1939 (12) TMI 7 - DSC - Income Tax

Summary

Issues Involved:
1. Whether the appellant company succeeded to the trade carried on by its subsidiary companies within the meaning of the Finance Act, 1926, Section 32(2).
2. Whether the appellant company set up a new trade after the amalgamation.
3. The proper method of computing the profits of the appellant company for income-tax purposes.

Issue-Wise Detailed Analysis:

1. Succession to Trade:
The primary issue was whether the appellant company succeeded to the trade carried on by its subsidiary companies within the meaning of the Finance Act, 1926, Section 32(2). The Court of Appeal referred the matter back to the Special Commissioners to reconsider their findings in light of the decision in Laycock v. Freeman, Hardy & Willis, Ltd. The Special Commissioners found that after April 7, 1934, the appellant company succeeded to the trade of bar rolling and plating formerly carried on by the subsidiaries. They considered that although this trade had been amalgamated as a department of the company's business, its identity had in other respects been preserved. The Court of Appeal upheld this finding, noting that the appellant company continued to carry out the same processes that the subsidiaries had previously done, from the steel bar stage to the production of tinplate. The only difference was that the steel bars were now produced internally rather than being purchased from an outside entity.

2. Setting Up a New Trade:
The second issue was whether the appellant company set up a new trade after the amalgamation. The Crown claimed that the appellant company must be treated as though it had set up the trades to which it had succeeded on April 7, 1934, and that the profits referable to those branches of their activities must be computed as the rule directs. The Court of Appeal agreed with the Crown's view that the appellant company should be treated as having started a new business. This artificial treatment was necessary to ensure that the acquiring taxpayer would not be charged with tax measured by the profits earned by the business at the time when it was owned by the predecessor.

3. Computation of Profits:
The third issue involved the proper method of computing the profits of the appellant company for income-tax purposes. The Special Commissioners found that there was no need to attribute any notional profits or expenses to the steel works or the plate works. The profits of the company's plate works were the actual profit on the sale of plate, which is the difference between the actual sale price and the actual cost of producing plate through each process. The Court of Appeal emphasized that the rule does not suggest that the taxable fund is anything but the real profits which the taxpayer has earned. The Court rejected the notion of introducing some element of notional profit, which would result in charging the taxpayer in respect of a profit which he has never realized. The proper method was to bring in the raw material, namely the steel bar, at the actual cost of production. This approach avoids any assumptions of notional sales and ensures that the taxpayer is only charged on actual profits realized.

Conclusion:
The appeal was dismissed with costs, affirming the decision that the appellant company succeeded to the trade of its subsidiaries and that the profits should be computed based on actual costs and profits, without introducing any notional elements. The Court of Appeal agreed with the Special Commissioners' findings and the method of computation, ensuring that the appellant company is taxed based on real profits earned.