Retail stock valuation must use expected sale price, not artificial replacement value based on internal margin assumptions.

For income tax stock valuation in a retail trade, market value means the price reasonably expected to be realised in the market where the goods are ordinarily sold. The lower-of-cost-or-market rule allows a trader to recognise an anticipated loss on sale, but it does not justify reducing closing stock merely because a smaller profit margin is expected. A notional replacement value based on internal gross margin calculations was treated as artificial and not as market value. The proper basis was the expected retail sale price, subject only to allowable deductions on the facts, so the replacement-value method was rejected.

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Issues: Whether, for income tax purposes, closing stock in a retail business may be valued below cost by reference to a notional replacement value based on expected retail selling prices and target gross margin, or whether it must be brought in at the price expected to be realised on sale in the relevant retail market.

Analysis: The Court held that, in the context of a retail trader, the relevant market is the retail market in which the goods are ordinarily sold. The recognised rule permitting stock to be taken at cost or market value, whichever is lower, operates to allow anticipation of an expected loss where the resale price is below cost, but it does not permit a reduction merely because the trader expects a smaller profit than hoped for. A notional replacement value derived from internal margin calculations was treated as artificial and not as market value. The Court also accepted that the expected sale price in the retail market, with only such deductions as were properly allowable on the facts, was the proper basis of valuation.

Conclusion: The taxpayers were not entitled to value closing stock by their replacement-value method; the stock was to be valued by reference to the expected retail sale price, and the appeal failed.

Ratio Decidendi: For income tax stock valuation in a retail trade, market value means the price reasonably expected to be realised in the market in which the trader ordinarily sells the goods, and the lower-than-cost rule applies only where a genuine loss on sale is anticipated, not merely a diminished margin of profit.

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