SINGLETON L.J. - (1.) I will endeavour first 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 on 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 companys 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 to arrive at the companys 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 beginning 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 companys method of valuation is applied. The Commissioners found (in paragraph 15 of the case) that the method adopted by the company concerning its base stock in its accounts is one of the methods recognized in this pNicular 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.
(2.) THEY did not consider the third contention put forward by the representative of the Crown, that the companys 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 consider 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 assessment if it did not show the full amount of the profits, or if it showed a distorted view of them, 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 the case. In each case the Commissioners say of the evidence, 'which we accepted.' I do not know what that means, particularly in regard to the evidence of the accountants. 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, by reason of their conclusion, accepted the evidence of Mr. Robson in preference to that of Mr. Gower. 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. Gower 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 of importance. The court ought to have before it the findings of fact of the tribunal; if those are clearly 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...' Paragraph 4 : 'We were concerned in the appeal with the method of dealing, in computing the companys 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 Ltd., 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 a fixed price or at an arbitrary price. (2) There was produced to us, for the purpose of illustration, a hypothetical account in illustration of the companys trading account for the accounting period (which follows closely the actual trading figures for the period) and a copy of the companys balance sheet as at April 3, 1948. (3) In the trading account, the base stock assumed to be 123,000 pounds in weight does 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 12 1/2 pence, and was increased in 1945 to 17 pence, then to 28 pence at March 29, 1947, and later to 30 pence, at April 3, 1948. (3) In the trading account, the base stock assumed to be 123,000 pounds in weight does 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 12 1/2 pence, and was increased in 1946 to 17 pence, then to 28 pence at March 29, 1947, and later to 30 pence, at April 3, 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 fixed process stock, that is, the cotton which is on 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 companys system it is not treated as part of the stock in the ordinary sense but is said to be included in the item of 'Land, buildings, boilers, and fixed stock' in the balance sheet. It is not in the profit and loss account, or in the trading account. Another matter to notice is that the spare process stock which is included in the trading account is taken, not at its value, but at an arbitrary figure. The third matter of importance is the very large variation in the price of cotton which has taken place over the years. Paragraph 5(3), which I read, shows values from 12 1/2d. a pound rising to 30d., and I think that I am right in saying that the later figures show that by the end of the accounting year the value had risen to 42d. per pound. Paragraph 6 states the practice which had been followed by the company : '(1) In all previous years of assessment the profits of the company and of its predecessor, Broadstone Spinning Company Ltd., were computed for income tax purposes according to the base stock system, i.e., the fixed process stock did not figure in the account (although, as stated in paragraph 5 above, a value was in fact attached to it in the companys balance sheet), the base weight of spare process stock was valued at the arbitrary figure referred to in paragraph 5(3) above, and any further spare process stock in excess of the base weight was valued at cost. (2) The assessments under appeal were made on the basis of bringing in all stocks of cotton at cost (which was agreed to be lower than market value); i.e., the base stock and the whole of the further spare process stock in excess of the base weight were brought in at the opening and the close of the account at a price representing the cost(at such opening or close) of raw cotton plus the cost of processing. (3) The question for our determination was whether the company was entitled to have its profits' (for the accounting period) 'computed for income tax purposes according to the base stock system.' Paragraph 7(b) again sets out the variation in prices. Paragraph 8 mentions two documents to which I shall have to referlater, D1 and D2, which become important when the court is asked to consider whether there could be more than one answer to the Crowns third contention : 'The weight of fixed process stock on machines in No. 1 mill rose during the accounting period from 31,191 pounds to 44,204 pounds (vide statement D1 and D2). No. 1 mill was put out of production in 1942 as a result of arrangements for the concentration of industry, and the cotton on the machines was run off. The company then created a reserve of 7,132 (which figures in the balance sheet), to cover the estimated cost, at prices then current, of re -clothing the mill. No. 1 mill is now gradually being brought back into production, and the machines are partially re -clothed; the cost of the fixed process of cotton on the machines in this mill has not yet been debited to the reserve account, but has temporarily been charged against revenue, although the company intends to capitalize it. When fully clothed, the machines in No. 1 mill will carry a weight of 88,000 pounds of cotton.' Let me add that No. 2 mill carries 92.000 pounds of cotton on the machines, so that the two mills together would carry upon the machines 180,000 pounds of cotton. It is not shown in the companys trading account, thought it is said that it is in the balance sheet figure of land, buildings, etc.
(3.) THE next four paragraphs in the case concern the witnesses who appeared before the Special Commissioners and paragraph 9 begins in this way : '... the secretary of the company attended and gave evidence before us (which we accepted) to the following effect.' He said that it was essential for the economical running of a mill that the machines should always remain clothed, and he described the system of buying and selling the cotton. He said that the fixed process stock was taken into the companys balance sheet as a fixed asset and did not figure in the trading account, and that the directors of the company had always taken the view that that was the way they wished the accounts to be presented to the shareholders, it being their view that a true trading result was arrived at in that way. I think it might well be said that if one had every year the same amount of base stock and fixed process stock, and if the value of it was the same, it would not affect the position of the trading account. But if the amount changes and the value changes, the position is not the same. The secretary is further recorded as saying : '... that the cotton on the machines (i.e., the fixed process stock) is always changing and is always on the move, and that the cotton on the machines at the end of the accounting period had in fact cost the company 42.85 pence per pound as shown in exhibit D2. The cotton on the machines at the end of the accounting period must have been bought during the period, and its price would be included in the purchases charged in the companys accounts. The price would, however, have been debited to the particular sale occasioning the purchase of the cotton. The 136,000 pounds of cotton on the machines at the end of the accounting period had cost the company 31.88 pence per pound; that was the bale price, plus the cost the company 31.88 pence per pound; that was the bale price, plus the cost of processing work done on that stock. That cost turned into sterling was 7,892 plus 16,425. The company had in fact allowed cotton bought at the advanced price to replace cheaper cotton on the machines. It had, however, advanced the price of yarn immediately the raw cotton price increased : the increase in the price of raw cotton was immediately (and, in his opinion, rightly) priced on yarn and not left on the base stock on the machines.' Mr. Robson, a member of a firm of chartered accountants, gave evidence on behalf of the company, which again the Commissioners say that they 'accepted.' He said that the company had followed 'a recognized commercial accountancy basis. The base stock method is a good method of accounting, though some other people might say there is a better method. He did not agree that it was undoubtedly a better method to bring in base stock at the beginning and end of the year at cost or market value; business people who consider the base stock method suitable in their businesses consider it the best.' He added that 'an accountant would give an unqualified certificate to accounts as giving a true and fair view of the profits of a company whether it employed the one method or the other so long as the company had adhered to one method consistently' from year to year. Later, in the record of his evidence : 'He agreed that in times of rising prices accounts prepared on the base stock method would show profits lower in amount than accounts prepared on the cost or market value basis; in times of falling prices, the opposite result would be produced.';