INCOME TAX CASES.

Star (Christchurch), Issue 9915, 2 August 1910, Page 2

INCOME TAX CASES.

TO-DAY'S PROCEEDINGS.

BOWRON BROS. 1 DEFENCE

MR RUSSELL'S ADDRESS. I _ The rehearing of the charge brought by tho Commissioner of Taxes against! Bowron Bros, m regard to income ta* returns was continued in the Supremo Court to-day before the Chief Rustics (Sir Robert Stout), and his Honor M* Justice, Sim. | Mr RuKsell a'Jdresscd the Court on behalf of the appellants, Bowron Bros. Ho said that the charge brought in the lower Court, that the firm had wilfully and knowingly ma<lo a false return, was a criminal charg.'-'.m the full sensa of tho word. That ivas the theory up->u which the prosecution was based in tho lower Court. M'.r Stringer, in opening the case, had pointed out that it was necessary for tho defence to show not only that the returns wera ■ false, but also that they weiVe false i<i the knowledge of the defendants. Be- ! yond doubt the case* was a one. All defences were now t\pen to the defendants that would be. opVn.tc tliem before a jury in an ordii.\ary criminal case, and they could cluM* 1 that all presumptions were in the'ij[ favour, and that the Crown must- show\ by the most cogent evidence that fraud had really been committed; and that there no doubt in the minds of the Court. The members of the firm had occupied a high position in this city for many years. Mr G. Bowron was a woll-known merchant, whose conduct had beon characterised by straightforwardness. The same thing could be said of Rfr Smith. Besides being a prominent citizen, Mr Smith held- pub-' lie positions,- and, of course, the con-' sequences of the charge would be very serious to both Mr Bowron and Mr Smith if the Court should hold that they were guilty of fraud. , As to a . penalty, in addition to paying the amount of tax in dispute, there would ' be a monetary penalty of about £SOOO. He would be able to show beyond any doubt that the profits which were, stated by Mr Tyers to have been made , wero absolutely illusory. The-, defendants might have been guilty of muddling, of bad book-keeping and of not taking -the caro that ought to hard , been taken; but of dishonesty on their, part there was not the.slightest tittle' 1 of evidence, and that would be shown" when the case 'or the defendants had been heard. Mr G. Bowron had been in business hero for mauy years. 'The concern, in tho beginning, was in ' a very small way, and Avas gradually built up by Mr Bowron in the course of time. Mr Bowron, however, had never had any commercial training, l . had never been in a merchant's office, and knew nothing of the science of book-keeping. Mr Smith had neve* kept & set of books in his life. Before he went, into Mr .Bowron's office \\& was in a laivyer's office. In the early days of Mr Bowrmt's business it wai the' practice to make income tax returns according to surpluses .made dur« . ing the periods covered. Mr Bowron started that, system with his business, and considered that it was the prope* test of the profits. The practice had: never been altered, and it was followed by Mr Smith when he joined the firm. It would, of course, be absurd to say that under that sj-stcm the firm could malo> the tax returns in ,the form, prescribed by ( the Department. iHaving first ascertained their profits, they obtained from their books" a statement of. tho disbursements during the year, and tho amount of sales affected. As ho had stated, he could not contend that the firm- was right in doing that. A» a iTuittor of fact it was liable to a fine of £ijo for not making the tax returns in tho prescribed form. To show the firm's profits from its point of view it was : mpossible for it to fill in the returns in the way sot forth by tho De~ , partmont. The principal portion of tho business had consisted for many years .of sending Home goods to London for sale, and that was the principal portion still. Another portion, but a much smaller one, was the shipping ol goods to London on behalf of clients in New Zealand. The goods—wool, leather and pelts—sent by the- firm itself during the six years ended 1967 wag valued at £975,000. The goods wore always drawn for by hills on London for high sums. The goods sent on behalf of clients were drawn upon at' only a moderate sum, probably 60 per cent. As each ship went away with the firm's own goods it credited its sales with them. The firm then drew, tho largest sum it thought the 'goods would bring in London and charged all! the sales against tho first portion of the profits "which Mr Tyers and Mr Modlin had made. | In reply to the Chief Justice. MrRussell said that there was no entry dealing with tho " returns from, the goods sold in London. There had been consistent losses on those goods. The Chief Justice: How do you know if there has been no account? It is quite- wrong to sav that the English people- owe you £l'oS_.ooO. ' ; ; Mr Russell: Of course it is wrong. 1 There is no such'debt owing. That has been quito a misconception all through. Mr Justice Sim: Is there any debt at all? Mr Russell: There was a debt of £37,000 which has been written off, but there is no debt on tho account between Bowrdi 8r05.," London, and Bowron Bros., Cbristchurch. I In reply to tho Chief Justice* Mi i Russell said that money had been re- : milled Home since the company was ! formed. The firm was in the habit ol sending a large quantity of goods foi clients, but the .advances made on them wei-f small. The firm drew against the goods for the- sums oaid to clients. An ;> advance of £6OO. ior instance, might' be made. The firm drew upon tho London house for £OOO. The goods brought £IOCO. The account sales wer? shown to the client, and tho Londoi* house J:o:>t £IOO. r " Mr Justice Sim: You really l©n« £4OO to vonr London house? I Mr Russell: Yes. i The Chiof Justice: This *is a new i statement, which docs not seem to have , been made before. What you are saying now was not suggested to Mr , Tyers.

In reply to a statement bj the Chief Justice that the books would show some returns of the transactions, Mr Russell said-that the- only entries In tho books were for clients' The London, firm kept its own 'accounts.. That' was really tho explanation <b£ what had occurred. There was no dishonesty in the case, and ho was en« dcavouring to show the Court- what were the real facts. _ / * i Tho Chief Justice said that Mr r¥tussoll was making a completely new suggestion. There was no suggestion in the Lower Court that thorp, ".vas a Homo debt. There' was no defence on tho ground, but Mr Russell w'as making it now. J 'Mr Stringer: On the cortrary, th<j defendants put in a balano i sheet of Bowron Bros.. London, s"towing that, thev owed tlio Chrisfrbhureh firm £IOO.OOO. 4 ■'■ . ' . The Chief Justice safd that he had read through all tho Papers and Mr Skerrotb's address, ar\d there was no • fiticrcvesticn on the liji'es ■ made by Mr\ Russell. ■ ■■£'■'■' , i Mr Russell: I'M question is. wlie-i iher the statement* is true or not. The Chief Justice: The Court has to look at more tha'fn that. You go before one Court a&d make a Sefence on certain lines, because there- is a debt of £l.oo.ooo,"and then you say there is no £100.000: 'J Mr Russell: It is a question whether it is. a fact or *-hot. The Chief Justice: I do.not know whether it is;'a fact or not; but if ft person in claiming nn alibi says in one Court that he was in Timaru. and '.n Christ"\iiiioh, and in another thai he mir. not in Timaru but in "WW* what would be thought of his ovideii .'■<? ? Mr Russell said thai it was a falsa analogy, because lhc_ present caso was a rcue.stion., of accounts. \ Tho Chief Justice: That is worse. \ Ur I »**A^>u> l idjj i a.t the <tefcndasdbii

should not be prejudiced in tho present case because- tliey did not make tho statement in regard to debt in the lower Court.

In reply to another remarkf by the Ohief-Justice, Mr Eu&Wl said that J'"r Bowron did not hand account sales to his officers to mako entries. In, Mr M'Cutchoon's balance-sheet, tho reclamations in connection with tho London house wore overshadowed. There was a sum of £30.000' deducted from the sum paid by the new company to Bowron Bros, to meet possible deficiencies in England aiid Amcricsi. The companv had taken otor a liability to the extent of at least £28,000. Owing to tho tremendous'.fall on account of tho American the company had not' obtained the price required for foods. As a matter of fact, the goods ad brought about £50,000 less in London than had beon drawn against them. If that Joss ha/l been made in London, it seemed to )bo clear that the assets for 1006 and' 1907 had been overstated by tlrtat sum.

| The ChieS'f-Justice: You will have to ■ show exactly what was tho correct statement for tho year ending September, 190;5, for which tho tax return was made ;'o'ut. ! . Mr/ Ilussell: Is the obligation upon

-\ TAxe Chief-Justice: Certainly. If want to show that the balance- , Jifneets are wrong, yon must do so. g. Mr Russell: It is for the Crown to prove tho case. ; The Chief-Justice: It has proved the case by showing that the balance-sheets do not conform witli your published statements.

j Air Russell: If tho balanoe-sheets are ! shown to contain possibilities of error? | Tho Gliief-Justice: t .You must show the errors, not the possibilities of error. Every balance-sheet shows possibilities of errors. ( Mr Russell: But these balance sheets nro shown to have possibilities of very large errors. 1 The Chief-Justice: If you produce balance sheets prepared by your own auditor, and wish to show that they [B.TO false, you must show where they are false. You published a prospectus. I Mr Russell: Pardon me, wo did not publish that prospectus. , The Chief-Justice: It conies from you or your company. You had something to do with it.

i Mr Ilussell: Something to do-with it, .that is different.

I Tho Chief Justice: Possibly tho account made a but if you wish io show that your auditor was misled you will hare to give details. It won't do to raiso a cloud of dust, and say that there -has been a mistake in 1905, because there W6re mistakes in other (years.

Mr Russell: Wo are charged with having committed an offdnco in a certain year, 1905. If there is a doubt on the whole case-, the direction to the jury would bo that it could not convict.

i The Chief Justice: I repeat that, if you .intend to show that your auditor was misled to mako a wrong balance sheet, you will have to make a correct one. It won't do for you to say that there have been mistakes. You must produce your drafts and accounts. You ought to bo ablo to construct a balance sheet for 1905, and that onus is upon you. Mr Russell: I submit that if we show that the balance-sheet might bo wrong it is sufficient.

'. The Chief Justice: I don't think so. There is no balance-sheet printed in the world that might not bo wrong. These balance-sheets were drawn up by'-the firm's officer, and you must show where the officer was wrong. Tho chargo against you is a specified charge that your statement of ' September, 1906, was false. The Crown, to prove the charge, produces your own balancesheets and Mr Smith's explanation to the Department's officer. You now say that the balance-sheet, was wrong, that Mr Smith's statement was wrong, that the statement in the Court was wrong, tha.t all was wrong. The Court cannot infe.r that the 1905 balance-sheet is.wrong, because the 1903 balanceiTsheet is wrong. | Mr Russell: I never, mad© such' a 'statement., Three balance-sheets have been put in. for 1902, 1903 and 1904. They are relevant or are not relevant. If they are relevant wo want to show that they are wrong. 1 • The Chief Justice: You are at liberty to do so: but you must show that the 1905 fyalauce-shect is wrong. You must show exactly where Mr Modlin was misled. You know the dim unity 2'ou are in.

j Continuing his address, Mr Russell ,'said -that when Mr Modlin prepared the I balance sheets to be sent to England, |he showed them to Mr Bowron, who glanced at them and said that the results looked high. Mr Modlin said that they were what the business would have given if the branches had been !consolidated. Mr Bowron understood ithat the balance sheets represented jwhat the business would produce if (there was a combination. He looked lit the totals only. The interview took only four or five minutes. Early in (1900 Mr Modlin said that the London debt was represented by £37,500, and Mr Bowron told him to take it off and ; reduce the capital accordingly. When ,tho income tax returns were behiolinade and Mr Smith suggested" that that sum should, be written off c x°, uld n , ot do Jt that year, but decided that ther»nm should bo written (off next year, 1905, and that was done. Ihat was the explanation of that point. |iie. wished to make it clear that surpluses and reclamations in Bowron Bros,? accounts referred to'clients only, med T l»rt'of the debt or" £106,000.■ ,In regard "to Mr Modlin's balance sheets for his principals at Homo,;if Mr Bowron had thought that they were to be accepted as a correct statement of the profits in Christchurch he would not have allowed them to go Home, or, at any rate, would have asked Mr Modlin not to send them. . Mr Bowron understood, that they were not profits actually mad© here, but were profits that might have ibeen made by the combined firms. The /firm was always twelve months behind li?,« ma^ mg up accounts, and when in ;1900 the firm was making up the rote%n° r u O4, i\ WaS 1 that ]£3/,500 could not be written off because the knowledge that it was a bad S■« n ?J c ? me - Ulltil December, 1905, after the taxation period, but it was written off in 1906 for the 1905 return. He admitted that the return had_not 'been made in full compliance ( of the regulations, but it was not done (with a view of. evading the law. The return only showed £2OOO bad debts. \J Mr Stringer: The figures wero all iVmaginary. I v Mr Russell: The disbursements were '.t*ken from tlio books and. the other iigWea wero placed in /to make the bahVnce. ; MV Justioe Sim: It was false.

I MA Russell: It was incorrect. TheV Ghief Justice said that the inUerroctWss had been known and clearly was !for the purpose of evading the 'atntute. \ J Mr Ruiasell said that he could not ehOw that\the bad debt had been included in the return. Tho ChienJustice said that the Court .wanted to k\uow why the firm had not .placftd tho btt.d debts in the return in 'order" to place N it before the Commisaioner. Mr Russell had said that items had b«en reduced to obtain the benefit of the writing-off, ■j Mr Russell said', that he would sub•mit that it was no'o enough that a return was incorrect hv reason of muddling or neglect, bi#." that had to be thown that the act hiy] been wilful and an attempt to evade by artifice.

EVIDENCE FOR TEE: APPELLANTS. Augustus Samuel Bi&s, accountant, '#f Wellington, stated that during the ''■ past six or seven creeks he had made an #a:haustive examination of Bowron books from September,' 1901. He ftrand that there were several items in !Mr Modlin's balance-sheets for 1902, MOB and 1904 which should not be ,'itare. He noticed the absence.of any ijiotioe of surpluses or deficiencies en ehipments of th© firm's own goods to London. The firm's practice had been to (debit goods shipped to London to tbo 'Loudon houso si the highest price

they were likely to realise. Goods shipped to London by the firm an its own ncoe-'uit were entered at tho highest price k was possiblo they might brin.tr. If they made less, a debit entry should have been, made in the goods account, but he had boon able to find no such entries in the books. He .had, however, seen a report irom tho London accountant which enabled him to reconcile the amount stated .by the firm to be owing to London and tho statement according to the books. Witness produced a balance-sheet tor 11.105, in which i> liability of £42,obb owing by tho London firm to the Christenurch firm was shown. .. The Chief ,'j ustico asked if there was anything in Mr Modlin's balance-sheet tor 1905 indicating this. Witness said that after September, 1904, Modlin had dropped the balance due by London in his balance-sheets, and showed only the current years liability. Modlin had apparently written off the London debt in two successive balaiice-sheots, writing off 10s in the pound in each. Witness found that £37,000 would have to be written ott for reclamations in 1902, 1903 and 1901. There was no entry in the books indicating those operations. An entry should have been made in the ledgor crediting Bowron Bros., London, with a corresponding debit entry m tho profit and loss account. The Chief Justice asked if witness could show him any entry on the 1900 balance-sheet in which sales in London were set down in excess. Witness said that he could not particularise, but the excess amount was undoubtedly there. There was no proof of reclamations in 1905, but a large proportion of tho total amount of reclamations should be charged in the years 1902, 1903 and 1904, which would make the profits shown by Modlin illusorv. He had reason to doubt the bona fides of tho London transactions. The partners of the London firm assured him that the account of them was correct. Witness estimated that the total reclamations from 1901 to 1907 would amount to £87,000. -The debits in Bowron Bros.' books in Christchurch were entirely made up of clients' surpluses. The effect of the reclamations was that the goods were debited at their full value, as At they were sold here. Of the £208,500 of capital shown in 1907 ho had found, from the' books and other data, that tlie increase of value of Ferry Road. Woolston and Hereford Street properties accounted fdr £24,161, land speculations and increased values of other properties for £30,569. Profit accounted for £56,363. Witness thererora niado the capital for .1907 £149.868. and wrote off the London liability of £37,381 and a ledger liability of £25,070. If'his figures were correct he could not see how the firm could have niado more than £56.000 profit, in the years under review. ' Dealing with •Tyers's " reconciliation statement " put in to show that the firm must have made larger 'profits s than it returned to acquire its assets, witness said that whereas Tvers set down" the,capital in 1901 as £87.400, to this should be added a debt of £25,000, which was paid by a debtor during the year, and the amount of liability of the London firm, over £37,000. Bowron Bros, had made £30,669 out of land speculation, instead of £BOOO as estimated by lyers. • Tyers estimated the fire loss at £14,000, whereas the loss was £4310. , Tyers allowed only £BOOO for "writing up "of properties, whereas they were written up £24,161. Tyers had written tip the stock in 1906 by £16,382, an estimate which was. erroneously based upon what had been done in 1905.

The Chief Justice said it was quite reasonable that Tyens should write up tho stock by that amount on the basis of the'business disclosed, as he was assuming the accuracy of Modlin's figures. It was really very little use Mr Russell bringing evidence which did not bear upon the year 1900, the year in which the return on which the case rested was made. ' Mr Russell: Well, your Honor, is it any use my leading any more evidence.

The Chief Justice: I do not think you. should,speaks.lika.that., Th© ; only use for evidence regarding the other years is to show the .system adopted by the firm.

In reply to a question by Mr Stringer witness said he assumed that the accounts of the London firm, which he had examined, were accurate. They were certified to by capable accountants, f Mr Stringer: But so were the Christchurch accounts: You apparently presume that the London accounts were correct because the Christchurch accounts were wrong. Thornhill Cooper, accountant and average adjuster, gave evidence that he adjusted the ioss at Bowron Bros.' tannery fire. The loss as adjusted bv witness was £4310. Tyers was £IO,OOO out when ho estimated it as £14,000. The insurance paid on the buildings was £2860, and on the plant £3598. He had examined the books and papers of Bowron Bros, during the past six weeks. There was no sign of the books having been balanced. There was no stock account, and there were accounts against people for large sums of money which had been standing for years .without'any credit entry. In one case the amount was £20,000. The witness went on to deal with the accounts of Bowron Bros, for 1906 and 190,'.

The Chief Justice eaid that though it might be proved that the returns for, 1906 and 1907 weie accurate, that could not possibly ■affect, the return for 1905. They must always come back to that return. . Mr Russell said that it was impossible Ifor him to give the Court any more information or enlightenment regarding 1905 than had already been given. There was the return—— Mr Justice Sim: And it is a false return.

Mr Russell said that was not contested,' but 1 he was endeavouring to show that it was not wilfully false and that there had been in fact no evasion of taxation. „

The Chief Justice said the charge would not. be met if Mr Russell succeeded, in proving that £IO,OOO in excess of the proper duty was paid in 1904 and 190 G. There would still be the ovasion of the duty in 1905 to answer. However, Mr- Russell had better continue his evidence, and justify himself later on. The witnas, continued to give evidence on tho lines of the previous witness, and said that £37,000 owing by the London firm was written off on the balance sheet in February, 1905, as a bad debt. Tho Chief Justice- asked for a copy nf the balance sheet, and on a copy being handed to him, pointed out that the date was .1904, not 1905, and that £37,000 had not been written off. The witness, after making some calculations, said that Modlin had explained to him how the amount was written off, but he could not locate tho entries. Modlin would be able to tell his Honor in which entries the writing-off was accomplished. Robert Henry Modlin, chartered accountant, said that in 1904 the debt owing by Bowron Bros., London, according .to the ledgers, was about £74,000. Witness wrote off 10s in tho. pound, and reduced the amount to £37,000 in the balance sheet. He was preparing the balance sheet for the London firm, and was told to reduce (•ho indebtedness. He was at work on the balance sheet at the end of 190J find beginning of 1905. In Februarv. 1905. George Bowron told him to eliminate the London firm's debt from the balance sheet altogether and take it off the assets —to wine off, not £37,000, but £74.000. Witness finally sent tJ-n balance sheet to FiWand wi+h the £74,000 eliminated. Witness submitted his second and third balance sheets to George Bowron before sending them to London. There was not a single entry of sales by the London firm on the Christchurch firm's account sales, outside sales for clients. He found, out three weeks ago for the first time tliat the goods sent Home wero on consignment only, and were not sales to Bowron Bros., London. He knew that close on £33,000 in cash and free shipments had been sent to London to meet deficiencies in 19Q6 and 1907. Such reclamation amounts should be

debited to whatever account the original shipments were credited to. He could not have made up an income-tax return from the firm's books without the stock sheet*. To Mr Stringer: He made up hit-balance-sheets from the books ant stock sheets of the firm, and believe* the figures he gob out to bo accurate. In auditng Bbwron Bros.' books, he never worried how much or how little income tax they were paying. He die not see the income tax returns. M Russell had told him that the good* sent to London by Bowron Bros, wen only on consignment. jo Air Russefi: Neither Smith noi George Bowron had ever forbidden hin to give* Tyers balance-sheets. The fin desired to give Tyers every possible in formation.

Cecil Morton Ollivier, accountant said he he'd investbste< the accounts of Bowron Bros, with a v-iew to finding out what the partners wero worth in 1001 and 1907. (Left sitting.)

At the Magistrate's Court this morning the esse was called, and was adjourned for a week.