Chaudhry v. R., [1999] 2 CTC 2560

Bowie T . C.J.:

These two appeals are brought by two brothers who are equal partners in a business carried on by them under the name “Trans Am Video.” The subject matter of the appeals is simply: what was the income of that business during the year ending December 31, 1992?

In filing their income tax returns for that year, they have each claimed a 50% share of a loss from the business amounting to $7,824.22. They were initially assessed on that basis, but subsequently reassessed to disallow a great many of the expenses claimed by them. And, incidentally, in the course of that reassessment, the amount of their gross revenues was reduced by the assessor to the extent of some $4,000.00, approximately.

The assessor, Terrance Wallace, gave evidence that he had spent some 15 months on this audit, an audit which was greatly impeded by the fact that there were no proper books and records maintained by the partners of this business, as is required by section 230 of the Income Tax Act.

Mr. Safdar Chaudhry gave evidence on behalf of the Appellants in both appeals. He admitted, during the course of his evidence, that he had received a letter from Revenue Canada prior to the 1992 taxation year, the purpose of which was to draw his attention to the need to keep proper books and records, and indicating to him that if he failed to do so the result might well be the disallowance of certain expenses claimed by him. That letter was written in April 1991, at which point he and his brother had been carrying on this business for approximately eight years.

The reasonable inference to be drawn from that letter having been written was that proper books and records had not been kept by them prior to that time. No proper books of account, indeed, no books of account of any kind, were introduced at the hearing. Mr. Chaudhry offered the explanation that they had been lost during the course of 1992, when a building was erected and the business was moved from rented premises to the premises built for the Appellants and owned by them, which, during 1992, became their place of business.

I find that explanation improbable. There are other elements of Mr. Chaudhry’s evidence which are less than satisfactory as well. I do not propose to detail all of them, but one example is his evidence to the effect that he imported tapes which were sent from England and paid for by cheques, which were offered in evidence, an example being a cheque for $600.00 made out to “Famous Video”. Mr. Chaudhry’s evidence was to the effect that there were no Customs documents available in respect of whatever this cheque had been written for, because when items of a value less than $20.00 are entered at Customs, no duties or goods and services tax is payable. I was asked to believe that this $600.00 cheque was for 30 items at $20.00 each, or perhaps more items, each being of less than $20.00 value, each imported separately but all paid for by one cheque. As counsel for the Respondent pointed out, if this explanation were accepted in respect of both of that $600.00 item and all the other items as to which Mr. Chaudhry offered that same explanation, it would have been necessary to enter hundreds of items individually through Customs during the 1992 taxation year. I find this to be inherently improbable, and I am driven to the conclusion that the oral evidence of Mr. Safdar Chaudhry is of little help in establishing the expenses of this business.

Attached to Schedule “A” to the notice of appeal is a listing which purported to be of expenses disallowed, apparently prepared by the agent for the Appellants. While that listing is not a totally accurate reproduction of the expenses disallowed, it certainly groups the majority of them together in one place. For practical purposes, they can be broken down into a number of groups which I shall deal with as follows.

First are five items as to which Schedule “A” gives no particulars other than the dates of the purchases. These are said to be supported by statements which were put into evidence as part of a disorganized bundle of cancelled cheques and other documents. In respect of those five items there are certain cancelled cheques, there are what appear to be monthly statements which do not indicate the name of the vendor, and there is a letter, dated in 1997, from Welcome Traders and addressed to “Whom it may concern,” which purports to indicate that Trans Am Video paid $3,800.00 to Muslim Medina, which is said to be a distributor for Welcome Traders.

Those five monthly statements, if that is what they are, indicate a balance brought forward at the beginning of each month, and certain purchases during the month. The cancelled cheques that accompany them are made out to Muslim Medina, most of them for round numbers -- all of them, in fact, for round numbers. In my view, they have virtually no evidentiary value. I note too that the total of those invoices was included further down the list as $3,800.00, supposedly supported by the same letter to which I referred a moment ago, dated in 1997, and addressed to “Whom it may concern.” It does not surprise me that Mr. Wallace disallowed these amounts.

The second group is a number of payments said to have been made to Hasan and Dawood Enterprises Ltd. There are some cancelled cheques, but there are no invoices, there are no Customs’ documents, there are no supporting documents of any kind to indicate what these cheques were written for, and I do not find them, either, to have any evidentiary value.

The next group is six payments said to have been made to NASA Marketing, and again, these are quite unsupported by any kind of invoices. There was an item in December 1992 of some $754.00 to CamoTech Inc., which apparently was allowed upon the second reassessment of the Appellants. The Appellants, therefore, cannot succeed again on that item on this appeal.

The next two items are amounts of $528.00 and $ 1,000.00, supported by cancelled cheques written to J.S. Saini and a T. Singh, and there are two further amounts of $100.00 each, supported purportedly by cheques to J.B.S., and a further amount of $400.00, being a cancelled cheque written to J. Singh. Again, there are no invoices, there are no supporting documents of any kind to indicate what these amounts were paid for, and I find them to be of no evidentiary value either.

The next item is an amount of $3,208.00 paid to Classic International, again without any documentation to establish what it was paid for. And the item below that is the $3,800.00 item which I mentioned a few moments ago, which is a repetition of the first five items on the list. Not only is this unsupported by invoices or anything of the kind, it also is a duplicate of another item.

The next group is three payments made, apparently, to “Madina Financial.” Two of these items appear to have been paid by cheques drawn out of an account of Chaudhry Farms, and again there are no supporting documents, no invoices which would indicate why they were paid, what they were paid for, or to whom they were paid, other than that “Madina Financial Services” is the payee of certain cheques.

There was a letter offered in evidence by the Appellants, apparently from Madina Financial, and dated February 10, 1997, purporting to be signed by the president of Madina Financial, and it simply says:

To whom it may concern

This letter is confirm that on April 4, 1992, Trans Am Video, check No. 0993, amount $3684.00, check No. 0036, amount $6410.00 and check No. , amount $5,000.00 gave to Madina Financial to transfer the money to Mr. Azar Naiz, c/o Classic International, House No. 339 street no. 44 1-9G Islamabad, Pakistan.

This letter, like that of Welcome Traders which I referred to earlier, is not sufficient to establish what the payments were made for, or that they were payments of legitimate business expenses. The fact that the letter was written in February 1997, some five years after the transactions, does not give me any great confidence in its evidentiary value.

Next is a money order payable to one A.D. Khurshid for $500.00, and following that, another money order payable to Mohammad Shahid for $500.00. Again, there are no documents to support those transactions, by way of invoices and receipts or anything to indicate what the money was paid for.

Next is a cheque or rather, a money order, for $600.00, payable to “Famous Video,” and again it is without any supporting documentation to establish why the money was paid.

The next item is certain payments, apparently made to Cana Imports Ltd., totalling some $8,000.00 and paid by way of a number of cheques bearing various dates during 1992. This amount was allowed, and it is not clear to me why it has been included in the schedule of expenses disallowed. Presumably, the Appellants’ agent was, for some reason, unaware that in the reassessment this amount had been allowed. However, that was the evidence of Mr. Wallace, and I have no reason to disbelieve that evidence.

The next item on the list is rent of $3,600.00 paid to a Mr. Filippelli. Again, following the Appellants’ notices of objection these amounts for rent were also allowed, as was the next item, which is hydro expenses allowed by Mr. Wallace during his reassessment.

Next are two payments, apparently made to Ace Travel Agency, and the total amount in connection with those is $4,266.57. There are two pieces of paper on the letterhead of “Ace Travel Agency” headed to “Whom it may concern”. The first says:

This is to certify that Mr. Safdar Chaudhary bought one (1) ticket from Trans Am Video on June 1, 1992. He has paid $839.57.

The second one says:

This is to certify that Mr. Safdar Chaudhary bought two (2) tickets from Toronto to Pakistan and back to Toronto for himself and for Liyaquad Chaudhary on the date of February 13, 1992. He has paid $3,427.00 for travelling.

And there are signatures which appear to be A.W. Sidor, and there is something in the nature of a seal to indicate that he is the general manager.

J was offered no explanation as to what business might have been conducted on the trips taken with these tickets, and there were no receipts or other documents to indicate charges against the business for hotels, meals, ground transportation, or any of the other expenses that one might expect to find associated with foreign business travel. I am not satisfied by this scant evidence that these are proper business expenses.

The next category of items of which the Appellants protest the disallowance falls under the heading “Advertising and Promotion.” Again, there is virtually a total absence of documentation, other than cancelled cheques, some of which are made payable to organizations, and one or two of which are made payable to individuals, and one of which is not made payable to anybody. Of these, I am satisfied that one cheque in the amount of $3,000.00, dated December 29, 1992, and made payable to “Sounds of Asia” is in fact in payment of legitimate business expenses in the nature of advertising or promotion of the Appellants’ business. It appears from Mr. Wallace’s evidence that that item was disallowed as a result of a misunderstanding on his part. In my view, that amount should be allowed.

There is also a cheque, as I mentioned a moment ago, for $650.00 which has no payee, but an examination of the endorsement on the back of the cheque suggests to me that it too was made in respect of a legitimate business expense. I find, on a balance of probabilities, even though the evidence is somewhat scant, that these two items do represent legitimate business expenses.

As to the evidence in this matter as a whole, I find that it falls squarely within the words of Mr. Justice McDonald, speaking for himself and for Justice Stone and Justice Linden, in Njenga v. R. (1996), 96 D.T.C. 6593 (Fed. C.A.), where he said in paragraph 3:

The income tax system is based on self monitoring. As a public policy matter the burden of proof of deductions and claims properly rests with the taxpayer. The Tax Court Judge held that persons such as the Appellant must maintain and have available detailed information and documentation in support of the claims they make....

As was the case in Njenga, what I have before me is insufficient documentation, further compounded by evidence which I find to be, at best, unreliable from the one person who gave evidence for the Appellants. Consequently, I am going to allow the appeals, but on this limited basis: that they are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that in computing their profits from the business Trans Am Video, the Appellants are entitled to have two items of expense, one for $3,000.00 and one for $650.00, referred to above, included in the computation of the income of the business. In all other respects, the appeals fail.

Appeal dismissed.