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TMI Blog1960 (3) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... repeat that I shall treat the question posed as relating to those three years. The special Commissioners then put a second question, to which I may make some brief allusion hereafter. The question arises in connection with the computation of the profits of the company, Duple Motor Bodies Ltd., for the purpose of Income Tax under Case I of Schedule D. Put in the language of the statute, which language is now enshrined in section I27 of the Income Tax Act, 1952, the real question to which this matter is related is : For the years in question, what were the full amounts of the profits or gains of this company's trade ? Before Whimster Co. v. Inland Revenue Commissioners, the profits or gains of a trade were, I understand, ordinarily arrived at, in the case of a company such as this, by discovering what the trading receipts were for the year in question and then deducting from those receipts the proper expenses which were allowable according to the Income Tax legislation. But since the Whimster case 1, it has been recognized that, for the purpose of ascertaining the full amount of the profits or gains of a trade, it is (or, at any rate, it may be) also necessary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses (or, at any rate, in this case) the cost of the materials used and the wages of the labour directly employed. The on-cost method goes further; it says that you should not exclude a proper proportion of other, more general costs of the company's business, some part of which should be attributed to the work which was in progress at the relevant dates. When Mr. Bucher opened the case for the Crown before us, be made it plain that what the Crown desired was that we should decide this matter as one of broad principle; that of the two champions being displayed before us, we must decide as a matter of broad principle between Sohrab and Rustum. Similarly, Mr. Borneman, for the taxpayers, invited us to decide that the direct cost method was the one that, generally speaking, should receive the imprimatur of this court. In support of these views, general arguments were put before us which clearly have much force. It was said by Mr. Bucher that if you are inquiring what is the value of, say, stock-in-trade, and in the circumstances you are to arrive at it by looking at what it has cost you to produce it, then it is not realistic to exclude any part of the general costs o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inconclusive; and certainly, if we adopted the drawing of the line which was indicated by the special commissioners and which Mr. Bucher was inclined, I think, to accept, though be thought it was wrong, we should be giving our sanction to a purely arbitrary definition of the limits of indirect costs which should be taken into account. What we have to do, I repeat and emphasize, is to apply our minds to the question of the proper way of valuing work in progress at the beginning and end respectively of the tree years with which we are concerned as it affects the profits or gains of the Duple Motor Bodies Ltd. At this stage I will cite two statements which were cited by Singleton L.J. in Patrick (Inspector of Taxes) v. Broadstone Mills Ltd. The first citation comes from the opinion of Lord President Clyde in the Whimster case itself. It is as follows : In computing the balance of profits and gains for the purposes of income tax, or for the purposes of excess profits duty, two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the last four words, but I do not think that criticism is justified. If either method is a proper method for arriving at profits for general commercial purposes, then it satisfies the test which is suggested by Lord President Clyde, but, of course, it still leaves it to be debated whether, in the particular circumstances of a particular case, it is fair. The commissioners went on : In this state of affairs we find that it is very much a matter of policy for the decision of the directors of a company which method should be used. A little lower down the commissioners proceed to deal with the still more vexing problem, as they thought and as I think : If in any particular case you do choose the on-cost method, then what of the indirect costs do you include ? As regards that, they said : If the on-cost method is applied, different accountants may apply different recognized variations of this method : and, whatever recognized variation of this method is applied, the accountancy profession as a whole would not condemn any particular recognized variation as being unsound. Furthermore, we find that there is considerable scope for difference of opinion as to how a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g more in the cost than the mere cost of labour and the cost of the material that has gone into that particular article. It seems to us that it has really cost more to build a vehicle body than just the cost of labour and material. The object of the on-cost method-whether we are right or wrong about this-is really to get at the cost; and as we are coming down on the side of the on-cost method is appears to us that any proportion of overheads, which on that method is to be attributed to cost, should be limited to factory overheads, namely, the overheads of the place where the thing is actually being made. We realize that the expression factory overheads is rather vague; but, since we are asked to decide this matter on a broad question of principles, we feel, as we have already said, that it is inevitable that a wide field for discussion should be left open and we do not feel able to define the term factory overheads. They conclude : We finish where we began, by saying we know full well that we have left a wide area open. We do not think we can help that. I cannot refrain from observing that it seems to me an obvious criticism of the Crowns argument that if, as a broa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have made from the Broadstone Mills case and also on the results it would or might appear to lead to, of which the citations from the case stated will have given sufficient illustration. I take by way of example what was said at the beginning of the Crowns contention-and I gather the special commissioners in some sense founded themselves upon this-that obviously, if you are asking how much it cost to produce something, you should not exclude altogether overheads, and it is unrealistic to do so. But the conclusion of the passage I have read seems to me to be this, that if, as the commissioners say, production is slack, it follows that the proportion of overheads attributable to the work in progress is larger, from which they apparently are led to the conclusion that the taxable profits are necessarily larger - a proposition which I venture to think is self-condemnatory. But I return to the facts of this case. There have been exhibited certain schedules, and I will make some reference to the figures. For the first year which has been the subject of debate, ended March 31, 1951 - since, by section 127, you look at the preceding year - you find this on the figures : the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basing themselves on the passage I have quoted. They were saying that because, owing to a slackening off of business, a greater share of overheads must be applied to work in progress, therefore the taxable profits of the taxpayers were greater. I add only this, that in order to arrive at the figure for which the Crown contended -namely, Pounds 14,000 excess of value of work in progress at the end as compared with the beginning-the proportion of overheads taken in as at March 31, 1950, was 27.9 per cent. of the whole, and at the end it was 40.5 per cent. The justification for these percentages has not been debated, but they make it perfectly plain that the increased value of the work in progress depends obviously on the fact that these taxpayers were doing less work. There was before us some discussion on the matter of onus of proof, and, of course, I accept it that where the taxpayer is assessed and complains that the charge made upon him is wrong, he must show it to be wrong; but also, as we all know, and as Mr. Bucher naturally and frankly conceded, in discussing the case the onus may shift from time to time from one party to the other. In considering the proper way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I would therefore dismiss this appeal. Pearce, L.J. I agree. There is a divergence of view in the accountancy profession as to the respective merits and defects of the direct cost and the on cost methods. The commissioners were asked by both sides to regard this case as a conflict a outrace between the two methods, and to give their verdict to the winner. We, too, have been asked to give such a verdict, but it would be wrong to lay down such a general rule as if it were a matter of law. It is a question of fact in each case to ascertain the true profit. The result has been that the ascertainment of the particular profits for the particular year - which, after all, was the real object of the inquiry - has been a little submerged by this ideological dispute. The costing of the work in progress, though it is a necessary part of accounting both from a commercial point of view and since the Whimster case, from the Income Tax point of view; yet it is only a means to the ascertainment of the profit and not an end in itself. Moreover, one year will correct the errors of another. And it would be unfortunate if dogmas of method obscured the real purpose - the findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result on the facts before the court : broad academic arguments are quite unsuited to the processes of the English law. Here, on-cost has been declared by the commissioners to have their vote as a general matter, regardless of the fact that when the details are looked into it produces an absurdity. Judged by that touchstone, the commissioners could not have come to the conclusion they did; but they were not looking at the facts, but at the theories which were so largely debated before them. The result is that, taking their eyes off the ball, so to speak, they came to a conclusion which is not, when the facts are looked at, tenable. The appeal must, therefore, be dismissed, though not quite on the ground on which the judge below dismissed it, for he decided upon the footing that the directors had the right to choose the method of costing for Income Tax purposes. In fact, of course, they have the right to choose the method vis-a-vis their shareholders and for the good of the company, but it cannot be that they are the arbiters when it comes to assessing the costs from any Income Tax point of view. It is, of course, well known that many things-reserves, and so on-which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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