Decided on January 23,1970

B. S. C. Footwear Ltd. Appellant
Ridgway Respondents


RUSSELL, L.J. - (1.) THE appellant taxpayers trade is that of selling footwear as retailers from their many retail shops up and down the country. For the most part they acquire the footwear for their trade from the manufacturers. The question for decision concerns the correct method of ascertaining the full amount of the profits or gains of the trade of a year. Stated more narrowly, the question for determination is the correct method of ascertaining the value of stocks of footwear held by the taxpayer at January 1, 1959, and December 31, 1959, the opening and closing dates of the accounting period forming the basis of assessment. Stated yet more narrowly, the question for determination is what is the market value to be considered in the present case in applying the time -honoured formula under which, for income tax purposes, in valuing stock -in -hand at the close of an accounting period (and consequently at the opening of the next accounting period) such stock is to be brought in at cost or if the market value be lower than cost, then at that lower value.
(2.) FOR many years the taxpayers have kept their accounts upon a basis that has been accepted by the Crown as demonstrating the full amount of their profits or gains for the relevant periods for the purposes of income tax. But a challenge to this was made for the first time by the Crown in respect of the period of 1959. Of course in the long run, since any basis of valuation must be followed consistently, it would seem that in a broad sense it makes little difference which approach to 'market value' is adopted. But questions of tax are seldom viewed in the long run. The dispute before us demonstrates that the Crown considers it preferable to challenge the previously accepted system, while the taxpayer considers it preferable to adhere to it. Ours not to reason why; certainly not ours to explain why. The full facts are set out in the findings of the commissioners in the stated case. I believe that for present purposes only the barest outline will suffice. The taxpayers operate a system, to some extent flexible, by which management fix from time to time an average 'mark -up' in terms of a percentage of retail selling price : say, as an example, 35 per cent. This produces the gross profit which is a larger percentage of cost : footwear costing Pounds 35s. is aimed to sell at Pounds 5 and vice versa.
(3.) VERY large stocks are carried and it is an essential part or aspect of this trade that there are sales in January and also in the summer of stock -in -hand at the end of the previous year. These sales are at reduced retail prices that will not, of course, produce the gross profit at which the percentage mark -up had been, so to speak, aimed. In valuing the stock -in -hand at December 31 (and consequently at January 1) in their accounts the taxpayers in effect job backwards from the expected (reduced) retail prices in the sales so as to produce a figure as the value of stock on which the expected (reduced) price in the sales will reflect a mark -up as previously stated : for example 35 per cent. The calculations are meticulous and detailed. The resultant values are described as replacement values the sums that the taxpayers say that they would be prepared to pay for the stock having regard to their estimates of future retail prices and their desired mark -up percentage. This seems to me a perfectly legitimate way of presenting such a companys financial situation over the years; much evidence was given before the commissioners by those of great experience in such matters to that effect, and I would not presume to criticise it. As a system of presenting accounts it was described as 'sophisticated,' a word that has in this use travelled far from its true sense. But the question for tax purposes is whether the value attributed to stock -in -hand by this method of calculation is properly to be described as market value, bearing in mind that stock is to be brought in at cost unless market value is shown to be lower. The Crown contends that market value in this context requires that the stock should be taken at the figures expected to be realised in due course on sale in the retail market. It is, of course, obvious that the taxpayers system of ascertaining replacement values will produce values lower than cost in many cases in which, according to the Crowns contention, market value is not lower than cost, and the stock must accordingly be valued at cost. Broadly speaking, the taxpayers contend that any diminution in hope of net profit on cost should be reflected in the terminal valuation, whereas the Crown contends that for income -tax purposes a valuation below cost is permissible only when sale at a figure below cost is expected.;

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