Trading stock diverted to personal use must be credited at market value, not production cost, for income-tax profit computation.

For income-tax purposes, when trading stock is withdrawn from a stud farm's taxable trade for the owner's own racing stable, the trading account must be credited with the stock's current realizable market value, not its cost of production. The House of Lords treated the diversion as a disposition out of trade requiring recognition of value actually appropriated, and rejected a cost-based entry as an ex post facto cancellation of expenditure that would distort true commercial profit. The credit therefore reflects the market value of the horses transferred, and the Revenue's position succeeded.

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Issues: Whether, for income-tax purposes, the value to be credited in a stud farm trading account on transfer of horses to the owner's own racing stable is the market value or the cost of production.

Analysis: The trading profit of a business must be computed on actual commercial principles, but where stock in trade is withdrawn from the taxable trade for the owner's own use or enjoyment, the accounts must still reflect a receipt for the disposition. The Court rejected the cost-of-production approach as an ex post facto cancellation of expenditure and as a fiction that would make the tax burden depend on how much of the product the owner chose to reserve for personal use. The better and fairer accounting treatment was to bring in the current realizable value of the stock transferred, since that represents the value appropriated out of the trade when no ordinary sale occurs.

Conclusion: The correct figure to be credited is the market value of the transferred horses, not their cost of production, and the appeal succeeds in favour of the Revenue.

Ratio Decidendi: Where trading stock is diverted from a taxable trade to the owner's own use, the trading account must be credited with its current realizable value, because actual profits are to be taxed and the taxpayer cannot reduce or alter those profits by electing to consume his own stock.

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