Central Motor Supplies Ltd v The Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Barnes, C.J. |
| Judgment Date | 01 January 1994 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | Nos. I 44 and I 45 of 1988 |
| Date | 01 January 1994 |
Tax Appeal Board
Barnes; P.C.; Burke, Mem.; Dean-Maharaj, Mem.
Nos. I 44 and I 45 of 1988
Mr. B. Roopnarine and Mr. V. Prashad for appellant.
Mrs. E. Bridgeman-Volney for respondent.
Revenue law - Income tax — Unemployment levy — Respondent adjusted the chargeable income figure which included the sum of $302,132.00 represented as unreported income for 1982 — Appellant appealed — Whether the accounting for 1982 been done on a cash or an accrual basis in regard to the figure of $1,064,122.00 did not represent the correct amount returnable as income from sales and that it should be replaced by the figure of $1,229,339.00 — Unreported income should have been $165, 217.00 instead of $302,132.00 — Appeal allowed.
These are appeals against assessments to income tax and unemployment levy for year of income 1982, during which the appellant had carried on business as a spare parts wholesaler at 48 Richmond Street, Port of Spain.
According to Notices of Appeal filed on 13th April, 1988, the grounds of appeal were –
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(a) The respondent failed to determine the objection of the appellant for the year of income 1982 in accordance with the provisions of the Income Tax Act.
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(b) Alternatively, the “respondent has failed to give due notice of its determination of the appellant's objection.
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(c) The Respondent wrongfully included in the business deposits sums which were of a capital nature not associated to the business income. These were in fact the sums introduced in the business due to Commercial Bank needs.
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(d) The method of computing the income of the appellant is not in accordance with established accounting principles.
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(e) The appellant did not understate its income by the amount alleged or at all.
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(f) The assessments are unjustified both in law and in fact.”
The respondent's contentions appear in paragraph 12 of statement of case as under –
“(a) that the return of income submitted by the appellant for the subject income year did not represent its true income for that year.
(b) that as result of the audit the respondent was of tree opinion that the Appellant had been assessed at a lesser amount than that which it ought to have been charged for the said income year. The respondent has, on the facts and in the circumstances of the case and to the best of its judgment, raised an additional assessment on the appellant under the provisions of Section 89(1) of the Income Tax Act, Chapter 75:01.
(c) that the appellant did not prove to the satisfaction of the Board that the outstanding debts became bad during the income year. The respondent therefore maintains its justification in re-computing the income of the company as set out in paragraph 4 (a) above.
(d) that the respondent did determine the objection of the appellant for the subject income year in accordance with the provisions of the Income Tax Act.
(e) that the respondent did give due notice to the appellant of the determination of its objection.
(f) that the appellant failed to satisfy respondent that sums included by the respondent as business deposits ought not to have been so treated.
(g) that the method of computing the income of the Appellant was in accordance with established accounting principles.”
The following occurrences are relevant to the steps leading up to the appeal, as set out at paragraphs 2 and 3 of the consolidated statement of case:–
“2. The appellant submitted a return of income for the said income year in which it declared the following:–
Gross Receipts on Sales
$1,064,122
Chargeable Profits
16,763
Tax on Chargeable Profits
7,543
3. The respondent accepted the appellant's return of income but by letter dated 28th February, 1985, informed the appellant that its return for the said income year was under examination.”
Following a tax audit, the income of the appellant for chargeability to tax was re-computed as shown at paragraph 4(a) of the consolidated statement of case, as under:–
“The total income of the company was recomputed by doing the following:–
Net Deposits Add:
$1,168,090
Cash Payments 1982
61,249
$1,229,339
Deduct Opening Debtors–1.1.82
(10,151)
Add: Closing Debtors — 31.12.82
147,066
Total Income
$1,366,254
Reported Sales
1,064,122
Unreported Income
$ 302,132 “
As a result of subsequent findings by the respondent the chargeable income figure was adjusted as under, vide paragraph 5 of the consolidated statement of case:–
| Unreported income | $302,132.00 |
| Allowable Expenses not claimed | (21,739.00) |
| Disallowed Expenses | 10,503.00 |
| Additional Wear and tear Allowance | (1,002.00) |
| Total Adjustments | $289,894.00 |
At the hearing, the adjustments of $21,739 for allowable expenses; $10,503 for disallowed expenses; and ($1,002) as additional Wear and Tear allowance were not disputed, thus the sole issue on which the court is to adjudicate is in regard to the finding that the sum of $302,132 represented unreported income for 1982.
In order to determine the matter, the main point to be considered on the evidence is whether the accounting for 1982 had been done on a cash or an accruals basis, in regard to the figure for unreported sales. There is no dispute as to the other issues as to such matters as bad debts, inventories and cost of sales. The following testified:–
| For the appellant Nepal Nana | –Director of the Appellant Company, of 30 Ellerslie Park, Maraval. |
| Herbert Lalsingh Maraval. | –Chartered Accountant of 116B Saddle Road, |
| For the respondent Brenda Reid Tax Department, Price Waterhouse, Chartered Accountants, (formerly — Field Auditor, Board of Inland Revenue | –Audit Senior, |
| Greta Jackman Board of Inland Revenue. | –Acting Field Auditor IV |
We shall refer only to such evidence as is relevant to the above.
During the course of Nana's evidence he had stated that he had told the auditor that he had adopted a simple system whereby sales were recorded in a Sales Day book, and deposits of takings had been made after money had been extracted to pay day expenses in cash and that a Debtors' Ledger to record credit sales had been maintained.
It is clear from Reid's evidence that this information, plus the fact that figures for Debtors' opening and closing balances appeared on the face of the Balance Sheet had prompted her to conclude that an accruals system had been followed by the appellant for the relevant year of income.
Reid testified that she had enquired of Nana as to the system of accounting used, whether the cash or the accruals system and he had replied frankly that he did not know, but that Lalsingh would be able to testify on that point. In the course of Lalsingh's testimony, he asserted that sales were accounted for on a cash basis, and indeed though a Debtors' Ledger had been maintained it was a memorandum account, the system being to treat incomings from debtors or sales as income in the year in which it was received.
Reid's evidence was that she had found that the figures for deposits on which her computation had been made included both the proceeds of cash sales and incomings from debtors' accounts.
There is no evidence that at the objection stage any consideration was given to the system of accounting actually used in the preparation of the accounts. This is not surprising because this point had never been raised in the letter of objection — folio 24 of the record. Instead, according to (b) of the letter of objection, the question of write-off of bad debts was introduced. It was stated therein as under –
“(b) The computation made for debtors balances included such sums that dated back to over one (1) year. These sums were written off as irrecoverable and explained accordingly.”
The objection auditor Jackman testified that she had accepted the tax auditor's conclusion and computation as to the make-up of the amount of unreported income by adopting a method of arriving at income from sales on an accruals basis.
The evidence as to the debtor's balance as at year's end is unclear, being that on the request of the tax auditor a schedule had been produced — folios 13 and 14 of the record which. showed a total of $147,066, however on the Balance sheet a sum of $49,000 appears. Lalsingh had testified that this was the balance...
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