TMI Blog1939 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... the agency as principal and the agency was entirely responsible for finding outlets for the productions of the subsidiary companies; goods manufactured by a subsidiary company were marked with its particular trademark and the different trademarks had come to be regarded as marks for brands of the agency; papers issued by the agency bore its name and described it as sales office for the appellant company as proprietor of the subsidiary companies of which the names were set out; customers did not know which of the subsidiaries produced the particular goods which they bought; the agency accounted to the subsidiaries for the proceeds of sale, deducting a selling commission. On April 7, 1934, in pursuance of a scheme of reorganisation, all the subsidiaries went into liquidation and the liquidator of each agreed with the appellant company for the transfer to it of that subsidiary's undertaking and assets, including goodwill. Thereafter the subsidiary companies' mills became branches of the appellant company, sales continuing through the agency company. Assessments to income-tax were made on the appellant company for the years ending April 5, 1935, and April 5, 1936, on the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted of making steel bars which they sold in part to the subsidiaries, in part to outside purchasers, and part of their production they themselves used for the purpose of making what is known as blackplate in a factory of their own. Steel bars are produced by two processes, (1) the smelting of pig iron or scrap iron and casting it into ingots; and (2) the heating and the rolling of the ingots to turn them into steel bars. Those were the commodities which they sold to their subsidiaries. The business of the subsidiaries consisted in making from those steel bars tinplate which they sold. The further processes necessary for making the tinplate consist of cutting the bars, rolling them into thin sheets which are called blackplate, and then dipping the blackplate into a bath of molten tin and passing it through rollers, which turns it into tinplate. Those processes were the processes carried on by the subsidiary companies, and their profits were, of course, ascertained by reference to the price which they paid to the appellant company for the bars and the profits that they made out of selling the ultimate product, the tinplate. There is one thing that arises in the course of these opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson succeeds to any trade -I read only the relevant words- ......which until that time was carried on by another person and the case is not one to which paragraph (1) of this rule applies, the tax payable for all years of assessment by the person succeeding as aforesaid shall be computed as if he had set up or commenced the trade......at that time. The Crown claimed that on the facts of this case the appellants had on April 7, 1934, succeeded to the trades theretofore carried by the six subsidiary companies, and they claimed that accordingly, in assessing the appellant company to income-tax for the years in question, the appellant company must be treated as though it had set up the trades to which it had so succeeded on April 7, 1934, and that the profits of the appellant company referable to those branches of their activities must be computed as the rule directs. The matter came before the Special Commissioners, who held originally that the appellants had succeeded to those businesses and they upheld the assessments, subject to certain agreed amendments on figures. The appellants appealed first to the King's Bench Division, and Macnaghten, J., upheld the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a state of affairs as merely an expansion of the business of the acquiring company. The sub-rule directs that the business acquired shall, for the particular purposes mentioned, be held, so to speak, apart from the activities of the acquiring company and for those purposes be regarded in a different light. Where the company carrying on a manufacturing business acquires the business of a company which carries on a retail business, or vice versa, it is obvious that the artificiality of this conception is great. Nevertheless, so far as the sub-rule directs this artificial conception to be applied, we are bound to apply it. It is obvious that at one end of the scale there may be a case where there can be no doubt as to the continuing identity of the acquired business. At the other end of the scale there may be a case where it is impossible for a reasonable person to say as a matter of fact that the acquired business any longer is being carried on in any identifiable form. Whether or not a particular case falls within either of those two types of cases is I view it, a question of law. With regard to the area that lies between those two extremes, as I view it, it is a matter of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of their subsidiaries and their own original trade. I cannot take that view. It seems to me quite clear upon the construction of the sub-rule that this artificial treatment of what, in this case at any rate, is in truth one business is only to endure for the purposes of computation so long as the setting up of a new business is a relevant matter; and it ceases to be a relevant matter, I think I am right in saying, in the fourth year after the date of setting up. Having made those general observations, the next thing which I think it is convenient to do at this stage is to say a word or two about the decision in Laycock v. Freeman, Hardy Willis, Ltd. [1938] 22 Tax Cas. 288; 7 I.T.R. 237, because it is upon that decision that the argument of the appellants is mainly based. That was a case where a company carrying on a retail business had acquired the businesses of two subsidiaries of its own which had manufactured the articles sold by the parent company in its retail shops and sold them wholesale to the parent company. After the acquisition of those manufacturing wholesale businesses, the parent company continued to sell in its retail shops articles produced in the factories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re amalgamation and the business after amalgamation could be established, namely, the making of sales wholesale. That was the object of the argument, and it was held by this Court that it was not legitimate to introduce something so completely unreal and to invent a sale which never had, in fact, taken place, in order to keep alive for the purposes of the sub-rule a business which had in fact, ceased to exist. In view of that case, this Court, as I have said sent the present case back to the Commissioners, and it is from their finding that the present appeal originates. The finding of the Commissioners is to be found in paragraph 3 of the supplement to the Case. They find that the appellant company did succeed to the trades of bar rolling and plating formerly carried on by each of the subsidiaries on April 7, 1934, and has continued to carry on such trades . That is their finding and, in so far as it is a finding of fact, it could not be interfered with by this Court unless this Court came to the conclusion that there was no evidence upon which it could be based. The Commissioners then go on to explain how it was that they came to that conclusion. They put to themselves a quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is impossible to say that those businesses any longer exist, even for the artificial purposes of the sub-rule, and the only method of getting these businesses back into a state of existence is by assuming the continuance of the missing part of their operations, namely purchase of the steel bars. I must confess that if that argument had been a tenable one, if the result flowed from the premises, it would have been a very attractive one, because it would have meant that the sub-rule could only be applied to the facts of the present case by assuming at the relevant stage a transaction which never in fact existed, namely, a purchase of steel bars. On that basis it was attempted to say that the observations made in Laycock v. Freeman, Hardy Willis Ltd. [1938] 22 Tax Cas. 288; 7 I.T.R. 237, on the subject of notional sales applied equally to the present case. In my opinion, that argument cannot be sustained. It is based on a proposition which I do not think is an accurate one; it is based on the proposition that the businesses acquired consisted of buying steel bars and then processing them in order to produce the finished article. In my opinion, that is a misleading description ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of his profits falls to be dealt with in the ordinary way. Now, if we are to say that the matter must be treated as though the appellant company had sold to the tinplate part of its business the steel bars which it makes in the steel bar part of its business at a profit, the result in practice would be this, that the part of the profits referable to the businesses acquired would be ascertained on the footing that those parts of the business had acquired their raw material at a particular price, which in fact, of course, they had not. With regard to the rest of the profits of the appellant company, they would fall to be treated as though the appellant company had sold at a profit products, namely, their steel bars, to their own tinplate departments, which, of course, they had not; and if that were the basis upon which the thing worked, the result would be to bring into charge to tax profits which had not been earned at all. The solution, in my judgment, is along difference lines. It seems to me that the businesses acquired may properly, for the purposes of the sub-rule, be treated, and should be treated, as being at the steel bar stage, namely, the stage when those branches of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the article down to that stage is a real figure and can be ascertained; there is nothing notional, imaginary or fictitious about it. There is another way of arriving at precisely the same result, and it is this. It may be said that the appellant company should be regarded as carrying on the businesses acquired, but as having modified them or altered them by substituting for a purchase of the raw material a manufacture of it for themselves. That, as I have said, leads to precisely the same result. Speaking for myself, I prefer the other method of arriving at the result, for the reason that this latter method is one which involves the consideration of a problem of fact of a rather different character, because it is necessary to treat the business carried on after the amalgamation as a business of producing steel bars and turning them into tinplate. Such a business is arrived at at the expense, so to speak, of the original business of the company which, on that basis, must be treated as having given up pro tanto a particular branch of its activities. Whether or not in a given case on that way of looking at it the Commissioners would come to a conclusion of fact on the identity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lgamation, the tinplate branches of the appellants' business produce, each of them, in the course of their operations, what may be called a by-product; namely, scrap. That scrap is something which has a value. Previously the subsidiary companies sold it, now it is not sold; nevertheless it is a valuable thing produced in the course of their operations. What in fact happens to it is that, together with the scrap produced by the other branches representing businesses which have been acquired and other raw material bought outside by the appellant company, it goes back, so to speak, into a common pot; and out of that common pot further steel bars are produced which find their way to the tinplate branches of the business. The proper method of dealing with that scrap so produced, in the light of those facts, appears to me to be quite a simple matter; and it seems to me a perfectly simple matter to ascertain, on the basis which the rule directs, the profits of these acquired businesses without introducing any element of notional sale of scrap at all. In other words, the existence of that scrap has the result of reducing the cost of producing the next lot of steel bars, and that reduct ..... 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