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Briton Ferry Steel Co. Vs. Barry (inspector of Taxes). - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
Decided On
Reported in[1941]9ITR122(Cal)
AppellantBriton Ferry Steel Co.
RespondentBarry (inspector of Taxes).
Cases ReferredLaycock v. Freeman
- appeal from a decision of maonaghten, j.briton steel forry co., the appellant company, was incorporated in 1899 and till 1934 its main business was the production of stee, bars, which it supplied to six subsidiary companies and to certion other consumers for conversion into blackplate and tinplate. the company itself convorted steel plates into blackplate at one of its own works. the business of the subsidiary companies was the manufacture of blackplate and tinplate. in 1931 the company formed a subsidiary agency company. from then till april 7, 1934, the course of business conducted by the agency company was that it found its own purchasers of black plate and tinplate; having found a purchaser, the agency at its own discretion selected the subsidiary company best suited to carry out the.....

Appeal from a decision of Maonaghten, J.

Briton Steel Forry Co., the appellant company, was incorporated in 1899 and till 1934 its main business was the production of stee, bars, which it supplied to six subsidiary companies and to certion other consumers for conversion into blackplate and tinplate. The company itself convorted steel plates into blackplate at one of its own works. The business of the subsidiary companies was the manufacture of blackplate and tinplate. In 1931 the company formed a subsidiary agency company. From then till April 7, 1934, the course of business conducted by the agency company was that it found its own purchasers of black plate and tinplate; having found a purchaser, the agency at its own discretion selected the subsidiary company best suited to carry out the particular order; all contracts for goods were made by the agency as principal and the agency was entirely responsible for finding outlets for the productions of the subsidiary companies; goods manufactured by a subsididary company were marked with its particular trademakr and the different trademarks had come to be regarded as marks or brands of the agency; papers issued by the agency bore its name and described it as sales office for the appellant company as proprietor of the subsidiary companies of which the names were set out; customers did not know which of the subsidiaries produced the particular goods which they bought; the agency accounted to the subsidaries for the proceeds of sale, deducting a selling commission. On April 7, 1934, in pursuance of a scheme of reorganisation, all the subsidiaries went into liquidation and the liquidator of each agreed with the appellant company for the transfer to it of that subsidiarys undertaking and assets, including goodwill. Thereafter the subsidiary companies mills became branches of the appellant company, sales continuing through the agency company.

Assessments to income-tax were made on the appellant company for the years ending April 5, 1935, and April 5, 1936, on the footing (a) that it had succeeded to a trade carried on by each subsidiary until April, 1934, within the meaning of the Finance Act, 1926, Section 32(2), or (b) that the appellant company had then set up a new trade, so that there should be included in its assessable profits the actual profits derived from each of the mills formerly run by the subsidiaries. The Special Commissioners upheld the assessments on the ground that there had been a succession, Macnaghten, J., affirmed this decision. The company appealed.

The Court of Appeal referred the matter back to the Special Commissioners to reconsider their findings of fact and law in the light of the decision in Laycockv. Freeman, Hardy & Wills, Ltd. The Special Commissioners found that after April 7, 1934, the company, instead of selling steel bars to the subsidiary companies, transferred them to the former works of those subsidiaries where the processes of rolling blackplate and tinplate were carried out. They found that the company succeeded to the trade of barrolling and plating formerly carried on. They considered that although this trade had been amalgamated as a department of the companys business, its identity had in other respects been preserved. They also found that there was no need to altribute any national profits or expense to the steel works or the plate works, the profits of the companys plate works being the actual profit on the sale of plate and the actual cost of producing plate through each process.

King, K. C., and F. Grant, for the appellant company.

The Attorney-General (Sir Donald Somervell, K. C.) and R. P.Hills, for the Crown.

GREENE, M. R. - This appeal arises out of assessments to income-tax made upon the appellants in respect of the years ending April 5, 1935, and April 5, 1936. The assessments were made upon the basis that on April 7, 1934, the appellants succeeded to the businesses previously carried on by six companies which were what is commonly called 'wholly owned' subsidiary companies of the appellants. Before April 7, 1934, when the businesses of the subsidiaries were transferred to the appellants. The subsidiaries having been put into liquidation (which date of convenience I will call 'the amalgamation date'), the business activities of the appellants consisted of making steel bars which they sold in part to the subsidiaries, in part to outside purchasers, and part of their production they themselves used for the purpose of making what is known as black plate in a factory of their own. Steel bars are produced by two processes, (1) the smelting of pig iron or scrap iron and casting it into ingots; and (2) the heating and the rolling of the ingots to turn them into steel bars. Those were the commodities which they sold to their subsidiaries. The business of the subsidiaries consisted in making from those steel bars tinplate which they sold. The further processes necessary for making the tinplate consist of cutting the bars, rolling them into thin sheets which are called blackplate, and then dipping the blackplate into a bath of molten tin and passing it through rollers, which turns it into tinplate. Those processes were the processes carried on by the subsidiary companies, and their profits were, of course, ascertained by reference to the price which they paid to the appellant company for the bars and the profits that they made out of selling the ultimate produce, the tinplate. There is one thing that arises in the course of these operations, namely, scrap, with which I will not deal now, bit I will mention later a particular argument that was founded upon it.

After the amalgamation date, what I may call the original activities of the appellant company underwent a change, because, as Clauson, L. J., put it in the course of the argument, they had lost six customers, namely, the six subsidiary companies, and the steel bars which previously they would have disposed of by sale to those companies they now no longer sold as steel bars at all. Those changes, therefore, have taken place as the result of the amalgamation in the business activities of the appellants. Looking at the business activities of the subsidiary companies and treating those for the moment as being held apart from the activities of the appellants after the amalgamation, the only difference in those activities is that, whereas the steel bars required for the production of the tinplate had previously been acquired by purchase from a separate entity, to wit, the appellant company, they are now produced by the same entity as is producing the tinplate; and, so far as the tinplate part of the business is concerned (by which I mean the part concerned with the operation of turning steel bars into tinplate) the only difference in that part which has occurred is that the raw material of those activities now enters that branch of the business not be reason of a purchase from an outside person, but by coming from the appellant company itself and being used by itself in the tinplate business. Those are, in my view, the main and crucial facts which it is necessary to bear in mind in considering the problem raised by this appeal. The other details are to be found in the original Stated Case and in the supplement to the Case. In that state of affairs, the Crown took the view that the profits of the appellants for the two years in question fell to be dealt with the accordance with the provisions of sub-section (1) of Section 32 of the Finance Act of 1936. That section substitutes the rule there set out in the place of rule 11 of the Rules applicable to Cases I and II of Schedule D. Sub-rule (2) deals with successions to businesses other than those specifically dealt with in sub-rule (1), which deals with the special case of partnerships, and it provides as follows : 'If at any time after the aid fifth day of April'that is April 5, 1928'any person succeeds to any trade'I read only the relevant words'...... which until that time was carried on by another person and the case is not one to which paragraph (1) of this rule applies, the tax payable for all years of assessment by the person succeeding as aforesaid shall be computed as if he had set up or commenced the trade...... at that time.'

The Crown claimed that on the facts of this case the appellants had on April 7, 1934, succeeded to the trades theretofore carried by the six subsidiary companies, and they claimed that accordingly, in assessing the appellant company to income-tax for the years in question, the appellant company must be treated as though it had set up the trades to which it had so succeeded on April 7, 1934, and that the profits of the appellant company referable to those branches of their activities must be computed as the rule directs.

The matter came before the Special Commissioners, who held originally that the appellants had succeeded to those businesses and they upheld the assessments, subject to certain agreed amendments on figures. The appellants appealed first to the Kings Bench Division, and Macnaghten, J., upheld the decision of the Commissioners. From his decision an appeal was brought to this Court and, after the case had been opened, or while it was in the course of being opened, the Court, as then constituted, took the view that, in view of a decision of this Court which had not been made public, although I think it had been delivered at the time when the matter was before the Commissionersa decision which the Commissioners had not got before them when they came to the decision to which they cameit was desirable that the matter should be referred back to the Commissioners in order that they might have an opportunity to reconsider their conclusions both of fact and of law in the light of the decision of this Court in that case. That was the case of Laycock v. Freeman, Hardy and Willis, Ltd., (1) (1938) 22 Tax Cas. 288; 7 I.T.R. 237.

At this stage I think it is convenient to say a word or two of a general character with regard to the effect of the sub-rule in question. The sub-rule is expressed in language which is easily applicable to the simple case of a person, who has not previously carried on a business, acquiring a business from somebody who has carried it on and continuing to carry it on thereafter. But the sub-rule indisputably is not limited to that simple class of matter. It extends to much more complicated transactions, of which the present is an example, and it involves, and necessarily involves, a large measure of artificiality in its application. It is obvious that where somebody, be it an individual or a company, who is already carrying on a business, acquires a business from somebody else and continues to carry it on, difficult questions must arise, because, in the ordinary course of business, if the business acquired is carried on, it becomes, to a greater or lesser extent, merged in fact in the old business of the company. It may alter its character; and the reality of the matter is that, as from the date of such an acquisition, there is one business and one business only, namely, the business of the person who is carrying it on. I disregard cases where the business acquired is of a totally different character from that previously carried on. That is the fact of the matter, that one company is carrying on one business : but the sub-rule directs us to regard the position in a different light. We are not entitled, and the assessing authority is not entitled, to treat such a state of affairs as merely an expansion of the business acquiring company. The sub-rule directs that the business acquired shall, for the particular purposes mentioned, be held, so to speak, apart from the activities of the acquiring company and for those purposes be regarded in a different light. Where the company carrying on a manufacturing business acquires the business of a company which carries on a retail business, or vice versa, it is obvious that the artificiality of this conception is great. Nevertheless, so far as the sub-rule directs this artificial conception to the applied, we are bound to apply it.It is obvious that at one end of the scale there may be a case where there can be no doubt as to the continuing identity of the acquired business. At the other end of the scale there may be a case where it is impossible for a reasonable person to say as a matter of fact that the acquired business any longer is being carried on in any identifiable form. Whether or not a particular case falls within either of those two types of cases is I view it, a question of law. With regard to the area that lies between those two extremes, as I view it,it is a matter of fact for the Commissioners to say whether or not there is a succession within the meaning of the sub-rule and profits derived from the business to which the succession has taken place. That is one general observation with regard to the sub-rule.

There is another general observation which I think it desirable to make in view of an argument put forward by the learned Attorney-General, which I shall have to mention later. The rule does not suggest that the taxable fund which the taxpayer ultimately is assessed upon is anything but the real profits which he, as a taxpayer, has earned. It is not legitimate, in my view, to apply the sub-rule in such a way as to introduce some element of notional profit with the result of charging the taxpayer in respect of a profit which he has never realised. The object of the sub-rule is to ensure that, in cases where there is the transfer of a business the person acquiring it shall be treated as having started a new business. If that principle had not been adopted, the result would have been, so to speak, that the business would have been treated as the person to be taxed and not the taxpayer himself, because the acquiring taxpayer would then have found himself charged in the first year after he acquired the business with tax measured by the profits earned by the business at the time when his predecessor owned it. That principle has not been adopted by the Legislature, and instead the acquiring person is treated as having started a new business. In some cases, that may work to his advantage, in other cases, to his disadvantage; but this is the principle.

The third point to which I wish to refer upon this sub-rule is that the direction as to the manner in which tax is to be computed, namely, that it shall be computed as if the trade had been commenced at the relevant time, of course only operates so long as that basis of computation is a relevant matter; and the basis of computation based on the hypothesis that the trade is a new trade lasts for so long only as the provisions of the Act in relation to the setting up of new trades persist. I say that because it was argued on behalf of the appellants that the effect of holding that in the present case there had been a succession would be that for ever afterwards the appellants must be treated for income-tax purposes as carrying on not one trade but seven, namely, the six trades of their subsidiaries and their own original trade. I cannot take that view. It seems to me quite clear upon the construction of the sub-rule that this artificial treatment of what, in this case at any rate, is in truth one business is only to endure for the purposes of computation so long as the setting up of a new business is a relevant matter; and it ceases to be a relevant matter, I think I am right in saying, in the fourth year after the date of setting up.

Having made those general observations, the next think which I think it is convenient to do at this stage is to say a word or two about the decision in Laycock v. Freeman, Hardy & Willis, Ltd., (1) (1938) 22 Tax Cas. 288; 7 I.T.R. 237, because it is upon that decision that the argument of the appellants is mainly based. That was a case where a company carrying on a retail business had acquired the businesses of two subsidiaries of its own which had manufactured the articles sold by the parent company in its retail shops and sold them wholesale to the parent company. After the acquisition of those manufacturing wholesale businesses, the parent company continued to sell in its retail shops articles produced in the factories which it had acquired from the subsidiaries which if had absorbed. Physically, so to speak, the lay-out of these operations remained the same, but there was one vital change in the situation. The business of the subsidiary companies which the Crown alleged was the thing to which there had been a succession had, as was found by the Commissioners, been that of manufacturing wholesalers. That implied that their profits were earned not by the mere act of manufacture but by realising on sale wholesale the products which they manufactured. After the amalgamation there was no longer in existence a manufacturing wholesale business at all. No profits were being realised by sale wholesale. That essential activity of the subsidiary companies had disappeared altogether, and it was an essential activity in making the profits which would be charged with tax. All that was left of the activity of the subsidiary companies was the actual manufacturing, a thing which by itself produces no profits. On that basis this Court held that there had on the special facts of that case been no succession.

There was one argument advanced in that case to which I must refer, because much play has been made with it by the appellants in the present case. It was the argument put forward by the Crown to the effect that there ought to be assumed for the purposes of applying the sub-rule a sale on wholesale terms from the factory to the retail side of the companys activities. That had a certain colour of plausibility in the fact that the company in its own departmental accounts had treated the matter as though there had been sales from the factory to the retail warehouse and a subsequent retail sale in the shops. That, of course, was, as was pointed out, a pure matter of convenience in accounting and did not reflect any actual transactions at all. But the use which counsel for the Crown endeavoured to make of it in argument was this : they said : 'It is not correct to treat the business of manufacturing wholesalers as having come to an end, because, although in fact there are no sales wholesale at all, there must be deemed to be sales wholesale as between the factory and the retail warehouse.' In other words, the arguments involved setting up an imaginary sale in order to produce what was an essential element, the existence of which was necessary before any identity between the business before amalgamation and the business after amalgamation could be established, namely, the making of sales wholesale. That was the object of the argument, and it was held by this Court that it was not legitimate to introduce something so completely unreal and to invent a sale which never had, in fact, taken place, in order to keep alive for the purposes of the sub-rule a business which had, in fact, ceased to exist. In view of that case, this Court, as I have said, sent the present case back to the Commissioners, and it is from their finding that the present appeal originates.

The finding of the Commissioners is to be found in paragraph 3 of the supplement to the Case. They find 'that the appellant company did succeed to the trades of bar rolling and plating formerly carried on by each of the subsidiaries on April 7, 1934, and has continued to carry on such trades'. That is their finding and, in so far as it is a finding of fact, it could not be interfered with by this Court unless this Court came to the conclusion that there was no evidence upon which it could be based. The Commissioners then go on to explain how it was that they came to that conclusion. They put to themselves a question formulated by myself in my judgment in Laycock v. Freeman, Hardy and Willis, Ltd., (1) (1938) 22 Tax Cas. 288; 7 I.T.R. 237, namely, 'whether or not it is true and fair to say that the business in respect of which the successor is said to be making profits is the business to which he succeeded'. The Commissioners go on as follows : 'We do not think that the fact that a purchaser of a trade chooses to amalgamate that trade as a department with his own prevents a succession if in other respects the identity of the trade acquired is preserved. In the present case we find that the identity of the trades formerly carried on by the subsidiaries has been preserved. As we understand it, we see no necessity for imputing any notional profit or expense either to the steel works or to the plate works. The appellant company produces these steel bars, not for re-sale, but for the purpose of its plate department. The profit of the plate works of the appellant company is the actual profit on the sale of plate, namely, the difference between the actual sale price of plate and the actual cost of producing plate through each process.' Subject to one comment which I shall have to make later, I cannot find anything to quarrel with in the method of approach to the question which the Commissioners there set out. It seems to me that they have properly directed themselves and have come to a conclusion to which the evidence before them justified them in coming. But it is said that there was really no evidence upon which they could come to the conclusion to which they did come with regard to the succession to and the carrying on of these businesses. It was said that, in order to arrive at that conclusion, it was an essential element in the logical process involved to assume at one stage a notional sale of the steel bars out of which the tin-plate was ultimately made. It was said that the business of the subsidiary companies could not be said to have persisted in a form identifiable for the purposes of the sub-rule, because, it was said, the businesses of the subsidiary companies had consisted in buying steel bar, subjecting them to the necessary processes and thereby producing tin plate. It was said, therefore : 'there is no longer within the four corners of what was acquired by any purchase of steel bars at all, and that essential element in the businesses acquired having diapered, it is impossible to say that those businesses any longer exist, even for the artificial purposes of the sub-rule, and the only method of getting these businesses back into a state of existence is by assuming the continuance of the missing part of their operations, namely purchase of the steel bars.' I must confess that if that argument had been a tenable one, if the result flowed from the premises, it would have been a very attractive one, because it would have meant that the sub-rule could only be applied to the facts of the present case by assuming at the relevant stage a transaction which never in fact existed, namely, a purchase of steel bars. On that basis it was attempted to say that the observations made in Laycock v. Freeman, Hardy & Willis Ltd., (1) (1938) 22 Tax Cas. 288; 7 I.T.R. 237, on the subject of notional sales applied equally to the present case. In my opinion, that argument cannot be sustained. It is based on a proposition which I do not thing is an accurate one; it is based on the proposition that the businesses acquired consisted of buying steel bars and then processing them in order to produce the finished article. In my opinion, that is a misleading description of the business. The way in which the business of the subsidiary companies was being carried on was, no doubt, by purchasing the half finished material, which was the raw material of their own businesses. There would have been no difference in their business in any relevant sense if, instead of buying their steel bars, they had decided to start making them for themselves; it would merely have been a change in the method of providing themselves with the raw material out of which they manufactured the tin plates. On the facts of the present case, the steel bars are, of course, made by the appellant company, which is now the same company which turns them into plates. I myself see no difficulty in obeying the directions of the sub-rule without introducing at any stage any notional sale. The business with which the sub-rule is concerned is the business carried on by the predecessor. If one examines the facts of the present case, one finds that the appellants, who are the alleged successors, are doing every singly thing which the subsidiary companies had previously done, from the steel bar stage; and from the point when the steel bar enters the tinplate branch of the business, the operations which take place are precisely the same, and the profits are ultimately made by the sale of the finished product. The only difference lies in the fact that the steel bar gets into the tinplate department not by a purchase from an outside body, but by a delivery from a different department of the appellants work, namely, the department which makes steel bars.

If the provisions of the section are to be carried out, and if the continued existence and identity of the businesses exist, what is the way in which the whole matter works out Here it is important to bear in mind what I said earlier on, that the rule does not have the result of taxing profits which have never in fact been realised. The problem, therefore, is to arrive at the taxpayers profit in accordance with the section, and anything in the shape of a notional sale must be rejected if that would involve ascribing to the taxpayer a profit which he has never earned. If a notional sale is to be assumed, it would work in that way. The problem being to ascertain the taxable profits of this taxpayer, a certain part of his profits falls to be dealt with in the artificial way provided by the sub-rule, and the rest of his profits falls to be dealt with in the ordinary way. Now, if we are to say that the matter must be treated as though the appellant company had sold to the tinplate part of its business the steel bars which it makes in the steel bar part of its business at a profit, the result in practice would be this, that the part of the profits referable to the businesses acquired would be ascertained on the footing that those parts of the business had acquired their raw material at a particular price, which in fact, of course, they had not. With regard to the rest of the profits of the appellant company, they would fall to be treated as though the appellant company had sold at a profit products, namely, their steel bars, to their own tinplate departments which, of course, they had not; and it that were the basis upon which the thing worked, the result would be to bring into charge to tax profits which had not been earned at all.

The solution, in my judgment is along different lines. It seems to me that the businesses acquired may properly, for the purposes of the sub-rule, be treated, and should be treated, as being at the steel bar stage, namely, the stage when those branches of the business procure for themselves a steel bar. Obviously in order to arrive at profits of those branches of the business on that basis, some figure must be brought into account to represent the cost of the steel bar. If that figure is based on an imaginary sale price at a profit, it is an unreal figure. If, on the order hand, it is brought in at the actual cost of producing that steel bar, it is a real figure; and treatingas we are bound by the rule to dothe two parts of what is in truth one business as though they were held apart, the only way in which in my judgment, that direction can logically be carried out is the way that I have indicated, of bringing in the raw material, namely, the steel bar, at the actual cost of production. If that is done, it fits in extractly with the fact, by reason of the amalgamation, the appellant company has lost six customers, because whereas it had previously been manufacturing with a view to selling to six customers, it is now manufacturing with a view to passing on to its tinplate department, without any profit to itself, something which it has manufactured in the other part of its concern.

Now, it seems to me that that solution of the difficulty is the proper solution; it is in accordance with the language of the sub-rule, and it involves no assumption of a notional sale. But it does involve this, that the cost of making the steel bars for these various acquired businesses must be ascertained. With regard to that, there appears to me to be no difficulty whatsoever in principle. There may be very serious difficulties in ascertaining the proper figure, but those are matters with which accountants are familiar, and with which they have to deal every day. Something was said about that class of operation in my judgment in Laycock v. Freeman, Hardy & Willis, Ltd., (1) (1938) 22 Tax Cas. 288; 7 I.T.R. 237. The accountants task would be to ascertain by proper methods and proper apportionment what the cost of production of the bars was, including of course overheads and all others things which have to be apportioned. The effect of that operation is not to invent some artificial and unreal process, such as a sale, but to ascertain what is a reality, namely, the cost of producing a particular article, wrapped up though that reality may be in a number of difficult problems of accountancy. Nevertheless, the figure of cost of the article down to that stage is a real figure and can be ascertained; there is nothing notional, imaginary or factious about it.

There is another way of arriving at precisely the same result, and it is this. It may be said that the appellant company should be regarded as carrying on the businesses acquired, but as having modified them or altered them by substituting for a purchase of the raw material a manufacture of it for themselves. That, as I have said, leads to precisely the same result. Speaking for myself, I prefer the other method of arriving at the result, for the reason that this latter method is one which involves the consideration of a problem of fact of a rather different character, because it is necessary to treat the business carried on after the amalgamation as a business of producing steel bars and during them into tinplate. Such a business is arrived at at the expense, so to speak, of the original business of the company which, on that basis, must be treated as having give up pro tanto a particular branch of its activities. Whether or not in a given case on that way of looking at it the Commissioners would come to a conclusion of fact on the identity of the business might present more difficult problems in future cases, it seems to me, than if the matter be approached in the way that I first indicated, namely, by treating the original business as continuing but as not making profit out of those steel bars which it passes on to the branches which represent the businesses acquired.

The learned Attorney-General suggested, but did not really strenuously argue, that the proper method was to ascertain the profits on the basis of a notional sale. When the matter was discussed in the course of argument, he did not with to press that argument, and the reasons why, in my judgment, it is not sustainable I think sufficiently appear from what I have already said.

There is only further matter to which I need refer, and that is the question of scrap. That arises in this way : Before the amalgamation, the subsidiary companies used to sell back to the appellant company the scrap which came into existence in the process of cutting and rolling out the steel bars into blackplate. The subsidiary companies sold that scrap back; it was used by the appellant company in the same way as it used the other scrap that it bought, in other words, the scrap went back into the mill and emerged finally in the form of other steel bars. As the result of the amalgamation, the businesses acquired no longer conduct the activity of selling scrap, that particular activity has come to an end; but the effect of that happening is not one which must necessarily have the result of forcing the Commissioners to say that the business of the subsidiary companies has come to an end. The sale of that scrap was a subsidiary part of those business and the fact that it is no longer done cannot, in my judgment, affect the question as to whether there is or is not a succession. Another argument is raised in connection with the scrap, and it is this : it is said that, whatever be the case with regard to the other interdepartmental transactions, in the case of the scrap you must assume a notional sale; otherwise you never can arrive at any proper result in figures at all. I listened carefully to that argument, and I hope that I understood it, but I am afraid that I cannot accept it. It seems to me that the position of the scrap is perfectly simple, and falls into line exactly with what I have already said on the main matters in the case. Since the amalgamation, the tinplate branches of the appellants business produce, each of them, in the course of their operations, what may be called a by-product; namely, scrap. That scrap is something which has a value. Previously the subsidiary companies sold it, now it is not sold; nevertheless it is a valuable thing produced in the course of their operations. What in fact happens to it is that, together with the scrap produced by the other branches representing businesses which have been acquired and other raw material bought outside by the appellant company, it goes back, so to speak, into a common pot; and out of that common pot further steel bars are produced which find their way to the tinplate branches of the business. The proper method of dealing with that scrap so produced, in the light of those facts, appears to me to be quite a simple matter; and it seems to me a perfectly simple matter to ascertain, on the basis which the rule directs, the profits of these acquired businesses without introducing any element of notional sale of scrap at all. In other words, the existence of that scrap has the result of reducing the cost of producing the next lot of steel bars, and that reduction of cost would be reflected in the cost price of the next lot of steel bars. I see no difficulty in the matter at all.

The only thing which remains for me to say is this : I have indicated what, in my opinion, is the strict method of applying this section to a case like the present, which does not involve any notional sale at all or any notional profit realised interdepartmentally. But it is right to say that I understand that in the present case the figures have been agreed on the basis that the profits of these businesses taken over are, for the purposes of the sub-rule, to be ascertained as a matter of figures on the basis of the interdepartmental sales which, for their own convenience, the appellants treat in their accounts as having taken place. In many cases it may be very convenient, both for the Crown and for the taxpayer, to adopt some such rough and ready method as that for arriving at the result, and nothing that I say must be taken as in any way precluding the parties from arriving at an agreed result without going through what may, in many cases, be an expensive and difficult process, raising, perhaps, matters of controversy, namely, of ascertaining the sum which should be treated as being the cost of the steel bar, as it is in this case, or whatever else it may be in other cases. Sensible people will, no doubt, endeavour to avoid unnecessary expense if, by so doing, they can reach a satisfactory and just result.

It was essential, for the purposes of this judgment, to ascertain what the true and proper course under the sub-rule is, because that is a necessary step in the whole process of reasoning which must be gone through in order to appreciate the proper application of the sub-rule to facts such as these.

In the result the appeal fails, and must be dismissed with costs.

SCOTT, L. J. - I agree.

CLAUSON, L. J. - I agree.

Appeal dismissed.

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