Sanat Paul, Star of India Restaurant Inc v. Minister of National Revenue, [1982] CTC 2737, 82 DTC 1738

The Chairman:—By agreement, the appeals of Sanat Kumar Paul and those of Star of India Restaurant Inc were heard on common evidence. The Minister of National Revenue, as a result of a net worth assessment for the period of January 1, 1973 to December 31, 1977, added to Sanat Kumar Paul’s reported income amounts of $38,005.98, $50,474.34 and $50,624.56 for the 1975, 1976 and 1977 taxation years respectively.

For the 1976 and 1977 taxation years the Minister of National Revenue added to the income of Star of India Restaurant Inc amounts of $37,233.44 and $22,000 respectively as unreported income.

Summary of Facts

Sanat Kumar Paul left Bangladesh in 1955 when he was 19 years old. After spending some years, in England, he came to Canada in May 1970. At that time, he had no assets other than a few hundred dollars and was unemployed until 1971.

In 1973 he began a restaurant business under the name of Curry Inn Restaurant. According to financial statements of the Curry Inn Restaurant (Exhibit R-1, tab 1), Mr Paul’s investment in the restaurant was $50,642 in 1974 and $40,000 in 1975. The Curry Inn Restaurant was incorporated in 1977.

In 1975 the Star of India Restaurant was incorporated and was in operation in 1976. Its financial statements show loans payable to Mr Paul in the amounts of $72,863 in 1976 and $89,389 in 1977 (Exhibit R-1, tab 5).

Mr Paul, as owner of Curry Inn Restaurant, in his tax returns for the 1975 taxation year, declared a loss of $15,091.32. For the 1976 and 1977 taxation years profits of $14,991 and $9,668.91 respectively were reported.

The tax returns of Star of India Restaurant Inc, in which Mr Paul was principal owner, showed a loss of $34,658 in 1976 and a loss of $17,690 in 1977.

The respondent’s position is that Mr Paul’s income in 1975, 1976 and 1977 does not justify or explain his investment of some $90,000 in the Curry Inn Restaurant in 1974 and 1975. As a result of an audit of the books of the Star of India Restaurant Inc, it was found that the deposits exceeded gross sales by $37,233.44 in 1976 and $22,000 in 1977 for a total amount of $59,233.44, considered by the Minister as unreported income. In the balance sheet prepared by the respondent’s auditor from the appellant’s financial statements, the loans receivable by the appellant from the Curry Inn Restaurant Inc and the Star of India Restaurant Inc as of December 31, 1977 were $25,955 and $30,155.66 respectively (Exhibit R-1).

The discrepancy in Mr Paul’s reported income on the basis of a net worth assessment covering the period of January 1, 1973 to December 31, 1977 was $151,592.41 (Exhibit R-1, tab 2).

The amount in issue therefore is the total of Mr Paul’s net worth discrepancy of $151,592.41 plus $59,233.44 of unreported income in the Star of India Restaurant Inc or $210,825.85 as of December 31, 1977. The question is whether that amount was income or whether it arose from some other source.

Evidence

Counsel for the appellant, in assuming the burden of proof, called Mr Sanat Kumar Paul as witness. In his testimony, Mr Paul stated that his father died in 1969 in Bangladesh, leaving the appellant and four brothers, two living in India and two living in Bangladesh. The father’s estate consisted of some land (rice paddies) and two grocery stores. Although there was no will, the evidence is that the estate was administered by Sanat Paul’s brother Shumil. Mr Paul did not know what the grocery stores were worth and had no idea of the acreage or the value of the father’s land. Nor did he know what his share of the father’s estate amounted to and did not seem to know whether his brother Shumil sold the land and the grocery stores or whether he continued to operate them. Mr Paul indicated at one point that Shumil was also in the construction business but gave no further details.

Mr Paul’s evidence was that in 1971 he received a letter from Shumil in which the letter stated that he had money in his possession which he wished to invest in Canada. Owing to the political unrest in Bangladesh during the period under review, it became necessary, according to Mr Paul, to circumvent the Bangladesh law which prohibited the transfer of money out of Bangladesh.

A scheme existed, a fact admitted by the respondent, by which a large number of persons originating from India and Bangladesh who resided in Canada would, over a period of time, give Mr Paul money in varying amounts to help relatives in their home country. It is alleged that Mr Paul would then advise his brother Shumil to give the said relatives from the funds Shumil had in Bangladesh an equal amount of money in their own currency at the current foreign exchange rate.

All the money received by Mr Paul in Canada was alleged to have been invested in his restaurant business and, according to him, it explains the source of the net worth discrepancy and the unreported income in issue.

There are no records of transactions or other documents between Mr Paul and his brother Shumil with respect to the source or the ownership of the funds, from which payments to relatives in India and Bangladesh were made, and the only other reference to the brother Shumil was with respect to a visit the latter made to Canada in 1976, at which time it was admitted Shumil had no money. In the financial statements of Curry Inn Restaurant Inc and the Star of India Restaurant Inc the loans to the restaurants are shown as being payable to Mr Sanat Paul; no mention is made of Shumil’s participation in the transactions.

Counsel for the appellants filed with the Board ten (10) affidavits in which ten individuals solemnly swear that, during the period under review, they gave to Sanat Paul varying amounts of money, mostly in cash, amounting to $63,665 (Exhibits A-1 to A-10). Other witnesses, who had not signed affidavits, testified that they also had paid money to Mr Paul amounting to an additional $6,000 to $7,000 for a total of roughly $70,000. It is Mr Paul’s contention that very many persons who had given him money were subsequently unavailable to sign appropriate affidavits or to testify at the hearing. Mr Paul showed the Board several letters which, it is alleged, confirm that yet other persons had given him money so that Mr Paul’s brother could in turn give their relatives abroad. The letters were not accepted as evidence since the persons who are alleged to have signed the letters were not present at the hearing for cross-examination.

Mr Paul stated in his testimony that most of the persons who had given him money to help relatives abroad were strangers whom he had met at social gatherings. He kept no records of the amounts received from these strangers which varied from $50 to $500 a month.

Counsel for the respondent subpoenaed the persons who had signed the affidavits and they were called as witnesses by counsel for the appellants. All of the witnesses stated that their relatives abroad had, within three weeks to a month, received at their own homes from unknown persons, an amount equivalent to the amount paid to Mr Paul. Many of the witnesses stated that they chose to pay money to Mr Paul rather than using bank services because it was cheaper and they knew he needed it. None of the witnesses kept a record of the amount given to Mr Paul over an extended period of time. Some of the witnesses clearly recalled the amount of the monthly payments made to Mr Paul but did not know what the total amount paid was. All of the witnesses admitted having had a prior discussion with Mr Paul with respect to the amount stated in the affidavit they signed.

In several instances the monthly amount recalled by the witnesses who signed the affidavits as having been paid to Mr Paul do not correspond with the total amount claimed in the affidavits.

For example, Mr D N Choudhury, in testifying, claimed he paid between $50 and $100 a month to Mr Paul between January 1973 and January 1977. Even taking Mr Choudhury’s higher figure, the total amount paid during the period would be $4,800 and not $5,850 as stated in the affidavit (Exhibit A-5).

In other instances, the affidavits indicate that the amounts were paid during a period commencing in 1972. Since the opening statement of Mr Paul’s net worth assessment is as at January 1, 1973, payments made to Mr Paul prior to that date would be reflected in the opening statement (Exhibits A-1, A-2, A-6, A-7 and A-9).

Exhibit A-10 is an affidavit signed by Bhanalul Choudhury, attesting that on or about April 1975 he paid $12,500 in cash to Mr Paul in order to become a partner in the Curry Inn Restaurant. Mr Choudhury in his testimony stated he was a cook at the Curry Inn Restaurant, earning $100 a week in 1973, which was subsequently raised to $200 a week. Mr Choudhury advanced no valid evidence to show how he was able to advance $12,500 to Mr Paul in April 1975. There is no document to establish that a partnership agreement was entered into by Mr Choudhury and Mr Paul and the financial statements of the Curry Inn Restaurant Inc do not reflect the existence of any partnership.

In reassessing Mr Paul, the Minister of National Revenue under subsection 163(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, imposed penalties in each of the taxation years 1975,1976 and 1977. Penalties were also imposed in the Minister’s reassessments of the Star of India Restaurant Inc for the 1976 and 1977 taxation years. In the respondent’s replies to the notices of appeal with respect to each taxpayer, reference is made to the imposition of penalties for each of the taxation years under review. At the hearing however, no mention was made of the penalties. Counsel for the respondent called no evidence to support the imposition of the penalties and did not satisfy or even assume the onus of establishing that the appellants omitted to declare some of their income in circumstances amounting to gross negligence. I can only assume that at the hearing, the respondent had abandoned his position on the assessment of penalties and that the Minister’s assessment on that point was no longer in issue.

Conclusion

The onus of establishing that the Minister’s assumptions on which the assessment of both Mr Paul and the Star of India Restaurant Inc are wrong rests with the appellants. The Minister’s assumptions of Mr Paul’s net worth discrepancy and that of its Star of India Restaurant Inc’s unreported income amounts to over $210,000. The evidence presented to the Board by way of affidavits and oral testimony indicates that an amount of some $70,000 which Mr Paul claims to have invested in the restaurants would have been paid to him as part of the scheme for helping the donors’ relatives abroad from funds available in Bangladesh.

The question of credibility is a basic factor in the determination of these appeals. There are three main points which the appellants must clearly establish if these appeals are to succeed. First, Mr Paul must establish the nature of his transactions with his brother Shumil in India; secondly, the witnesses, whether with or without signed affidavits, must be reasonably accurate as to the amounts they actually paid to Mr Paul within the period covered by the net worth assessment and thirdly, Mr Paul must prove that the amounts so received were invested in the Curry Inn Restaurant Inc and the Star of India Restaurant Inc and that they are, as he alleges, the nonincome source of his net worth discrepancy and his unreported income. In the circumstances of these appeals, Mr Paul must be kept to the strict proof of these three points.

As to the nature of Mr Paul’s transactions with his brother Shumil, his evidence was extremely vague, not only as to the value of his father’s estate and his share of proceeds of its disposition, but more importantly, Mr Paul failed to establish any arrangement or authority by which he could invest in his own name moneys he received in Canada, the equivalent amount of which was paid to persons living abroad from funds which the evidence shows were owned by Mr Paul’s brother.

No loan agreements or promissory notes were entered into or exchanged between Mr Paul and his brother. The financial statements of Curry Inn Restaurant Inc and Star of India Restaurant Inc prepared by a Canadian firm of chartered accountants do not show that Mr Paul’s brother, the owner of the funds in Bangladesh, was either a lender or a shareholder in the restaurants. Indeed the loans made to the restaurants are shown as being payable to Mr Paul alone. Mr Paul’s statement that he “owed his brother a lot of money” is not sufficient proof that the amount in issue in these appeals comes either directly or indirectly from his brother.

With reference to the second point, I accept, as indeed did counsel for the respondent, that a scheme did exist by which moneys were paid in Canada to Mr Paul and in return an equal amount of money from a vaguely described source in Bangladesh was paid to persons residing in India and Bangladesh. On the basis of the affidavits and the testimony of the witnesses, one must accept that some moneys were paid to Mr Paul mostly in cash on a monthly basis and that the moneys were subsequently received by relatives abroad.

The question of the credibility here relates to the total amounts paid by each witness during the period covered by the net worth assessment. Although the witnesses seemed to recall the monthly payments made to Mr Paul, none of them had kept any records of the payments and most could not recall the total amounts paid within the time frame in which the moneys were paid. All the witnesses admitted in cross-examination that the total amount claimed in their affidavits had, prior to the signature of the affidavits, been discussed with Mr Paul who had not kept any records of the payments either. Moreover, nothing in the affidavits or in the testimony of the witnesses establishes that the moneys paid to Mr Paul were used by him in relation to his restaurant business. The affidavits, in my view, have very little probative value for the proposition that such payments were the source of the net worth discrepancy and unreported income of over $200,000, as reflected in the financial statements of the restaurants in a period of five years.

Finally, the evidence is that Mr Paul received the moneys in cash in relatively small amounts on a monthly basis. He testified that he put the money in his pocket or in the cash register; he made no record of the payments but advised his brother of the amounts he had received. Witnesses testified that their relatives received an equivalent amount of money in local currency at their own homes, whether in India or Bangladesh, within a month of their giving Mr Paul the said moneys. While this evidence may give credence to the existence of a scheme in which Mr Paul was involved in order to get money into and out of India and Bangladesh without utilizing the services of the bank, it does not prove that the moneys received by Mr Paul in Canada, in whatever amount, in the period under review, were used by himself to invest in the restaurants. No evidence was produced either by Mr Paul or his accountants to establish any relationship between the amounts so received by him and deposits made in bank accounts of either of Mr Paul’s restaurants.

The penalties no longer being in issue in these appeals, I must conclude that the appellants have failed to establish that the Minister’s assumptions on which he based his assessments were wrong and while there may well have existed some financial scheme in which Mr Paul was involved, the Board, on the evidence, is not persuaded that the moneys so paid to him were in fact invested in the restaurants and they do not represent or explain the amount of Mr Paul’s net worth discrepancy and the Star of India Restaurant Inc’s unreported income.

For these reasons, the appeals are dismissed.

Appeals dismissed.