(1.) LORD EVERSHED M.R. The question for the decision of this court may be taken as it was formulated by the special Commissioners at the end of the case stated. It is as follows : '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 companys Case I profits was erroneous in law.' The question as formulated did not (and I will assume deliberately did not) limit the subject -matter to the companys Case 1 profits for particular years; but I wish to say at the beginning that the problem before the special Commissioners and before us should be treated as so limited. At the beginning of the case three years are referred to (though, for the purposes of this judgment and of the argument, one particularly has been mentioned), namely, the year 1951 -52 and the two succeeding years. I repeat that I shall treat the question posed as relating to those three years. The special Commissioners then put a second question, to which I may make some brief allusion hereafter.
(2.) THE question arises in connection with the computation of the profits of the company, Duple Motor Bodies Ltd., for the purpose of income -tax under Case I of Schedule D. Put in the language of the statute, which language is now enshrined in section I27 of the Income -tax Act, 1952, the real question to which this matter is related is : For the years in question, what were the full amounts of the profits or gains of this companys trade ? Before Whimster & Co. v. Inland Revenue Commissioners, the profits or gains of a trade were, I understand, ordinarily arrived at, in the case of a company such as this, by discovering what the trading receipts were for the year in question and then deducting from those receipts the proper expenses which were allowable according to the income -tax legislation. But since the Whimster case 1, it has been recognized that, for the purpose of ascertaining the full amount of the profits or gains of a trade, it is (or, at any rate, it may be) also necessary to bring into the account at the beginning and at the end respectively of the relevant period the values of the work in progress or the stock -in -trade, or perhaps both; and that such values will, again in the ordinary case, be arrived at by looking at the market value or the cost, whichever is the less. The effect of bringing these matters into the account is this, that, if at the end of the year, the value of the work in progress or stock -in -trade is shown to be greater than it was at the beginning, then, to that extent, the full amount of the profits will be increased; and vice versa if, at the end of the year, the value of such items is less than it was at the beginning.
In the present case, it is to be noted that we are here concerned not with stock -in -trade but with work in progress. The reason for that is the nature of this companys business of manufacturing motor bodies, and we were informed by Mr. Bucher in his opening that in truth the business wholly, or at any rate very substantially, consists of making these bodies to order. That being so, there would, of course, be no question of a market value for any bodies, either partly finished or wholly finished, but still on the premises of the company; and that, indeed, is so stated in the case stated, where, in the course of formulating their decision, the Commissioners say : 'It is agreed that there is no question before us of market value.' I can now state again, and more precisely, the nature of the question we have to decide, and I can further explain the reference to 'on -cost' in the question as it was posed by the special Commissioners. The problem is, in relation to the taxpayers trading for the years I have mentioned, how you should arrive at the value, at the beginning and end of the periods, of their work in progress. It appears quite clearly that in the profession of accountancy there are two methods or theories which are current, both of which appear to have their devotees. The methods or theories are known, the one as the 'direct cost' method and the other as the 'on -cost' method. The direct cost method, as the words naturally import, means that you value the subject -matter -in this case the work in progress -by looking, at the beginning and end of the relevant periods, at what has been expended on the work in progress, and expended exclusively upon it -namely, for practical purposes (or, at any rate, in this case) the cost of the materials used and the wages of the labour directly employed. The on -cost method goes further; it says that you should not exclude a proper proportion of other, more general costs of the companys business, some part of which should be attributed to the work which was in progress at the relevant dates.
(3.) WHEN Mr. Bucher opened the case for the Crown before us, be made it plain that what the Crown desired was that we should decide this matter as one of broad principle; that of the two champions being displayed before us, we must decide as a matter of broad principle between Sohrab and Rustum. Similarly, Mr. Borneman, for the taxpayers, invited us to decide that the direct cost method was the one that, generally speaking, should receive the imprimatur of this court. In support of these views, general arguments were put before us which clearly have much force. It was said by Mr. Bucher that if you are inquiring what is the value of, say, stock -in -trade, and in the circumstances you are to arrive at it by looking at what it has cost you to produce it, then it is not realistic to exclude any part of the general costs of the companys business, and so to do simply loads those costs unduly upon the sold articles. On the other side, Mr. Borneman has said that here you are only concerned to arrive at a valuation, and in doing so -because, after all, you are merely comparing two dates -it is only necessary and only safe to look at the costs which can be certainly discovered and ascertained and that you should not go beyond that into territory which at once becomes vague and unchartered. He supports that by saying that in this case the special commissioners, having decided in favour of on -cost, were then unable to express any concluded view as to what of the possible items of indirect expenses are those which should be included.;