Acme Slide Fastener Company Limited- v. Thomas Edward Knott, (The Queen)-, [1962] CTC 320, [1962] DTC 1261

OUIMET, J. ;—The Court, seized of the appeal against a judgment rendered by his Honour Judge T.-A. Fontaine, of the Court of Sessions of the Peace, on February 25, 1958, and a sentence imposed on March 26, 1958, upon charges arising out of the Income Tax Act, Chapter 52, 11-12 George VI, 1948, R.S.C., having examined the proceedings, the evidence and the exhibits, and DELIBERATED:

WHEREAS, on August 16, 1955, a complaint was laid by the respondent against the appellant, as follows:

“1. 1 am credibly informed and I have reason to believe that,

in Montreal, District of Montreal, on or about the 30th of June 1950, ACME SLIDE FASTENER Co. Ltd. having its Head Office in the City and District of Montreal, did make a false declaration or a deceptive statement in its income tax return on Form T2, Return for the year 1949 dated June 22nd 1950 and filed on June 30th 1950, pursuant to the Income Tax Act, Chapter 52, 11-12, George VI 1948, R.S.C., and amendments or regulations made thereunder viz. in omitting in said return certain assets in order not to disclose an additional net income of $8,805.46, thereby avoiding the payment of tax amounting to $2,431.84 payable in virtue of the said act.

2. Furthermore, in Montreal, District of Montreal, on or about the 30th of June 1951, Acme Slide Fastener Co. Ltd., having its Head Office in the City and District of Montreal, did make a false declaration or a deceptive statement in its income tax return on Form T2, Return for the year 1950, dated June 29th, 1951, and filed on June 30th, 1951, pursuant to the Income Tax Act, Chapter 52, 11-12, George VI 1948, R.S.C. and amendments or regulations made thereunder wiz. in omitting in said return certain assets in order not to disclose an additional net income of $29,560.55, thereby avoiding the payment of tax amounting to $10,249.00 payable in virtue of the said act.

3. Furthermore, in Montreal, District of Montreal, on or about the 27th of June 1952, ACME SLIDE Fastener Co. Ltd., having its Head Office in the City and District of Montreal, did make a false declaration or a deceptive statement in its income tax return on Form T2, Return for the year 1951, dated June 1952 and filed on June 27th 1952, pursuant to the Income Tax Act, Chapter 52, 11-12, George VI 1948, R.S.C., and amendments or regulations made thereunder viz. in omitting in said return certain assets in order not to disclose an additional net income of $25,801.24, thereby avoiding the payment of tax amounting to $11,765.36, payable in virtue of the said act.

4. Furthermore, in Montreal, District of Montreal, on or about the 26th of June 1953, ACME SLIDE Fastener Co. Ltd., having its Head Office in the City and District of Montreal, did make a false declaration or a deceptive statement in its income tax return on Form T2, Return for the year 1952, dated June 24th 1953 and filed on June 26th 1953, pursuant to the Income Tax Act, Chapter 52, 11-12, George VI 1948, R.S.C., and amendments or regulations make thereunder viz. in omitting in said return certain assets in order not to disclose an additional net income of $19,868.79, thereby avoiding the payment of tax amounting to $9,537.34 payable in virtue of the said act.’’

WHEREAS evidence was adduced before the Court below from May 95, 1956, until July 7, 1957, and judgment was rendered on February 25, 1958, the appellant being then found guilty on the four (4) charges as laid and sentenced, on March 26 of the same year, to a total fine of $12,000;

WHEREAS the present appeal was initiated on the same day and taken on délibéré by Honourable Mr. Justice Lazure on April 28, 1959;

WHEREAS the said délibéré was struck on December 15, 1959, mainly because the record had not been completed as of that date;

WHEREAS the undersigned took the present appeal under advisement on February 26, 1960, and the parties, by consent, adduced further evidence out of Court, on the trial de novo, from May 21, 1959, to October 5, 1960;

WHEREAS the original evidence and all the exhibits were filed into the record to form part thereof, also by consent;

WHEREAS the appellant filed a factum in writing on June 1, 1961, and the respondent did likewise on July 1;

WHEREAS the record was finally completed at the end of October of the same year;

WHEREAS, due to a very crowded court calendar, including a term of the Criminal Assizes in the District of Terrebonne and two terms in the District of Montreal, it has been impossible for the undersigned to study the record, examine the exhibits, analyze the evidence (comprising 371 pages in the Court below, and 223 in this Court, a total of 594), and take cognizance of the above-mentioned factums any earlier;

CONSIDERING that the learned trial judge appears to have based his judgment on the following reasons :

“Il s’agit surtout de savoir si certains inventaires des marchandises de la compagnie intimée ont été produits de bonne foi, c’est-à-dire s’ils sont véritables ou s’ils ont été faites de mauvaise foi, en fraude de la loi, surévalués, modifiés ou changés, etc., et, dans ce cas, si une telle surévaluation ou modification était permise au regard des dispositions de la loi et faite de bonne foi et légalement.

L’un des moyens de défense de l’intimée résulte de sa prétention que les marchandises en main étaient surévalués dès les inventaires préparés par les messieurs Yaphe. Cette prétention semble mal fondée parce que, si tel était le cas, il n’y aurait pas lieu d’en tenir compte, subséquemment, dans la préparation et la production de ces inventaires annuels et des bilans produits avec les déclarations d’impôt . . .

La compagnie intimée a fait entendre, comme son principal témoin expert, M. Arthur Gilmour. Ce témoin est obligé d’admettre

que la comptabilité de la compagnie laissait beaucoup à désirer, qu’elle était irrégulière et qu’elle n’était pas conforme aux méthodes comptables généralement établies . . .

Il faut donc toujours en revenir à ce que nous énoncions tout-à-l’heure à savoir que le compagnie intimée a diminué illégalement et frauduleusement le prix coûtant des marchandises en en diminuant la quantité ou en établissant la valeur de l’inventaire ou un montant arbitraire. On ne saurait être de bonne foi en recourant à de pareilles méthodes de fabriquer un inventaire.

Tout en essayant d’exonérer ou de justifier en quelque sorte la compagnie défenderesse, le témoin de celle-ci, ledit Arthur Gilmour, n’en est pas moins obligé d’admetter au cours de son témoignage que la comptabilité de la compagnie était défectueuse et qu’elle n’était pas conforme aux pratiques habituelles des comptables. Son témoignage est davantage sujet à caution puisqu’il se base surtout sur les inventaires préparés le 31 août 1954 alors que, à cette date, il lui était impossible de déterminer l’année d’achat des diverses marchandises en main et principalement les marchandises considérées comme inserviables, marchandises que le dit Gilmour a catalogué dans une proportion d’environ 50% comme hors d’usage . . .

Nonobstant la déclaration du témoin Gilmour, il nous paraît prouvé et établi . . . que la compagnie intimée a diminué illégalement et tout à la fois le coût de revient et la quantité des marchandises . . .

En résumé l’ensemble de la longue preuve qui a été faite en cette cause établit que l’intimée a fait des fausses déclarations dans ses rapports d’impôt sur le Revenu pour les années 1949 à 1952, fausses déclarations concernant la valeur des inventaires rapportés chaque année et, pour 1952, les entrées dans le bilan de créances doutueses ou mauvaises qui, en fait, ne l’étaient pas.”

(The italics are ours.)

CONSIDERING that, in view of the particulars furnished by the respondent, pursuant to a judgment rendered on December 7, 1955, and of the substance of His Honour Judge Fontaine’s own judgment, it appears that, generally speaking, there are three (3) classes of charges against the appellant:

1. Decreasing the value of its inventory for the taxation years 1949, 1950, 1951 and 1952;

2. Omitting to report sales of $366.01 for the taxation year 1950 ;

3. Wrongfully charging as doubtful debts certain amounts which were recoverable and were, in fact, recovered, and decreasing the amount of certain sales to three (3) customers ;

CONSIDERING that, by far, the most important of all such charges are those of having decreased the value of the appellant’s inventory for the four (4) taxation years referred to above ;

CONSIDERING that the evidence adduced before the Court below consisted mainly in the testimonies of the respondent, an official of the Department of National Revenue, Income Tax Division, and of one of his colleagues, Mr. R. Lacombe, as well as that of Mr. K. Ruddick, chartered accountant, auditor of the company appellant, who testified under protection of the Court;

CONSIDERING that the evidence adduced by the appellant, in the first instance, consisted mainly of an expert testimony on the part of Mr. Arthur Gilmour, and of a deposition on the part of K. Ruddick, above-mentioned ;

CONSIDERING that this evidence was supplemented in appeal with the filing of a considerable number of additional exhibits and the hearing of additional witnesses, on behalf of the appellant, including Mr. Jaromir Valenta, manager of Acme Slide Fastener since December 1955, John Jick, C.A., B. C. Lassner, manager of Klix Fastener Corporation, a competitor of the appellant, Harry Wasserman, ‘‘Zipper Consultant’’ in charge of the appellant company since 1953, Abe Ernst, of the Bronx, New York, president of Acme Slide Fastener since 1949, Jos. Carmel, Ivo Marinelli and D. Madrigano, respectively tool room foreman, production foreman and chain machine foreman for the company ;

CONSIDERING that the respondent was recalled as well as a representative from the Department and Karl Ruddick, to testify on behalf of respondent;

CONSIDERING that the Court intends to review only those parts of the evidence as are pertinent to the issue and which may be summarized and commented upon as follows:

Acme Slide Fastener Company Limited was incorporated and started to do business on January 1, 1949. Its only business was the manufacture and sale of zippers. At all material time, the shares of appellant were owned as to 50% by the Yaffe brothers, of Montreal, and as to the other 50%, by a Mr. A. Ernst, of New York City, U.S.A. The latter came to visit the firm infrequently but on an average of approximately two (2) to three

(3) times a year. He was the only one of the three who had any experience in the manufacturing and merchandising of zippers, having been in the business since 1932, in the United States.

In 1952, Mr. Ernst bought over the Yaffe brothers’ interest (one of the brothers having committed suicide at the time), for a total of $40,000, which was found to be the approximate value of the company as a going concern (being 50% of $80,000).

K. Ruddick, C.A., of Montreal, was the auditor of the company and prepared, for the use of the directors, statements concerning inventories, as well as balance sheets. He also filed as exhibits the company’s income tax returns, profit and loss statements, balance sheets and inventories for the years 1949 to 1953 inclusive.

Ruddick’s testimony was evidently far from satisfactory to the learned judge below. Indeed, a cursory reading of same would seem to indicate that Ruddick personally had something to hide. At one point (page 208), the judge even declared that he had thought of declaring the witness hostile . . . And there is no doubt in the mind of the undersigned that Ruddick’s services as an accountant and auditor to the appellant could hardly be called satisfactory in the light of generally accepted accounting principles.

However, it must be borne in mind that the company, and not Ruddick, is the object of the prosecution . . .

Furthermore, the relevant section of The 1948 Income Tax Act, under which the appellant was charged, namely Section 120(1) (a) (which is similar in wording to Section 132(1) of Chapter 148, R.S.C. 1952, as amended), reads as follows:

“120. (1) Every person who has

(a) made, or participated in, assented to or acquiesced in the making of, false, or deceptive statements in a return, certificate, statement or answer filed or made as required by or under this Act or a regulation .. . .

is guilty of an offence, and . . . is liable on summary conviction to . . .”

A distinction must be drawn, at the outset, between poor accounting practices, which might be difficult to unravel, and false or deceptive statements in an income tax return.

The respondent seems to base its own complaint on the fact that some papers, which were found in the premises and in the possession of the appellant, and filed as exhibits P-8, P-13, P-14, P-17 and P-18, were the true inventories related to the taxation years referred to in the complaints, as opposed to the actual inventories submitted to the Department along with the income tax returns for all such years (exhibits P-4 to P-7 inclusive).

The respondent’s contentions are based upon the assumption that certain figures, appearing in the said exhibits P-8, P-12, P-17 and P-20, represent a proper valuation of inventories as at the end of each of the taxation years 1949 to 1952. It was explained by witness Lacombe (in his testimony of October 5, 1960, at page 18) that this assumption had to be relied upon “because respondent had no factual knowledge of quantities or values of the inventories on hand at the end of any of the years from 1949 to 1952”.

There is no doubt that, at first sight such discrepancies coupled with certain alterations, which appear on some of the exhibits, may rightly have aroused a suspicion in the mind of the very able investigators of the Department.

However unsatisfactory some parts of his testimony may have been, the witness Ruddick gave explanations as to the manner in which these exhibits were prepared.

As at the end of every month (not only at December 31st of each year), Ruddick was advised of quantity statistics by the management of the company (namely by the brothers Yaffe), which he inserted on a standard schedule and extended at standard prices equivalent, in the case of stringers and zippers, to estimated costs to make and sell.

These monthly schedules and the statements prepared therefrom were then circulated to management for internal control purposes.

Such statistics were not used in the financial statements presented to the appellant’s bankers, nor were they used for purposes of computation of share valuations upon the transfer of shares between the shareholders in 19538.

On the contrary, the inventory used for the purposes of valuation of the share for sale purposes was the same as that shown on the income tax return for that year.

All financial statements used, for any purpose other than internal managerial control, reflected inventories in the same amounts aS were used in the reporting of income for income tax purposes.

The Messrs. Yaffe’s inexperience in the manufacturing of zippers and stringers, their very poor administrative ability coupled with the fact that Mr. Ernst, the president of the company, lived in New York, made numerous adjustments necessary from time to time.

Indeed, the evidence is to the effect that only Ernst had any idea of the actual value of the merchandise on hand. He stated that he used Exhibits P-8, P-12 and P-17 as a basis for the 1949, 1950 and 1951 computations in order to complete the annual financial statements of the company. He testified that he inspected the physical quantities of zippers and stringers and determined that the percentage thereof that were defective, obsolete or unsaleable.

Based upon his knowledge of the manufacturing cost of these products, he was then able to form an opinion as to the proper inventory valuation of such products.

He and the Yaffe brothers having agreed upon this valuation, Ruddick was then instructed that the inventory valuation of product inventory (which forms a part of the items included in P-8, P-12 and P-17), was a specific dollar amount. Naturally, this amount was less than the amount originally shown in these exhibits, because no allowance had been made for unsaleable quantities and unit costs included other than manufacturing costs. The total dollar value appearing in P-8, P-12 and P-17 accordingly required a downward adjustment (increasing in amount as unsaleable quantities on hand increased year by year) if such schedules were to reflect appropriate yearly inventory values. Such a procedure may naturally have appeared unusual both to the Department’s investigators and to the learned judge below because he did not have the advantage of listening to Ernst’s explanations which were given only during the trial de novo.

It is significant that Ernst should have commented on inventory values shown in figure in Exhibit P-8, because, in his own terms, “figures were completely out of line’’. He asked for corrections in such inventories and got them (p. 27). He also gave instructions as to future inventories. He swore that he ‘‘raised the roof’’, because he found that the merchandise produced by the company comprised a “lot of junk’’ and he “noticed very little improvement from year to year ”, As a matter of fact, ‘‘about 30% to 50% of the merchandise was no good and not fit to be shipped” (p. 32). This is why he gave instructions to reduce inventories, on account of obsolescence, by about 30% to 50%. In 1951, he got ‘‘real mad” (p. 34). And it was only in 1953, after the business was entrusted to the management of a Mr. Wasserman, formerly of New York, that a proper inventory was actually made, in order to enable Ernst to purchase the business for the above stated amount of $40,000 which was 50% of its actual total worth.

Jos. Carmel, tool room foreman, Ivo Marinelli, production foreman, and D. Madrigano, chain machine foreman, employed by the appellant since around 1950 or 1951, all testified to the lack of maintenance on all machinery, the processing of merchandise with worn tools, the poor quality of the merchandise, the segregation of the merchandise in 1953, after Mr. Wasserman’s arrival, in the form of ‘‘job lots’’ and ‘‘scrap’’ (namely, unsaleable or worn merchandise), former saleable production and current production.

Such testimonies were corroborated in some material particulars by Mr. B. C. Lassner, manufacturer of the Klix Fastener Corporation, who has been in the zipper business for twenty- three (23) years, as a competitor of the appellant.

Having studied Exhibit A-6 and compared the figures it contained with Klix Fastener’s figures of 1949, this witness has come to the conclusions that all his company’s prices for that year corresponded with those of Acme’s (p. 6). He also compared Exhibits A-7, A-9, A-10, A-12, A-13, A-15, A-16 and A-17, up to and including the year 1952, and came to the same conclusions.

He ventured to say that Acme’s zippers were ‘‘of a poor quality’’ and expressed the opinion that ‘‘most of what was put in the inventory in such small companies, because the supplies were not constant, might have easily become obsolescent”’.

Harry Wasserman, formerly of West End, New Jersey, who calls himself a ‘‘zipper consultant’’, came to take charge of the appellant’s business in 1953 in a managerial capacity.

“All their merchandise was scrapped’’, he says.

He made the inventory as at the end of 1953, in the month of February 1954, when the value of the goods in inventory was set at $93,000, and he gave this inventory to Ernst and Eli Yaffe to be used for the settlement between the two in the transaction that was subsequently made.

Furthermore, another additional witness, Jaromir Valenta, who described himself as manager of Acme Slide Fasteners since December 1955, said that he saw Exhibit P-8 and others first in August and September of 1958.

In his opinion, the cost of finished goods as expressed therein was “absolutely high’’. He therefore recalculated the values from the same papers and compared it with purchase invoices since 1949 (p. 7). He put the cost accounting in order at Acme Slide, establishing a percentage of efficiency of labour at between 90% and 93% (reduced to 85% in the chain production).

He was satisfied that unit prices of cost of raw materials, as distinguished from zippers and stringers on Exhibits P-8, P-12, P-17 and P-20, are substantially accurate (p. 20). His calculations and corrections are included in Exhibits A-5, A-9 to A-21 inclusive, which have to be read in conjunction with P-8, P-12, etc.

In order to arrive at his conclusions, this witness said that he had to open boxes of invoices which he had brought to his home and obtained from the company, and checked all invoices for different prices.

However, in this Court’s opinion, one of the most impressive parts of the evidence was supplied by Arthur W. Gilmour, C.A., a partner in the firm of Clarkson, Gordon & Company for the last nine (9) years (who, prior to that, had been for some thirteen (13) years an officer of the Department of National Revenue, where he held the position of Director of the Income Tax Succession Duty, Division for the district of Montreal), and who also is a lecturer in accountancy at McGill University.

At no time was he ever the auditor of the appellant. And it was only after the books of Acme Slide Fastener had been seized by representatives of the Department of National Revenue, that he was approached by an officer of the appellant and asked to carry out an investigation into the affairs of the appellant, to determine whether or not appellant and its officers had violated any of the provisions of the Income Tax Act (p. 221).

As stated by Gilmour (p. 231), Section 14(2) of the Income Tax Act requires that, for the purpose of computing income, an inventory of stock in trade be valued at its cost to the taxpayer or its fair market value, whichever is lower (or in such other manner as may be permitted by regulations). Cost, to the taxpayer, ‘‘consists of the total of the material costs, the labour costs and the manufacturing expenses’’. ‘‘Fair market value”” may mean the ‘‘current price at which goods may be sold or the realization value which can be obtained for defective or obsolete goods which cannot be sold for their cost of manufacturing” (pp. 232 and 233).

The ‘‘cost of manufacture’’ must be distinguished from the “cost to make and sell’’, the latter being the ‘‘cost of manufacturing plus all administrative and selling costs, such as salaries, commissions and advertising expenses’’. The cost to make and sell should never be used to establish inventory cost in a manufacturing concern (p. 236).

In his evidence, the witness Gilmour gives full particulars of the investigation conducted by himself and his assistants, and of the inventory determined by him as at August 31, 1954 (Exhibit D-1).

He states that, ‘‘in his opinion, based upon his work and the work of his staff, he had prepared an accurate inventory as at that date of $105,137.26” (p. 236).

It is noteworthy that Gilmour states, at page 238, that at the time of his investigation he had in his own words: ‘‘two firm anchor points . . .” that is January 1, 1949, when the appellant commenced operations and possessed no inventory, and August 31, 1954, when Gilmour was able to prepare an accurate inventory. As a result, he declares quite emphatically (pp. 238 and 239):

“As a result, we were able to state that, if an accurate inventory was prepared at August 31st, 1954—and we believed that an accurate inventory was prepared by us at that date— then the true income earned by the Company during that entire period has been disclosed.’’

(Italics are ours.)

Although he admits that quantities in inventories ‘‘ought never to change” (p. 301) and that ‘‘it should have been possible for the company’s officers and their auditors to have made an accurate account’’ (p. 302) (it never being a good professional practice to reduce quantities), he conceded that, from his own experience, he had seen many similar alterations in inventories (p. 315).

However, ‘‘if a gross understatement of inventory had been

made, then the profit of the company would have been increased tremendously to the exact extent that inventories had been understated” (p. 330).

Indeed, the profit arrived at in 1954 (based on the inventory made by Gilmour’s staff at the time) would have been increased by at least $100,000 if this was the case.

On the other hand, relying on the fact that his inventory of 1954 was accurate and ‘‘that the figures of that year were comparable to earlier figures’’ (p. 331), the witness came to the conclusion that there had been no understatement.

He went on to say that, from his own experience, many interim statements were prepared by auditors with a view to satisfy their client (p. 345).

In his opinion, differences as shown in Exhibits P-8 et seq. “may represent a perfectly normal record of obsolete or valueless stock carried forward from year to year’’ (p. 349).

It is in evidence that the company never cleared their warehouse and never threw out old goods. The value of obsolete materials should have been subtracted, but the witness has, in his own experience, ‘‘seen amounts as high as $38,000, representing obsolete goods, in the inventories of other companies which he had audited’’ (pp. 352 to 355).

“The amount of $64,167.25’’, he added, “may well represent the cumulative total of amounts deducted from earlier inventories or the cumulative amount of obsolete stock deducted each year’’ (p. 359).

Mr. Gilmour insisted that a concealment of inventory ‘‘never successfully understates profits” and that, ‘‘when an honest inventory is taken, all concealed profits must show, which they did not when his own accurate inventory was conducted in the year 1954 (p. 364).

Granting that the appellant’s auditors’ methods may have been ‘‘extremely stupid’’, he, nevertheless, stated that amounts which appeared in income tax returns forming the basis of the present prosecution are “much closer to the true value of the goods and inventory than those appearing in informal statements seized in the hands of the company’’. (p. 366).

Mr. Gilmour’s testimony was supported by that of Mr. John Jick, C.A., of Clarkson, Gordon & Company.

Stating that the calculations of one of the Department’s officials, through his formula as expressed on Exhibits R-2 to R-6, would not necessarily produce the true cost of sales figure (p. 4), because the most important factor had been ignored, he contended that prices shown on Exhibit P-8 and following were not appropriate, and he finally concluded that the value goods in inventory, “one had to estimate the cost of manufacturing, but one should not add the selling cost’’.

Such experts’ testimonies tend to confirm the explanations given at length by Ruddick as to the reductions he made on instructions from Mr. Ernst and the Yaffe brothers.

The method of revaluation used was suggested to him (p. 182).

Similarly, the confidential nature of the statements forwarded to Mr. Ernst on January 26, 1951, which seems to have impressed the learned trial judge as deeply as the investigators of the Department, was, in the opinion of the undersigned, the subject of a satisfactory explanation.

Indeed, as at March 10, 1949, Mr. Ruddick sent a long letter to Mr. Ernst, which was filed as Exhibit P-53, in which the following sentence talks more eloquently than Ruddick’s testimony as to the question of difficulties experienced by Acme Slide and its administrators:

“Of course, I realize that even the above adjustment is not sufficient to correct the material cost, but outside of the various mistakes due to inexperience, and consequently the tremendous waste, I cannot find another explanation. Any hints or suggestions by yourself to trace the above discrepancy will be appreciated.”

On July 18, 1950, he wrote again (Exhibit P-50) and his letter terminates as follows:

“Naturally, I would have been more pleased if there had been no error in inventory, with the results as they were, that is showing a profit. I shall endeavour to give the monthly figures more personal supervision in the future.’’

A mere glance at Exhibits P-22 and P-23, showing calculations in pencil, would, at first blush, seem to indicate that the corrections or calculations reflected an intention on the part of Mr. Ruddick to reconcile the inventory prepared for the use of the management with inventories as prepared for the use of the Department.

However, in view of the explanations given and also in view of Mr. Gilmour’s testimony, such apparent discrepancies are, in the opinion of the undersigned, satisfactorily accounted for.

It does not seem to stand to reason that such apparently compromising papers would have been kept purposely in the company’s files, as they were of no use to anyone once the yearly inventory sheets had been finalized and sent to the Income Tax Department. The same applies to Exhibits P-15, P-16, P-17, P-18 and P-20.

On the other hand, Exhibit P-14, being a letter dated January 26, 1951, excerpts of which are quoted herein, might present disquieting features, were it not for the evidence taken as a whole which makes them plausible. Such excerpts are as follows :

“Enclosed find confidential statements for the year ended December 31st, 1950. These statements show the results of the year operations, except for the cost of merchandise, which is only estimate!

Needless to say these estimated figures are only for your own personal information, and should at no time be made available to anybody else.

As soon as we have the actual inventory established and the final statements completed, I shall ask you to return these provisional statements to me.’’

It is hardly surprising that the very efficient investigators of the Department, upon falling on such apparently damning admissions, would have jumped at the conclusion that ‘‘there was something rotten . . . not in Denmark, but in the Acme Slide Fastener Company . . .”!

However, when read in conjunction with the context of the evidence adduced by Ruddick, as confirmed by Ernst and Wasserman, such statements may now be considered as quite innocuous.

The same remark applies to the letter of January 23, 1951, addressed to Ernst, filed as Exhibit P-13, wherein Ruddick states :

“You will note that the stringers and zippers are not priced for reasons we discussed when you were in Montreal . . .”’

and to the sentence in Exhibit P-9, dated February 25, 1950:

“You already know about the discrepancy of $8,000 in the inventory figures.’’

Exhibits A-1 to A-20 permit the Court to come to a definite conclusion that calculations in Exhibits P-8 and following, tally with the overall situation as of the different years which are covered by these exhibits.

Concerning the poor quality of the zippers turned out by the company as at December 6, 1951, Exhibit A-34 is quite impressive. It is a letter forwarded to Mr. Eli Yaffe by Lou Elkin, of Winnipeg, Canada, in which he says among other things:

“There have been numerous complaints about the quality of zipper that is being turned out. It seams (sic) that a lot of the tapes are cut too short on top, teeth missing and zippers coming apart at the bottom. Also that they don’t measure a true size; a 614 measures 614 etc. I’m returning the defective ones that I’ve replaced here so that you can see for yourself.’’ On April 23, another remark is to be found :

“Enclosed you will find zippers that they got. The tapes are filthy dirty and are a disgrace to send out to an account . . .

Are your inspectors wearing smoked glasses? Or do they sleep standing up ?... ”

Similar unflattering remarks are to be found in letters dated July 8, December 19, February 24, 1953, May 11, 1953, June 17, 1953, October 14, 1953, November 7, 1953 and November 26, 1958.

On December 10, the situation seems to have been improving somewhat as appears from the following excerpt:

“From the looks of the No. 3’s that are being shipped now, there is evident (sic) a marked improvement in the quality. Keep it up!”’

CONSIDERING that the evidence as a whole indicates that the original quantities and values of stringers and zippers, as they appeared in Exhibits P-8, P-12, P-17 and P-20, did not represent a computation of inventory values of these products for the purpose of determination of income subject to tax in accordance with the provisions of Section 14 of the Income Tax Act ;

CONSIDERING that the purported inventories of these products included substantial quantities of defective and obsolete material which should have been segregated from saleable quantities as a preliminary step in the computation of proper inventory valuations ;

CONSIDERING that Exhibits A-7, A-10, A-13 and A-16 show cost calculations per yard of aluminium and brass chain (stringer) and zipper based upon the actual material, labour and manufacturing overhead costs incurred in 1949 to 1952 inclusively ;

CONSIDERING that such costs are, in all cases, substantially less than the unit prices mentioned in Exhibits P-8, P-12, P-17 and P-20, the whole appears more clearly from Exhibits A-2, A-12 and A-33 ;

CONSIDERING that witness Joseph Jick gave evidence on behalf of appellant to show that calculations, made by one of respondent’s representatives, and submitted in Exhibits R-3 to R-6 inclusive, were entirely meaningless, in that a serious error in accounting principles had been made in the computation of “cost of sale” (p. 4, October 5, 1960) :

“The most important factor, which has been ignored in applying the formula which has been applied in Exhibit R-3 relates to machine or labour inefficiencies incurred in the manufacturing process. For example, if products have been manufactured and have not been sold and are unsaleable for various reasons, such as damage in the course of manufacture, or obsolescence due to market conditions, the cost of manufacturing these units which do not appear in the total units sold, is also a cost of sales item in addition to the cost of the sales actually sold.”

CONSIDERING that the second charge against the appellant, namely that of omitting to report sales of $366.01 for the taxation year 1950, appears to have been refuted by Exhibits A-22 and A-23, which are two (2) credit notes totalling the same amount ;

CONSIDERING that, as to the third class of charges, namely that appellant wrongfully charged as doubtful debts certain amounts which were recoverable and were in fact recovered and decreased the amount of certain sales to three (3) customers, such charges appear to have arisen due to a misinterpretation of the books of account by respondent, in the light of principles involved in accounting for allowances claimed for doubtful debts, under the provisions of Section 11(1) (e) of the Income Tax Act;

CONSIDERING that, at the end of any taxation year, the law allows a deduction from income in a reasonable amount as a reserve for doubtful debts;

CONSIDERING that, in his evidence, Mr. A. W. Gilmour referred to two (2) methods in accounting for bad and doubtful debts:

“1. To write the debt off the books completely; if the debt is

subsequently collected, the amount collected is credited anew to the profits for the year in which it is collected; or

2. To make a charge to profits and credit what is known as a provision for doubtful debts; if the debts become uncollectable, the amount is written off against that provision.”

CONSIDERING that, with the exception of one or two cases involving minor accounts, Gilmour consistently stated that reserve for doubtful debts was required, in respect of the accounts under questioning, and submitted Exhibit D-7 showing the continuity of the reserve in subsequent years, and concluded by saying (p. 269) :

“I say, without hesitation, that the amount set up at the end of 1952 should have been greater, in my opinion.”

CONSIDERING that the complaint in respect of the offence for the taxation year 1949 was laid after the expiration of a five (5) year period prescribed by Section 124(4) (now Section 136(4) ) of the Income Tax Act and more than one (1) year from the day on which evidence, sufficient, in the opinion of the Minister, to justify a prosecution for the offence, came to his knowledge, the seizure of the appellant’s books and records having been made on March 9, 1954 and the complaint laid on August 25, 1955;

CONSIDERING that, however haphazard may have been the manner in which the appellants and their auditors computed the inventory, the evidence submitted, both at the first trial and in the trial de novo, appears amply to support the appellant’s contentions that the respondent has not discharged the onus of establishing that false and deceptive statements had been made by the appellant in its income tax returns on Form T2 for the years 1949 to 1952 inclusive;

CONSIDERING that the presumption of innocence applies in the present case as in all other criminal cases and that, in any event, the appellant was at all times entitled to the benefit of a reasonable doubt;

CONSIDERING that the respondent’s evidence is mostly circumstantial in nature and that the Court must apply to it the principles expressed in the Hodge’s case (1838) (Crankshaw, 7th Edition, pp. 814 et seq.), namely that:

“1. Circumstances from which a conclusion is to be drawn

must be fully established ;

2. Each fact adduced in evidence must be consistent with the conclusion arrived at ;

3. Such circumstances must be of a conclusive nature; and

4. Such circumstances must exclude, beyond any reasonable doubt and with moral certainty, any other logical hypothesis but the guilt of the accused;”’

CONSIDERING that such evidence appears to be more consistent with the accused’s innocence than with its guilt;

CONSIDERING that the weight of circumstantial evidence adduced by an accused is sufficient if it creates a reasonable doubt ;

CONSIDERING that the undersigned, having instructed himself accordingly, cannot but come to the conclusion that the charge in respect of the year 1949 is unfounded in law as well as in fact, and that all charges for subsequent years up to and including the year 1952 are equally unfounded in fact;

CONSIDERING with respect that the judgment a quo should be reversed and the appeal maintained ;

For THESE REASONS:

Doth Maintain the appeal ;

Doth Acquit the appellant of all charges brought against it in respect of the taxation years 1949 to 1952 inclusive;

DotH ORDER the respondent to return to the appellant all books, documents and exhibits seized in the present instance;

DotH RESERVE judgment, subject to representations, as to possible fees to be recommended under Section 731 of the Criminal Code.