Bending the law or breaking it?

As an exercise, last week we placed whatever evidence had emerged about the questionable financial dealings of Nitin Gadkari and Robert Vadra before a panel of non-partisan experts: a corporate lawyer, a former IT commissioner and a CA.

In the case of Mr Gadkari, this was not entirely a theoretical exercise, given that the 18 investor companies that have bought a majority stake in his Purti Group are being probed by tax officials and the ministry of corporate affairs. Here are some of the things our experts felt could constitute potential violations by these companies: One, by giving wrong information about their addresses and /or the identities of directors, these companies may have breached provisions of the Income Tax and Companies Act.

Two, our experts felt the maze-like nature of these companies suggests an attempt to conceal their source of income and real ownership (many of these companies are owned by each other, and by an ever-expanding common pool of other companies, making it almost impossible to determine where they got the Rs 68cr to buy shares in Purti).

And what of the more serious concern of money laundering? Almost every one on the panel said that these exhibit the behaviour of shell companies used to convert black money to white. But almost all admitted that to establish this requires ‘piercing the corporate veil’ , which is very difficult to do.

So there does seem to be scope for inquiry, perhaps even action against the companies. But what of Purti itself? Mr Gadkari (and his company’s spokesperson) at first claimed they got funds from legitimate investors, but now argue they are not aware or responsible for the malpractices of their investors/shareholders.

This argument seems flawed, given that Mr Gadkari’s personal staff are directors of some of these companies! Moreover, is it possible for a promoter to argue ignorance of who owns his company?

While this may seem like a bizarre logic to an ordinary citizen, how would the law view it? On this, our experts were divided. One of them claimed Purti could use the arms length argument to demand immunity, another said that certain sections of corporate and tax law allow the govt to go after everyone down the chain, which means not just the investor companies, but Purti as well.
In the case of Robert Vadra, our panel disagreed with the govt’s clean chit.

The Haryana bureaucrat Ashok Khemka, who was transferred for ordering an inquiry into Mr Vadra’s land deals, pointed to doubts surrounding a single transaction: the 3.5 acre plot in Manesar which Mr Vadra bought in 2008 for about Rs 7cr and sold to DLF for Rs58 cr. According to Mr Khemka, Mr Vadra may have bought the land with a ‘dud’ cheque , issued from his Corporation Bank account which didn’t have the balance. In an act of remarkable generosity, the seller didn’t cash the cheque until after the sale was registered, by which time DLF had remitted Mr Vadra an advance for the same amount. Mr Khemka suggests that this makes the registry of the sale invalid, and carries the accompanying charge of concealing information from a govt official, since it’s on the basis of a payment that wasn’t actually made.

Mr Khemka has also raised questions over why the Haryana govt continued to renew the licence for the Manesar land in Mr Vadra’s name up until 2011, even though DLF had entered into an agreement to sell in 2008 and paid him 90% of the amount much prior to that. Did Mr Vadra conceal the fact that he had sold the land to DLF when he applied for a licence extension? If so, Mr Khemka suggests that this could lead to potential action under Haryana’s land laws.

There is also a potential taxation grey area connected to this sale. Rather than pay Mr Vadra the Rs 58cr all at once, DLF paid him over a period of four years. DLF said this was linked to his getting certain clearances. But they said he got all those clearances in the first year itself. So why stagger the payments? Tax experts say it’s to allow Vadra to treat DLF’s advances as loans, rather than taxable income. This means he could invest a bulk of the amount, tax free, elsewhere, which he successfully did. Is this legal? The Congress insists it is. But our expert pointed out that the IT Act says ‘any income is liable to tax as and when it accrues, not when it’s fully realised’. And so the staggered transactions could amount to a concealment of income, which involves severe tax penalties, even prosecution.

So in balance, our experts agreed that there was enough scope for inquiry and possible action against the financial transactions of both these gentlemen. They all agreed that it may not amount to very much, but enough to singe the reputation of both individuals and the parties they represent. But by doggedly defending Mr Vadra and only acting against Mr Gadkari, the govt has undermined whatever emerges from the Purti probe. Even if those findings are genuine, the shocking double standards has allowed Mr Gadkari to play the martyr. And Mr Vadra to remain above the law. Leaving the Indian public none the wiser.