Stock valuation for tax must fairly reflect yearly profits; artificial methods may be rejected even if long accepted.

For income tax purposes, closing stock must be valued by a method that most fairly reflects the true profits and gains of the year, and there is no rigid rule requiring cost or market value, whichever is lower. A valuation method may be rejected if it is artificial, unreal, or likely to anticipate future profits rather than measure year-end value. On that basis, a replacement-value formula based on reduced retail price was not accepted because it distorted taxable profits, while a retail selling price less direct selling expenses was treated as a more reliable approximation of stock value. Longstanding acceptance of a practice did not prevent correction where it failed to disclose true profits.

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Issues: Whether the taxpayers' method of valuing closing stock at a reduced figure derived from retail selling price less mark-up was permissible for computing profits and gains for income tax purposes, and whether the revenue could require valuation on the basis of cost or market value, whichever is lower, or net realisable value.

Analysis: The Court held that there is no rigid substantive rule of law compelling stock to be valued only at cost or market value whichever is lower, but the method adopted for tax purposes must fairly disclose the profits of the year and avoid anticipating future profits. The taxpayers' replacement-value formula was treated as artificial because it produced figures that did not represent the real value of stock on the accounting date and could depress taxable profits beyond what commercial prudence justified. The Crown's method, based on retail selling price less direct selling expenses, was regarded as a more reliable approximation to value in the context of a retailer's stock, and the longstanding acceptance of the taxpayers' method did not prevent correction where the method failed to reflect true profits and gains.

Conclusion: The taxpayers' stock valuation method was not accepted for tax purposes, and the revenue's basis of valuation was upheld.

Ratio Decidendi: For income tax purposes, stock must be valued by a method that most fairly reflects the true profits and gains of the year, and a long-accepted accounting practice may be rejected if it produces valuations that are unreal and distort taxable profit.

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