SIR WILFRED GREENE, M.R. - Prior to April 1, 1935, the respondents, Freeman, Hardy and Willis Ltd., were the owners of all the shares in two limited companies which manufactured boots and shoes at factories belonging to those companies. The respondents themselves are the well-known firm of boot and shoe retailers, and for the purpose of their retail business they purchased from those two subsidiary companies the whole of the products of their factories and sold them in their shops. The subsidiary companies, being the vendors of their shoes to the respondents, thereby, the virtue of those sales, made profits. The subsidiary companies and the respondents being in law separate entities, the sales, of course, were real sales. As from April 1, 1935, as the result of certain resolutions of the two subsidiary companies and certain sale agreements, the respondents acquired the goodwill of the business of those companies, together with their freehold land, factories, plant, and so forth. Putting it shortly, they took over the whole of the assets, and they took over the shall of the two subsidiary companies, and thereafter continued to manufacture the same class of goods in the same factories, which had previously belonged to those two companies, and with the same machines. The products of the two factories were sold by the respondent their shops, but of course there was this difference in the position after April 1, compared with the position before April 1, namely, that, whereas in the former period there was a sale by the two subsidiary companies to the parent company whenever the products were sold, now the shoes reached the retail purchaser without any such intermediate sale having taken place. For the purpose of their internal accountancy, the respondents keep separate accounts for the manufacturing at these two factories, treating them for accountancy purposes as though they were separate concerns, and those accounts are kept in a way which is very common, indeed almost universal, in well organised concerns of any size. They are kept by treating the factory as an independent entity, and crediting it, as though it were a vendor, with a notional purchase-price for the goods it produces, that notional purchase price being arrived at by a method of adding a percentage of profit over and above the cost of production. In point of fact, that procedure, which was adopted after April 1, resembles superficially what took place before April 1, because, as the respondents had complete control of the two subsidiaries while they existed, they were able to fix the purchase-price which those subsidiaries were to charge for the goods which they supplied. Similarly, after April 1, 1935, they continued to fix the notional purchase-price on the same basis as that upon which it had been fixed before. I say that the resemblance is superficial, but of course the difference is essential, because, whereas in the one case the accounts reflected a true legal relationship of vendor and customer between two separate entities, they now do not reflect any such relationship, and are merely a means for the better information and guidance of the respondent company by departmentalising its own internal accounts.
In these circumstances, the Crown claims that sched. D, cases I and II, r. 11(2), applies. That, of course, is a rule which deals with successions to trades, professions or vocations. The effect of the application of that rule, effete applied, would be that the profits of the business taken over from the two subsidiary companies would fall to be ascertained, upon the footing that there were new businesses set up on April 1, 1935, and by the joint operation of that rule and r. 1(2) the measure of profits of those businesses would be the actual profits of the year, and not any profits of an earlier period. Rule 11, as it originally stood, was a rule which dealt, in a comprehensive paragraph, with cases where there was a change in the ownership of a business, whether that change was, for instance, by a change in the members of a partnership, or the dissolution of a partnership, or whether it was a change by the purchase of a business.
By the Finance Act, 1928, Section 32, that comprehensive rule was divided into two paragraphs, and was amended in order to bring it into line with the changes introduced in 1926 with regard to the measure on which profits were to be assessed for the purpose of sched. D. As it stands at present rule 11(2) provides as follows :
'If at any time after the said April 5, (1928) any person succeeds to any trade, profession or vocation which until that time was carried on by another person and the case is not one to which para (1) of this rule applies (that is the paragraph which deals with changes in partnerships), 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, profession or vocation at that time.'
I need not read the rest. That rule is contemplating that, when schedule D comes to be applied, it will be possible to find that the person sought to be assessed is deriving taxable profits from a trade, profession or vocation to which he has succeeded. Taking that sub-rule in connection with the first paragraph of schedule D itself, it is contemplating that there will be a charge to tax in respect of the annual profits or gains arising or accruing to the person succeeding to the trade from the trade to which he succeeds. If, for instance, the trade which he has acquired has come to an end, it is not possible to say of him that he is deriving any profits from it. The rule appears to contemplate the continuance of a trade, after a change in ownership by virtue of a succession. The language of Lord Kinross in the Scottish Case of Watson Brothers v. Lothian may usefully be referred to in this connection. He said at p. 444 :
'That, of course, is not the case we have to deal with, which comes second in the fourth head, and that is - if any person shall have succeeded to any trade, manufacture, adventure, or concern, or any profession within such respective periods, the duty payable shall be estimated in a particular way; the way there again being determined by a regard to the previous history of that trade, manufacture, or adventure, or concern, all upon the view that what was bought was a continuing thing, a continuing adventure, with all its prospects, with all its trade connections, and with all those things which result in the making of a profit.'
That of course, does not mean that the business, regarded after the succession, must be in every respect and in every detail identical with the business which was carried on before the succession. The successor may succeed to a business, let me say, with 50 shops. He may choose to shut up some of those shops. He may make alterations in the goods that he sells. All sorts of alterations of that kind may take place. He may change his supplier. He may cut out a particular class of customer or a particular area. All questions of that kind appear to me to be really matters of fact for the determination of the Commissioners, who, where matters of that kind arise, have to set themselves the question 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. Changes of that kind may or may not be so substantial as to make it right to say, as a matter of fact (that would be a question for the Commissioners), that the business is not the same as the one to which he succeeded. The differences may be so substantial as to justify a finding to that effect.
With those preliminary observations in mind, I come to consider their application to the facts of the present case. For the purpose of answering the question that arises, the first thing to ascertain, it seems to me, in the trade to which the respondents are said to have succeeded. When I look at the case, I find in para 4 a sentence which appears to answer that question :
'These two companies (the subsidiary companies), whose works were in Kettering and Legislator respectively, were manufacturing wholesale concerns which sold the whole of their finished products to the respondent company.'
That sentence is, in my view, a finding that the business of those two companies was that of 'manufacturing wholesale concerns.' The circumstance that they are said to have sold the whole of their finished products to the respondent company I do not read as being part of the description of the business, but merely as a statement of fact as to the way in which the wholesale manufacturing business was in fact carried on. The important description is 'manufacturing wholesale concerns' and, writing that out a little more at length, it seems to me that that quite clearly means manufacturing concerns which dispose of their products wholesale.
The first question, therefore is whether or not the business of manufacturing and disposing of their products wholesale is a business which after April 1, was carried on by the respondents. The special commissioners answered that question in the negative, and Lawrence, J., has affirmed their decision. In so far as the finding of the commissioners is a finding of fact, of course, we cannot interfere with it, but I am prepared to assume the correctness of the view which Lawrence, J., took namely, that the finding does involve matters of law which we are at liberty to investigate. At any rate, the case, has been argued upon that footing, although we stopped Mr. Latter, and I do not know whether he was going to elaborate an argument to the effect that the decision is a pure decision of fact. For the purpose of this judgment, nothing that I say must be taken to prejudge that matter upon which we have not heard argument, but assuming (and my prima facie inclination would be to accept the views of Lawrence, J., on this) that the matter is one which we can investigate, the question which arises appears to me to be whether or not, it can truly be said that the business of a wholesale manufacturing concern is being carried on by the respondents. The answer to that question seems to me to be quite clearly in the negative. Manufacture in these factories is being carried on, but the mere manufacture is not the thing which produces the profit of the business. That part of the business of the subsidiaries which was essential for the realisation of taxable profit namely, the selling of their goods wholesale - has disappeared, and the goods are now sold and the profits realised by the respondents in their ordinary organisation and in their ordinary retail shops. It seems to me therefore, that the special commissioners were amply entitled to find and I think that one the facts they were bound to find, that the businesses of the two subsidiary companies ceased, and by that I do not understand them to be finding that the manufacturing part of the business had ceased. Obviously, it had not. It is quite clear what that finding means. It does not mean that the factories have stopped making shoes, because they have held earlier in the case that the shoes are still being made in the factories. What it means is, I think, clearly that the businesses have ceased, in the sense that the businesses to which it is alleged the respondents succeeded under the rule now no longer exist. In other words, they ceased to exist, for the purpose of the rule. The fact that manufacturing is carried on is, of course, irrelevant for the purposes of the rule in any case where the business, within the meaning of the rule, is no longer extent. That is what the Commissioners have found, and in my judgment, they were perfectly right.
There is another angle from which the matter may be viewed, and it is this. The rule is a rule the object of which is to fix the method by which profits or gains are to be assessed in a particular case. The profits or gains are the profits or gains earned by means of a trade to which the tax-payer in question has succeeded.
Accordingly, the question arises whether or not, it is possible to put the finger upon some taxable profits arising from a trade and to say of those profits that they arise from the trade which was taken over. In the present case, Freeman Hardy and Willis Ltd., realised a profit by the sale in their retail shops of boots and shoes which they manufactured in the two factories which they acquire but that profits was not realised by the businesses which they took over. The business which they took over, before they took them over, were realising a profit of a different character and on a different scale - namely, the profit of a manufacturer selling his goods wholesale. The profit that Freeman, Hardy and Willis Ltd., now make by selling those products retain in their shops is realised by the intervention of the retail business, which was their business all along, and is their old business. It therefore seems to me impossible to predicate of the profits which they make by selling in their retail shops these boots and shoes manufactured in these factories that they are profits referable, for the purposes of the rule to the trade to which they succeeded.
The Crown endeavours to get out of that difficulty by an argument to this effect. It says : The profit which is made by selling the boots and shoes retail in the shops can, for the present purpose be dissected and split up into two profits, the wholesalers profit and the retailers profit, and in so far as the profit is referable to the head of the wholesalers profit, that is to be deemed for the purpose of the rule to be the profit derived from the carrying on of the trade taken over. In my judgment, that is wholly illegitimate. There is no such thing in a case of this kind, for any income-tax purpose, as a wholesalers profit. It is wholly non-existent. The expression is a convenient one from the point of view of accountants, whose task it is to dissect profits and attribute them in part to one aspect of their clients activities and in part to another aspect of the clients activities. Obviously, a wholesaler makes a wholesalers profit and a retailer makes a retailers profit. Nevertheless, to say of a manufacturer who sells retail that he makes two profits, wholesalers profit and a retailers profit - although for accountancy purposes if may be very convenient and useful that the accounts should be kept on that basis - has no reality in fact, since no profit is realised until the goods are sold and the profit that is realised is the profit realised by disposing of the goods by sale. It is quite impossible, in my judgment, to say that the present case ought to be treated as though there had taken place a notional sale by the factory to the warehouse upon some basis to be fixed by reference to some evidence as to what a wholesalers profit would be. I know of no such principle permissible under the Income-Tax Acts, save in one case to which Mr. Latter has referred us. I need not do more than give the reference to it. It is the All Schedules Rules, r. 12, which was introduced I think in 1918 to meet a special case. The Commissioners, in dealing with that matter, said this :
'We were further of opinion that in the year 1935-36 the respondent company made one profit only, and that that profit could not for income-tax purposes be divided into a manufacturing profit and a retail profit.'
I entirely agree with that conclusion.
Reliance was placed, on behalf of the Crown, upon some authorities, particularly Bell v. National Provincial Bank of England. That was a case where the National Provincial Bank had acquired the business of a banking company at Wolverhampton called the County of Stafford Bank. After that acquisition, they continued to carry on business on the premises of the County of Stafford Bank. They took over, I think, the staff and books. Profits were there made, but those profits were merged in the entire profits of the business of the National Provincial Bank, and were not kept distinct. The Crown took the view that the National Provincial Bank had succeeded to the business of the County of Stafford Bank. The Commissioner found that there was no succession, but the matter eventually came to the Court of Appeal who held that there was a succession. That case, in my judgment, does not help the Crown. The business that was being carried on there by the acquiring company was a banking business. That business was carried on both before and after the acquisition. The business that it acquired was a banking business. That business it continued to carry on after the acquisition. The fact that the profits of the acquired business, existing, as it did, both before and after the acquisition fell into the common pool of the profits of the acquiring company did not prevent the applicability of the rule. The only difficulty that was presented was the ascertainment of the figure of those profits for the purpose of the application of the rule. The business persisted both before and after the acquisition. It was the same business. It was being carried on, and it was making profits. The problem was to find out what the profits were, and for that purpose, of course, dissections of accounts and so forth were necessary. However, that seems to me to be a totally different case from the present, where it is not possible, in my view, as I have already said, to say of the business carried on before the acquisition that it persisted after the acquisition, in view of the circumstance that that essential part of it by which the profits were realised and became taxable, namely, the wholesale selling of the products ceased and came to an end, with the result that the net profits of that description were realised at all. There were one or two authorities referred to, but they do not really touch the present point, and I do not propose to refer to them. In my opinion, the decision of the judge affirming the decision of the Commissioners was perfectly right and the appeal must be dismissed with costs.
FINLAY, L.J. - I am entirely of the same opinion and for the same reasons.
LUXMOORE, L.J. - I agree.
Appeal dismissed with costs. Leave to appeal refused.