Davies (HM Inspector of Taxes) v The Shell Company of China, Ltd

JurisdictionEngland & Wales
Judgment Date07 May 1951
Date07 May 1951
CourtHigh Court



Davies (H.M. Inspector of Taxes)
The Shell Company of China, Ltd.

Income Tax, Schedule D - Profits of trade - Sums deposited with company by foreign agents - Depreciation of foreign currency resulting in profit to company on repayment of deposits - Whether profit assessable.

The Company was a British company which sold and distributed petroleum products in China. The Company made a practice of requiring its agents to deposit with the Company a sum of money, usually in Chinese dollars, which was repayable when the agency came to an end. Previously the Company had left on deposit with banks in Shanghai amounts approximately equal to the agency deposits, but because of the hostilities between China and Japan the Company transferred these sums to the United Kingdom and deposited the sterling equivalents with its parent company, which acted as its banker. Owing to the subsequent depreciation of the Chinese dollar with respect to sterling, the amounts eventually required to repay agency deposits in Chinese currency were much less than the sums held by the Company to meet the claims, and a substantial profit accrued to the Company.

On appeal to the Special Commissioners against assessments to Income Tax under Case I of Schedule D, the Company contended that the deposits received from its agents had been used as fixed capital and not as circulating capital, and that the profit on exchange was a capital profit not subject to Income Tax. For the Crown it was contended that the deposits, to which the Company could have recourse in the event of default by the agent, were circulating capital and that the exchange profit was made in the course of the Company's business and must be included in the computation of its profits for Income Tax purposes. The Commissioners found that the exchange profit was a capital profit not subject to Income Tax.

Held, that the Special Commissioners' decision was correct.


Stated under the Income Tax Act, 1918, Section 149, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the King's Bench Division of the High Court of Justice.

1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 13th July, 1949, The Shell Company of China, Ltd., hereinafter called "the Company" or "the Respondent Company", appealed against an assessment to Income Tax for the year 1942-43 made under Case I of Schedule D on the Company in the sum of £319,470 less £30,600 capital allowances. The ground of appeal was the inclusion in the said assessment of a sum of £229,475 which arose in consequence of variations in the rate of exchange, as hereinafter appearing, between sterling and the Chinese dollar.

2. The Company was incorporated in 1913 as "The Asiatic Petroleum Company (North China), Ltd.", its name being changed in 1944 to "The Shell Company of China, Ltd." A copy of the Company's memorandum and articles of association is annexed, marked A, and forms part of this Case(1).

3. The Company (which is one of the subsidiaries of the Shell group) has at all times been an English company, having its seat of control in this country. The head office for the operation of its business is in Shanghai. The business consists of the sale and distribution of petroleum products in China, the trade being done on a Chinese dollar basis.

4. War between China and Japan broke out in July, 1937. It had been the Company's practice for many years to carry on some 80 per cent. of its business in China through agents, who numbered about 600 and between them covered the whole of the Company's trading territory in China. They were generally large firms, often being Chinese family concerns. These agents, who were remunerated by commission or allowances, received from the Company petroleum products on consignment, and sold them on behalf of the Company, remitting the proceeds to the Company less agreed deductions.

5. Most of the agents did not make any payment to the Company in respect of goods supplied to them till after the goods had been sold, payment being then made at fixed credit intervals. From every such agent (except in a very few cases where they were of high financial standing) the Company made a practice of requiring a deposit. The deposit was made, with relatively trifling exceptions, in Chinese dollars. Thus the dollar liability of the Company in respect of agents' deposits at 31st December, 1936, exceeded $7,000,000 and was equivalent at the current rate of exchange to £430,559, while the liability in respect of sterling deposits was £24,875. With such sterling deposits the present case is not concerned.

6. The agent's deposit was made by him on his being appointed by the Company, and he was at the same time required to sign an agreement in relation thereto. The following is a translation of the form of agreement.


I …………………………………………………… hereby acknowledge that I have this day deposited with you the sum of Dollars ....................................................... ................................................. Chinese Currency ($ ............................... Chinese Currency) as and by way of a security so far as the same shall extend for all claims or demands whatsoever which you may at any time or times have against me arising out of or connected directly or indirectly with or consequent upon my employment by you as a ........................................ ..................................... or in any other capacity and for all losses damages costs charges and expenses that you may sustain or incur by reason of any misconduct neglect or default on my part during such employment.

You may at any time or times at your absolute discretion and without giving any notice whatsoever to me apply the said deposit or any part thereof in or towards payment or satisfaction of any such claims or demands losses damages costs charges and expenses.

It is understood that so long as the said deposit or some part thereof is retained by you by way of security the same or any balance thereof which for the time being shall not have been or require to be applied by you for the purposes aforesaid or any of them will bear interest at the rate of ....................... per cent per annum ( ……………… % p.a.).

Upon my ceasing to be employed by you in any capacity and provided all claims and demands (whether in respect of losses damages costs charges and expenses or otherwise) which you may then have against me have been fully paid and satisfied the said deposit or any balance thereof then remaining in your hands is to be repaid to me together with any interest accrued thereon at the rate aforesaid and unpaid at the date of such repayment.

Such repayment may be made by you at any of your Offices in China at your discretion and by cheque or demand draft for the number of Dollars in Chinese Currency corresponding to the number of Dollars deposited or remaining to be repaid with interest as above mentioned or in the same number of Chinese Dollars then current as may be most convenient to you at the time of such repayment.

Dated the ................ day of ...................... 19 …

(Depositor's Chop and Signature)


We hereby acknowledge the receipt of the above mentioned Deposit on the above mentioned terms.



7. It was the Company's practice to place and leave on deposit with banks in Shanghai amounts approximately equal to the total amounts outstanding on the aforesaid agents' deposits. The Company's bank deposits, which bore interest, were relatively long-term, being normally made for the fixed term of one year.

8. On the outbreak of the Sino-Japanese war, and the commencement in August, 1937, of hostilities in Shanghai, the Company came to the conclusion that it was unsafe to have large sums of money in Shanghai banks. It therefore decided to bring its bank deposits home to England, this transfer entailing conversion of dollars into sterling. The operation began in August, 1937, but on account of the fixed term of the deposits, it was spread over the ensuing year, the last remittance home being in August, 1938, when the last deposit matured.

9. The sums so brought home by the Company were placed on deposit with its parent company, the Shell Petroleum Co., Ltd., which acted as its bankers.

10. The sterling so placed on deposit appreciated in relation to the Chinese dollar liabilities against which it was held and exchange profits thus accrued to the Company as set forth below.

11. Copies of the following documents are annexed, and form part of this Case:-

Balance sheets and profit and loss accounts of the Company for the calendar years 1936 to 1945 inclusive-Annexe B(1).

Statement of agents' security deposits-Annexe C(1).

Reconciliation statement, reconciling column 3 of Annexe C with certain balance sheet figures (as explained below)-Annexe D(1).

12. The sums brought home by the Company and deposited with the Shell Petroleum Co., Ltd. (see paragraph 9 above) were merged in larger balances with the latter company. Thus on the assets side of the Company's balance sheet as at 31st December, 1938, appears an item "Amount owing "by an Associated Company-£600,607 14s.4d.," and corresponding items appear in the later balance sheets. The amount stated as owing includes in each case the outstanding amount on deposit by the Company on account of agents' deposits brought home.

On the liabilities side of each balance sheet up to that for the year 1944 is an item "Cash deposited as security by agents". The amount shown for this item in the balance sheet as at 31st December, 1938, is £349,336 8s. 9d.

13. The statements of agents' security deposits (Annexe C) is arranged in eight numbered columns.

Column 1 shows the Company's outstanding liability to its agents in...

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4 cases
  • Beauchamp v F. W. Woolworth Plc
    • United Kingdom
    • House of Lords
    • 8 June 1989
    ...reversed, and the courts do not appear to have been inhibited from reaching their own conclusion. In Davies v. Shell Co. of China Ltd. (1951) 32 T.C. 133, 151, Jenkins L.J. said: "I think it is recognised that these questions between capital and income, trading profit or no trading profit, ......
  • Beauchamp v F. W. Woolworth Plc
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 28 July 1988
    ... ... Anthony Paul Beauchamp (HM Inspector of Taxes) (Respondent) and ... The main business of the appellant company, which was the subsidiary of an American finance ... in Davies v. The Shell Company of China. Limited (1951) ... ...
  • Nuclear Electric Plc v Bradley
    • United Kingdom
    • Court of Appeal (Civil Division)
    • 17 October 1995
    ... ... 393(8) of the Income and Corporation Taxes Act 1988 ("the Act") with the result that Section ... -(1) Where in any accounting period a company carrying on a trade incurs a loss in the trade, ... In Davies v Shell Co. of China Ltd ... (1951) 32 TC 133 ... ...
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    • Queen's Bench Division (Administrative Court)
    • 24 February 2000
    ... ... managers were recruited, and in 1983 an investment management company called Pos Tel Investment Management Ltd (Pos Tel) was established ... Mr Flesch relied upon Jenkins LJ in Davies v The Shell Company of China 32 TC 138 , when he said at page 155, ... ...

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