Carroll Industries Plc v Ó Culacháin, S. (Inspector of Taxes)

• Jurisdiction: Ireland
• Judge: Miss Justice Carroll
• Judgment Date: 02 December 1988
• Neutral Citation: 1988 WJSC-HC 1862
• Docket Number: No. 980R/1987,[1987 No. 980R]
• Court: High Court
• Date: 02 December 1988

1988 WJSC-HC 1862

THE HIGH COURT

No. 980R/1987

CARROLL INDUSTRIES v. O CULACHAIN (INSPECTOR OF TAXES)

REVENUE

BETWEEN

CARROLL INDUSTRIES plc (FORMERLY P.J. CARROLL AND COMPANY LIMITED) AND P. J. CARROLL AND COMPANY LIMITED

APPELLANTS

AND

S. O'CULACHAIN

INSPECTOR OF TAXES

RESPONDENT

Citations:

ODEON ASSOCIATES THEATRES V JONES 1971 1 WLR 442, 1971 2 AER 407, 48 TC 247

WHIMSTER & CO V CIR 12 TC 813

CRONIN V CORK & COUNTY PROPERTY CO LTD 1986 IR 559

MIN NATIONAL REVENUE V ANACONDA AMERICAN BRASS LTD 1956 1 AER 20

PATRICK V BROADSTONE MILLS LTD 1954 1 AER 163, 1954 1 WLR 158

BSC FOOTWEAR LTD V RIDGWAY 47 TC 495

LOWE & ORS V IRC 1983 STC 816

SECRETAN V HART 45 TC 701

CIR V COCK RUSSELL & CO LTD 29 TC 387

PEARCE V WOODALL-DUCKHAM LTD 1978 STC 372

THOMPSON HILL LTD V CIR 1984 STC 251

HEATHER V P-E CONSULTING GROUP LTD 48 TC 293, 1973 CH 189, 1972 3 WLR 883

INCOME TAX ACT 1952 S137

Synopsis:

WORDS AND PHRASES

"Profits or gains"

Assessment — Trade — Tobacco manufacturer — Assessment of profits — Valuation of stock — Method of valuation — Cost price or market price appropriate — Replacement-value method inappropriate — Ordinary principles of commercial accountancy — Relevance — ~See~ Revenue, corporation tax — (1987/980 R — Carroll J. — 2/12/88) - [1988] I.R. 705 - [1989] ILRM 552 |Carroll Industries Plc v. O'Culachain| REVENUE Corporation tax Assessment — Profits or gains — Trade — Stock — Valuation — Historical accounting method appropriate — Replacement-value method inappropriate — Review of authorities — The appellant company manufactured and sold cigarettes and other tobacco products — They prepared their annual accounts in accordance with the Historical Cost Accounting Convention up to 30/6/75 and thereafter they prepared their accounts in accordance with the Current Cost Accounting Convention, although some accounts based on the H.C.A. Convention were included — The appellants" tobacco purchases were held in stock for periods from 15 to 30 months and they came to the conclusion that the only way to reveal the true performance of the company was to value their stock of tobacco on the basis of its replacemnent cost in accordance with the C.C.A. Convention, instead of valuing the stock on the basis of its cost when purchased in accordance with the H.C.A. convention — The Revenue Commissioners took the view that the appellants" stock should be valued in accordance with the H.C.A. Convention and the dispute came before the Appeal Commissioners who found in favour of the Revenue Commissioners — The Appeal Commissioners stated a Case for the opinion of the High Court and enquired whether they were correct in deciding that the appellants" profits for the relevant accounting period should be assessed on the basis of accounts prepared in accordance with the H.C.A. Convention — Held that the words "profits or gains" have not been defined by statute for taxation purposes but that those words have been interpreted judicially for that purpose — Held that the profits or gains from a trade for any specified accounting period consist of the difference between the receipts from the trade during that period and the expenditure laid out to earn those receipts: ~Whimster v. Commissioners of Inland Revenue~ 12 T.C. 813 and ~Cronin v. Cork and County Property Co.~ [1986] I.R. 509 considered — Held that, in ascertaining that difference, the value of the appellants" stock must be calculated in accordance with ordinary principles of commercial accounting, so far as applicable, subject to any relevant statutory provisions — Held that the principles of commercial accounting were only applicable insofar as they were appropriate for the purpose of aiding the ascertainment of the taxpayer's profits or gains — Held that it was not possible to ascertain the appellants" profits of trade for the accounting period without taking into account the value of their stock at the start of the accounting period and the value of that stock at the end of that period — Held that the value of that stock at such dates for tax purposes was its cost price or its market price, whichever was the lower figure: ~Patrick v. Broadstone Mills Ltd.~ [1954] 1 All E.R. 163 considered — Held that a valuation of stock on the basis of its current replacement cost appeared to be in accordance with much commercial accounting practice but that a valuation of stock on that basis was not an appropriate method of ascertaining the profits of a trade for an accounting period since that method, being based on the replacement value of stock which has not been replaced, does not reveal the expenditure laid out to earn receipts during that period — Held that the question posed should be answered in the affirmative — (1987/980 R — Carroll J. — 2/12/88) - [1988] I.R. 705 - [1989] ILRM 552

|Carroll Industries Plc. v. O Culachain|

1 Judgment of Miss Justice Carroll delivered the 2nd day of December 1988.

2 The Appellants are cigarette and tobacco manufacturers since 1824. Their accounts were prepared in accordance with the Historical Cost Accounting Convention (H.C.A.) (i.e. actual cost) up to the 30th of June 1975. From then on their accounts were prepared in accordance with the Current Cost Accounting Convention (C.C.A.) (i.e. replacement cost) although accounts based on H.C.A. were also included. Because their tobacco purchases were held in stock from 15 to 30 months, the Company made the changeover to C.C.A. so that costs could be related to current costs at the time of sale and not to the cost of tobacco purchased a considerable time previously. It was felt that replacement cost accounting was the only way to judge the real performance of the Company as a going concern.

3 When the Revenue would not accept the changed system of accountancy, the matter came on appeal before the Appeal Commissioners. The net question which they had to decide was whether Corporation Tax should be computed and assessed on the basis of accounts prepared in accordance with the H.C.A. Convention or the C.C.A. Convention.

4 A considerable amount of time was devoted before the Appeal Commissioners and this Court to considering the evolution of C.C.A. and its status as an accepted method of commercial accounting.

5 The Commissioners in their determination laid considerable reliance of the Report on Direct Taxation by the Commission on Taxation published in July 1982 and in particular the views expressed in paragraph 26.88 at page 357 as summarizing effectively what the case is about. I give the quotation in full.

"Accountancy is in the process of evolving and developing from the traditional Historical Cost Convention which is widely regarded as inadequate and misleading. Although an accounting standard exists which makes it mandatory for certain businesses to publish current cost accounts, there is as yet insufficient acceptance that this method is adequately tested and capable of general application. Until the evolution has reached a point at which the accounting profession has confirmed the principles and practice of current cost accounting for universal application, it would not be appropriate as a basis for a system of taxation."

6 The Appeal Commissioners relied in particular on two cases Whimster and Company .v. C.I.R. 12 T.C. 813 and Odeon Associates Theatres Limited .v. Jones 48 T.C. 247.

7 The determination then went on to state:

"Having regard to the ratio decidendi of the above cases and the other cases referred to at the hearing, we have come to the conclusion that while the C.C.A. Convention could be regarded as most appropriate for the Appellant Company, it cannot be regarded as coming within the ambit of "the prevailing system of commercial accountancy". In the circumstances, therefore, we feel that at this moment of time C.C.A. is not the appropriate Convention of commercial accountancy to determine the profits of the Appellant Company for tax purposes. All previous cases were involved with H.C.A. and we are constrained not to change the position at this point of time."

8 The quotation about the "prevailing system" would seem to have come from the judgment of Pennycuick V.C. in Odeon Associates Theatres Ltd. .v. Jones 48 TC 247 at p. 273.

9 The matter has now come before this Court by way of Case Stated to know if the Commissioners were correct in their determination.

10 The arguments for the Appellants may be summarized as follows:

11 (1) Since "full amount of profits and gains" is not defined in the Tax Acts, therefore they must be ascertained in accordance with the correct principles of commercial accountancy.

12 (2) There is no requirement in the Tax Acts which requires any particular basis of accountancy to be used. Different accounting conventions have been used in differing circumstances and for differing businesses. There are several methods of accounting which are appropriate in different circumstances.

13 (3) C.C.A. is generally accepted by the accounting profession as being the only means by which a true and fair view of profits and gains can be ascertained. The true profit of an entity necessarily entails keeping the capital base intact.

14 (4) Having ascertained what are the proper or correct principles of commercial accountancy at any given time, profits are ascertained in accordance with this and taxes payable on those profits. It is irrelevant that it is not the prevailing system.

15 The arguments for the Revenue may be summarized as follows:

16 (1) The overall structure of the tax code effectively presupposes the use of H.C.A. as the starting point.

17 (2) The correct principles of commercial accounting should be those prevailing with general acceptance.

18 (3) The mere fact that certain businesses find a particular accounting exercises useful or informative does not establish that method as a principle of commercial accountancy for tax purposes.

19 ...