisition of such incremental wealth. It stands to reason that if the public servant can explain the incremental wealth as solely due to loans and other sources of external financial accommodation, there can be no presumption of having indulged in corrupt activities.
There are two ways of handling this. You could subtract the figure of borrowings from the value of incremental wealth. Alternatively, you could add it to the figure of legal sources of income. One can see that in purely arithmetical terms, it matters little whether you subtract loans from incremental wealth or add it to the figure of known sources of income. The effect remains the same.
This is the reason the Karnataka High Court judgment talks of loans as incomes which, viewed in purely accounting terms, is an anachronism but one that is eminently excusable in the current context (disproportionate assets).