Commissioners of Inland Revenue v COCK RUSSELL and Company, Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 03 November 1949 |
| Date | 03 November 1949 |
| Court | King's Bench Division |
HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
Excess Profits Tax - Income Tax principles - Valuation of stock-in-trade - Whether each item, or stock-in-trade as a whole, to be valued at cost price or market value, whichever is lower.
For the purposes of the accounts of its business as at 31st December, 1945, the Respondent Company valued all but two items of its stock-in-trade at cost price, which was much below market value, and the two remaining items at market value, which was below cost price.
An assessment to Excess Profits Tax for the chargeable accounting period ended on 31st December, 1945, was made on the Company on the footing that the whole of the stock-in-trade should be valued at cost price, which was lower in the aggregate than market value. On appeal, the General Commissioners upheld the Company's contention that it was justified for taxation purposes in valuing its stock-in-trade item by item at cost price or market value, whichever was the lower.
Held, that the Commissioners' decision was correct.
Stated by the Commissioners for the General Purposes of the Income Tax for the City of London pursuant to the provisions of the Finance (No. 2) Act, 1939, Section 21(2), the Finance Act, 1937, Fifth Schedule, Part II, Paragraph 4, and the Income Tax Act, 1918, Section 149, for the opinion of the High Court of Justice.
1. At a meeting of the said Commissioners held on 20th October, 1947, at Gresham College, Basinghall Street, in the said city, Cock Russell & Co., Ltd., an incorporated company carrying on business at 60 Fenchurch Street, in the said city (hereinafter called "the Company") appealed against an assessment to Excess Profits Tax in the sum of £2,970 made upon it under the provisions of Section 12(1) of the Finance (No. 2) Act, 1939, for the chargeable accounting period beginning on 8th February and ending on 31st December, 1945.
2. The Company was incorporated in January, 1945, for the purpose of acquiring the goodwill, stock, and other assets of the partnership firm of Cock Russell & Co. (hereinafter called "the Firm") which carried on in the City of London the business of wholesale wine and spirit merchants. The business was of long standing, being commenced over 100 years ago. The Company in fact acquired the said assets and business on 7th February, 1945 (but as from 1st January, 1945) and has since carried on the same. It made up its first accounts for the year ended 31st December, 1945.
3. Prior to the outbreak of war in 1939 the said business comprised a large trade in port wine, but during the war such wine became difficult to procure, and the price accordingly rose. In October, 1945, the Company managed to purchase five pipes of port at £810 per pipe in bond. A pipe is
115 gallons. After an adjustment was made for shortages in the casks containing the port, the total purchase price worked out at £3,486.4. The Company almost immediately resold three of the five pipes at £860 a pipe for two of the pipes and £865 for the third. The remaining two pipes were transferred to London and kept in bond there, the Company's intention being to bottle the port and sell the same to its customers in lots of a few dozen each.
5. Later on in October, 1945, a very large quantity of port-over 1000 pipes-became available on the market owing to the death of a wine merchant holding large stocks. The result was that the price of port immediately fell, dropping in October to between £640 and £700 a pipe: in November to between £640 and £680: and in January of 1946 to between £600 and £670 a pipe. These were the prices fetched in public auctions. There were no recorded sales in December, 1945. Throughout 1946 prices continued to fall owing to increasing supplies, the price dropping to between £500 and £600 a pipe.
6. For the purpose of its profit and loss account for the year ended 31st December, 1945, the Company valued the two pipes of port, which it still had in hand out of the aforesaid purchase of five pipes, at its market value as at 31st December, 1945, which was £600 a pipe. After allowing for shortages in the casks the valuation at market value worked out at £1,182 15s. 0d. The rest of the Company's large and valuable stock-in-trade was for the purposes of the said account valued at cost, which was very much less than the market value thereof on 31st December, 1945.
7. During 1946 the port wine in the said two pipes was bottled and sold. The result of the transaction was as follows:-
Price realised for the wine bottled and sold |
… |
£1,675 |
10s. |
0d. |
||
Deduct:- |
||||||
£ |
s. |
d. |
||||
(a) Written down value as above as being |
||||||
cost of the wine |
1182 |
15 |
0 |
|||
(b) Duty |
333 |
4 |
0 |
|||
(c) Cost of bottling |
40 |
9 |
0 |
|||
(d) Carriage and breakages |
51 |
0 |
0 |
£1,607 |
8 |
0 |
Profit |
£68 |
2 |
0 |
8. The Commissioners of Inland Revenue objected to a small portion of the Company's stock, namely, the two pipes of port in question, being valued at market value for the purpose of arriving at the balance of profits and gains for the year ended 31st December, 1945, for assessment to Income Tax and Excess Profits Tax without taking into account the vastly increased value of the remainder.
9. Evidence was given before us, which we accepted, as follows:-
(a) Mr. W.C. Cock, managing director of the Company, and previously the senior partner in the firm, explained the method of stocktaking for the purpose of the accounts for the year ended 31st December, 1945. Bottled stock was valued bin by bin, and bulk stock (i.e., that in casks) was valued cask by cask. Samples of the stock would be tasted, and the wine in each bin and cask would be valued at cost or market value whichever were the lower, and the figure so obtained would be included in the final figure for the stock as a whole. This method of valuation had always been followed in the business. At certain times in the year...
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