McEnearney & Company Ltd v Board of Inland Revenue
| Jurisdiction | Trinidad & Tobago |
| Judge | Koylass, C. |
| Judgment Date | 02 November 1984 |
| Court | Tax Appeal Board (Trinidad and Tobago) |
| Docket Number | I 14 — I 17 of 1977 |
| Date | 02 November 1984 |
Tax Appeal Board
Koylass, C.; Burke, M.; Julumsingh, M.
I 14 — I 17 of 1977
T. Milne for appellant
B. Roopnarine for respondent
Revenue Law - Appeal against assessment to corporation tax and unemployment levy — Whether appellant's stock valuation was a proper one arrived at in accordance with accepted accounting principles — Assessment referred back to respondent for reassessment by reducing chargeable income for years in question.
These are appeals against additional assessments to corporation tax d 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 –
“(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 Aistons Limited, Alyce Glen Industries Limited and Amalgamated Industries Limited.
(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,
(c) that the appellant created reserves as its closing stocks at certain percentages of the cost prices in respect of its stocks.
(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 west paid to Barclays Bank, D.C.O., adjusted the appellant's stock value-n and increased the chargeable income for the years 1970, 1971, 1972 and 3 in amounts of $519,039, $520,595, $466,252 and $426,810 respectively, under –
1970
Interest on loans 489,039
Stock obsolescence 30,000
Total 519,039
1971
Interest on loans 430,142
Stock obsolescence 90,453
Total 520,595
1972
Interest on loans 328,766
Stock obsolescence 137,486
Total 466,252
1973
Interest on loans 317,977
Stock obsolescence 108,833
Total 426,810
In respect of all the years, the appellant stated its reasons to be eed in support of the appeals as under –.
“1. 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 —
“(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.
(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 Appel.. lant 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.
(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.
(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.
(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 lark loan, thus the issue before the Court relates to the disallowance of amounts of 530.000. 596,453, 5137, 486 and $108,833, claimed as stock obsolescence for the years of income 1970, 1971) 1972 and 1973, respectively. In is regard, we note that the claims for stock obsolescence result from the luation 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 soId whether or not there was a demand. He estimated that the number of parts in stock at any time would be approximately 66,000.
He described the method adopted by the appellant in valuing its closing ck 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 s, had been approved by the appellant's auditors and had never in the past challenged by the respondent. A similar method had been adopted by other anies, though the percentages and the spread over the years might vary from 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 continuous basis and stock balances were adjusted on stock cards, as and when discrepancies were found, without any accounting entry being made. Adjustments to stock cards were made in regard to pilfered, damaged or deteriorated stocks. The financial effect of any adjustments would be reflected only in the year end stock valuation exercise.
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(2) Stock cards show costs in sterling at f.o.b prices, plus estimations for freight, insurance, customs duty, handling charges, transport and brokerage. There was at exchange factor which was taken into consideration in regard to the initial write down of 25 per cent.
In cross — examination, the witness amplified his evidence as to the appelt's justification for applying a 25 per cent depreciation for all stocks, en thoSe held for less than one year. The following factors were mentioned:
Exchange fluctuations
Landed cost factors
Stock cards reflected cost at latest prices
Obsolescence
Deterioration
Pilferage.
He further stated as follows:
The system employed was a practical cne which the appellant had adopted ter many years experience in the trade.
In regard to the years 1970 to 1973, he had had access to the files which vided information as to the valuation of closing stocks for purposes of the ellant's Balance Sheets.
He was familiar with the accountancy principle that closing stocks are to valued at cost or market value, whichever is lower, and opined that net realisable value and market value were probably the same. In his opinion, the stock had been valued in accordance with that accepted principle in the relet years.
Models of motor vehicles changed every five years, and when a change occurred, stock items would be retained if sales were being made.
Asked whether he could ascertain the actual value of damaged or deteriorated stock, he answered that he could not, as no record of that nature had been maintained, though entries had been made on stock cards from time to time. He added that on occasions, damaged or deteriorated items would have been sold for scrap value; otherwise they would have been dumped from time to time and the relevant stock cards removed. He did not know whether any items had been dumped during the relevant years, nor could he state what percentage of stock purchased in 1970 had been on hand at the end of the years 1970, 1971, 1972 and 1973; however, it would be possible to undertake such an exercise. He also could not say what percentage of stock written down by 25 per cent had been subsequently damaged or had deteriorated.
The witness stated that S. M. Supersad, Chartered Accountant, had represented the appellant at the...
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