Duple Motor Bodies Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeViscount Simonds,Lord Reid,Lord Tucker,Lord Hodson,Lord Guest
Judgment Date28 March 1961
Judgment citation (vLex)[1961] UKHL J0328-1

[1961] UKHL J0328-1

House of Lords

Viscount Simonds

Lord Reid

Lord Tucker

Lord Hodson

Lord Guest

Ostime (Inspector of Taxes)
and
Duple Motor Bodies Limited
Commissioners of Inland Revenue
and
Duple Motor Bodies Limited
[Consolidated Appeals]

Upon Report from the Appellate Committee, to whom was referred the Cause Ostime (Inspector of Taxes) against Duple Motor Bodies Limited, and Commissioners of Inland Revenue against Duple Motor Bodies Limited (Consolidated Appeals), that the Committee had heard Counsel, as well on Monday the 27th. as on Tuesday the 28th, days of February last, upon the Petition and Appeal of Francis Henry Ostime, of Somerset House, London (one of Her Majesty's Inspectors of Taxes), praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 18th of March 1960, so far as therein stated to be appealed against, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, or that the Petitioner might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Petition and Appeal of the Commissioners of Inland Revenue, of Somerset House, Strand, London, W.C.2, praying. That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 18th of March 1960, so far as therein stated to be appealed against, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order, so far as aforesaid, might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet (which said Appeals were, by an Order of this House of the 28th day of July last, ordered to be consolidated); as also upon the Case of Duple Motor Bodies Limited, lodged in answer to the said Appeals; and due consideration had this day of what was offered on either side in these Appeals:

It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Orders of Her Majesty's Court of Appeal of the 18th day of March 1960, in part complained of in the said Appeals, be, and the same are hereby, Affirmed, and that the said Petitions and Appeals be, and the same are hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeals, the amount thereof to be certified by the Clerk of the Parliaments.

Viscount Simonds

My Lords,

1

These appeals cannot, in my opinion, be sustained. They relate to assessments made upon the Respondent company to income tax under Case I of Schedule D of the Income Tax Act. 1952, for the years of assessment 1951-52, 1952- 53 and 1953-54 and to profits tax for the chargeable accounting periods between the 1st April, 1950, and the 31st March, 1952. The same questions arise in regard to all these assessments and it will be sufficient to take a single example, namely, the assessment to income tax for the year of assessment 1951-52. In that year the Respondent company were assessed to income tax in respect of their trade of motor body builders in the sum of £250,000. They appealed to the Commissioners for the Special Purposes of the Income Tax Acts, who upheld the assessment but stated a Case for the opinion of the Court. The case came before Mr. Justice Vaisey, who reversed the determination of the Commissioners. His decision was affirmed by the Court of Appeal.

2

The question at issue between the parties was as to the correct method of ascertaining the cost of work in progress in order to determine the full amount of the profits or gains of the company's trade, and I will state at once the question as formulated in the Case Stated. It was:

"Whether, on the evidence and in view of our findings, … our decision that the 'on cost' method should be applied in arriving at the cost of work in progress for the purpose of computing the company's Case I profits was erroneous in law."

3

This question was followed by another, which, in the view that I take, does not arise. If it did arise, I do not think that there are materials which enable your Lordships to answer it.

4

My Lords, it must be apparent that, before your Lordships can answer the question whether it was erroneous in law to apply the "on cost" method for the purpose indicated, you must be told precisely what the "on cost" method is. I doubt whether at the end of two days' discussion it is possible to form any clearer idea of it than that it is at least something different from the "direct cost" method about which there is no less difficulty of definition It was significant that learned counsel, after arguing strenuously in favour of the "on cost" method, invited your Lordships to assist the Crown by saying in what that method consisted In these circumstances I would myself be content to dismiss this appeal upon the single ground that the Case Stated does not formulate a question which the Court can properly answer. I will, however, state certain further facts and make some observations upon them in deference to the arguments that we have heard.

5

The Respondent company was incorporated in July, 1946, and took over the business of a company which had been incorporated in 1919. Its business is that of building to order bodies for different types of road vehicles, mostly motor coaches. As the business is almost entirely that of building bodies to order, very few finished bodies are included in work in progress at the end of an accounting period. The business is seasonal, the busy season ending about the end of June. The turnover of the business was over £1,000,000 per annum in the years 1948 to 1954. Upon these facts the question arises how for tax purposes (income tax or excess profits tax) the cost of work in progress consisting of motor bodies is to be ascertained.

6

I have referred to the two methods, "direct cost" and "on cost", and note that the company and its predecessor had since 1924 been assessed on the former method until the assessments were made which are now in dispute. As these words are labels invented by accountants to describe two different methods. I will try to explain them, with the proviso that no explanation is precise or satisfactory. Before doing so, it is proper to say—it is indeed implicit in what I have said—that it is common ground that some value must be attributed to work in progress, and that in ascertaining that value two considerations must be borne in mind, first, that the ordinary principles of commercial accounting must as far as practicable be observed and, secondly, that the law relating to income tax must not be violated: see Whimster & Co. v. Commissioners of Inland Revenue, 1926, S.C. 20: that is to say, by one means or another the full amount of the profits or gains of the trade must be determined.

7

It is perhaps easier to say what the "direct cost" method means than the "on cost" method. By that I mean that there appears to be less vagueness in the definition of that method. In the instant case it seems that the Respondent company has included nothing more in "work in progress" than wages and material directly attributable to that work. But that is by no means the end of the matter. For the company in the course of the case has conceded that other items of expenditure might well be included. "Direct cost" therefore remains an imprecise term The question of "on cost" method presents far greater difficulties. Let me cite some passages from the Case Stated.

"There are several different ways of applying the On-Cost method. Indirect expenditure is quite commonly divided by Cost accountants into headings of:—( a) Factory Expenses; ( b) Office Expenses; ( c) Selling Expenses; ( d) Dispatch and Financial Expenses.

It is a common, but not universal, method of applying On-Cost method to include in the cost of Work-in-Progress a proportion of either all the Factory Expenses or of some only of them, and to exclude the other headings of indirect expenditure.

If the On-Cost method is applied, different Accountants may apply different recognised variations of this method; and whatever recognised variation of this method is applied, the Accountancy profession as a whole would not condemn any particular recognised variation as being unsound. Furthermore, we find that there is considerable scope for difference of opinion as to how a recognised variation of the On-Cost method should be applied to the facts of each particular case."

8

My Lords, what a prelude is this to asking the Court whether the decision of the Commissioners that the "on cost" method should be applied in arriving at the cost of work in progress in the present case was erroneous in law! I could understand it better if the question were whether the direct cost method could properly be applied. But it would not be much better.

9

The consideration of this problem undoubtedly presents something of a dilemma. The practice of accountants, though it were general or even universal, could not by itself determine the amount of profits and gains of a trade for tax purposes: see, for example, Minister of National Revenue v. Anaconda American Brass Ltd. [1956] A.C. 85 at p. 102. On the other hand, it was the basis of President Clyde's decision in Whimster's case that the ordinary principles of commercial accounting require that in the profit and loss account of a manufacturer's business the values of the stock-in-trade at the beginning and end of the period covered by the account should be entered at cost or market price whichever is the lower, although there is nothing about...

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