ALLEGED TAX FRAUD.

Dominion, Volume 3, Issue 755, 2 March 1910, Page 5

ALLEGED TAX FRAUD.

F ♦" WELL-KNOWN FIRM PROSECUTED «■ HUGE DISCREPANCIES. » g - —• » f PAYMENT OF £10,000 SUGGESTED !. (By TeleEraDh—Press Association.) >, Christchurch, March 1. 0 The income taji cases came before Mr H. W. Bishop, Stipendiary Magistrate, a the Magistrate's Court this morning The informations were laid against Wil liam Bowron, George Bowron, and Georg, Join Smith, trading in partnership a Bowron Bros., of Christchurch, mer chants. The informations alleged: 8 That on November 6, 1306, defend- ' ants' firm (1) did knowingly and wile fully mate a false return in writing e 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 def liver a false return in writing in relation to the income of the firm of Bowron Bros,, affecting that firm's liability to taxation. , (3) Did knowingly and wilfully make 3. a false return in writing in relation t to the income of the firm of Bowron Bros., affecting that firm's liability to taxation. The Crown Prosecutor, Mr. Stringer > K.C., appeared for the Deportment. Mr Skerrett, K.C., with him Mr. Anthony appeared for the defendant. , Sir. .Skerrett took a preliminary objec tion, raising the question of the magis 1 trato's jnrisdiction to hear the case, am I arguing that though tho information wa r laid within the statutory period, instruc tions were not given to issue summonse ' till January 13 last. ; ■ The magistrate, after hearing counsel': argument, and Mr. Stringer's reply, sai( [ that though ho felt there was much 1 ii Mr. Skerretfs argument, he was bount ' not to decline jurisdiction. Mr. Stringer opened the case, and calle< in evidence. The Informant Called, <- i William Maurice Tyers, inspector ii . the Land and Income Tax Department and the informant •in the preseni case, stated ~ that in June of las' year he in Christchurch, and mad< an investigation, into the accounts o: i Bowron Brothers, Limited, and Bo'wioi '• Brothers, Mr, George Bowron said thai •he was not conversant with the books and referred him to Mr. Salter, and wit ness made an appointment for Juno ?0. as Jlr. Salter ha 4 only been ap pointed. Witness arranged with lum tc take the accounts of the company first Witness sa,w .Mr,. Smith , about the accounts .of Bowron Brothers, and Mr, 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 and 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 Aucfc land to straighten up the affairs of the firm in Julyj'l9o7, when tjie firm was preparing to soli, - and that ho was the accountant up_. to , April or May, 1909, . Then he left for England. " Mr. 'Smith said that Mr. M f Cutcneon had prepared the last return up to July 31, 1907, and that prior to that date he himself had prepared a return He said that all work sheets from which the. returns , had been made, including Mr. M'Cutheon's, had been destroyed All stock sheets prior to July 31, 1907, had .been destroyed. Did Not Like Paying"Taxes. ' Mr. Smith also said that his firm did not like paying taxes, any more than other people, but he had always., been careful to return too much'rather than too little to the Department. l It was witness's experience 'that i Sims' .of. any magnitude or standing had an annual balance-sheet, and he usually worked from them. No balance-sheet being availablej witness had to start on the books. He had looked through the ledger, (ind he found that Mr. Goodsir, the' former accountant, gathered all the accounts to the ledger, whioh ho thought would probably affect the profit and "loss account, into what he called "transfer balances account," He had done this for the two years ending September, 1906, but this Sad not been done by M'Cutcheon in 1907. On July 2; Mr. Salter, suggested that Mr. Modlini auditor' of the company, .might have some information about old stocks. Mr. Modlin sent down pencil notes of stocks at November 30, 1904,. and September 80, 1905. The6e stocks did not agree with the returns, but it was suggested that it might inolude plant. Ultimately it was found that they were true aheets 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 ending October, 1907. He left these with Mr. Smith, and suggested that the figures should be checked. Discrepancy of £41,000. There was such an enormous' discrepancy between his figures and the returns that ho thought they should be looked into. The discrepancy was rough-, ly aboiit J&il,000. Their returns for 1906. lowed ,£II,OOO odd, and his figures showed <£68,000 for ten months ending July, 1907. The return showed a loss of £5000 odd, and his figures showed a profit ot £25,000 odd. At that time he put the following questions to Mr. Smith, and obtained replies:— . ■ Are the ledgers kept by Mr. Goodsir the only ones?— Yes. Was there no private ledger?— No. None, Was there no profit and loss account before September 30, 19.08?— No. None. Was there no balance-sheet before Julv 31, 1907 F-No. None. Have all stock-sheets prior to July 31, 1907, been destroyed?— Yes. How were returns prepared?—l got expenses from the accountant and filled in purchases, Bales, and stocks' myself. Witness, continuing, said.that towards the end of the month Mr. Smith told him that he was getting Mr. Modlin to-check tho assessments, and there was delay in getting Mr. Modlin to start. On August 30 witness had an . interview with Mr. Smith and Mr. Modlin. Mr, Smith explained that Mr. Modlin had been auditor for the firm for the : last five years. He came out from England five years ago to make inquiries into the firm's affairs in connection with the proposed limited liability company of Bowron Bros., Limited,/ which was to embrace the firms of, Bowron Bros., Christchurch, and Bowron Bros., London. He had s'everal interviews with Mr. Modlin over the' assessments. That was the first occasion on which Mr. Modlin had seriously checkod the figures. Witness had some surprise at Mr. Modlin wanting time, and he explained' that Messrs. Bowron Bros, wanted him to go through the books agaifl, Witness rectified two omissions which Mr, Modlifl pointed out, and also a mistake in tho books in favour, of the Department. He did not suggest any alteration , for 190G, bnt in connection with the 1905 accannts he explained that .£2OOO should bo charged as part of a bad debt of .£105,252 due from Bowron Bros., London. Businesslike Steps Not Taken. Mr. Modlin left for Wellington, and witness did not see him again until September 13. In the interim witness sa,w Mr. Geo. Bowron and asked him a number of questions and got replies. Has Mr. George Bowron, Mr. Wilb'am Bowron, or Mr. Smith, cither separately or in any oapaoity together, any interest in the firm of Bowron Bros., London?— None. ....... vVere any businesslike steps taken to collect balances from..time to time?— No. Witness also recollected that Mr. Bow- : ion or Mr. Smith said that these large ' balances were riot required here, and they had allowed Bowron Bros., London, < the use of the money. Mr.-Geo.' Bowron '■ told him that the- business- only com- .: menced to yield largo profits about 1901, i A debt of .2108,000 was represented as I surpluses due on goods sent to London to : be sold through Bowron Bros., London, ] Certain portions included goods belong, i ing to the clients, of Bowron Bros., 1 Christchurch. but oonsigned by the local i

firm. These shipments were drawn , against, and the. surjluses should .have " been remitted to Christchurch with the account sales. Witness had another interview with Mr. Modlin. Ho pointed ont that it was ridiculous to claim as a )_ deduction any portion of the , £108,000, which had not accrned in the two years and ten months ending July 31, 1907. That portion which had accrued in that period amounted in round figures to .£17,000. "Seemed Absolutely Astonished." ), Witness submitted certain proposals ta Mr. 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 conversation with r- Mr. Slodlin. and Mr. Smith, the former it mentioned that what was practically a balance-sheet had been brought out in i] connection, with the flotation of the London company, but Mr. Smith said that > e it was a statement showing what oould is have . been done if no interest or no r- exchange had been payable. Witness gathered from him that the balancesheet was not in any sense an exact statement. Mr. Smith told Mr. Modlin that ho 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-ba!anc« sheet for 1905. Later on Mr. Modlin produced a balance-sheet up to September 30, 1905, without a profit and loss and revenue account. He said that he had been instructed by Mr. Geo. Bowron to produce it, It was produced for the purpose of controverting witness's figures. Witness eaw at once from the balance-sheet that the state of affairs was quite different from what had been represented to him, and he and Mr. Modlin went to see Mr, Bowron. He told him what Mr. Smith had said about there being no balancesheets or profit and loss accounts of , any kind prepared for the firm prior ;• to July 31, 1907. '' Mr. Smith Smiles. o- . Mr. Smith said, with a sort of smikb ' s- that the balance-sheets must have been d out of his mind. Witness asked for mora is information, and Mr. Bowron produced a > copy of the prospectus iof the proposed>s company of Bowron Bros., Ltd., London. He also got Mr. Bowron's authority ta 'a get balance-sheets from Mr. Modlin, _ toil gether with any other accounts he mights n have. Mr. Modlin handed him the bald ance-sheets for 1902, 1903, and 19M. Mr. Skerrett objected that the balanced sheets dealing with a period prior to the commission of the alleged offenca" were not. admissible. Mr. Stringer said, that he wanted the ■ n balance-sheets in to prove a systematic ' k and wilful evasion of the law. £ The magistrate ruled that the docttmerits vere' admissible. . ' e The balance-sheets wers then put in, if and, witness,' continuing, stated that the.' n income returned for 1902 was .£7425) 13s. f. id., and Mr. Modlin's' balance-sheet j showed £22,751 ,os. sd„ a difference, of .£15,321 7s. Id. For 1903 the return showed i £10,395 15s. Id., and the balance-sheet y £22,035 17s. 4d„ a difference of £11,690" 2s. 0 3d.; for 1901 the return was £12,860 Bs. j," 8d.,. and balance-sheet £20,533 18s. lid.', y a difference of £7673 10s. 3d.; for 1905 the return was £18,836 2s. Bd., and/balance- . [" sheet. £52418 Bs. 3d., a difference 6£ 1 £33,582 ss. 7d. In all cases the difference r vas against the. Department. ij When Mr. Stringer asked for the 1908 balance-sheet, Mr. Skerrett objected that ' s there was no connection between it and a those of previous years, but the objeotion was overruled. 1 Witness .produced a return for 1900, 0 showing £11,895 19s. 6d. ; s ■. " : _ a Missing Balance-sheets. - t . Witness had no balance-sheet for that . ; year. He had asked Bowron, Smith and ; Modlin for it, but was given no absolute ■ j assurance that there was no balanceJ sheet. But all thought none had been ' } prepared. He made up his . assessment trom the books and stocks. He could get ' no absolute assurance that there had'been • a stocktaking on September 80, 1906. He estimated that the stock on hand' at that date was under-returned to the Department, in the. same proportion as the pre--1 yious year. Sr. Modlin s balance-slieet for 1 1905 showed stock in that year, and the 1 amount was more than that given on the 1 return by about £17,000.' , The return 1 showed £72,562 3s. 2d., and balance-sheet r £89,779 145.: 3d. His assessment of ths income which should have been returned ! for 1906 was :£71,045 . 7e. ,6d. The pro- . visional assessment he gave Smith m August was £68,676 7s. Id. The only o'l>1 jection was for the deduction of theiwhols • or part of the bad debt of £108,000.' A' \ statement of descropancies prepared by witness had- showed that they were mada | on both sides, but were very largely in favour of the' firm, and agamet the'De--1 partment. The returns purported to be correct. returns.. ■ . Mr. Modlin's balance-sheet for ISOS when compared with the books, was found to bp substantially correct The adjustments necessary were in favour of the taxpayer. Witness considered he had a thoroughly efficient cheok on the general of Mr. Modlin's balanaMheefa. In 1902 they showed that the capital on Ootober 1 was £87,407. Is. 6d.; to that amount he added return of profits and the amount by which they had written up their properties. On the basis of ' their own returns their capital in Ootober, 1907, should have been £91,308 6s. 3d. As a matter of fact they had ■ £208,000 capital. " • £10,000 for Back Taxation. > Mr. Modlin's balance-sheet gave a TOr • suit which approximated to this. ~Tha 1 amount shown by Mr/ Modliii wis £219,547, but liters was a deduction of £32,206 for roserVe. The: capital- vas £217,341 on September "23 last Witness suggested to Mr. Modlin, without prejudice, that the firm should make, full restitution. Mr. Modlin was to consult with the firm. Nothing came of.thi?, bu'£ Mr. .Smith saw -the Commissioner of -' Taxes in Wellington.- The 'time for a 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 Bowtou Bros., through Mr. Modlin, thai thev should pay £10,000-in respect to back taxation short paid, and so settle the dispute between them and the Com- ' missioner, leaving taxation on £103,000 to be determined by the Commissioner. ' My. Smith had sent a letter to -the Com- • missionor explaining how the discrepancy occurred. Tjie letter was put in, but on tha magistrate being informed that it was thf outcome 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 Mr. Smith yras in negotiation \vith the Commissioner with a view to 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? ' —No. What do you suggest the, negotiations were about?— What Bowron Bros, though! they would care to pay. Witness thought these conversations would be understood by the Commissioner and Mr. Smith to be without prejudice to the present proceedings. Replying to Mr. Stringer, witness stated that prior to laying the information 6s November 5 he . made it quite clear thai as far as he was concerned all negotiations were off. Ho had similarly muck the same clear to Mr. Modlin on Sep - tember 25. He admitted, however, that at that time the Department was still ; negotiating. ' i . Mr. Stringer said that in those circumstances he wonld not further deal with . the letter. The Court then adjourned till to-mor-row.