Tommy et Al v Board of Inland Revenue

• Jurisdiction: Trinidad & Tobago
• Judge: Barnes, J.,Burke, J.,Dean-Maharaj, J.
• Judgment Date: 01 January 1993
• Court: Tax Appeal Board (Trinidad and Tobago)
• Docket Number: Nos. I 72 — I 73 of 1988
• Date: 01 January 1993

Tax Appeal Board

Barnes, J.; Burke, J.; Dean-Maharaj, J.

Nos. I 72 — I 73 of 1988

Tommy et al

and

Board of Inland Revenue

Appearances:

Mr. S. Seemungal for the appellants

Miss Allyson West for the respondent

Revenue law - Discovery — Respondent requiring additional information on which to determine income of partnership — Whether bank deposit method correct method for verification — Appeals allowed and assessments referred back to respondent for reassessment.

JUDGMENT of THE COURT:

1 These are two separate appeals against assessments to income tax for income year 1982 which were instituted under the Tax Appeal Board Act, p. 4:50 on 8th June, 1988. During the year of income the appellants, who were marital partners, operated a business partnership, under the name of “Nina's Boutique” at 31 Frederick Street, Port of Spain, which carried on a wholesale retail trade in fabrics. The individual appeals were consolidated by order the Court on 7th October, 1991.

2 The appellants had submitted a partnership return for the year of income 1982 which reflected sales of $3,024,638 and a net profit of $46,101. They had also submitted individual income tax returns, which in each case reflected the income for the year derived from the partnership of an amount of $23,051. The respondent had accepted the income tax returns and had assessed each taxpayer accordingly.

3 By separate letters dated August 17, 1984, the appellants and' partnership were informed by the Board of Inland Revenue that their into tax returns for the year of income 1982 were under examination and the respondent wished to carry out an audit of the relevant accounting books and records.

4 The respondent's consolidated statement of case revealed that the tax auditor had considered that the records which were made available to him were inadequate to determine the income of the partnership and stated at paragraphs 5 to 8, as under,:–

• “5. During the initial interview held with the first named appellant he informed the Respondent's Auditor that the appellants owned one bank account (Republic Bank Account 04287592) through which all their business and personal transactions were conducted. The first named appellant indicated that he had purchased one asset during the year a Mercedes Benz motor car at a cost of approximately $117,000.00.

• 6. The respondent's Auditor in the course of investigations discovered the existence of another active bank account (Republic Bank Account 042827932) into which a cheque from Sterling Bros Ltd in respect of a part of the refund of purchase tax on the motor car had been deposited.

• 7. The respondent requested the production for examination of this bank account on September 9, 1984. The account was finally presented for examination on January 7, 1985.

• 8. The appellant subsequently gave explanation of the transactions in the account and sought further deductions in respect of claims for additional business expenses.”

5 The discoveries arising from the audit were set out at paragraph of the consolidated statement of case, as under:–

• “9. (1) As a result of the audit the following facts were discovered –

  • (a) the appellants included in their claim for purchases sums totaling $130,620.00 which claim was not substantiated;

  • (b) the appellants claimed as repairs to the premises the sum of $25,284.00 for which no bills and receipts were produced. The appellants were the tenants of Mazraa Ltd and paid a monthly rental;.

  • (c) the first-named appellant and his sister Laurette Tommy Tannous were the sole directors and shareholders of Mazraa Ltd which owned the premises above mentioned;

  • (d) that loans totaling $413,906 were made to one Bob Daniel during the year of income 1982;

  • (e) that the appellants had paid the loans of Mazraa Ltd and claimed the bank interest as a deduction in their accounts.

• (2)

  • (a) In addition it was alleged that the first-named defendant engaged in gambling and deposits to the accounts included gambling winnings;

  • (b) it was also alleged that Laurette Tommy the first named appellant's sister, the owner of another dry goods business had transferred stock valued $100,000.00 to Nina's Boutique in 1982 in consideration of loans paid by Nina's Boutique on her behalf.”

6 The action taken by the respondent on completion of the audit is set out at paragraph 10 of the consolidated statement of case as under:–

“10. After completion of its audit and analysis of the appellants' tax affairs the respondent proposed to assess the appellants' income by using the bank deposit method which is an indirect method of income verification. It therefore adjusted the partnership return as follows:–

Net income per return	$ 46,101.00
Expenses re current account 042827932	183,210.00
Unreported income	1,413,475.00
Professional services	4,290.00
Traveling	2,391.00
Bank interest	24,243.00
Loan interest	18,496.00
Wear & Tear	(150.00)
Total adjustments to income	1,645,955.00

The respondent apportioned this adjusted income on an equal basis of $822,978.00 and $822,977.000 to each partner.”

7 After considering the appellants' response to its proposal, the respondent according to paragraph 11 of the consolidated statement of case assessed the appellants to additional income tax and unemployment levy in the following sums:–

8 Norman Tommy Nina Tommy

	$ Norman Tommy	$ Nina Tommy
Adjusted chargeable income	793,726.00	834,038.00
Tax liability	413,273.00	415,201.00
Unemployment Levy	39,686.30	40,060.00

9 According to paragraphs 13 and 15 of the consolidated statement of case the appellants by letter dated May 5, 1986, folios 118–129 of the record in respect of the partnership, and by separate letters of the same date from the individual taxpayers, objected to the assessments, and the respondent by separate letters dated May 4, 1988 notified the respective appellants of the determination of their objections.

10 On 8th June, 1988 notices of appeal were filed which in each case gave the grounds of appeal, as under:–

1

The Board of Inland Revenue erroneously imputed to the firm of Nina's Boutique income which was never earned. Fifty percent of this imputed income was assessed on the appellant. 2. Interest paid in respect of loans used in the production of income of the firm was not allowed as a deduction in arriving at chargeable income. 6/ 3. Expenses. “3. Expenses on repairs carried out to the building used by the firm in the production of income were not allowed in arriving at chargeable income. These repairs were effected in accordance with the terms of a rental agreement. 4. Expenses in respect of repairs to owner occupied property were disallowed despite the production of bills, receipts and statements from the building contractor. 5. The entire assessment is arbitrary, excessive and unreasonable in the circumstances.”

11 According to paragraph 17 of the consolidated statement of case, the respondent will contend

• “(a) that the appellants failed to submit to it true and correct returns of their income for the year of income 1982;

• (b) that the respondent was of the view that the appellants had been assessed at lesser sums than were properly chargeable arid accordingly assessed them to such additional sums as to the best of its judgment ought to have been charged;

• (c) that the appellants failed to satisfy the respondent that the assessments were excessive in that amounts deposited to their accounts had come from non-taxable sources or that they were properly entitled to deductions claimed as expenses wholly and exclusively incurred in the production of their income;

• (d) that the assessments are valid and should be upheld.”

12 At the commencement of the hearing on 3rd February, 1993 the parties filed with the Court a partial agreement, (marked “A” by the Court), which had the effect of reducing the partnership income to be assessed from $1,692,056 to $1,004,458.00, and which reflected other particulars, as under:–

“THIS AGREEMENT is made this 3rd day of February, 1993 between the parties to this action.

WHEREAS the respondent has agreed that the partnership income of the firm of which the appellants are the only partners should be reduced as follows:

• (a) by allowing as a deduction

  • i. the interest element of certain loan repayments made by the appellants amounting to $54,641.00;

  • ii. further revenue expenses of $628,728.00; and by correcting certain mathematical errors of $262.00 and $2,617.00 thereby reducing the adjustment in respect of unreported income from $1,413,475.00 to $727,227.00; and

• (b) by allowing a deduction of $1,350.00 thereby reducing the adjustment in respect of loan interest from $18,496.00 to $17,146.00

IT IS HEREBY AGREED that the partnership income should be reduced from $1,692,056.00 to $1,004,458.00 and that each appellant's share of the partnership income should, as a result, be reduced from $846,028.00 to $502,229.00 xxx”

13 Norman Tommy, the first named appellant, as well as the following persons testified:–

For the appellants Laurette Tannous	22 Pine Avenue, Bayshore Business Managress
Omar Ali	Mc Bean Road, Couva Chartered Accountant
For the respondent Subert Gilbert	Field Auditor III Board of Inland Revenue.

14 In the course of his testimony Omar Ali put in a letter dated 8th October, 1991, which he had sent to the tax auditor, and to which was attached a statement headed “Proposed Adjustments to Adjusted Income”. This, document was admitted as Exhibit O.A.#1 and was referred to by Ali and other witnesses at the hearing. of the total adjustments proposed in this document in the sum of $543,789 in regard to unreported income; the Court was specifically called upon ‘to consider the following:–

(1) Loan repayments — Bob Daniels –	$293,906
(2) Personal expenses paid by cash...