INCOME TAX CASES.

Otago Witness, Issue 2921, 9 March 1910, Page 16

INCOME TAX CASES.

DEPARTMENTAL PROSECUTION JN CHRISTCHURCH. " - CHRISTCHURCH, March 1 The income tax cases came baforeMr H. W. Bishop, stipendiary magistrate, at the Magistrate's Court this morning Informations were laid against William Bowron, George Bowron, and George John Smith, trading in partnership as Bowron Bros., of Christchurch, merchants. The first information alleged that on November 6, 1906, the defendant firm did knowingly and wilfully make a false return in writing in relation to the income of the said firm of Bowron Bros •affecting that firm's liability to taxation, by evading the full taxation in respect of income tax; (2) did knowingly and wilfully deliver a false return in writing in relation to the income" of the firm of Bowron Bros, affecting that firm's'liability to taxation. The Crown Prosecutor (Mr Stringer, E.C.) appeared for the department,' and Mr Skerrett, K.C., with Mr Anthony, appeared for defendants. Mr Skerrett took a preliminary objection, raising the question of the magis : trate's jurisdiction-to hear the case, atgu r irig that though the information was laid within the statutory period, instructions were, not given to issue the summonses till January ■: 13 last. The Magistrate, after hearing counsel's argument and Mr Stringer's reply, said that though he felt there was much in Mr Skerrett's argument he felt bound to hold that he had jurisdiction Mr Stvinger opened the case, and called evidence.

William Maurice Tyers, :\ inspector in the Land and Income" Tax Department, and the informant in the present case, stated that in June of last year he was in Christchurch, and jnade' an investigation into' the accounts of Bowron Bros. (Ltd.) and Bowron Bros. George Bowron. said that- he was not conversant with the books, and referred him to Mr Salter, and witness made an appointment for June 30, ,as Mr Salter. had' only been newly appointed. . Witness arranged with him to take the accounts of the company first. Witness saW Mr Smith about the accounts of Bowron Bras. Smith told him that prior to July 31, 1907, the date on which the firm sold out to the company, no balance sheet or profit arid loss account of any kind had ever been prepared by the firm. He explained who had kept the company's ledgers, and threw considerable doubt on their accuracy; He said that Mr M'Cutcheon had been brought from Auckland to straighten up the affairs of the firm in July, 1907, when the firm was preparing to sell, and that he was the accountant up to April or May, 1909, when he left for England. Smith said that M'Cutcheon had prepared the last 'return up to July 31, 1907, and that prior to that date he himself had prepared the return. He said that all the work sheets from which the returns had been made, including M'Cutcheon's, had been destroyed. All the stock sheets prior to July 31, 1907, had .been, destroyed. He also said that his firm did not like paying taxes any more than, other people, but had always been careful to return too much rather than too little to the department. It was witness's experience that firms of any magnitude or standing had an annual balance sheet, and he usually worked, from them. No balance sheet being available, witness had to start on the books. He looked through the ledger, and he found that Goodsirj a. former accountant, had gathered to .a ledger all the accounts which he thought would probably affect the profit and loss account into what "he called a. "transfer balances account." He had done this .for the two yeai-s ending. September, 1906, but this had not been done by "M'Cutcheon in 1907. On July 2 Salter suggested that Modlin, "auditor of the company, might have some information about the old stocks. Modlin sent down pencil notes of the stocks at 30th November, 1904, and 30th September, 1905. These stocks did not agree with the returns, but it was suggested that it might include plant. Ultimately it was found that they were true sheets, and .-did not include plant. Witness made interim reports to the Commissioner about the middle of August. Witness made his provisional assessment for the two years ended October, 1907. He left these with Smith, and suggested that the figures should be checked. There was such an enormous discrepancy between his figures and the returns that, he thought they should be looked into. The discrepancy was, roughly,, about £41,000. Their return for 1906 showed .£II,OOO odd, and his Swires showed £68.000 odd for the 10 months ended July, 1907. "The return showed a loss of £SOOO odd, and his figures showed, a profit: of £25,000 odd. At that time he put the following questions to Smith, and obtained replies. Are the ledgers kept by Goodsir the only ones? —Yes. Was there no private ledger?—No, none. i

Was there no profit and loss account before September 30, 1908?—No, none. Was there no balance sheet before July 31, 1907?—N0, none. • . ' Have all the stock sheets prior to July 31, 1907, been destroyed?—Yes. How were the returns prepared?—l got the expenses from the , accountant and filled in the purchases, sales, stocks myself.

Witness (continuing) said that towards the end. of the .month . Smith told. him that he was getting Modlin to check the assessments, and, there was a delay in getting _ Modlin to start. On the'. 30th August witness had an interview' with Smith and .Modlin..' Smith explained' that Modliri" had been auditor for firm for fire last five years. He came out from England five years ago to make inquiries into the firm's *ffairs in connection with the proposed limited liability company of Bcwron Bros. (Ltd.), which, was to em* braiie the firms cf Bowron Bros., Christ'

church, and Bowron Bros., London. He had several interviews with Modlin over the assessments That was the first occasion on which Modlin had seriously checked his figures. Witness had expressed some surprise at Modlin wanting time, and he explained that Messrs Bowron Bros, wanted him to go through the books again. Witness rectified two omissions which Modlin pointed out, and also a mistake in the books in favour of the department He did not suggest any alteration for 1906, but in connection with the 1905 accounts he explained that £2OOO should be charged as part of a, bad debt of £108,252 due from Bowron Bros., London. Modlin left for Wellington, and witness did not see him again until September 13., In, the interim witness saw George Bowron, and asked him a number of question, and got replies; Has George Bowron, William Bowron, or Smith, either separately or in any capacity together, any interest in the firm of Bowron Bros., London?—None. Were any businesslike steps taken to collect a balance from time Co time?—No. Witness also recollected that Bowron or Smith said that these large balances were not required here, and they had allowed Bowron Bros., London, the use of the money. George Bowron told himthat the business only commenced to yield large profits about 1901. The debt of £IOB,OOO was represented as surpluses due on goods sent to London to be sold through Bowron Bros., London. Certain portions included goods belonging to clients of Bowron Bros., Christchurch, but consigned by the local firm. These shipments were all drawn' against and the surpluses should have been remitted to Christchurch with the account,sales. Witness had another interview with Modlin He pointed out that it was ridiculous to claim as a deduction any portion of the £IOB,OOO which had not accrued in two year% and 10 months, ending July 31, 1907. That portion which had accrued in that period amounted in round figures to £17,000. Witness submitted certain proposals to Modlin, who agreed - that witness's figures were reasonable. The firm seemed to be absolutely astonished at witness's provisional assessment. In the course of a conversation with M°dlin and Smith, the former m&'iitioned that what was practically a balance sheet had been brought out in connection with the flotation of the London company, but Smith said that it was a statement showing what could have been done if no interest or no exchange had been payable. Witness gathered from him tnat the balance sheet was not in any sense an exact statement. Smith told Modlin that he was to confine his criticism of witness's figures to his. search in the books, and not to give his reports for witness's information. Witness never dreamt that there was an actual balance. sheet for 1905. Later on Modlin produced a balance sheet up to September 30, 1905, without a profit and loss or. revenue account. He said that he had been instructed by George Bowron to produce it. It was produced- for the purpose of controverting witness's figure. Witness saw at once from the balance sheet that the state of affairs was quite different from what had been represented to him, and he and Modlin went to see Bowron. "He told him what [Smith had said about there being no balance sheets or profit and loss accounts of any kind prepared for the firm prior to July 31, 1907. Sniith said with a sort of smile that the balance sheets must have been out of his mind. Witness asked for more information, and Bowron produced a copy of the prospectus of, the proposed company of Bowron Bros., Ltd., London. He also, got Bowron's authority to get the balance sheets from Modlin, together with any other accounts he might have. Modlin handed him the balance sheets for 1902, 1903, and 1904. Mr Skerrett objected that the balance sheets, dealing with a period prior to the commission of the alleged oifence were not admissible.

Mi- Stringer said that he wanted the balance sheets put in to prove a systematic and wilful evasion of the law. The Magistrate ruled that the documents were .admissible, and the balance sheets were put in. Witness, continuing, stated that the income returned for' 1902 was. £7429 13s 4d, and Modlin's balance sheet showed £22,751 0s sd, a difference of £15,321 7s Id. For 1903 the return showed £10,395 15s Id, and the balance sheet £22,085 17s 4d, a difference of 2s 3d. For. 1904 the"*return showed £12,860 8s Bd, and the balance sheet £20,533 18s lid, a difference of £7673 10s 3d. For 1905 the return showed £18,836 2s Bd, and the balance sheet £52,418 8s 3d, a difference of £33,582 5s 7d. In all the cases the difference was against the department. When Mr Stringer asked for the 1906 balance sheet, Mr Skerrett objected that there was no connection between it and those previous years, but the objection was over-ruled. Witness produced the return for 1906, showing £.11.895 19s 6d. Witness had no balance sheet for that year. He had asked Bowron, Smith, and Modlin for it, but was given no absolute assurance that there was no balance sheet, and that all thought none had been prepared. He made up the assessment from the books and stocks. He could get no absolute assurance that there had been a stock-taking on September 30, 1906. He estimated that the stock on hand at that date was under-returned to the department in the same proportion as in the previous year. Modlin's balance sheet for 1905 showed that the stock that year was more than that given on the return by about. £17,000. The , return showed £72,562 3s 2d, and . the balance sheet £89,779' 14s 3d. His/assessment of income which should have been returned for 1906 was £74,045. 7b' 6d. The provisional assessment he gave Smith in August was £68,676 7s Id. The only objection was to the deduction of the whole or part of the bad debt of £IOB,OOO. A statement of discrepancies prepared by witness had showed that they were made

on both aides, but they were very largly in favour of the firm and against the department. The returns purported to be correct returns. 'Modlin's balance sheet for 1905 when compared with the books was found to be substantially correct. The adjustments necessary were in favour of the taxpayer. Witness considered he had a thoroughly efficient check on the general accuracy of Modlin's balance sheets. The balance sheet in 1902 showed that the capital on October 1 was £87,407 Is 6d. To that amount he added the return of profits and the amount by which they had written up their properties. On the oasis of their own returns their .capital in October, 1907, should have been £91,506 6s 3d. As a matter of fact they had £IOB,OOO capital. Modlin's balance sheet gave a result which approximated that the amount shown by Modlin was £149,547, but, deducting £32,206 reserve, the capital was £217,241. On September 23 last witness suggested to Modlin without prejudice "that the firm should make full restitution. Modlin was to consult with the firm. Nothing came of this, but Smith saw the Commissioner of Taxes in Wellington. The time for settlement expired,, so far as witness was concerned, on September 25 last. Witness stated that on his own initiative, and without binding the Commissioner of Taxes, he suggested without prejudice to Bowron Bros., through Modlin, that they should pay £IO,OOO in respect to back taxation short paid, and so settle the dispute between them and the Commissioner, leaving the taxation on the £IOB,OOO to be determined by the Commissioner. 'Smith had sent a letter to the Commissioner . explaining how the discrepancies occurred. The letter was put in, but on the magistrate being informed that it was written as the oucome of negotiations for a settlement, he ruled it out, and Mr Stringer withdrew it.

Witness, in reply to Mr Skerrett, stated that he knew, of his own knowledge that Smith was in negotiation with the Commissioner with a view of arriving at some method of adjustment. Mr Skerrett : That would be with a view of paying the Commissioner what was'owing by Bowron Bros, to the State? Witness : No. What do you suggest the negotiations were about ?—What Bowron Bros, thought they Would care to pay.

Witness thought these conversations would be understood by the Commissioner and Smith to be without prejudice to the present proceedings. [Replying to Mr Stringer, witness stated that prior to laying the information on November 5 he made it quite clear that as far as he was concerned all the negotiations we're off. He had similarly made the same clear to Modlin on September 25. He admitted, however, that at that time the department was still negotiaing. Mr Stringer said that in those circumstances he Would not fuVther deal with the lette>.

SECOND DAY. CHRISTCHURCH, March 2. The income tax case was resumed today, and the examination in chief of Wm. Maurice Tyers continued by Mr Stringer, K.C. '

Witness stated he had taken from the books the development of the account with Bowron Bros., London, but Jamisch (the inspecting accountant) had a statement regarding it which went further back. At the interview with Smith in August last Smith produced a statement regarding a bad debt. Smith pointed out that there were only two items—viz., £25,000 due to Bowron Bros., Christchurch, and £58,000 to clients (unspecified). This was up to September 30, 1907. Witness did not get an opportunity to closely examiar the balance sheet at that time. Later it was shown to him by George Bowron. (Balance sheet produced). ■' Mr Skerrett : It shows a deficiency of £103,000? -

Witness : Apparently without going into it it does.

This concluded the examination in chief

In reply to Mr Skerrett witness said that he "had had nothing to do with the returns until a quite recent date. He had had something to do with an assessment in 1899, but. he had no knowledge of having had anything further to do with the firm's assessments, as the firm pencilled the dates in the returns, ami were written in by himself. Mr Skerrett : Will you tell me that in the books for the period March 30, 1905, to March 30, 1906, thte amount paid in wages is not shown a? £2020 Is? Witness said that he could not say.

Mr Skerrett : Are you prepared to deny that all these disbursements in this return do not agree with the entries in the firm's books for the period from March, 1905, to March, 1906? Witness : I have not the books, but I should say it is impossible. Mr Skerrett : I ask you a simple question : Can you say if the items agree? Witness said that he could not. Mr Skerrett : That is all I want from you on the point. How long have you been in the servicfe of the department as inspector?—Seven and a-half years. Prior to that, what • were you in the department?—l was clerk. Permanent or temporary clerk?—At that time I was temporary clerk. Prior to joining the service what was your occupation ?■—l was a seaman, an officer in the service of the New Zealand Shipping Company. So your total accountancy experience is derived during the period you were inspector in the Income Tax Department? —Not* necessarily. Oh occasions I have performed the same duties in prior years. Do you. swear that you do not know of a departmental instruction to inspectors that they should not push the investigation of accounts beyond three years? -r-There was afl old rule at one time. Who was that rule made by ?—■Mr John M'Gowan, who was then Commissioner of Taxe* »

Who abrogated the rule ?—Witness did not reply. Was it Mr Tyers who abrogated the rule? —Mr Tyers did not take his investigations ' beyond three years. Who abrogated it ?—I don't know. I consider that the rule had lapsed. Very contrary instructions have been given at times.' , "

Mr Skerrett asked how the witness came to push his investigations back to 1898, and witness replied that he did not do so; He examined the books to discover, the system which had been followed. - How far did : your investigations extend. "back?-i(3nly to the year ending September, 19041' •, Did Bowron Bros, not tell you that Modlin had been sent out by the Home underwriters to report on the business? —I- could not: say. Did yoU;:know that his balance sheets were accompanied by written reports?— Mjjdlin told me. You knew that Modlin was reporting to the underwriters in England ?—No; he reported to Burne, Jones, English accountants.

Did Modlin not inform you that in consequence of the reports and balance sheets' sent- by him the underwriters declined to act upon them? —I don't remember that. He said that he made strong re-: marks to his principals on the way in which the accounts had been kept. Did he not say that he informed the English accountants that owing to the way in which the books had been .kept he could not rely on the statement he produced ?—He said that there were certain details to a small degree which might be unreliable. Modlin never gave him to understand that the balance sheets were not substantially correct?

You have an exceptional interest, have you not, in the success of this prosecution ? —No, I think I can get nothing but hard knocks, whatever the result.

Cat] you suggest whether there is any reason why you should be desirous that this prosecution should succeed I —T iiope myself that if 1 am wrong 1 shall lose the case. i •••.••

That is very gratifying. I have no doubt that his Worship will attend to that.. Is it not a fact that you have made this the matter of a charge against your superior officer ?.—This among others. . How .many others ? Give me some idea of the number.-—rl don't mind.

A thousand , or so? —Witness (to the bench) :■ 1 don't know, your Worship, whether it is right to go into "this thing. His Worship : You say you decline to answer ? —Witness : I don't decline if you say I must answer. His Worship : If you object I will settle the matter then. Witness : I believe that Mr Skerrett is -counsel for the officer to whom he refers. Mr. Skerrett-.v How many matters have formed the subject of complaints ?—As he (i.e., the officer referred to) is not here or represented I decline to answer. . . His Worship : Very well; •

Mr Skerrett : Have.you not on several occasions been guilty of positive incivility, to Mr Smith? —Not on any occasion. Have you not told him that ne was lying ?—Never. Can you swear, that?—Yes, I do.

I will just; fix the occasion. That was not said in the •: presence of the Commissioner of Taxes ?—No, certainly not. Have you any reason to believe that the entries in the books of the firm so far as they go are all entries honestly made with the intention of recording the real transactions ? —No. . .. The books as far as they go are an honest set of books ?—I am not prepared to say one way or another. Have you .found any dishonest entry in the books ?—No. Mr Skerrett : I think I can rest content with that!

Replying to further questions, witness stated that he thought that £lll,OOO of the profits on which taxes were short paid during the last three years would be about the amount of the deficiency. If the bad debt of £IOB,OOO was deducted, there would not be £3OOO. profits on which the taxes were short paid. The £IOB,OOO would be addable.

I am asking you to assume . that bis Worship finds that £IOB,OOO is deduct--able?—lt is not in the.profits, and in any, case it could only be deducted in the year it'was written off. That is the law. We will see about the law ! The general rule is to allow the deduction of a bad debt when it is ascertained to be bad?—r And written off books.

You say the regulation provides that if must ■ also, be written off the books ? Yes, it has. to be returned as income.; For instance, you make £2OOO on credit, but do not return it. Therefore you cannot have it deducted. Continuing, witness stated that it was impossible to allow deductions of bad debts in the year they are incurred. As a rule it would mean two or three years before a bad debt was ascertained to be a bad debt. There was always an interval between the incurring of a bad debt and the time it was ascertained to be bad. About July 31, 1907, the books showed that Bowron "Bros., London, were indebted to the Christchurch firm in the sum of £IOB,OOO. To witness's knowledge no portion of that sum was recovered. He did not doubt that the moneys rer ceived by the firm were paid regularly, and properly into the bank. His esti» mate of £lll,OOO was arrived at by taking Modlin's balance sheet for 1905 and by making additions of stock short entered in previous years. Assuming your figures, and assuming that this £IOB,OOO is deductable, do you not admit that Bowron Bros. h ave substantially paid, their taxation during the period ?—No. . ; Why not ?—One thing is the debt has not been written off. You say that this £IOB,OOO bad debt is not deductable because it was not written off?—That is the law! That is what Shylock said!—l don't represent Shylock. Co on?—Another thinjj is that the in<|

come which became a bad debt had never been to the beat of my knowledge and belief returned to the department. It waa an Honest loss of £IOB,OOO of their money?—l don't know that it is a loss. .

Have you any reason to doubt that no ipart of that money has been received in New Zealand ?—I have no reason to doubt

'.Therefore, it is honest loss as far as you know? —I don't know. It may exist in investments in London, or it may be a good debt. :fave you seen any trace of interest paid ?—No. Can you point to any single circumstance showing that these transactions were not ordinary consignment transactions on behalf of the firm or their clients? —Yes, the fact that the account was allowed to accumulate to such an enormous extent.

You are aware that Bowron Bros., London, are related to Bowron Bros., Christchurch ?—I have heard that they are brothers.

Mr Skerrett then passed on to Modlin's balance sheet from September 30, 1904, to September 30, 1905. The witness said that he admitted that the balance sheet showed the true profits, but he did not accept the whole balance as being accurate.

Mr Skerrett : Does the comparison of the balance sheet of the year ending September 30, 1904, with that of 1905 show reduction of the firm's capital to the extent of £33,982 ?—Witness : I don't see it.

Mr Skerrett : Well, I'll give you the figures. In* sale to the company, was the debt to the firm included in the sale ? Witness : No. : ~ •

Mr Skerrett : Then the capital of the company was reduced by £IOB,OOO? — Witness : That is so. Was it not a reasonable inference that this debt was excluded from the sale of the company, because it was not an asset at all ?—lt is a •possible inference. Replying to further questions, witness stated that he had not valued the assets retained by the firm on the formation of the company at £33,000. After allowing, £20,000 for Bowron Bros., London, and certain other drawings, all the reserves were expended. A bad debt of £15,671 15s 8d of Bowron Bros., London, was also allowed. The firm's books did not show any stock except at their branches in Dunedih, Wellington, and 'Palmerston North, these branches being treated as agencies. Are the transactions brought into account in the year in which the profits were really earned, or are they brought in in subsequent years?—Of course, if a sale was made in London, and advice was not received at the date of balancing, it might be treated so. but generally merchants wait a little while after balancing in order to get their accounts up to the date of the balancing. Continuing, witness stated that Modlin's figures were based on the correct stocks, and the correct stocks were reflected in all Modlin's balance sheets.

You added something—the short return of stock made in the previous year, 1903? —Yes.

Is it not plainly wrong to bring into a subsequent year the profits of a previous year ?—No, I do not th'ink it is wrong. Do you not bring into the year 1905 the profits earned in the previous year?— That is not my fault. Is it not the fact that you added to the year ending September 30, 1905, the profit existing on September 30, 1904, and already earned? —You can argue both ways. I know some people who will argue anything. But the question is, What was the estimate if the stock had been handed in correctly on September 30, 1904? The balance of profit for that year would have been increased by the sum you added to Modlin's profit?—That is so. That is only £IO,OOO or £15,000?—No, it is about £7OOO or £BOOO. Witness was closely examined as to discrepancies in the balance sheets and the figures he had supplied to'-the court. He had checked no other period from the books other than the year ending September, 1905, though he had taken the figures from the books relating to 1905. 1906, and 1907. Witness had suggested to Modlin that Bowron Bros, should pay £IO.OOO to the Commissioner exclusive of the liability on the bad. debt. What was the answer given to you?—

Modlin informed me through the telephone that Smith took it very badly. Was there any suggestion by Mr Smith that he considered this a species of blackmail—Absolutely no suggestion. Modlin asked me if the department would make a definite proposal, but I said that it would have to emanate from the department. This concluded the cross-examination.

Witness, re-examined, said that in an interview with the Commissioner and Mr Smith he had described the statement put in by Mr Smith as untrue. At that time he detailed where the inaccuracies existed. He left the New Zealand Shipping Company in 1886, when he joined the Property Tax Department. He had been continuously in the department since 1891. In regard to the bad debt he had allowed a deduction of the amount accrued between September 30, 1904, and July 31, 1907. Percy Howard Goodsir, accountant and land agent, said that he was in the employment of Bowron Bros, from May, 1904, till July. 1907. During that time Mr Modlin was auditor of the company. He audited the books regularly and continuously. Witness never took out any balance sheets of the firm. The books were kept in such a way that a balance sheet could be taken out. To Mr Skerrett : The document (produced) was a statement prepared by witness showing the expenditure up to March 31, 1906, and given by him to Mr Smith for income tax purposes. Referring to the firm's journal for September, 1904, folio 301, entries of bad debts amounted to £6633 17s lOd. Witness made entries shortly after joining the firm on May 3, 1904. , Charles Frederick Thomas, manager ot the Bank of New Zealand at Christchurch, stated that at the time Bowron Bros, banked with the bank, and did so for a good manv years prior to the incorporation ©f the company. Witness said that there were no balance sheets supplied to the bank prior to 1907. There were notes as to the position in respect to assets and liabilities. This concluded the case, for the prosecution.

THIRD DAY. CHRISTCHURCH, March 3. The heading of the charges against Bowron Bros, of making a false return in regard to the amount of income tax payable by that firm was continued today before Mr Bishop, S.M. Mr Stringer K.C., for the prosecution, and Mr Skerrett, K.C., with him Mr Anthony7for the defence.

Before proceeding with the case for the defence. Mr Skerret submitted that he was entitled at this stage to ask for further particulars. The evidence had been of a most general character, and defendants were entitled now to have particular charges defined. The defence had written asking for particulars, and had been informed that the alleged false return related to the year ending March 31, 1906. when the income was returned at £18,836, when it shoud have been £52,318, or after certain adjustments had been made. £62,755. Defendants were clearly entitled to more definite information, and to have the information amended accordingly. Mr Stringer said that he could not be asked to do this. He had made a charge that a false return had been sent in, and that was sufficient.

Mr Skerrett : If there was a charge of false nretence you would have to set out the false pretence.

Mr Stringer : The false pretence was n false return. Mr Skerrett said that defendants were entitled to more definite information than that contained in the general information. The Magistrate : I do not follow Mr Skerrett in this matter. Here is an information on which certain evidence has been called. It is for me to sav whether there is a case to answer at this stage. The case must stand or fall bv this information, and it is for the defence to answer the information as it now stands.

Mr Stringer : I don't object to Mr Skerrett putting in the particulars with which I supplied him. but I don't feel bound by those particulars if evidence discloses something else.

The Magistrate : I sha.ll ultiinate'y have to hold whether the evasion has b«en substantiated or not. I cannot see rr>y way to force Mr StrinfrerV hand. is a case for the defence to answer.

Mr Skerrett said that ha did not intend to call evidence, but he would submit that there was no case made out justifying a conviction. He pointed out that this was a charge on tne criminal side of the court. It was certanly a charge of fraud, and the rules of law relating to the proof of fraud were clearly applicable to the proof of crime. Nothing was clearer than that the proof of fraud must be clear and conclusive. It must not rest on a mere inference, which might be drawn either one way or the other, and it clearly could not rest on suspicion. It was conceded that the books of the defendant firm were ho/iestly kept, that the entries were honest entries, and were made for the purpose of recording true and actual transactions. It was true that they were not scientifically or artistically correct, and that to ascertain the position of the firm at any time a great amount of independent investigation would be necessary. Mr Tyers, who was not prolific in admissions, had no reason to suppose that they were not honest entries. The next observation was that there had been no concealment by the defendants of their books or papers. For months the officers of the Income Tax Department had had ample access to these. It had been conceded by Mr Tyers that mistakes of an important kind against the defendant had been made by themselves. They had failed to claim allowances which were allowed under the statute. Another observation was that the whole controversy as to the short payment of duty depended upon whether allowance should be made in respect to a bad debt due from a company in London, which was admitted to have been incurred, and of which there was no evidence of having been paid. Mr Strnger : We did not admit that. We say that it does not affect the case. Mr Skerrett : Mr Tyers said that he had no reason to suppose it was not honestly entered, or that it had been recovered or paid.

Mr Stringer : His evidence is that it does not enter into the calculations at all.

Mr Skerrett : That is not evidence; it is merely his contention. Counsel went on to call his Worship's attention to the statement, and pointed out that the charge was one of wilfully and knowingly by means of a false return, evading payment of taxation. What had the informant to prove ? First, that the statement dated November 6, 1906, was knowingly false in some material particular. The second requirement was that it must be proved that it was done for the purpose of evading payment of the full taxation. The defence would submit that the expression "evade" meant intentional and designed evasion. It must be shown that the true taxation for that year was the amount in excess of that which was paid. It was an ingredient of the offence that not only must the return be wilfully false, but that thereby the defendant must have evaded payment of the taxes. It must be proved that by these false returns there was an amount of duty returned less than the real amount of duty payable. He (counsel) asked whether there was a tittle of legal proof of these statements. The return was in writing, and sent in in accordance with the act. It set out in wriitng the amount of income derived during the year ending March 31, 1906, the preceding date of the return. In order to justify the substitution of another data for the termination of the year it was necessary that application should be mad« to the Commissioner of Taxes ftxiriisr that date, and that that date should be accepted by the commissioner. The statement was sent in in writing, and must be read according to the writing. It said that the return was of the income derived during the year ending March 31. 1906. How was the prosecution to eo behind that statement? The letter which accompanied the statement was before the court, and set out that "we have pleasure in handine _ in the income tax returns for the year ending March, 31 last, which we trust you.> will find correct. etc.' v The court could riot a;o behind the -written statement contained in the return. Smely it was necessary for the Crown to prove affirmatively that the return, which purported in writing to be up to March. 1906, wps in reality for the .year ending September, 1905. There was not a single document or a tittle of evidence to show that Maxah 31, 1906, was not the correct date. The are-

vious return, up to March 31, 1902, showed an actual return to that date. There was no proof or evidence of any alteration of system. Mr Tyers could not produce a solitary document or officer of the department to &ay that they dealt with these returns as returns up to September 30. If tha Tax Department chose to take statements of this kind, which, on their face, represented a certain thing, and act upon them without insisting upon correction, surely they were bound by them. There was no evidence that there had been an alteration of the time for making the return. The return up to September, 1906, might have been the return for six months, as Mr Smith was away at that time. There was no evidence to justify his Worship in reading something into the statements which contradicted the writing in the statements. Counsel for the piosecution might say that, according to the statement made in June, 1909, by Mr Smith the returns were made up to September 30 in each year. That, however, could not be true, as one return was made up to July 31. 1907. and others up to March 31 in other years. The statement, if made, might be evidence against Mr Smith, but it was not evidence against his partners. Mr Stringer had called' evidence that stocks wetre taken to September 30 in each year, but there was no evidence that stocks were not taken on March 31 of each year. Mr Stringer; The witnesses said annually on September 30.

The Magistrate: I think they said annually.

Mv Skerrett replied that the mere fact that that stock was taken up to September 30 did not show that the statement was drawn up to September 30. It would be an unwarrantable inference that, because stocks were made up to that time, the statements were also made up to that time. The prosecution had to establish that up to the date of the return the duty was short-paid. His Worship had positive evidence that the returns were made up to March 31. There was not the' evidence of any person to show that this return was understood by the department to be a return up to September 30, 1906. If, then, the return was up to March 31, what proof was there that an amount of more than £IB,OOO was open for taxation? It was no proof of evasion that the profits between September 30, 1904 and 1905, were a greater sum than between March, 1905 and 1906. The two oeriods were not comparable at all. Particulars of the returns of previous years were only admitted for one purpose—viz., to prove that the statement sent in on November 6, 1906, was wilfully false. In order to entitle that evidence to be admitted, thfe prosecution must first prove that the return was false. The whole Question depended on whether his Worship was justified in reading into that statement, contrary to its express language, that it was up to September 30 instead of March 30. If his Worship was not justified in doing that, there was no proof of the falsity_ of the statement, or that the dutv had been evaded. If the accounts referred to Mairch, 1906, there was ample evidence to show that the State ha-d not suffered by an evasion of duty. The Crown claimed that from the period September. 1904 to 1905, there was a sum of £lll.OOO r>refits which had not been accounted for. For the purposes of assessment for duty it included two items—viz., increase of 6tock. which ought not to be included, and £IOB.OOO. the bad debt due from the London firm. In regard to this amount, it was incurred in a business wav by a consignment " of Bowron Bros.' '.' goods and customers* goods in 1905. There was a liability of £90,£.00 due from these people which had not been recovered, andthe balance sheet ptit in, prepared by the auditors of the London firm, shows' that there was a deficiency of assets • over liabilities to the extent of no less a sum than £103,0C0. Tn that balance'sheet Bowron Bros, and Co. were shown as being creditors onlv to the amount of £31,000. Counsel submitted that there was no evidence at all that the indebtedness oi Bowron Bros.. London, did not increase th'« previous taxation return that :would be represented by sales in the previous return. It was suggested that this item should not be written off for various reasons: It was said that it could not be disallowed or deducted because -it was not written off in ttve company's books. Quoting from the return, counsel said

that, in the instructior.s regarding deductions it was provided—"book and bad, debts pp?v<wil to be bad, and no others." Section 87 of the act provided: "In ascertaining the income derived from business, employment, or emolument no deduction is to be made in respect to bad debts except bad debts proved to be such to the satisfaction of the Commissioner." This provision, counsel went on, did not deal with the return but with the manner in which the Commissioner had to assess an assessment. Therefore, the provision in the regulations that bad debts deduct able must be written off was ultra vires to the statute, which did not require that bad debts be written off. The 1905 balance sheet showed that the debt in question was disregarded, the effect of such disregarding of it being to writs off £37,000 of capital. A bad "debt represented an asset which in previous years had been brought into account for the purpose of assessing duty. In subsequent years that asset was found to be irrecoverable and not of its face value. Then the taxpayer in the subsequent year or in subsequent years was entitled to writ* it off, either to its full value or to the amount likely to be recovered. There was clear evidence that the amount referred to was not sold to the company in 1907, and counsel suggested that hist. Worship was entitled to draw the inference that it was known to be irrecoverable and bad. Mr Tyers suggested that it was retained as an asset by Bowron Bros., but counsel pointed out that it "was in the highest degree unlikely that they would so retain it on the formation of the company. Since that date Mr Tyers himself contemplated writing off £17,000 of liabilities ■ incurred by the London firm. There/was ample evidence that there was a genuine. .debt of £IOB,OOO. The transaction was incurred in the ordinary course Of business, and there was liot the slightest evidence that it was left invested in the London firm, or that it yielded any profits. Why should Mr Smith make a uift of it to Messrs Bowron Bros.? Mr Stringer said that it was impossible to conceive that the firm would go on trading with this liability, but there was liability. It was incurred, and the firm was trading.

Mr Stringer: My objection was that ifc would not be allowed to increase.

Hi.' Worship: Yes. it was the large accretions that Mr Stringer referred to.

Mr Skerret (continuing) said that the Commissioner of Taxes could have no control over a trader as to whom ho should trust or as to with whom he should trade. If trading were a mere sham or a disguise for a gift, that was quite another matter, and under the present law Bowron Bros, would he liable to par 5 per cent, on the amount involved. The facts were that the London firm was in its early stages.

Mr Stringer said he du.. not think counsel should put it in that way. . Mr Skerrett said lie was going to ask the bench to infer that- there was a long connection between the two firms. Ha suggested that there was a relationship between the partners in Enrrland and two of the partners here. The inference, which was not an unreasonable one, was that Bowron Bros, in New Zealand were desirous of assi.aing the English firm by keeping the business they had and by taking advantage of their services in the disposal of the goods. His learned friend would sav that this debt was not proved to be bad to the satisfaction of the commhisioner, and therefore it could not be deducted. But, that difficulty existed on the part of the Crown, which had to show to his Worship that it is a debt such as th*« commissioner would not allow to be deducted. it had to be proved under section 106 that the defendants had evaded any of the duty, and had put in false returns, and that the amount teferred to was taxable. It mijght be said that this, debt ought to have been shown in the column of bad debts in.the return. It was clear that it was not so shown, but the circumstances were exceptional. 'Hie debt existed on. goods consigned belonging to Bowron Bros., and belonging alec to their clients. A great part of this debi consisted of moneys which ought never to have gone into the sales account 'or I'.ito the profit and loss account. Clients' |(joods that are sold ought not to form an li-em of sales or of profit and loss. The surplus belonged to the clients. All r-hat wa* due to Bowron Bros, way th» commission payable. In the cir~um-

stances, Bowron Bros. were reasonably justified in supposing that they were entitled to deduct this amount from the gross amount, returned without showing it amongst the bad debts. The books showed thai the amount was allowed to remain in the books without any formal writing-off. and it was not transferred to bad debts. In the circumstances, it was submitted that there was no evidence of fraud on fchd part of Bowron Bros. That debt was established. That it was irrecoverable was established, and that this year being a profitable one the firm was entitled to deduct it from its gross returns. At anyrate, the mere fact that it was not shown in the list of bad debts was no evidence of fraud. It was a real debt, and no question cf technicalities should be brought into the question. The matter ought to be dealt with from a commonsen.se point of view. How few are there oi those who make income tax returns who know anything of the intricacies of law, who appreciate the very complicated form submitted ? He thought they were very few indeed. That Messrs Bowron Eros, did not was shown by the mistakes made against' themselves in tlxeh returns.

Mr Stringer: There is a deduction of bad debts. Mr Skerrett: Up to March 31, 1906. But these were written off at the commencement Of the company, and transferred to the bad debts account. Continuing, counsel said that Mr Tyers produced a ct&tement in his endeavour to account for the fact that the amount of capital taken over by the company indicated that short profits must have been returned to depa. 1 tment. - Although it was not of importance in dealing with the present matter, it might be of importance hereafter. In that statement there were items of £16,000-odd and of £1624, increases of stocks charged by Mr Tyers oh his own mere assumption. He also chargec 1 profits up to July 31, 1907, at 519,437, whereas they suggested that writing up of the properties amointed to something like £50,000. M,r Tyers suggests that that was due to expenditure on properties, but there is nothing in the evidence to warrant it. In Mr Tyers's account he added to capital no less a sum than £32,106, which he explained was reserve charged to Bowron Bros, to meet anticipated deficiences in accounts transferred to the company, but it could not be disputed that it was a fact that the whole of that amount and more had to be found by Bowron Bros. Mr Tyers assumed that the loss by the fire was but gave no evidence in support. As a matter of fact, the loss was considerably less. Counsel contended that he had shown or would show at the proper time that the capital account properly dealt with, showed that the returns sent to the department were accurate and correct returns. Mr Tyers stated that the profits made in one year totalled £62,000. No such profits were ever made. They therefore submitted that there was no evidence to justify his Worship in saying that this was a return to September 30, 1905. If it is a return from March, 1905, to March, 1906, there was no proof that the statement is false. There was no proof that the duty due for that year exceeded the amount of duty ■ paid, 'and evidence of profits made between September, 1904, and September, 1905, was no proof of profits made during any other period. Mr Stringer, replying on the points of law raised, said that it was impossible for the commissioner to make any deduction on bad debt unless it was claimed. How was it possible for the commissioner to adiudicate on a claim to allow for a bad debt of £IOB,OOO if it were not claimed ? If the amount were included fh the profit shown, it would have not only absorbed all the income assessable in this particular year, but would have absorbed it for the whole period for which they made returns. Therefore they would have rendered themselves free from taxation for the whole period of that term. There could be really no point in the suggestion that the prosecution should prove .that the debt was a bad one. As to the contention regarding the periods covered by the returns and by the balance sheet, counsel thought that Mr Skerrett was seeking to strain the return to the extent that it would not bear for a single moment. His friend asked the court to ignore the statement made by Mr Tyers, that Mr Smith told him that the returns were made from September 30 to September 30. Further, his friend ignored the fact that in various respects the return corresponds exactly with the balance sheets, which were made up to September 30. Counsel then enumerated a number of items that were identical on both documents. Continuing, he said that his Worship would see that if 10 months of the return ended July 31, 1907. were carried back, it ended in a period of September, and unless the periods have run prior to that from September to September, where did the intervening period from March to September come in ? The defence had given no explanation how it would be possible to make any kind of return unless at the stocktaking period. The return stated that it was as "at the end of stocktaking." " Stock in hand on the date of stocktaking." If these accounts were not made at the time of the stocktaking how was it possible for any kind of a return to be made, except in the way counsel suggested ? It does not purport to be an estimate. It gave exact figures. The position was irresistible, that they were made for a period from September to September. His Worship asked what was proposed to be done in regai-d to the other information ?

Mr Stringer asked that they should be allowed to stand over until judgment was given in the first. His Worship said that could only be done with the consent of Mr Skerrett. Mr Skerrett raised no objection, and th«v were consequentlv held over. His Worship said that he reserved 'his decision-