Empire Sales and Agencies Ltd v The Board of Inland Revenue

• Jurisdiction: Trinidad & Tobago
• Judge: Koylass, C.,Burke, M.,Julumsingh, M.
• Judgment Date: 19 November 1982
• Court: Tax Appeal Board (Trinidad and Tobago)
• Docket Number: I 10 of 1979
• Date: 19 November 1982

Tax Appeal Board

Koylass, C.; Burke, M.; Julumsingh, M.

I 10 of 1979

Empire Sales and Agencies Limited

and

The Board of Inland Revenue

Appearances:

S. Shivarattan for appellant

E. John-Charles and Mrs. E. Bridgeman-Volney for respondent

Revenue Law - Appeal vs. assessment of income tax and employment levy — Issue was method adopted by company in valuing its trading stock — Whether generally accepted accounting principles were used — Finding that figure given by appellant as value of stock at end of year 1971 was correct figure — Appeal allowed.

JUDGMENT of THE COURT:

1 By notice of appeal filed on 17th January, 1979, the appellant appealed from the decision of the Board of Inland Revenue dated the 29th day of December, 1978, wherein a tax in the sum of $64,030.05 and unemployment levy in the sum of $7,114.44 were levied in respect of income of the appellant for the income year 1971. The grounds of appeal are as follows–

• “(a) Statement of allegations of fact (i) The trading stocks at the end of the year were valued in accordance with the accepted practice of the company and accountancy principles.

• (ii) The stocks were shown in the accounts at marketable value

• (b) Statement of the reasons to be advanced in support of appeal (i) the method of valuation of trading stocks at the end of the trading year was always accepted by the Board of Inland Revenue (ii) If the method of valuation is changed at the end of the year the similar method should be adopted at the beginning of the year.”

2 In paragraph 14 of the statement of case, as amended by leave of the Court, the respondent contends –

• “(a) The respondent had never accepted the appellant's method of valuation of trading stocks at the end of the trading year.

• (b) Even if the respondent had accepted the appellant's method of valuation of trading stocks at the end of the trading year (which the respondent denies), the said method-of valuation of trading stock was not in accordance with the principles of income tax law.

• (c) the said figure of $88,213.83 given as the value of stock as at 31st December, 1971 was arbitrary, unreasonable and bore no relation to the facts.

• (d) Accordingly, the respondent was justified in rejecting the said figure of $88,213.83 and in substituting therefore the sum of $213,681.48 which was the value of closing stocks as per The appellant's stock sheets for the year of income 1971.”

3 The only issue in this case concerns the method adopted by the Company in valuing its trading stock for the income year 1971 in the light of accepted accounting principles.

4 The main witness for the appellant company was Louis Legendre. He testified that he was the Managing Director of the Company from its inception in 1952. Prior to that, he had been the Chief Executive Officer of the firm from 1948 before it had been incorporated.

5 He stated that in the year of income 1971, the Company operated a Sales Agency. The principal items sold were –

• (a) a range of highly selective pesticides;

• (b) a range of metallic floor hardeners intended for use in factories and similar industrial buildings;

• (c) grouting compounds for industrial machinery;

• (d) laboratory apparatus consisting of glassware, including pipettes, thermometers and volumetric flasks; and

• (e) chemicals of a reagent nature.

6 Those items, he stated, were extremely vulnerable to stock depreciation and obsolescence caused principally by –

• (a) degradation of chemical formulations of items while in storage under local conditions;

• (b) limited markets for highly specialised items;

• (c) cessation of representation of manufacturers from overseas at times when there were unsold items still in stock;

• (d) obsolescence due to changes in usage patterns;

• (e) fragile instruments such as glassware contained in sealed packages, which, on being sold and opened, would reveal damage of one sort or another.

7 The witness referred to instances of large shipments of goods ordered for sale to certain Government organisations, such as the Port Authority, the Ministry of Health, the Water and Sewerage Authority and the Ministry of Agriculture, which had resulted in total loss due to changes in project plans and consequent cancellations of orders.

8 He also referred to several instances of gelling, hardening and spoilage of articles for one reason or another.

9 The following exhibits were put in through him–

Original stock sheets — LL 1 to LL 77,

List of items that had been depreciated or completely written off — LL 78 to LL 84.

10 In cross-examination, he was asked repeatedly in different ways to account for apparent differences in detail between items listed in exhibits LL 78 to LL 84 and information contained in his letter of 28th March, 1977 (folio (30) of record). This letter is of such relevance that it is reproduced hereunder in full –

“We refer to the Board of Inland Revenue's letter dated 30th November, 1976, calling for an explanation of the apparent discrepancies between the figures of the closing stocks — 31st December of each year — shown in the Trading Accounts and those shown on the inventories (stock sheets) for the years of Audit — 1971, 1972, 1973 and 1974 of this Company.

In order that the matter be considered in its proper perspective due consideration must be paid to the following vital facts–

The main activities of this Company are Sales Agent/Distributor, marketing a selective range of specialised products and services that are oriented to a restricted number of customers in the INDUSTRIAL rather than the Consumer Sector. A consequence of this orientation is the high risk element in the market and resale value of the majority of our stock items.

Based on bitter and costly product and market experience gained over a period of years, it has been this Company's consistent policy to prepare annually comprehensive master stock sheets of ALL items purchased by this company, showing the purchase price, irrespective of the market value. These are the stock sheets held by the Board of Inland Revenue. This information plays a vital role in our sales and ordering operations. It also provides essential data required for adequate protection against fire and other operational risks. These stocks are then deliberately written down in value which is based on an assessment of the potential resale market value of the items at the time of the assessment.

A substantial part of these stocks were ordered for specific major projects — such as — Factory Buildings; Water retaining structures; (Reservoirs, Water Treatment Plants etc.): Port Development; Pesticides used in Public Health Programmes; (such as eradication of Aedes Aegypti Mosquito — yellow fever carrier); Rodent Control Projects carried out by Local Health Authorities; Control of Insects in the Sugar Cane Industry. Because of the selective nature of these: products unsold stocks are highly vulnerable to market changes resulting from obsolescence, changing application techniques and degrading of certain products while held in storage.

As a direct result of the high risk nature of these products and based on costly market and product experience gained over a period of years the stocks were deliberately written down to reflect a REALISTIC potential resale market value on the following basis–

ITEMS: DEPRECIATION:

• 1. LABORATORY GLASSWARE/APPARATUS

  These are extremely high risk items with a high incidence of breakage, chipping, shortages and dead stock which are never recoverable — 50%

• 2. STERNSON PRODUCTS:

  These are materials ordered for major construction projects such as Reservoirs, Treatment Plants, Industrial Buildings, and Processing Plants with an extremely high incidence of losses and dead stock caused by chemical reaction in storage and are non recoverable — 50%

• 3. EXPANDITE PRODUCTS:

  These are materials ordered for major construction projects such as Reservoirs, Treatment Plants, Industrial Buildings, Processing Plants, with an extremely high incidence of losses and dead stock caused by chemical reaction in storage and are non recoverable. — 50%

• 4. BAYER PESTICIDES:

  BAYGON FORMULATIONS:

  These formulations are highly susceptible to environmental changes such as temperature and humidity while in storage which causes a degrading of the active ingredient. — 25%

  ITEM: DEPRECIATION:

  BAYTEX FORMULATIONS:

  These are extremely high risk public health insecticides and are limited to only one customer — Ministry of Health and its public health agencies. — 50%

  DIPTEREX FORMULATIONS:

  These are extremely high risk formulations with the active ingredient being extremely sensitive to environmental changes such as temperature, humidity particularly sunlight which precipitates a degrading of the active ingredient resulting in heavy loss due to dead stocks while in storage. — 50%

  FOLIMAT:

  UNDEN & VALEXON:

  These insecticides are of an extremely high risk nature with a limited storage life with the active ingredient being sensitive to environmental changes. The sale of these insecticides is entirely dependent on one customer namely Caroni Limited. — 50%

  RACUMIN:

  This Rodenticide is of an extremely high risk nature being vulnerable to constant weevil contamination in storage resulting in the degrading of the active ingredient with frequent heavy losses due to dead stock. The sale of this rodenticide is restricted to Local Health Authorities for their anti-rodent programmes. — 50%

  TAMARON:

  This insecticide is of an extremely high risk nature with the active ingredient being susceptible to environmental changes. — 50%

  In addition to the losses experienced from dead stocks of Bayer Pesticides, because of the inherent problem of Toxicity to humans and the environment, special precautions involving extra ordinary expenses are involved in the safe disposal of these unsalable stocks.

• ITEM: DEPRECIATION:

  5. PNEUMATIC COMPONENTS LTD.

  These items present a high...