PATRICK (INSPECTOR OF TAXES) Vs. BROADSTONE MILLS LTD

JUDGEMENT

(1.) I will endeavour first to state the question for our consideration as simply as I can. The company has always adopted a system of accounting which is known as the base stock system. Under that system the fixed process stock, i.e., the cotton which is on the machines, does not appear in the trading account at all, and the spare process stock is taken at an arbitrary figure. The contention of the company is that the system is well recognised and is in accordance with the principles of sound commercial accountancy and that it ought to be adopted in order to arrive at the companys liability to tax. On behalf of the Crown it is said that, even if the system is satisfactory for ordinary commercial requirements over a period of years, it is not a proper way in which to arrive at the companys profits for taxation purposes in any year of assessment, and further that it does not show the full amount of profit for the year in question. Moreover, it is claimed that no system will give the true profits of the year unless there is a valuation of stock made (either on market price or cost price) at the beginning and at the end of the accounting period; in other words, if there is a variation between the beginning and the end of the year in the amount of stock, or in its value, those are matters for consideration which are omitted to an extent if the companys method of valuation is applied. The Commissioners found (in paragraph 15 of the case) that the method adopted by the company concerning its base stock in its accounts is one of the methods recognized in this pNicular trade of cotton spinning and is in accord with sound commercial practice. They also found that the method the company had adopted for computing its profits was in accordance with sound commercial practice; and they allowed the appeal against the assessment.

(2.) THEY did not consider the third contention put forward by the representative of the Crown, that the companys method 'did not show the full amount of the profits of the relevant year, but showed a distorted view of those profits and understated them, and the company had been undercharged in the first assessment made upon it.' Their failure to consider this has led to the expenditure of much time in this court. Mr. King, on behalf of the company, submitted that on the findings of the Special Commissioners the company was entitled to succeed. Sir Andrew Clark, on behalf of the Crown, submitted that, notwithstanding the findings, the method adopted could not be a proper way to ascertain the profits of the company in the year of assessment if it did not show the full amount of the profits, or if it showed a distorted view of them, and he set out to show that this was so; to which Mr. King replied that we ought to be guided by the findings of the Commissioners on fact. All this could have been avoided if the Commissioners had made a finding on the third contention. They ought to have done so. For some time I thought that this court ought to remit the case to them for a finding, but it was put to us that there could only be one answer, and that, in such circumstances, there was no point in sending the case back. There is a further matter to which I direct attention. Four witnesses gave evidence before the Special Commissioners, who set out a summary of their evidence in the case. In each case the Commissioners say of the evidence, 'which we accepted.' I do not know what that means, particularly in regard to the evidence of the accountants. If it means that they accepted the views given as those of the witnesses who gave them it carries one nowhere. If it means more than that, it does not appear to me that they could accept both of two conflicting views. The essential requirement of a case stated is that it shall contain the findings of fact of the tribunal which states it. This case is lacking in that respect. It is said by Mr. king that we ought to assume that the Commissioners, by reason of their conclusion, accepted the evidence of Mr. Robson in preference to that of Mr. Gower. That may be a fair assumption to make; but the Commissioners, have already said that they accept the evidence of both, and nowhere do they say that Mr. Gower is wrong in the view he expressed that the method adopted by the company led to a distorted view of the profits in the relevant year. I mention these matters with the object of saving time in future cases. It is not that which someone says which is of importance. The court ought to have before it the findings of fact of the tribunal; if those are clearly stated there is usually no need to set out the evidence which is given.

(3.) THE next four paragraphs in the case concern the witnesses who appeared before the Special Commissioners and paragraph 9 begins in this way : '... the secretary of the company attended and gave evidence before us (which we accepted) to the following effect.' He said that it was essential for the economical running of a mill that the machines should always remain clothed, and he described the system of buying and selling the cotton. He said that the fixed process stock was taken into the companys balance sheet as a fixed asset and did not figure in the trading account, and that the directors of the company had always taken the view that that was the way they wished the accounts to be presented to the shareholders, it being their view that a true trading result was arrived at in that way. I think it might well be said that if one had every year the same amount of base stock and fixed process stock, and if the value of it was the same, it would not affect the position of the trading account. But if the amount changes and the value changes, the position is not the same. The secretary is further recorded as saying : '... that the cotton on the machines (i.e., the fixed process stock) is always changing and is always on the move, and that the cotton on the machines at the end of the accounting period had in fact cost the company 42.85 pence per pound as shown in exhibit D2. The cotton on the machines at the end of the accounting period must have been bought during the period, and its price would be included in the purchases charged in the companys accounts. The price would, however, have been debited to the particular sale occasioning the purchase of the cotton. The 136,000 pounds of cotton on the machines at the end of the accounting period had cost the company 31.88 pence per pound; that was the bale price, plus the cost the company 31.88 pence per pound; that was the bale price, plus the cost of processing work done on that stock. That cost turned into sterling was 7,892 plus 16,425. The company had in fact allowed cotton bought at the advanced price to replace cheaper cotton on the machines. It had, however, advanced the price of yarn immediately the raw cotton price increased : the increase in the price of raw cotton was immediately (and, in his opinion, rightly) priced on yarn and not left on the base stock on the machines.' Mr. Robson, a member of a firm of chartered accountants, gave evidence on behalf of the company, which again the Commissioners say that they 'accepted.' He said that the company had followed 'a recognized commercial accountancy basis. The base stock method is a good method of accounting, though some other people might say there is a better method. He did not agree that it was undoubtedly a better method to bring in base stock at the beginning and end of the year at cost or market value; business people who consider the base stock method suitable in their businesses consider it the best.' He added that 'an accountant would give an unqualified certificate to accounts as giving a true and fair view of the profits of a company whether it employed the one method or the other so long as the company had adhered to one method consistently' from year to year. Later, in the record of his evidence : 'He agreed that in times of rising prices accounts prepared on the base stock method would show profits lower in amount than accounts prepared on the cost or market value basis; in times of falling prices, the opposite result would be produced.'