Charles Mcenearney & Company Ltd v The Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Koylass, C.,Burke, M.,Julumsingh, M. |
| Judgment Date | 01 November 1984 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | I 14 – I 17/1977 |
| Date | 01 November 1984 |
Tax Appeal Board
Koylass, C.; Burke, M.; Julumsingh, M.
I 14 – I 17/1977
T Milne for the appellant.
B. Roopnarine for the respondent.
Revenue Law - Assessment of taxes — Additional assessment to corporation tax and unemployment levy — Valuation of closing stock — Method for valuing stock — Stock checks — Stock cards — Depreciation for all stocks — Consideration of Brisco Sales Ltd. v. B.I.R 17 of 1976; Empire Sales and Agencies Ltd. v. B.I.R I 10 of 1979 and B.S.C Footwear Ltd. v. Ridgway [1971] 2 All E.R. 534 — Whether the stock should be valued at costs — Whether the Appellant had correctly valued its closing stocks in accordance with the accepted accounting principle that the stock must be valued at cost or net realisable value whichever is lower — Finding that the appellant's stock valuation had been a proper one arrived at in accordance with accepted accounting principles, properly applied to produce figures for closing stock at cost or net realisable value — Appeal allowed and assessments be referred for re — assessment by reducing the chargeable income for the years by the following amounts adjusted for stock obsolescence.
The appellant's business in the years under consideration and to the time of the hearing is motor vehicle traders, including dealing in spare parts and servicing vehicles. It was the sole local representative of the Ford Motor Company and under its contract with that company it was required to stock all parts for vehicle sold whether or not there was a demand.
In valuing its closing stock, the appellant adopted a method that had been in force for at least twenty years, had been approved by the appellant's auditors and had never in the past been challenged by the respondent. Following an audit on the appellant's books and records, the respondent adjusted the appellant's stock valuation and increased the chargeable income for the years under consideration.
The appellant appealed.
closing stock is to be valued in accordance with the accepted accounting principle that stock must be valued at cost or net realizable value, whichever is lower; in this case the appellant's stock valuation has been a proper one arrived at in accordance with accepted accounting principles, properly applied to produce figures for closing stock at cost or net realisable value, the method employed was a recognized one, had been approved by its auditors had been consistently applied for a long period of years and was in accord with the guidelines set out.
Appeals allowed, assessments referred back to the respondent for reassessment by reducing the chargeable income for the years by amounts adjusted for stock obsolescence.
Cases referred to:
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(1) Brisco Sales Limited v. B.I.R. (1978–85) 2 T.T.T.C. 86.
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(2) Empire Sales and Agencies Limited v. B.I.R. (1978–85) 2 T.T.T.C.389.
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(3) B.S.C. Footwear Limited v. Ridgway [1971] Ch. 427; [1970] 2 W.L.R. 888; 47 TC 495; [1971] 2 All E.R. 534.
Appeals against additional assessments to corporation tax and unemployment levy.
These are appeals against additional assessments to corporation tax and unemployment levy for the years of income 1970 to 1973, inclusive. They were consolidated by order of the Court on 3rd June, 1982.
Following an audit of the appellant's books and records, the respondent found –
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(a) That the appellant obtained loans from Barclays Bank D.C.O., now Republic Bank of Trinidad and Tobago for the purpose of acquiring Ordinary Shares in Alstons Limited, Alyce Glen Industries Limited and Amalgamated Industries Limited.
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(b) Claimed as a deduction in computing the chargeable profits of the appellant for the years of income 1970, 1971, 1972 and 1973 the interest paid to the Bank,
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(c) that the appellant created reserves as its closing stocks at certain percentages of the cost prices in respect of its stocks.
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(d) that stocks which were considered to be obsolete by the appellant were omitted from the appellant's inventory of stock as at the balance sheet date.
As a consequence, the respondent disallowed the claim in respect of interest paid to Barclays Bank, D.C.O., adjusted the appellant's stock valuation and increased the chargeable income for the years 1970, 1971, 1972 and 1973 in amounts of $519,039, $520,595, $466,252 and $426,810 respectively, as under –
1970
Interest on Stock loans – $489,039
Stock obsolescence –$30,000
Total – $519,039
1971
Interest on Stock loans – $430,142
Stock obsolescence – $90,453
Total – $520,595
1972
Interest on Stock loans – $328,766
Stock obsolescence – $137,486
Total – $466,252
1973
Interest on Stock loans – $317,977
Stock obsolescence – $108,833
Total – $426,810
In respect of all the years, the appellant stated its reasons to be advanced in support of the appeals as under –
- The purpose of the loan was to benefit the trade and preserve the business profits of the appellant and/or the loan and the application thereof were steps taken in the ordinary and prudent course of the management and operation of the appellant. 2. The Board's refusal to allow the said sum claimed in respect of obsolete or depreciating stock in trade, is based on erroneous accounting principles.
The respondent stated its contentions as under in a statement of case filed on 2nd July, 1982
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(a) that since any dividend income arising in respect of the Ordinary Shares purchased in the companies referred to in paragraph four (4) above, is exempt from Corporation Tax in the hands of the appellant the interest paid on the loan or any part thereof, applied towards the purchase of the said Ordinary Shares is just an allowable deduction under the Income Tax Ordinance and/or Corporation Tax Act for the purpose of computing the chargeable profits of the appellant for the years of income 1970, 1971, 1972 and 1973.
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(b) that the interest paid by the appellant on the loans obtained and applied towards the purchase of the ordinary shares in the various companies is not an expense wholly and exclusively incurred by the appellant in the production of its income for the years of income 1970, 1971, 1972 and 1973 and accordingly is not an allowable deduction under the provisions of the Income Tax Ordinance and/or the Corporation Tax Act 1966.
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(c) The appellant failed to satisfy the respondent that its stock which it had written off by 100% of cost during the years of income, 1970, 1971, 1972 and 1973 was of no value. Accordingly, the respondent disallowed the appellant's claim for stock obsolescence in respect of its Spare parts to the extent of 60 per cent of the amount so written off and adjusted the appellant's stock valuation accordingly.
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(d) that since the appellant omitted from its inventory of its spare parts as at the date of its balance sheet such items which it considered to have become obsolete or stolen, the appellant is not entitled to reserve claim as a deduction for tax purposes, the general reserve made, allegedly for obsolescence and theft, in computing its chargeable profits for the years of income 1971, 1972, and 1973.
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(e) That the general reserve created by the appellant allegedly for obsolescence and theft, in respect of its stock other than spare parts, is not an allowable deduction for the purpose of computing the chargeable profits of the appellant for the years of income 1971, 1972 and 1973.
At the hearing, the appellant conceded in regard to the interest paid on the bank loan, thus the issue before the Court relates to the disallowance of amounts of $30,000, $90,453, $137, 486 and $108,833, claimed as stock obsolescence for the years of income 1970, 1971, 1972 and 1973, respectively. In this regard, we note that the claims for stock obsolescence result from the valuation placed on the appellant's closing stock for the relevant years.
The first witness for the appellant was Gary De Silva, the Financial Director of the appellant. He described the appellant's business in the years 1970 to 1973, and to the present time, as motor vehicle traders, including dealing in spare parts and servicing of vehicles. The appellant had been the sole local representative of the Ford Motor Company since 1919. Under its contract with that company it was required to stock all parts for vehicles sold whether or not there was a demand. He estimated that the number of parts in stock at any time would be approximately 60,000.
He described the method adopted by the appellant in valuing its closing stock as follows:
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(1) At year end, all items in stock for one year or less would be depreciated by 25 per cent.
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(2) Such stocks would not be further depreciated at the end of the second year.
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(3) At the end of the third year, provided there had been no movement of a particular item of stock in that year, such stock on hand would be completely written off.
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(4) In the event of a sale of items written off as at (3) above, such a sale would be recorded in the usual manner at normal selling price, and the balance of the particular stock item would be brought back into stock at the latest cost price.
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(5) At the end of the fourth year, the items so brought back into stock would be depreciated by 25 per cent and by 100 per cent as for new stock — as at (1) and (3) above.
He stated that the method adopted had been in force for at least twenty years, had been approved by the appellant's auditors and had never in the past been challenged by the respondent. A similar method had been adopted by other companies, though the percentages and the spread over the years might vary from one company to another. During protracted discussions with the respondent, no suggestions as to an alternative system had been made by the respondent.
In arriving at the method for valuing its stock, the appellant had considered the following factors:
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(1) Stock checks were done on a...
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