TMI Blog1969 (11) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... idered in the present case in applying the time honoured formula under which, for income tax purposes, in valuing stockin-hand at the close of an accounting period (and consequently at the opening of the next accounting period (and consequently at the opening of the next accounting period) such stock is to be brought in at cost or if the market value be lower than cost, then at that lower value. For many years the taxpayers have kept their accounts upon a basis that has been accepted by the Crown as demonstrating the full amount of their profits or gains for the relevant periods for the purposes of income tax. But a challenge to this was made for the first time by the Crown in respect of the period of 1959. Of course in the long run, since any basis of valuation must be followed consistently, it would seem that in a broad sense it makes little difference which approach to market value is adopted. But questions of tax are seldom viewed in the long run. The dispute before us demonstrates that the Crown considers it preferable to challenge the previously accepted system, while the taxpayer considers it preferable to adhere to it. Ours not to reason why ; certainly not ours to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... replacement values will produce values lower than cost in many cases in which, according to the Crown's contention, market value is not lower than cost, and the stock must accordingly be valued at cost. Broadly speaking, the taxpayers contend that any diminution in hope of net profit on cost should be reflected in the terminal valuation, whereas the Crown contends that for income tax purposes a valuation below cost is permissible only when sale at a figure below cost is expected. I must say, as I did at an early stage in argument, that I have always thought that in this context market value meant the price at which the stock could be expected in due course to be sold in the market in which the trade of selling by the taxpayer was conducted. And after extensive argument I am not persuaded that my original assumption was wrong. It seems to me to be wholly artificial to speak of the values calculated in the manner stated as the market values of the stock : the taxpayers would not dream of selling in any market at those values when they aim, in due course of selling retail, at prices showing a gross profit of over 35 per cent. of those values. Nor was it suggested that there wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarded in the course of stock valuation as irrecoverable and may properly be treated as a loss incurred in the first period. This I believe to be the basis of the principle that for tax purposes market value, if below cost, may be taken as the value of stock-in-hand. The principle relates to loss of all gross profit and more, and not to diminution. The Crown's figures of valuation are based upon the taxpayers' estimate of retail selling prices in due course : but they allow a deduction for salesmen's commission. This, it is suggested by the taxpayers, reveals a fallacy in the Crown's approach, for, they say, all kinds of overheads, will be involved in producing these sales, overheads that will be absorbed in the mark-up involved in the taxpayer's method of valuation. I do not myself think that this shows a fallacy. Granted that market value means that which the stock is expected to produce on retail sale, it seems to me logical and reasonable to look for the money expected to reach the till as a result of sales : in effect the salesman's commission does not reach the till, though in practice he does not abstract it from money handed over the counter and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n accountancy practice. Although this may appear elaborate and artificial to a lawyer (see Lord Simond's speech in the Duple case at page 748) it is aimed, almost always successfully, at arriving at an aspect of the truth. For upwards of 20 years prior to 1959, the eminent chartered accountants who audited the taxpayers' accounts have accepted the taxpayers' method described by my Lord and which I need not repeat. The auditors would certainly not have certified the accounts unless, in their view, these accounts had presented a true picture of the taxpayers' profits or gains. The Crown must equally have been satisfied during all those years that the taxpayers' method fairly revealed the full amount of the taxpayers' profits or gains for the years in question. The findings of the special commissioners show that there are many chartered accountants who agree that this method, approved for so long by the Crown and by the taxpayers' auditors, is unexceptionable. The Crown, however, claim that now, at last, they have seen the light. They have discovered that they erred for more than 20 years in accepting the taxpayers' method as correctly showing the taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost (as the Crown contend), or (2) at its cost price or at replacement price in a notional market which would show an arbitrary profit calculated by the taxpayers if such replacement price is lower than cost (as the taxpayers contend). There appears to be some difference of opinion between accountants in deciding which of these two methods should be followed. I am tempted to echo what Lord Reid said in another context, at page 753 : . . . if the accountancy profession cannot do that, I do not see how I can. I feel, however, reluctantly driven to the conclusion that, in the present case, there is good reason for the change sufficient to outweigh difficulties in the transitional years, because the method consistently applied prior to 1959, however commercially sensible it may be and however true the picture it gives of the taxpayers' trading results over the years, does not for the year 1959, taken in isolation, accurately reproduce the profits or gains of that particular year as is required for the purpose of income tax. The method adopted must, for tax purposes, be not only consistent over the years but must produce the full profits or gains for each year. I think th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, in effect, as not having been bought in year A or in preceding years but in year B. Accordingly, the profit or loss in year A is not affected by the amount which has been spent in buying the closing stock. The profit or loss on that stock is left to fall in year B, in which year it will presumably be made. The only exception to that rule is an exception made in favour of the taxpayer. If, at the end of the year, the market price of the closing stock can be shown to have fallen below the cost price, the stock is taken into the account at the market price and thus the loss is anticipated. To that extent, the taxpayer is relieved from paying some of the tax he would otherwise have had to pay in respect of year A. If, on the other hand, there had been a rise in the market price of the stock at the end of year A, the rise is ignored and the stock is still taken into account at cost price. It is a cardinal principle of accountancy practice and of our tax law that, whilst provision may be made in the trading accounts for expected losses, profits must not be anticipated. No tax is chargeable on a profit until that profit has been achieved. It is, I think, important to realise that so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower ordinarily refer to the price in the market in which the goods were bought for resale-certainly not in the case of a retail taxpayer. I am conscious, however, that there are many businesses in which manufacturers hold considerable stocks of commodities such as steel, tin, tobacco, tea, rubber, and so on which are used in the course of manufacturing goods for sale. The market prices of some of these commodities fluctuate violently. There is no material before me to show how such stocks are dealt with in the profit and loss account when the market in which the stocks were bought has fallen by the end of the accounting period. I doubt whether the resale price of the commodities in question is the true criterion because the manufacturer has no intention of reselling them except as part of a manufactured product. In such cases the market price may well be the price in the market in which the commodities were bought. Such businesses are, however, very different from that with which we are concerned in the present case and, as Lord Reid pointed out in the Duple case, at page 755 : the real question is . . . . . . what method best fits the circumstances of a particular bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It was first stated by the Lord President, Lord Clyde, in Whimster Co. v. Inland Revenue Commissioners 1926 S. C. 20 ; 12 T. C. 813, 823, in these words: . . . . . the ordinary principles of commercial accountancy require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at the cost or market price, whichever is the lower, although there is nothing about this in the taxing statutes. The Lord President's market price has in later cases been silently transmuted into market value. Price and value have different meanings, though in a given case the price of an article and its value may well be identical. For the moment, I shall assume that market price means market value. I do not think that the method of valuing stock for which the taxpayers contend can be regarded as an assessment on the basis of market value. Their business is retail trade. They have the goods in order to sell them at retail. The price at which the goods might be bought and sold on the wholesale marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falls to be ascertained : here, the stock-in-trade at the end of the year. What, then, is the position where, as here, in the ordinary course of business, the most profitable method and the normal method of disposal of stocks-in-hand on December 31, 1959, involves the selling of them, or some of them, at special bargain sales, weeks or months after the relevant accounting year has ended ? There can be no doubt that this sensible method of doing business will involve expenditure which is properly referable to the stock thus to be sold. The goods have to be kept in store or on the shelves. They presumably are insured, at a cost. There may well be expenditure in advertising specifically to attract the public to buy these goods from the previous year's stock at the bargain sales. All this expenditure is incurred in 1960 for the purpose of securing the market price on 1959's leftover stock. Is it right to ignore such expenditure in assessing the market value of the goods at December 31, 1959 ? For it is ignored if one takes the market value simply as being the price which will be obtained at bargain sales in January or July or October, 1960, less salesmen's commission. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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