The taxpayer, which operated an airline, was effectively compelled to pay for the major overhaul of each jet engine after every 17,000 hours of air time. It deducted for accounting and income tax purposes the cost of each engine overhaul in advance of the performance of that work, by accruing the estimated cost of each overhaul on the basis of the number of hours flown. Knox J., in declining to overturn the finding of the special commissioners that this method of anticipating the costs of major engine overhauls presented a truer picture of annual profits than the two other methods of dealing with such costs that also were used in the aircraft industry and accorded with accountancy practice, stated (at p. 316) that "the fact that a liability is contingent or future in the sense that it will not fall to be discharged in the relevant accounting period is not a bar to the making of a proper provision against that liability in that accounting period", and that "the Court is slow to accept that accounts prepared in accordance with accepted principles of commercial accountancy are not adequate for tax purposes as a true statement of the taxpayer's profits for the relevant period".
Email this Content