THE
CHIEF
Justice:—This
appeal
involves
the
ascertainment
of
the
proper
amount
of
excess
profits
for
its
1947
taxation
year
of
the
respondent
company
Anaconda
American
Brass
Ltd.
pursuant
to
the
Excess
Profits
Tax
Act,
1940.
By
Section
2(1)
(f)
of
that
Act
‘‘profits’’
means
the
amount
of
the
company’s
net
taxable
income
as
determined
under
the
Income
War
Tax
Act
and
in
accordance
with
the
well-known
Section
3(1)
of
the
latter,
“income”
means
the
annual
net
profit;
that
is,
profits
are
not
to
be
ascertained
over
any
period
except
(as
applied
to
the
present
case)
the
1947
calendar
year.
The
statement
of
Lord
Clyde
in
Whimster
&
Co.
v.
The
Commissioners
of
Inland
Revenue
(1925),
12
T.C.
818,
as
to
the
two
fundamental
matters
to
be
kept
in
mind
in
computing
annual
profits
is
accepted
in
England
and
is
applicable
here.
It
appears
at
p.
823
of
the
report:
‘“In
the
first
place,
the
profits
of
any
particular
year
or
accounting
period
must
be
taken
to
consist
of
the
difference
between
the
receipts
from
the
trade
or
business
during
such
year
or
accounting
period
and
the
expenditure
laid
out
to
earn
those
receipts.
In
the
second
place,
the
account
of
profit
and
loss
to
be
made
up
for
the
purpose
of
ascertaining
that
difference
must
be
framed
consistently
with
the
ordinary
principles
of
commercial
accounting,
so
far
as
applicable,
and
in
conformity
with
the
rules
of
the
Income
Tax
Act,
or
of
that
Act
as
modified
by
the
provisions
and
schedules
of
the
Acts
regulating
Excess
Profits
Duty,
as
the
case
may
be.
For
example,
the
ordinary
principles
of
commercial
accounting
require
that
in
the
profit
and
loss
account
of
a
merchant’s
or
manufacturer’s
business
the
values
of
the
stock-in-trade
at
the
beginning
and
at
the
end
of
the
period
covered
by
the
account
should
be
entered
at
cost
or
market
price,
whichever
is
the
lower;
although
there
is
nothing
about
this
in
the
taxing
statutes.
’
’
The
second
of
these
propositions
was
approved
by
the
House
of
Lords
in
Ryan
v.
Asia
Mill
Ltd.
(1951),
32
T.C.
275.
At
p.
298,
Lord
Porter
states:
i
‘
It
was
also
common
ground
that
in
computing
such
profits
the
value
of
the
Appellant
Company’s
stock-in-trade
in
hand
at
13th
January,
1945,
was,
in
accordance
with
the
principles
enunciated
in
Whimster
&
Co.
v.
Commissioners
of
Inland
Revenue,
1926
S.C.
20
at
page
25,
required
to
-be
included
at
a
figure
representing
its
true
cost
to
the
Appellant
Company.”
At
p.
300,
Lord
Radcliffe,
with
whom
Lord
Normand
agreed,
puts
it
thus:
‘‘Here
we
are
dealing
with
the
application
of
‘the
principle
of
commercial
accounting
.
.
.
that
in
the
profit
and
loss
account
of
a
merchant’s
or
manufacturer’s
business
the
values
of
the
stock-in-trade
at
the
beginning
and
the
end
of
the
period
covered
by
the
account
should
be
entered
at
cost
or
market
price,
whichever
is
the
lower’.’’
Lord
Clyde’s
two
propositions
were
approved
by
the
Court
of
Appeal
in
Patrick
v.
Broadstone
Mills
Ltd.,
[1954]
1
All
E.R.
163.
At
p.
171
Lord
Justice
Singleton
(with
whom
Birkett
and
Hodson,
L.JJ.,
agreed,
although
the
former
added
a
comment
of
his
own)
set
out
the
extract
given
above.
After
setting
out
the
head-
note
in
Sun
Insurance
Office
v.
Clark,
[1912]
A.C.
443,
as
it
appears
in
6
T.C.
59
and
Lord
Loreburn’s
examination
in
his
speech
in
that
case
of
the
previous
decision
of
the
House
of
Lords
in
General
Accident,
Fire
and
Life
Assurance
Corpn.
Ltd.
v.
McGowan,
[1908]
A.C.
207,
Lord
Justice
Singleton
extracts
what
the
Lord
Chancellor
had
said
(p.
77)
towards
the
end
of
his
speech
:
“I
am
equally
anxious
that
your
Lordships
should
not
be
supposed
to
have
laid
down
that
the
method
applied
by
the
commissioners
in
the
present
case
has
any
universal
application.
If
the
Crown
wishes
in
any
future
instance
to
dispute
it
they
can
do
so
by
evidence,
and
it
is
not
to
be
presumed
that
it
is
either
right
or
wrong.
A
rule
of
thumb
may
be
very
desirable,
but
cannot
be
substituted
for
the
only
rule
of
law
that
I
know
of,
viz.:
that
the
true
gains
are
to
be
ascertained
as
nearly
as
it
can
be
done.”
Leave
to
appeal
to
the
House
of
Lords
in
the
Patrick
case
was
refused
by
the
Court
of
Appeal
(85
T.C.
72)
and
no
motion
for
leave
has
been
made-to
the
House
itself.
Two
other
preliminary
but
important
matters
may
be
mentioned.
The
first
of
these
is
that
in
Russell
v.
Town
and
County
Bank
(1883),
13
App,
Cas.
418
at
p.
424,
Lord
Herschell
stated:
‘“The
profit
of
a
trade
or
business
is
the
surplus
by
which
the
receipts
from
the
trade
or
business
exceed
the
expenditure
necessary
for
the
purpose
of
earning
those
receipts.’’
Lord
Fitzgerald,
at
p.
429,
in
the
same
ease,
stated
:
‘‘
'Profits’
I
read
on
authority
to
be
the
whole
of
the
incomings
of
a
concern
after
deducting
the
whole
of
the
expenses
of
earning
them—that
is,
what
is
gained
by
the
trade.’’
The
second
is
Lord
Cairns’
statement
in
Coltness
Iron
Company
v.
Black
(1881),
6
App.
Cas.
315
at
p.
324:
"It
may
be
proper
for
a
trader,
or
for
a
trading
company,
to
perform
in
his
or
their
books
an
operation
of
this
kind
every
year,
in
order
to
judge
of
the
sum
that
can
in
that
year
be
safely
taken
out
of
the
trade
and
spent
as
trade
profits.’’
This
part
of
Lord
Cairns’
speech
was
reiterated
by
Lord
Buckmaster
(with
whom
Lord
Atkinson
concurred)
in
Naval
Colliery
v.
Commissioners
of
Inland
Revenue
(1928),
12
T.C.
1017
at
p.
1047,
to
which
Lord
Buckmaster
added:
66
.
But
it
cannot
be
done
when
the
question
is
the
amount
of
profits
received.”
To
the
same
effect
are
these
statements
by
Lord
Sands
in
the
Whims
ter
case:
i
‘
The
consideration
of
how
it
would
be
prudent
for
a
trader
to
act
does
not
solve
the
question
here
presented
to
us
as
one
of
Revenue
Law.
Under
this
law
the
profits
are
the
profits
realized
in
the
course
of
the
year’’
(p.
826).
4
‘The
manner
in
which
they
have
adjusted
their
accounts
was
probably
quite
reasonable
as
a
domestic
arrangement,
but
it
would
lead
to
great
confusion
if
such
haphazard
and
speculative
estimates
were
to
enter
into
the
business
of
the
collection
of
the
public
revenue’’
(p.
827).
The
respondent
was
incorporated
in
Canada
in
1922
but
is
a
subsidiary
of
The
American
Brass
Co.,
a
United
States
corporation.
It
operates
a
primary
brass
mill
and,
from
raw
metals
which
it
purchases
from
various
Canadian
mining
companies
and
from
scrap,
it
produces
semi-finished
copper
and
copper
brass
alloys
in
the
form
of
sheets,
rods,
seamless
tubes,
and
shapes.
About
90%
of
the
metal
content
of
its
products
consist
of
copper
(over
80%)
and
zine
(about
15%').
It
purchases
from
companies
with
which
it
has
no
connection
all
its
raw
metals
at
the
market
and
has
always
avoided
speculation
in
their
price
as
it
seeks
to
make
a
profit
entirely
from
their
fabrication.
The
prices
charged
for
its
products
are
based
upon
the
replacement
cost
of
the
metal
content
of
its
product
and
a
processing
charge
which
includes
all
expenses,
other
than
the
replacement
cost
of
the
metal,
and
an
allowance
for
profit.
The
processing
charge
has
never
been
affected
by
fluctuations
in
the
prices
of
the
raw
metals,
which,
particularly
in
the
case
of
copper
and
zine,
have,
since
the
lifting
of
price
controls
on
June
10,
1947,
varied
considerably.
With
unimportant
exceptions:
from
January
1,
1947,
until
February
28,
1947,
it
accepted
orders
on
the
condition
that
the
price
would
be
that
shown
on
its
price
list
in
effect
on
the
first
day
of
the
month
in
which
the
order
was
shipped;
from
February
28,
1947,
until
December
31,
1947,
it
accepted
orders
on
the
condition
that
the
price
would
be
that
shown
on
the
price
list
in
effect
on
the
date
when
the
order
was
shipped.
During
the
first
few
days
of
each
month
the
company
calculated
the
raw
materials
which
would
be
required,
and
what
orders
it
would
fill
by
shipment,
in
the
next
calendar
month.
The
amount
of
raw
materials
ordered
was
the
amount
so
estimated
to
be
required
in
that
next
calendar
month.
The
company’s
business
is
not
seasonal;
its
turn
over
is
slow
(about
three
or
four
times
a
year)
and
the
inventory
required
is
large
physically
and
in
value.
One
pound
of
metal
in
the
inventory
has
the
same
value
as
another,
no
attempt
is
made
to
identify
any
portion
of
the
inventory,
and
any
record
of
scrap
would
be
of
very
little
use.
The
company
commenced
and
ended
the
year
1947
with
an
inventory
of
raw
materials.
The
question
is
not
as
to
the
quantities
but
as
to
values.
It
is
settled,
if
not
admitted,
that
the
values
must
be
taken
at
market
or
cost,
whichever
be
lower.
The
difficulty
arises
because
the
company
put
a
value
on
its
inventory
at
the
end
of
1947
on
the
Lifo
assumption,
that
is,
last-in-first-
out,
while
the
appellant
valued
the
stock
on
the
Fifo
assumption,
that
is,
first-in-first-out.
Neither
theory
is
based
on
any
presumption
as
to
the
actual
physical
movement
of
the
metals
in
the
course
of
operations.
As
to
Lifo,
to
quote
Mr.
DeRoche,
a
witness
for
the
company,
it
is
an
‘‘assumption
as
to
the
order
in
which
costs
should
flow
into
cost
of
sales
and
for
the
establishing
of
the
amount
of
cost
to
be
assigned
to
the
quanity
on
hand’’;
it
is
“indicative
of
the
flow
of
costs
which
are
employed
in
the
method’’.
If
the
company
piled
its
metals
in
such
a
way
as
to
be
able
to
allocate
the
actual
purchase
prices
to
the
various
lots
there
would
be
no
difficulty,
because
the
cost
of
what
had
been
used
in
processing,
whereby
its
profit
were
made,
would
be
known.
Since
it
did
not
do
this
it
was
necessary
to
adopt
some
method,
the
result
of
which
would
most
nearly
approach
the
known
facts.
As
to
copper,
which
accounts
for
more
than
80%
of
the
metal
content
of
the
company’s
products,
the
situation
in
1947
was
that
the
company
purchased
63,268,555
pounds
and
at
the
end
of
the
year
14,291,007
pounds
were
on
hand.
Slightly
more
than
the
total
closing
inventory,
”5.6.,
14,745,979
pounds
had
been
purchased
in
the
last
three
months
of
the
year
at
21.5
cents
per
pound.
In
using
the
Lifo
assumption
the
company
went
back
to
the
year
1936
when
the
theory
had
been
adopted
by
it
for
corporate
purposes
and
allocated
the
cost
of
the
closing
inventory
of
14,291,007
pounds
in
the
following
manner:
“
(a)
6,500,000
pounds
were
regarded
as
having
a
cost
of
7.5
cents
per
pound
(the
average
cost
of
the
copper
in
the
inventory
when
LIFO
was
adopted
in
1936)
amounting
to
$487,500
;
(b)
802,697
pounds
were
regarded
as
having
a
cost
of
9.466
cents
per
pound
(the
average
price
paid
in
1936)
amounting
to
$75,983.30
;
(ce)
17,577
pounds
were
regarded
as
having
a
cost
of
11.191
cents
per
pound
(the
average
price
paid
in
1937)
amounting
to
$1,967.04;
(d)
639,807
pounds
were
regarded
as
having
a
cost
of
10.443
cents
per
pound
(the
average
price
paid
in
1938)
amounting
to
$66,847.04;
(e)
973,477
pounds
were
regarded
as
having
a
cost
of
11.036
cents
per
pound
(the
average
price
paid
in
1939)
amounting
to
$107,432.92
;
(f)
3,151,684
pounds
were
regarded
as
having
a
cost
of
11.5
cents
per
pound
(the
price
paid
in
1945)
amounting
to
$362,443.66
;
(g)
2,205,765
pounds
were
regarded
as
having
a
cost
of
11.5
cents"
per
pound
(the
price
paid
in
1946)
amounting
to
$253,662.97.”
As
more
than
two-thirds
of
the
copper
inventory
is
continuously
in
process,
it
is
evident
that
about
two-thirds
of
the
14,291,007
pounds
could
not
have
been
used
in
manufacturing
the
products
sold
in
1947.
What
is
required
is
the
cost
of
the
metals
used
in
processing
so
as
to
ascertain
the
profit
for
that
year
and
not
what
the
company
adopts
as
a
wise
plan
to
cover
fluctuations
over
the
years
in
the
cost
of
its
raw
materials.
I
would
think
that
an
assumption,
the
result
of
which
indicates
that
6,500,000
pounds
had
been
in
the
premises
since
1936,
would
be
unwarranted
and
that
it
is
contrary
to
the
facts
is
shown
by
the
evidence
of
Mr.
Evans,
the
company’s
Works
Manager,
and
Mr.
Richardson,
an
accountant
called
as
a
witness
on
behalf
of
the
company.
At
p.
139
of
the
record
the
following
appears
in
the
examination-in-chief
of
Mr.
Evans:
4
‘Mr.
Pattillo:
Q.
And
do
you
happen
to
know,
Mr.
Evans,
of
your
own
knowledge
whether
you
have
on
hand
at
the
plant
copper
that
has
been
received
from
the
refineries
that
has
been
there
for
a
good
many
years
and
that
has
never
yet
gone
into
the
mill?—A.
I
would
not
know
whether
there
would
be
any
around
there
or
not.
His
Lordship:
Q.
Is
it
likely
that
there
would
likely
be
any
considerable
portion
of
quite
old
copper
in
the
plant?—A.
No,
there
would
not
be,
sir,
any
large
quantity
that
you
could
identify
as
being
an
old
lot.
There
might
be.
There
is
only
one
instance
that
I
know
of
where
we
had
some
east
billets
which
had
been
in
the
yard
for
about
five
years—that
is
an
alloy.
Q.
Some
cast
billets?—A.
Yes.
Q.
That
were
in
the
yard,
and
was
that
any
particular
kind
of
alloy
?—A.
It
was
a
special
alloy
for
which
we
had
no
orders
during
that
period.
’
’
At
p.
284
Mr.
Richardson
is
under
cross-examination
:
“Mr.
Pickup:
Is
not
the
difference
this
on
that
one
point—
that
Lifo,
as
you
say,
does
not
reflect
physical
realities;
Fifo
may
or
may
not?—A.
It
may
approximate
them.
I
would
doubt
if
you
would
ever
have
a
case
where
it
could
be
said
that
it
exactly
reflected
physical
realities.
Q.
But
in
many
cases
you
would
have
it
where
it
substantially
reflected
physical
realities.
That
is
true,
isn’t
it?—A.
That
is
right.
His
Lordship:
Would
it
be
possible
for
the
Lifo
method
to
reflect
physical
realities?—A.
It
would
be
possible
to
be
a
reasonable
reflection
of
the
movements
in
a
particular
year
but
cumulatively
you
would
get
probably
further
and
further
from
reality.
That
is,
at
the
end
of
ten
years
on
the
method
you
would
probably
not
have
at
that
stage
the
quantity
of
material
on
hand
ten
years
old
corresponding
to
the
quantity
which
was
priced
at
the
prices
of
ten
years
ago,
for
instance.
Mr.
Pickup
:
Well,
if
we
look
at
Exhibit
7,
we
find
that
the
exhibit
is
showing
that
in
1947
at
the
end
of
the
year
the
company
is
still,
so
far
as
reality
is
concerned,
operating
on
the
basis
of
having
an
inventory
that
it
had
prior
to
1936
and
some
more
raw
copper
that
it
got
in
1936,
1937,
1938
and
1939.
Is
that
what
you
mean
(and
I
think
it
is)
when
you
say
it
is
actually
further
and
further
away
from
the
reality
if
you
use
Lifo?—A.
Well,
I
cannot
speak
as
to
the
realities
in
this
particular
case
but
I
do
not
imagine
that
any
of
the
company
witnesses
would
claim
for
a
minute
that
there
is
a
quantity
of
metal
now
on
hand
acquired
in
the
year
1936
equal
to
the
quantity
which
is
priced
at
that
price.
I
did
not
hear
their
evidence.
’
’
In
the
United
States
Fifo
had
been
in
use
for
years
and
efforts
to
secure
permission
from
the
taxing
authorities
to
use
the
Lifo
method
in
connection
with
such
industries
as
The
American
Brass
Company
did
not
succeed
until
1938.
It
was
only
when
legislation
in
that
year
permitted
the
use
of
this
method
for
tax
purposes,
subject
to
certain
conditions,
that
the
United
States
parent
company
made
its
tax
returns
in
that
form.
Such
a
method,
either
with
or
without
conditions,
has
never
been
permitted
in
Canada.
This
was
known
to
the
company,
which,
although
for
corporate
purposes
had
made
use
of
the
theory
as
early
as
1936,
adopted
it
for
tax
purposes
in
Canada
only
on
June
16,
1947,
when
it
filed
its
tax
returns
for
the
year
1946.
Before
that
date
very
considerable
increases
in
the
price
of
copper
and
zine
had
occurred
as
a
result
of
the
relaxation
and
later
of
the
removal
of
price
controls.
The
company’s
appeal
to
the
Exchequer
Court
from
the
appellant’s
assessment
of
it
for
1946
was
abandoned
and
was
dismissed
without
costs.
Even
though
the
Lifo
assumption
is
recognized
as
a
proper
accounting
method
for
corporate
purposes,
the
authorities
noted
above
show
that
that
is
not
sufficient
and,
therefore,
the
view
of
the
learned
President
of
the
Exchequer
Court
that
the
question
to
be
determined
was
whether
Lifo
was
an
acceptable
accounting
method
for
the
company
is,
in
my
opinion,
incorrect.
The
Lifo
method
does
not
determine
the
company’s
profits
for
1947
more
accurately
than
the
Fifo
method
which
latter,
for
the
reasons
given,
is
more
in
accordance
with
the
known
facts.
The
following
statement
by
Lord
Loreburn
in
Sun
Insurance
Office
v.
Clark,
[1912]
App.
Cas.
443,
may,
I
think,
be
repeated
with
advantage
:
“A
rule
of
thumb
may
be
very
desirable,
but
cannot
be
substituted
for
the
only
rule
of
law
that
I
know
of,
viz.:
that
the
true
gains
are
to
be
ascertained
as
nearly
as
it
can
be
done.’’
The
appeal
should
be
allowed,
the
judgment
of
the
Exchequer
Court
set
aside,
and
the
assessment
made
by
the
appellant
restored
with
costs
throughout.
Estey,
J.:—The
respondent,
at
its
primary
brass
mill
in
Toronto,
produces
copper
and
copper-base
alloys
for
which
it
requires
and
purchases
large
quantities
of
copper
and
zine
and
smaller
quantities
of
lead
and
tin.
At
all
times
it
has
on
hand
a
quantity
of
these
metals.
In
1946,
for
the
first
time,
and
again
in
1947
the
respondent,
in
preparing
its
income
tax
returns,
computed
the
value
of
the
inventories
of
these
metals
under
the
Lifo
system
of
accounting.
The
appellant
refused
to
accept
this
computation
and
insisted
that
the
valuation
of
these
metals
be
computed,
as
in
former
years,
under
the
Fifo
system.
Upon
an
appeal
to
the
Exchequer
Court
the
learned
President
upheld
the
respondent’s
contention.
In
part,
the
learned
President
stated
:
“Under
the
circumstances,
I
find
that
the
Lifo
method
was
appropriate
in
the
circumstances
of
the
appellant’s
business.
This
means
that
it
was
entitled
to
use
the
method
in
ascertaining
the
cost
of
the
metal
content
of
its
finished
products
that
was
properly
chargeable
against
its
gross
income
for
sales
and
that
the
method
correctly
reflects
its
net
taxable
income
in
1947
and
I
so
find.
It
follows
that
the
appeal
from
the
assessment
for
1947
must
be
allowed.”
In
a
business
such
as
that
of
the
respondent
it
is,
in
any
practical
sense,
impossible
to
precisely
identify
each
item
in
its
inventory
and
allocate
to
it
the
exact
cost
thereof.
It
is,
therefore,
conceded
that
some
assumption
or
arbitrary
method
must
be
adopted
in
determining
the
valuation.
In
1946
the
difference
in
the
computation
under
the
two
systems
was
not
sufficient
to
warrant
that
the
proceedings
in
respect
to
that
year
be
continued
and
we
are,
therefore,
here
concerned
only
with
the
year
1947.
The
valuation
of
the
inventory
as
computed
under
Lifo
for
the
year
1947
was
$1,611,756.43
less
than
the
valuation
computed
under
the
Fifo
system.
The
older
system
which
the
respondent
used
in
computing
its
income
tax
returns
prior
to
1946,
and
which
the
appellant
in
this
case
insists
upon,
is
known
as
Fifo.
Under
this
system
it
is
assumed
that
the
items
in
the
inventory
first
received
are
the
first
used,
or,
as
expressed
by
the
letters
‘
‘
f.i.f.o.
’
’,
first-in-first-out.
Under
the
Lifo
system
the
difference
material
hereto
is
that
it
is
assumed
that
last
items
received
are
the
first
used.
This
may
be
illustrated
by
observing
how
the
respondent’s
copper
inventory
was
computed
in
1947.
On
January
1,
1936,
the
year
in
which
the
company
adopted
the
Lifo
system,
it
had
on
hand
6,500,000
pounds
of
copper,
the
average
price
of
which,
in
1935,
was
7.5¢
per
pound,
a
total
of
$487,500.00.
The
weight
and
the
price
of
the
copper
added
to
the
above
6,500,000
pounds
in
the
subsequent
years
are
as
follows:
|
Date
|
Weight
|
Cost
per
lb.
Total
|
|
Jan.
1,
1937
|
802,697
lbs.
|
9.466e
|
$
75,983.30
|
|
Jan.
1,
1938
|
17,577
**
|
11.191
|
1,967.04
|
|
Jan.
1,
1939
|
639,807
‘‘
|
10.443
|
66,847.04
|
|
Jan.
1,
1940
|
973,477
‘‘
|
11.036
|
107,432.92
|
|
Jan.
1,
1946
|
3,151,684
‘‘
|
11.5
|
362,443.66
|
|
Jan.
1,
1948
|
2,205,765
“*
|
11.5
|
253,662.97
|
The
foregoing
figures
show
that
on
December
31,
1947,
the
total
inventory
of
copper
was
14,291,007
pounds
and
the
cost
thereof
$1,355,836.93.
In
the
years
December
31,
1939,
to
December
31,
1944,
inclusive,
as
well
as
in
1947,
the
company
used
more
copper
than
it
purchased.
In
such
years
under
the
Lifo
system
the
excess
used
over
purchases
was
subtracted
from
the
surplus
in
the
last
year
in
which
there
was
a
surplus.
This
may
be
illustrated
by
referring
to
the
years
1946
and
1947.
In
1946
the
excess
in
the
quantity
purchased
over
that
which
was
used
was.
2,936,468
pounds.
In
1947
the
company
used
more
than
it
purchased
to
the
extent
of
730,703
pounds.
This
quantity
was,
in
the
inventory,
deducted
from
the
1946
surplus,
leaving,
as
shown
in
the
above
table,
as
of
January
1,
1948,
2,205,765
pounds
and,
of
course,
the
earlier
weights
remained
unchanged.
The
value
of
these
2,205,765
pounds
was,
therefore,
computed
at
11.5c
per
pound,
being
the
average
cost
thereof
in
1946.
The
inventory
of
all
metals
as
of
December
31,
1947,
computed
on
the
Lifo
basis,
totalled
$1,848,497.89.
Mr.
Gordon,
who
supervises
the
auditing
of
respondent’s
books,
when
asked
if
this
figure
was
either
the
cost
or
the
market
price
of
the
metals,
replied
:
“No.
It
is
certainly
not
the
market
price—nothing
to
do
with
it—
and
it
depends
on
what
you
mean
by
‘cost
price’.
It
is
‘cost’
as
considered
on
the
last-in-first-out
basis.”
The
accountants
called
as
witnesses
made
it
clear
that
the
Lifo
method
is
not
intended
to
indicate
physical
flow
of
goods.
Rather,
as
one
stated,
“it
is
a
statement
of
an
assumption
as
to
the
order
in
which
costs
should
flow
in
and
out
of
an
inventory
account
on
the
calculation
under
this
method.’’
When
asked
if
he
would
apply
the
same
principle
if
it
was
known,
as
a
fact,
that
the
raw
materials
last
in
were
not
the
first
used,
he
replied:
‘‘In
appropriate
circumstances
I
would
apply
the
principle
because,
as
I
indicated,
I
do
not
think
that
physical
identification
of
goods
has
anything
to
do
with
proper
determination
in
certain
circumstances.”
Or,
as
otherwise
stated,
“In
my
opinion,
first-in-
first-out
again
is
a
description
of
a
costing
method
and
refers
to
the
order
in
which
items
of
cost
recorded
through
the
inventory
account
should
be
taken
out
of
the
inventory
account.”
And
again,
‘‘I
thought
I
had
made
it
clear
that
the
question
of
physical
identification
is
not,
in
my
opinion,
a
factor
which
governs
the
determination
of
income.’’
In
1936
the
respondent
adopted
the
Lifo
system
of
accounting.
but
until
1946
continued
to
file
its
income
tax
returns
as
prepared
under
the
Fifo
system
because
it
had
been
informed
that
the
Department
of
National
Revenue
would
not
accept
returns
prepared
under
the
Lifo
system.
In
the
years
immediately
preceding
the
war
the
prices
of
these
metals,
particularly
copper,
which
constitutes
83%
of
the
respondent’s
inventory,
remained
rather
constant.
Throughout
the
war
period
and
until
June
10,
1947,
the
prices
of
these
metals
were
fixed.
With
the
increase
in
the
price
of
these
metals,
particularly
copper,
the
difference
in
the
computation
of
the
inventory
under
Fifo
and
Lifo
was
such
that
the
company
decided
to
insist
upon
the
appellant
accepting
its
computation
of
its
inventory
under
the
Lifo
system.
That
the
difference
may
be
substantial
is
evident
from
the
fact
that
in
1947
the
computation
of
the
inventory
arrived
at
under
the
Lifo
system
was
$1,611,756.43
less
than
that
arrived
at
under
the
Fifo
system.
Though
the
company
computed
its
income
tax
returns
in
1946
on
the
Lifo
basis,
the
change
in
prices
was
not
such
as
to
make
a
great
difference,
but
in
1947,
as
indicated
by
the
figures,
the
position
was
entirely
changed.
The
issue
here
raised
is
whether,
under
the
Income
War
Tax
Act
and
the
Excess
Profits
Tax
Act,
the
Minister
must
accept
returns
computed
under
any
recognized
accounting
system
which
is
deemed
appropriate
to
its
business
by
a
company,
or
whether
the
Minister
in
a
particular
case
may
insist
upon
that
accounting
system
which
will
the
more
closely
arrive
at
the
actual
value
of
the
inventory.
Mr.
Richardson
stated:
“The
question
is
as
to
what
portion
of
the
expenditure
for
the
purchases
of
raw
material,
for
labour
and
for
manufacturing
supplies,
and
expenses,
is
properly
chargeable
against
the
gross
revenues
from
sales
during
the
year
;
and
what
portion
is
properly
to
be
carried
forward
as
a
charge
against
future
periods.”
In
order
to
more
fully
appreciate
the
purpose
and
object
of
the
Lifo
system
it
is
of
some
assistance
to
consider
the
circumstances
under
which
it
was
developed.
Mr.
Peloubet,
of
the
accounting
firm
of
Pogson,
Peloubet
and
Company
of
New
York,
explained
that
in
the
years
1916
and
1917
management
then
using
the
Fifo
method
was
disturbed
not
so
much
by
the
general
increase
but
by
the
fluctuation
in
prices.
As
he
stated
:
“.
.
.
what
they
did
not
like
was
the
fluctuation
and
the
idea
:
‘If
we
end
the
year
with
a
higher
price,
we
are
going
to
show
a
terrific
profit
which
is
not
there
and
if
we
end
it
at
a
low
price
we
are
going
to
show
an
apparent
shortage
which
is
not
there’.’’
Mr.
Peloubet
also
stated:
“.
.
.
the
management
of
the
company
realized
in
the
middle
and
late
20’s
that
their
accounts
were
not
on
a
correct
profit
basis,
that
they
were
not
correct
for
dividend
purposes.
Of
course,
it
had
no
relation
at
that
time
to
taxation
because
no
one
even
thought
of
taxation
in
connection
with
this
but
the
company
was
definitely
disturbed
about
their
profit
showing
and
they
were
definitely
disturbed
about
the
amount
of
inventory
profits
that
were
shown.”
There
is
no
necessary
conflict
between
a
system
that
computes
profits
for
dividend
purposes
and
one
that
computes
profits
for
taxation
purposes,
but,
of
course,
there
may
be.
It
is
obvious
that
if
the
respondent
continues
in
business
and
to
use
the
Lifo
method
of
accounting
for
100
or
even
1,000
years
and
never,
at
any
time,
utilizes
its
entire
inventory
or
stock
of
metals,
the
inventory
will
be
computed
as
containing
some
copper
at
7.50
per
pound,
i.e.,
the
average
price
paid
in
1935,
or,
as
otherwise
stated,
if
the
6,500,000
pounds
shown
in
the
inventory
as
on
hand
on
January
1,
1936,
never
becomes
exhausted
the
remaining
portion
thereof,
whatever
it
may
be,
will
be
computed
at
7.5¢
per
pound,
irrespective
of
what
current
market
values
may
be.
It
is
this
feature
that
I
assume
Mr.
Richardson
had
in
mind
when
he
said
the
longer
the
period
the
farther
the
inventory
computation
becomes
from
reality.
He
quite
properly
pointed
out
that
Fifo
is
often
far
from
reality
because,
whatever
the
system
used,
some
arbitrary
assumption
must
be
made,
but
the
problem
which
must
be
decided
for
taxation
purposes
is
which
of
the
two
more
nearly
approaches
the
actual
value,
or
market
value.
The
respective
assumptions
are
:
under
Lifo
the
first
metals
received
ar
the
first
used
in
production
and
under
Lifo
the
last
metals
received
are
the
first
used.
The
income
tax
law
is
concerned
with
commercial
and
industrial
operations
within
the
taxation
period
and
with
the
computation
of
profits
upon
operations
carried
on
in
an
exchange
or
market
sense
during
that
period.
Therefore,
an
accounting
system
which
tends
to
minimize
fluctuations
in
prices
and
business
losses
and
gains
and,
therefore,
provides
a
more
even
accounting
history
for
dividend
and
other
purposes,
may
possess
the
greatest
merit
from
a
corporate
point
of
view,
but
it
does
not
follow
that
the
Minister
must,
for
taxation
purposes,
accept
that
method.
Throughout
the
evidence
the
profits
shown
in
periods
of
rising
prices
are
referred
to
as
fictional
profits
and
the
losses
in
periods
of
falling
prices
as
fictional
losses.
It
is
obvious
that
accountants,
in
so
describing
these
losses,
are
considering
the
interests
of
the
company
over
a
period
of
years
and,
as
Mr.
Peloubet
states,
such
fictional
profits
and
losses
were
not
‘‘correct
for
dividend
purposes”.
Mr.
Richardson
stated:
‘“The
objective
is
to
arrive
properly
at
profits
or
losses
and
in
the
sort
of
illustration
which
I
gave
you
on
Exhibits
25
and
26
it
may
arrive
at
a
more
stable
result
by
avoiding
the
showing
of
fictional
profits
or
losses;
it
is
not
a
process
of
levelling
for
the
sake
of
levelling.
There
is
nothing
arbitrary
about
the
process
about
which
you
could
say:
‘This
is
something
he
should
do
in
the
interests
of
conservatism’
or
anything
of
that
kind.”
Then,
after
pointing
out
that
where
physical
identification
is,
as
here,
impossible,
some
assumed
basis
must
be
accepted,
he
was
asked
:
“Q.
Well,
do
you
agree
with
this,
that
above
all
any
assumption
adopted
should
not
be
unduly
out
of
line
with
the
ascertainable
unquestioned
physical
facts?—A.
No.
I
do
not
agree
with
that,
Mr.
Pickup.”
In
fact,
as
Richardson
stated,
referring
to
both
systems,
“They
are
not
based
on
presumption
as
to
the
physical
movement—or
what
we
sometimes
call
the
‘physical
flow
of
goods
through
the
inventory
and
out
to
customers,’
but
rather
are
indicative
of
the
flow
of
costs
which
are
employed
in
the
method.
’
’
or,
as
he
stated
when
specifically
referring
to
Lifo,
It
is
the
accountants’
conception
of
how
‘‘costs
should
flow’’
that
commends
the
Lifo
system.
They
find
in
Lifo
that
over
a
period
of
years
it,
to
a
large
extent,
eliminates
the
artificial
profits
or
losses
and
goes
far
to
compute
how
the
costs
of
the
company
should
flow.
It
may
well
be
that
where,
as
here,
the
inventory
is
neither
subject
to
“physical
determination’’
nor
to
“style
changes
or
obsolescence’’
that,
from
the
point
of
view
of
the
company
which
is
concerned
with
how
costs
should
flow
and
dividends
be
paid
over
a
period
of
years,
Lifo
is
the
more
acceptable
system
of
accounting.
It
does
not,
however,
follow
that,
apart
from
legislation
particularly
directed
to
Lifo,
its
computation
of
the
inventories
must
be
accepted
by
the
Minister.
The
word
‘‘profits’’
is
not
defined
in
either
the
Income
War
Tax
Act
or
the
Excess
Profits
Tax
Act,
but
it
has
been
repeatedly
defined
as
that
surplus
in
the
taxation
period
by
which
the
receipts
from
a
trade
or
business
exceed
the
expenditures
necessary
for
the
purpose
of
earning
those
receipts.
Fletcher
Moulton,
L.J.,
stated
in
In
re
Spanish
Prospecting
Company,
Limited,
[1911]
1
Ch.
92
at
98:
“The
word
‘profits’
has
in
my
opinion
a
well-defined
legal
meaning,
and
this
meaning
coincides
with
the
fundamental
conception
of
profits
in
general
parlance,
although
in
mercantile
phraseology
the
word
may
at
times
bear
meanings
indicated
by
the
special
context
which
deviate
in
some
respects
from
this
fundamental
signification.
‘Profits’
implies
a
comparison
between
the
state
of
a
business
at
two
specific
dates
usually
separated
by
an
interval
of
a
year.
The
fundamental
meaning
is
the
amount
of
gain
made
by
the
business
during
the
year.
This
can
only
be
ascertained
by
a
comparison
of
the
assets
of
the
business
at
the
two
dates.
.
.
.
Even
if
the
assets
were
identical
at
the
two
periods
it
would
by
no
means
follow
that
there
had
been
neither
gain
nor
loss,
because
the
market
value—the
value
in
exchange—of
these
assets
might
have
altered
greatly
in
the
meanwhile
.
..
A
depreciation
in
value,
whether
from
physical
or
commercial
causes,
which
affects
their
realizable
value
is
in
truth
a
business
loss.”
The
income
tax
statutes
are
concerned
with
business
and
commercial
enterprises
the
assets
of
which
possess
a
value
to
the
extent
that
they
may
be
used
or
exchanged.
As
stated
by
Fletcher
Moulton,
L.J.,
in
In
re
Spanish
Prospecting
Company,
Limited,
supra,
at
p.
100:
‘‘The
figure
inserted
to
represent
stock
in
trade
must
be
arrived
at
by
a
valuation
of
the
actual
articles.
Property,
of
whatever
nature
it
be,
acquired
in
the
course
of
the
business,
has
a
value
varying
with
the
condition
of
the
market.’’
It
is,
therefore,
the
current
commercial
trading
or
market
values
that
these
statutes
contemplate
should
be
used
in
the
computation
of
profits.
If
it
be,
from
a
business
or
commercial
sense,
impracticable
to
determine
that
valuation
with
accuracy,
then
that
method
which
more
closely
approximates
the
current
market
value
should
be
used.
In
Whimster
&
Co.
v.
The
Commissioners
of
Inland
Revenue
(1925),
12
T.C.
813,
the
company
prepared
its
income
tax
returns
and
allowed
for
losses
which
it
anticipated
in
the
following
year.
It
had,
in
fact,
settled
with
one
of
its
partners
who
was
retiring
upon
the
basis
of
that
statement.
It
was
conceded
that
such
was
not
a
usual
method
and
was
not
‘‘in
accordance
with
ordinary
commercial
practice’’.
Lord
Clyde
states
at
p.
823:
‘‘In
such
a
case
the
trader
may,
as
a
matter
of
ordinary
commercial
prudence,
decline
to
treat
the
profits
shown
in
his
accounts
in
the
same
way
as
he
would
have
done
if
the
circumstances
of
his
business
had
been
liable
only
to
the
normal
fluctuations
of
trade.
He
may,
for
instance,
prefer
to
carry
his
profits
forward,
or
put
them
to
reserve,
rather
than
consume
or
divide
them.
But
they
are
none
the
less
profits
of
the
year
or
accounting
period
to
which
the
accounts
relate,
and
as
such
assessable
to
Income
Tax
or
Excess
Profits
Duty
.
.
.
It
is
therefore
nothing
to
the
point—say,
as
regards
assessment
to
Income
Tax—that
if
a
particular
trader’s
profits
were
computed
on
an
average
of
two
years
instead
of
three,
or
simply
on
the
results
of
the
year
immediately
preceding
the
year
of
assessment,
an
apparent
profit
might
be
turned
into
an
apparent
loss.’’
and
at
p.
825
:
“But
all
this
cannot
affect
the
answer
to
the
question:
What
are
the
actual
profits
made
during
the
accounting
period?
Whatever
the
bargain
made
with
the
retiring
partner—generous
or
strict,
fair
or
unfair—the
question
remains
the
same
and
so
also
does
the
answer.’
The
metals
here
in
question
do
not
suffer
a
physical
depreciation
in
value.
Their
commercial
or
market
values,
however,
do
fluctuate
from
time
to
time.
Under
Lifo
the
current
market
value
is
used
to
compute
the
value
of
only
that
quantity
assumed
to
be
added
to
the
inventories
in
the
last
year
and
the
valuation
of
the
balance
of
the
inventories
is
computed
by
using
the
market
values
of
former
years.
The
assumption
under
Fifo
eliminates
many
of
the
former
years
and,
therefore,
the
computation
thereunder
more
closely
approximates
the
current
value
than
that
made
under
Lifo.
Moreover,
the
Lifo
system
is
comparatively
new.
While
the
reason
for
its
development
in
the
early
20’s,
as
explained
by
Mr.
Peloubet,
had
no
relation
to
taxation,
it
has
become
more
widely
adopted
in
the
United
States
since
the
passage
of
the
legislation
in
1938
and
1939,
permitting
a
company
to
compute
its
income
tax
returns
under
the
Lifo
system,
subject
to
certain
specified
conditions.
As
stated
by
Mr.
Butters
:
“In
contrast,
since
1939
few
management
decisions
on
Lifo
have
been
made
without
reference
to
their
tax
effects.
Decisions
as
to
whether
to
use
Lifo,
how
to
apply
it,
and
even
as
to
the
industries
in
which
the
method
constitutes
acceptable
accounting
practice,
have
been
dominated
by
tax
considerations.”
The
Lifo
system
provides
an
alternative
method
which,
as
illustrated
in
this
case,
may
produce
a
valuation
substantially
different
from
Fifo.
While
the
Income
War
Tax
Act
and
the
Excess
Profits
Tax
Act
contemplate
that
the
valuation
of
these
inventories
be
computed
according
to
the
recognized
or
accepted
accounting
methods,
these
statutes
do
not
contemplate
that
a
company
may,
from
time
to
time,
adopt
that
which
may
best
serve
its
ends.
Many
companies
would
not,
and
I
do
not
suggest
the
respondent
did
or
would,
from
year
to
year,
adopt
that
method
which
would
result
in
a
lower
tax.
It
would
seem
that
the
statutes
do
not
provide
against
this
possibility.
Moreover,
that
it
can
be
done
by
a
company
in
any
year
without
changing
its
accounting
system
is
illustrated
by
the
fact
that
the
respondent
adopted
the
Lifo
system
in
1936
for
accounting
purposes,
but
continued
to
compute
its
income
tax
returns
on
the
Fifo
basis
until
1946.
It
was
no
doubt
such
considerations
which
caused
the
United
States
to
enact
legislation
in
1938
and
1939
which
permitted
a
company
to
prepare
its
income
tax
returns
under
the
Lifo
system,
but
only
upon
certain
conditions,
which
may
be
summarized:
(a)
The
company
must
start
with
a
cost
inventory
on
the
same
basis
as
it
ended
its
last
Lifo
period
of
cost.
(b)
Once
adopted
the
Lifo
method
cannot
be
changed
without
the
consent
of
the
appropriate
revenue
officials.
(c)
The
company
must
keep
its
corporate
accounts
on
the
same
basis
as
its
tax
accounts.
(d)
It
is
not
a
compulsory
system,
but
a
company
may
elect
to
adopt
the
Lifo
method.
The
Income
War
Tax
Act
and
the
Excess
Profits
Tax
Act,
1940,
do
not
contain
any
such
provisions.
In
my
opinion
the
Minister
was
justified
in
refusing
the
respondent’s
computation
and
requiring
that
the
company
compute
its
inventories
upon
a
basis
that.
more
nearly
approximated
the
current
market
value
thereof.
In
my
opinion
the
appeal
should
be
allowed
with
costs.
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