Patrick (Inspector of Taxes) v Broadstone Mills Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE SINGLETON,LORD JUSTICE BIRKETT,LORD JUSTICE HODSON |
| Judgment Date | 11 December 1953 |
| Judgment citation (vLex) | [1953] EWCA Civ J1211-1 |
| Date | 11 December 1953 |
| Court | Court of Appeal |
[1953] EWCA Civ J1211-1
In The Supreme Court of Judicature
Court of Appeal
(Revenue Paper)
Lord Justice Singleton
Lord Justice Birkett
Lord Justice Hodson
SIR ANDREW CLARK, Q.C., and SIR REGINALD HILLS (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, W.C.2) appeared as Counsel on behalf of H.M. Inspector of Taxes.
MR CYRIL KING, Q.C., MR S.M. YOUNG and MR H.H. MONROE (instructed by Messrs Peacock & Goddard, 1, Raymond Buildings, London, W.C.I, Agents for Messrs Barlow, Parkin & Co., Stockport) appeared as Counsel on behalf of Broadstone Mills Limited.
This is an appeal by the Company, Broadstone Mills Ltd., against an Order of Mr Justice Vaisey which reversed a decision of the Special Commissioners and restored an assessment to Income Tax made upon the Company for the year 1943-49 under Case I of Schedule D of the Income Tax Act: 1918, in the sum of £27,000, and an additional assessment for the same year in the sum of £19, 218 less £11, 853 capital allowances.
The Company carries on business as cotton spinners at Stockport. It was incorporated in the year 1920, when it took over as a going concern the cotton spinning business which had been carried on since 1904 by Broadstone Spinning Company, Ltd. The Company owns two mills (herein referred to as No. 1 mill and No. 2 mill), which are adjacent and are indeed joined together by buildings. In these mills cotton is subjected to processes in various machines resulting in the production of yarn; the average time taken for raw cotton to pass through the mill and emerge as saleable yarn is approximately six to eight weeks.
Before dealing with the facts, I will endeavour to state the question for our consideration as simply as I can. The Company has always adopted a system of accounting which is known as the Base Stock system. Under that system the fixed process stock, i.e., the cotton which is upon the machines, does not appear in the trading account at all, and the spare process stock is taken at an arbitrary figure. The contention of the Company is that the system is well recognised and is in accordance with the principles of sound commercial accountancy and that it ought to be adopted in order to arrive at the Company's liability to tax.
On behalf of the Crown it is said that, even if the system is satisfactory for ordinary commercial requirements over a period of years, it is not a proper way in which toarrive at the Company's profits for taxation purposes in any year of assessment, and further that it does not show the full amount of profit for the year in question. Moreover, it is claimed that no system will give the true profits of the year unless there is a valuation of stock made (either on market price or cost price) at the commencement and at the end of the accounting period: in other words, if there is a variation between the beginning and the end of the year in the amount of stock, or in its value, those are matters for consideration which are omitted to an extent if the Company's method of valuation is applied.
The Commissioners found that the method adopted by the Company in dealing with its base stock in its aocounts — I take this from the findings — is one of the methods recognised in this particular trade of cotton spinning and is in accord with sound commercial practice. They also found that the method the Company had adopted for computing its profits was in accordance with sound commercial practice, and they allowed the appeal against the assessment.
They did not deal with contention (3) which was put forward by the representative of the Crown. That contention was "that that method" — that is the Company's method — "did not" show the full amount of the profits of the relevant year, but "showed a distorted view of those profits and understated" them, and the Company had been undercharged in the first "assessment made upon it".
Their failure to deal with this has led to the expenditure of much time in this Court. Mr King, on behalf of the Company, submitted that on the findings of the Special Commissioners the Company was entitled to succeed. Sir Andrew Clark, on behalf of the Crown, submitted that notwithstanding the findings the method adopted could not be a proper way to ascertain the profits of the Company in the year of assessmentif it did not show the full amount of the profits, or if it showed a distorted view of thorn, and he set out to show that this was so. To which Mr King replied that we ought to be guided by the findings of the Commissioners on fact. All this could have been avoided if the Commissioners had made a finding on the third contention. They ought to have done so. For some time I thought that this Court ought to remit the case to them for a finding, but it was put to us that there could only be one answer and that) in such circumstances, there was no point in sending the case back.
There is a further matter to which I direct attention. Four witnesses gave evidence before the Special Commissioners, who set out a summary of their evidence in paragraphs 9, 10, 11 and 12 of the Case. In each case the Commissioners say of the evidence, "which we accepted". I do not know what that means, in regard to the evidence of the accountants in particular. If it means that they accepted the views given as those of the witnesses who gave them it carries one nowhere. If it means more than that, it does not appear to me that they could accept both of two conflicting views. The essential requirement of a Case Stated is that it shall contain the findings of fact of the Tribunal which states it. This Case is lacking in that respect. It is said by Mr King that we ought to assume that the Commissioners accepted the evidence of Mr Robson (in paragraph 10) in preference to that of Mr. Gower (in paragraph 11) by reason of their conclusion in paragraph 15. That may be a fair assumption to make; but the Commissioners have already said that they accept the evidence of both, and nowhere do they say that Mr Gowor is wrong in the view he expressed that the method adopted by the Company led to a distorted view of the profits in the relevant year.
I mention these matters with the object of saving time in future cases. It is not that which someone says which is ofimportance. The Court ought to have before it the findings of fact of the Tribunal; if those are cloarly stated there is usually no need to set out the evidence which is given.
It is not easy to state the facts in this case, which involves some technical matters, without reading a considerable part of the Case itself. Paragraph 3: "At all stages in the production of yarn, quantities of cotton in various stages of manufacture are either on the machines or are waiting by each machine ready to take the place of the cotton on that machine. The cotton which is actually on the machines and undergoing process is termed Fixed Process Stock and that which is waiting to replace the cotton on the machines is termed Spare Process Stock. There were produced to us (and are annexed here to, marked A, and form part of this case) a series of photographs of various machines used in the mills, showing the Fixed Process Stock on the machines and the Spare Process Stock in convenient positions by the machines." Paragraph 4: "We were concerned in the appeal with the method of dealing, in computing the Company's profit for income tax purposes, with the Fixed Process Stock and an agreed weight (hereinafter called the base weight) of Spare Process Stock (being the minimum required to ensure continuity of production); these are together referred to as Base Stock. The Company in fact held Spare Process Stock in excess of the base weight of Spare Process Stock but there was no dispute as to how this should be dealt with. It was agreed that for Income Tax purposes the excess should be valued at cost price (being lower than the market value)." Paragraph 5: "(1) The Company, and its predecessor, Broadstone Spinning Company Limited, has always adopted a system of accounting known as the Base Stock System. In this System the Base Stock and any further Spare Process Stock held are not carried in the accounts at cost or market value, but are carried, either at afixed price or at an arbitrary price. (2) There was produced to us, for the purpose of Illustration, a hypothetical account in illustration of the Company's trading account for the accounting period (which follows closely the actual trading figures for the period) and a copy of the Company's Balance Sheet as at 3rd April, 1948" "(3) In the Trading Account, the Base Stock assumed to be 123,000 pounds in weight docs not figure at all, either in opening or in closing stocks, and the further Spare Process Stock in excess of the base weight is carried at a figure of 28 pence per pound. This is an arbitrary figure designed to represent the cost of raw cotton plus a weighting for the cost of processing. The figure was originally 12½ pence, and was increased in 1945 to 17 pence, then to 28 pence at the 29th March, 1947, and later to 30 pence at the 3rd April, 1948. (4) In the Balance Sheet the Fixed Process Stock is included in the item 'Land, buildings, boilers … and Fixed Stock — £333,236.' It is so included at an unascertained figure representing the cost of the Fixed Process Stock on the purchase of the mills by the Company in 1920, and has not been changed since."
That paragraph makes clear two or three matters of great importance in this case. The first is that the bare stock, that is, the cotton which is upon the machines which has been processed, is not taken into account so far as regards the trading account. It is omitted entirely, because on the Company's system it is not dealt with as part of the stock in the ordinary...
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