1938 (12) TMI 16 - DSC - Income Tax

Summary

Issues Involved:
1. Application of Rule 11(2) of Schedule D, Cases I and II.
2. Determination of whether the business of the two subsidiary companies continued after April 1, 1935.
3. Assessment of profits for tax purposes post-acquisition.

Issue-wise Detailed Analysis:

1. Application of Rule 11(2) of Schedule D, Cases I and II:
The Crown claimed that Rule 11(2) of Schedule D, Cases I and II, applied to the respondents' acquisition of the two subsidiary companies. Rule 11(2) stipulates that if a person succeeds to a trade, profession, or vocation previously carried on by another, the tax payable shall be computed as if the successor had commenced the trade at the time of succession. The rule contemplates a continuing trade after a change in ownership, implying that the successor derives taxable profits from the trade taken over.

2. Determination of whether the business of the two subsidiary companies continued after April 1, 1935:
The respondents, Freeman, Hardy, and Willis Ltd., acquired the goodwill, land, factories, and staff of the two subsidiary companies and continued manufacturing in the same factories. However, the Special Commissioners found that the business of the two companies, described as "manufacturing wholesale concerns," ceased to exist after April 1, 1935. The essential part of the business that realized taxable profits, namely the wholesale selling of products, disappeared. The respondents sold the products directly in their retail shops, changing the nature of the business from wholesale to retail.

3. Assessment of profits for tax purposes post-acquisition:
The Crown argued that the profit made by selling the boots and shoes retail could be split into a wholesaler's profit and a retailer's profit for tax purposes. However, the court rejected this argument, stating that such a division was illegitimate for income-tax purposes. The profits realized by the respondents through retail sales could not be attributed to the trade taken over from the subsidiaries. The court emphasized that no profit is realized until the goods are sold, and the profit realized is the profit from the sale, not from any notional intermediate sale.

Conclusion:
The court concluded that the Special Commissioners were correct in finding that the businesses of the two subsidiary companies ceased to exist for the purposes of Rule 11(2). The manufacturing continued, but the wholesale selling, which was essential for realizing taxable profits, did not. The respondents' profits from retail sales could not be considered as profits from the trade taken over. The appeal was dismissed with costs, affirming the decision of the lower court.