LAYCOCK Vs. FREEMAN, HARDY AND WILLIS, LTD

JUDGEMENT

(1.) Prior to April 1, 1935, the respondents, Freeman, Hardy and Willis Ltd., were the owners of all the shares in two limited companies which manufactured boots and shoes at factories belonging to those companies. The respondents themselves are the well-known firm of boot and shoe retailers, and for the purpose of their retail business they purchased from those two subsidiary companies the whole of the products of their factories and sold them in their shops. The subsidiary companies, being the vendors of their shoes to the respondents, thereby, the virtue of those sales, made profits. The subsidiary companies and the respondents being in law separate entities, the sales, of course, were real sales. As from April 1, 1935, as the result of certain resolutions of the two subsidiary companies and certain sale agreements, the respondents acquired the goodwill of the business of those companies, together with their freehold land, factories, plant, and so forth. Putting it shortly, they took over the whole of the assets, and they took over the shall of the two subsidiary companies, and thereafter continued to manufacture the same class of goods in the same factories, which had previously belonged to those two companies, and with the same machines. The products of the two factories were sold by the respondent their shops, but of course there was this difference in the position after April 1, compared with the position before April 1, namely, that, whereas in the former period there was a sale by the two subsidiary companies to the parent company whenever the products were sold, now the shoes reached the retail purchaser without any such intermediate sale having taken place. For the purpose of their internal accountancy, the respondents keep separate accounts for the manufacturing at these two factories, treating them for accountancy purposes as though they were separate concerns, and those accounts are kept in a way which is very common, indeed almost universal, in well organised concerns of any size. They are kept by treating the factory as an independent entity, and crediting it, as though it were a vendor, with a notional purchase-price for the goods it produces, that notional purchase price being arrived at by a method of adding a percentage of profit over and above the cost of production. In point of fact, that procedure, which was adopted after April 1, resembles superficially what took place before April 1, because, as the respondents had complete control of the two subsidiaries while they existed, they were able to fix the purchase-price which those subsidiaries were to charge for the goods which they supplied. Similarly, after April 1, 1935, they continued to fix the notional purchase-price on the same basis as that upon which it had been fixed before. I say that the resemblance is superficial, but of course the difference is essential, because, whereas in the one case the accounts reflected a true legal relationship of vendor and customer between two separate entities, they now do not reflect any such relationship, and are merely a means for the better information and guidance of the respondent company by departmentalising its own internal accounts.

(2.) In these circumstances, the Crown claims that sched. D, cases I and II, r. 11(2), applies. That, of course, is a rule which deals with successions to trades, professions or vocations. The effect of the application of that rule, effete applied, would be that the profits of the business taken over from the two subsidiary companies would fall to be ascertained, upon the footing that there were new businesses set up on April 1, 1935, and by the joint operation of that rule and r. 1(2) the measure of profits of those businesses would be the actual profits of the year, and not any profits of an earlier period. Rule 11, as it originally stood, was a rule which dealt, in a comprehensive paragraph, with cases where there was a change in the ownership of a business, whether that change was, for instance, by a change in the members of a partnership, or the dissolution of a partnership, or whether it was a change by the purchase of a business.

(3.) By the Finance Act, 1928, Section 32, that comprehensive rule was divided into two paragraphs, and was amended in order to bring it into line with the changes introduced in 1926 with regard to the measure on which profits were to be assessed for the purpose of sched. D. As it stands at present rule 11(2) provides as follows : If at any time after the said April 5, (1928) any person succeeds to any trade, profession or vocation which until that time was carried on by another person and the case is not one to which para (1) of this rule applies (that is the paragraph which deals with changes in partnerships), 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, profession or vocation at that time. I need not read the rest. That rule is contemplating that, when schedule D comes to be applied, it will be possible to find that the person sought to be assessed is deriving taxable profits from a trade, profession or vocation to which he has succeeded. Taking that sub-rule in connection with the first paragraph of schedule D itself, it is contemplating that there will be a charge to tax in respect of the annual profits or gains arising or accruing to the person succeeding to the trade from the trade to which he succeeds. If, for instance, the trade which he has acquired has come to an end, it is not possible to say of him that he is deriving any profits from it. The rule appears to contemplate the continuance of a trade, after a change in ownership by virtue of a succession. The language of Lord Kinross in the Scottish Case of Watson Brothers V/s. Lothian may usefully be referred to in this connection. He said at p. 444 : That, of course, is not the case we have to deal with, which comes second in the fourth head, and that is - if any person shall have succeeded to any trade, manufacture, adventure, or concern, or any profession within such respective periods, the duty payable shall be estimated in a particular way; the way there again being determined by a regard to the previous history of that trade, manufacture, or adventure, or concern, all upon the view that what was bought was a continuing thing, a continuing adventure, with all its prospects, with all its trade connections, and with all those things which result in the making of a profit.