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TMI Blog1969 (2) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... yers purchase shoes from whole-salers they calculate the price which they are prepared to pay by reference to a so-called mark-up which is fixed periodically by the directors, being the percentage margin between wholesale buying price and retail selling price which will cover the taxpayers' expenses and produce the rate of net profit which is considered appropriate. But a substantial part of the stock still in hand at the end of the year will never be sold at the retail Some of it will be sold as reduced prices in the January sales ; some may be sold at still lower prices in subsequent sales. The gross prices realised on these sales may sometimes be less than the costs of purchase of the articles even if one makes no deduction for expenses. In other cases although the gross prices exceed the cost the net price realised may fall below it. A third possibility is that the net prices exceed cost but show a smaller profit margin than was envisaged by the mark up. The practice which the taxpayers have followed for at least 30 years past in making up their accounts has been to value the stock in hand at the end of the year at its then replacement value, that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when it was incurred even though some of the stock bought, as would normally be the case, was unsold at the close of the year. But of course if an unusually large quantity of stock was bought in year A and a correspondingly smaller quantity in year B, to put no figure on the unsold stock at the end of the year of purchase would unduly depress the profit shown for year A and unduly swell the profit for year B, so for many years it has been the accepted practice of accountants to bring in the unsold stock as a closing item on the receipt side of the account of the year A and an opening item on the expense side of the account for year B. But at what figure is the unsold stock to be brought in ? If one regards the object of the exercise as being simply to exclude from the expense side of the account in year A the cost of the unsold stock, then obviously the figure which you bring in will be that cost. But if the value of the stock, whether in the wholesale or retail market has changed since its purchase, to bring it in at cost may distort the picture if one is trying to achieve a fair balance in estimating the profits as between year A and year B, for if the value has fallen it may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market value to take is the wholesale market value ; but I cannot treat it as authority for the proposition for which the taxpayers are contending, namely, that a retailer can value his unsold stock by reference to the wholesale or replacement value, if less than cost, even though the price which he could obtain for it must really be that the formula cost or market value whichever is the lower is an accountants' formula which has been accepted by the courts and that its meaning must be determined by reference to the practice of accountants. In the Duple case [1961] 1 W. L. R. 739 ; 39 T. C. 537., the court had to consider the meaning of the cost limb of the formula with reference to the valuation of work-in-progress. The evidence showed that some accountants thought that cost of work-in progress ought only to include direct manufacturing costs while others thought that it should include a proportion of the overheads-the on-cost method. The court there held that as either view was tenable and the former view, for which the taxpayer was contending, had in fact been accepted by the revenue for some time in connection with the accounts of that company, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versally accepted, was according to the evidence accepted by many modern accountants, the revenue, so the argument ran, had not discharged the onus which was on them to show that the taxpayers' accounts had for years been prepared on a wrong basis for income tax purposes. These arguments are plausible but they do not convince me, for to my mind there is a considerable difference between looking to the views of accountants to discover the meaning of the word cost in the formula and looking to them to discover the meaning of the words market value. The word cost does not itself suggest any answer to the question what items of a manufacturer's expenditure may properly find a place in an estimate of his costs of manufacturing or partially manufacturing some object. The court must necessarily look to the views of accountants to discover the answer to that question and if different accountants take different views and neither view appears to inherently unreasonable, the court may well conclude that neither view is necessarily wrong and that how the estimate should be made in any particular case must depend on such considerations as how the costs of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore parting with the case I would say that I am expressing no view on the question what, if any anticipated expenses can be deducted from the anticipated retail selling price in arriving at market value. The revenue was only prepared to allow the deduction of expenses directly connected with the sale such as sellers' commission. Mr. Lawson's evidence on this point was as follows : In arriving at net realisable value, he considered that only direct expenses connected with sale should be deducted from the expected selling price, and that nothing else should be deducted, because fixed expenses (such as rent, rates, salaries and other overheads) are incurred in any event ; there was a large body of opinion in accountancy circles that fixed expenses should not be anticipated or deferred in any way. Mr. Coates on the other hand considered that even if market value must be determined by reference to the retail selling price, a proportion of overheads should be deducted. His evidence on this point was : He was also of opinion that to adopt net realisable value on the basis put forward by the Inland Revenue would overstate the value of the stocks ; he atta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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