Stock valuation for income-tax must disclose true yearly profits; base stock method rejected as distorting taxable income.

For income-tax computation, profits must reflect the true year's results by bringing stock into account at both the beginning and end of the accounting period on a real valuation basis. A base stock system that excludes fixed process stock from the trading account and assigns an arbitrary value to spare process stock was held to distort profits and fail to disclose the full taxable gains of the year. The accepted commercial rule of valuing stock at cost or market price, whichever is lower, applies only where it correctly reflects income. On the facts, the company could not use the base stock method, and the Revenue's assessment was upheld.

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Issues: Whether the company was entitled, for income-tax purposes, to compute its profits on the base stock system instead of valuing stock at cost or market price, whichever is lower, and whether that method correctly reflected the full profits of the year of assessment.

Analysis: The company's base stock system excluded fixed process stock from the trading account and valued spare process stock at an arbitrary figure. The Court held that for income-tax purposes the true profits of the year could not be ascertained without bringing into account the value of stock at both the beginning and the end of the accounting period. The governing approach was that profits are to be computed on the full amount of the yearly profits or gains, and stock-in-trade is ordinarily to be valued at cost or market price, whichever is lower, in accordance with accepted commercial accounting applied consistently with the taxing provisions. On the facts found, the base stock method understated profits and created a distorted view of the relevant year's results.

Conclusion: The company was not entitled to have its profits computed for income-tax purposes according to the base stock system. The assessment on the Revenue's basis was upheld and the appeal failed.

Ratio Decidendi: For income-tax computation, stock must be brought into account at the beginning and end of the year on a real valuation basis, and a commercially recognised accounting method cannot be used if it does not disclose the true profits of the year.

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