Ryan (HM Inspector of Taxes v Asia Mill, Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 28 June 1951 |
| Year | 1950 |
| Date | 28 June 1951 |
| Court | King's Bench Division |
No. 1470-HIGH COURT OF JUSTICE (KING'S BENCH DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Purchases of stocks of cotton from Cotton Controller - Provision for adjusting payments to be made in event of subsequent change in price of cotton - Sum paid to Controller under this arrangement - Whether part of cost of stock-in-trade.
The Company was one of a number of firms of cotton manufacturers which agreed, at the request of the Cotton Controller, to operate a new system in purchasing from him their supplies of raw cotton. Under this system, the manufacturers were to purchase not merely sufficient cotton to meet existing orders for yarn, but as large stocks as they could store. It was provided that in the event of a rise or fall in the price of cotton after such purchases had been made, the Controller should receive from, or make to, the manufacturer a payment of an amount calculated on the quantity of cotton held or ordered by the manufacturer at the date of the price variation, above or below the quantity he required to meet existing contracts for yarn. Under these arrangements, following an increase in price, the Company paid a sum of £55,087 7s. 4d. to the Controller and was assessed to Income Tax on the basis that for the purpose of computing its profits its stock-in-trade at the end of the year in question should be valued at cost and that in arriving at the cost the appropriate proportion of the £55,087 7s. 4d. should be included.
On appeal to the Special Commissioners, the Company contended that the cost of the cotton must be ascertained solely by reference to the invoice prices paid for it, and that the payment to the Cotton Controller, being an amount calculated by reference to the Company's position at the time of the price variation, did not represent an addition to the actual cost of the cotton purchased. The Commissioners allowed the appeal.
Held, that the decision of the Commissioners was correct.
Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 1st July, 1947, Asia Mill, Ltd. (hereinafter called "the Respondent Company") appealed against an assessment to Income Tax in the sum of £22,000 less an allowance of £3,070 for wear and tear and £456 exceptional depreciation for the year ended 5th April, 1946, made upon it under the provisions of Case I, Schedule D of the Income Tax Act, 1918.
2. The Respondent Company carries on the business of cotton spinners. For the purpose of computing its profits for the purposes of Income Tax for the year 1945-46 the basis year was the Respondent Company's accounting year ended 13th January, 1945.
3. Pursuant to arrangements made in August, 1942, between cotton spinners and the Cotton Controller (an official of the Ministry of Supply) the Respondent Company, during the said year ended 13th January, 1945, paid a sum of £55,087 as hereinafter appearing to the Cotton Controller. It was common ground between the parties to this appeal that this sum of £55,087 constituted a proper deduction in computing the profits of the Respondent Company for the said year. It was also common ground that in computing such profits the value of the Respondent Company's stock-in-trade in hand at 13th January, 1945, was required to be included at a figure representing its true cost to the Respondent Company, and that no question of market value arose.
4. The question in dispute was whether in ascertaining the cost of such stock-in-trade the said sum of £55,087 or any part of it should be included.
5. Since April, 1941, transactions in raw cotton and cotton yarn have been subject to regulations made by the Cotton Controller from whom alone all raw cotton had to be bought. The Cotton Controller fixed day-to-day prices for the purchase of raw cotton and the margins to be added in ascertaining the selling prices of yarn. From April, 1941, to September, 1941, cotton was bought from the Controller without any cover system, but from September, 1941, till (1) August, 1942, spinners were given "cover "notes" entitling them to purchase raw cotton at the ruling prices, for the fulfilment of approved yarn orders, to the extent of 12 weeks' production.
In August, 1942, new arrangements designed to simplify procedure and to secure the dispersal of cotton stocks were directed by the Cotton Controller. Under these new arrangements spinners were urged to assist the Controller by purchasing cotton to the fullest extent of their storage space, irrespective of their yarn orders in hand, and in the event of a rise or fall in the general price level of raw cotton they were to make payments to or receive payments from the Controller according to whether their respective positions were "long" or "short" at the time of the variation of the general price level.
A spinner's position is "long" where he has purchased a weight of cotton in excess of the weight of yarn he has contracted to sell; and "short" when he has contracted to sell a weight of yarn in excess of the cotton he has in stock or has contracted to purchase.
6. The arrangements briefly described in the foregoing paragraph of this Case are set out in detail in a letter addressed by the Cotton Controller to the Respondent Company on 24th August, 1942, and in the form of undertaking and explanatory notes enclosed with that letter. The said
form of undertaking was duly signed on behalf of the Respondent Company and was returned to the Cotton Controller.A bundle comprising the said letter of 24th August, 1942, the enclosures therewith and a letter from the Cotton Controller dated 21st September, 1942, is annexed hereto marked "A" and forms part of this Case(1).
7. With effect from 1st February, 1943, all raw cotton prices were reduced by 1d. per pound. As the Respondent Company's position at 30th January, 1943, was "long" the Respondent Company received from the Cotton Controller a payment amounting (after minor adjustments) to £10,233 19s. 4d.
8. With effect from 17th April, 1944, the prices of all types of raw cotton were increased by 41/2d. per pound.(2)As the Respondent Company's position at 15th April, 1944, was "long" to the extent of 2937,993 pounds an amount of £55,087 7s.4d. became due from the Respondent Company to the Cotton Controller, representing 41/2d. per pound on this "long" position. This amount of £55,087 7s. 4d.was duly paid by the Respondent Company.
9. Particulars of the calculations leading to the payments mentioned in the last two foregoing paragraphs are set out in various letters comprised in the bundle annexed hereto marked "B" and forming part of this Case(1).
10. A statement setting out particulars of the Respondent Company's cotton stocks in hand at 13th January, 1945, is annexed hereto marked "C" and forms part of this Case(1). The figures of price shown in this statement represent the actual prices paid on the purchase of the several lots specified therein and do not embody any adjustments in respect of the sums received from and paid to the Cotton Controller in 1943 and 1944 respectively. Certain of the stocks shown in the said statement-that is to say all lots bearing an invoice date earlier than April, 1941, were purchased otherwise than from the Cotton Controller.
11. All cotton purchases by the Respondent Company from the Cotton Controller were effected by contracts made in accordance with one or other of the forms of contract and advice note annexed hereto marked "D" and forming part of this Case(1).
12. A copy of the Respondent Company's accounts for the year ended 13th January, 1945, is annexed hereto, marked "E", and forms part of this Case(1). The sum of £55,087 paid to the Cotton Controller as above stated is included in the debit item "Cotton and Charges- "£164,197 13s. 7d." In these accounts the value of the Respondent Company's stock-in-trade at 13th January, 1945, appears at the figure of £191,312 13s. 2d. In arriving at this figure the Respondent Company added 41/2d. per pound to the invoice prices of all stocks of raw cotton bought prior to 17th April, 1944.(2)
13. Mr. F.W. Gower, a chartered accountant and the principal advisory accountant to the Board of Inland Revenue, gave evidence that in his opinion, from an accountancy point of view, the accounts as presented were correct. In our opinion, as appears from our decision, the fundamental question is purely one of law depending on the proper construction of the documents.
14. It was contended on behalf of the Respondent Company:
(2) that as all stocks of cotton held by the Respondent Company at 13th January, 1945, had been purchased by the Respondent Company outright at fixed prices under contracts in which no provision was made for price adjustments in the event of subsequent variations in the general level of cotton prices the cost of such stocks must be ascertained by reference solely to the invoice prices paid;
(3) that the said sum of £55,087 was a sum calculated (in accordance with the arrangements above described) by reference to the Respondent Company's cover position at the time of the general price increase and did not represent an addition to the actual cost of the cotton purchased; and
(4) that accordingly no part of the said sum of £55,087 was required to be treated for Income Tax purposes as a part of the cost of the cotton stocks of the Respondent Company in hand at 13th January, 1945.
15. It was contended on behalf of the Inspector of Taxes:
(a) that the payment of £55,087 7s. 4d. was made by the Company to the Controller in respect of 2937,993 pounds of cotton actually in stock or on order at 15th April, 1944, at the rate of 41/2d. per pound;
(b) that 2546,518 pounds of cotton remained in stock at 13th January...
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