Taxable profits must reflect actual stock costs; commercial accounting practice cannot override statutory income computation principles.

For income-tax purposes, taxable profits must be computed by reference to ascertainable facts and the actual cost of stock used in earning the year's receipts. The last-in-first-out method was rejected because it treated closing inventory as a theoretical cost residue and could reduce profits by assigning older costs to stock not shown to have been used for the relevant receipts. Commercial accounting practice could not override the statutory basis of computation where it produced a theoretical rather than factual valuation of inventory. The first-in-first-out approach was therefore upheld as the proper method in substance.

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Issues: Whether, for computing taxable profits of a manufacturing business, the last-in-first-out method could be adopted in preference to the first-in-first-out method on the footing that it reflected accepted commercial accounting practice.

Analysis: The relevant taxing provisions required profits to be determined as annual net profit or gain, with stock valuation serving the purpose of ascertaining true taxable income. Where actual facts can be ascertained, they must be given effect, and an assumption may be made only to the extent necessary to fill gaps in the evidence. The last-in-first-out method treated closing inventory as a theoretical residue of cost and allowed current-year profits to be reduced by attributing older, lower costs to stock retained, even though those costs related to materials not shown to have been used in earning the receipts of the year. Accepted accounting practice for corporate purposes could not override the statutory requirement to compute taxable profits on a proper income-tax basis.

Conclusion: The last-in-first-out method was not permissible for determining the respondent's taxable profits, and the Minister's assessment based on the first-in-first-out approach was upheld in substance.

Final Conclusion: Taxable profits had to be computed by reference to the actual cost of stock used in earning the year's receipts, and commercial accounting practice could not displace the statutory method where it produced a theoretical rather than factual valuation of inventory.

Ratio Decidendi: For income-tax purposes, profits must be determined by using the ascertainable facts and, where assumptions are necessary, only the assumption that most nearly reflects actual cost and true gains may be adopted; a theoretical replacement-cost method cannot prevail over the statutory computation of income.

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