Viswanatha Iyer, J.:— Two questions have been referred to this court for decision which are as follows:

“(i) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,65,515, being profit arising on the devaluation of the Indian rupee on 6th June, 1966, was income chargeable to income-tax?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in rejecting the assessee's claim to deduct an amount of Rs. 52,935 being loss arising on the valuation of closing stock of Government securities, in determining its total income for the assessment year 1967–68?”

2. The assessee is a banking company and, as part of its banking business, has been purchasing cheques, payment orders, mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies and, sometimes, foreign currencies themselves from its clients.

3. These foreign exchange assets are subsequently sold or encashed through the assessee's correspondent-banks in the foreign countries concerned and the proceeds credited to the current account of the assessee with the correspondent-banks concerned. These bank balances are periodically transferred to India. During the accounting year ending December 31, 1966, the Indian rupee was devalued on 6th June, 1966. At the time of the devaluation the assessee's accounts with the correspondent-banks in foreign countries stood credited with the sale proceeds of negotiable instruments and foreign currencies, as mentioned above. Consequent on devaluation, the value of these, in terms of the Indian rupee, registered a substantial increase to the extent of Rs. 4,65,515. This excess realisation on devaluation was treated by the Income-tax Officer as the income of the assessee during the accounting year. The assessee claimed that the profit derived on the devaluation of the Indian rupee was in the nature of a windfall, that it had nothing to do with the business carried on by it and that it was solely due to an act of the Government in fixing the value of the Indian rupee in terms of the foreign currencies and in the circumstances the profit was not liable to tax. This was not accepted by the Income-tax Officer and he assessed this excess realisation of Rs. 4,65,515 as income from business. The assessee appealed to the Appellate Assistant Commissioner. He also came to the conclusion that the appreciation in the value of the foreign exchange assets represented a profit arising to the assessee in the course of its trade and, therefore, confirmed the Income-tax Officer's order treating it as part of the assessee's income from business. Aggrieved by the order of the Appellate Assistant Commissioner, the assessee filed a second appeal before the Appellate Tribunal. It was contended there that the appreciation in the value of its foreign exchange holdings did not represent a trading profit and the assessee relied on the decision of the Supreme Court in Commissioner Of Income Tax, Mysore v. Canara Bank Ltd. [1967] 63 I.T.R 328 to support its stand. The Tribunal, after considering the evidence in the case and the contention put forward by the assessee, came to the conclusion that the above decision of the Supreme Court did not apply to the facts of this case. In that case the appreciation in value was in respect of assets which were blocked and sterilised and with which the bank was unable to deal and consequently it had ceased to be its stock-in-trade. In those circumstances, the Supreme Court held that the increase in value of those assets owing to exchange fluctuation was a capital receipt. But, relying on the following passage in the same decision:

“If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts.”

the Tribunal came to the conclusion that this principle applies to the facts of this case. The assessee had been purchasing bills of exchange and foreign currencies as part of its business and the sale proceeds of these bills of exchange and foreign currencies constituted its trading receipts. Consequent on the devaluation of the Indian rupee, the amount receivable by the assessee appreciated in value and this represented an appreciation in the value of the sale proceeds of the assets in which the assessee was dealing in the course of its banking business. The Tribunal was, therefore, of the view that there could be no doubt that the appreciation in value amounting to Rs. 4,65,515 represented part of the trading receipts of the assessee and accordingly constituted a revenue receipt in the hands of the assessee. The first question referred to above arises out of this conclusion.

4. The second question sought to be raised by the assessee is in respect of an alleged loss of Rs. 52,935 on the revaluation of its holding of Government securities. The facts relating to this question are briefly as follows:

As on the last day of the accounting year relevant to the assessment year 1967–68, viz., December 31, 1966, the assessee valued the Government securities held by it and as the market price of these securities on that date was less than the cost price, this difference amounting to Rs. 52,935 was taken as loss arising from the valuation of the closing stock of securities. This amount was adjusted by the assessee in its balance-sheet against the devaluation profit of Rs. 4,65,515, referred to earlier, and the balance of Rs. 4,12,580, remaining after such adjustment was credited to the reserve account along with other appropriations. In the return filed for the assessment year 1967–68 a claim was made to deduct the above loss of Rs. 52,935, arising from the valuation of Government securities, in determining its total income for purposes of income-tax assessment. The Income-tax Officer found that the assessee had been valuing the Government securities at cost in all the earlier years and it was not following the method of valuing the securities at cost or market price, whichever was lower. He further found that the loss has not been debited to the profit and loss account but had merely been adjusted in the assets account in the balance-sheet. As there was no actual loss arising on the sale of securities and as there was no debit to the profit and loss account on account of the alleged loss and as the method of valuation adopted for this year was not in accordance with the method of accounting regularly employed by the assessee, the Income-tax Officer disallowed the loss. In appeal the Appellate Assistant Commissioner pointed out that there was no buying and selling of Government securities during the year and the depreciation in the value of the securities has been written off to a reserve account and not to the profit and loss account. In that view it was held that even if there was a loss it was due to depreciation in value of investments and was, therefore, not admissible as a loss in computing its income. In second appeal the Tribunal took the view that the Government securities should not be treated as investments but as stock-in-trade in a limited sense in the same way as cash forms the stock-in-trade of the bank. The Tribunal also observed that it could not be held to be a stock-in-trade in the sense in which securities form the stock-in-trade of a stock and share dealer. This is because there were no sales of securities as part of its business but only purchases of securities out of its cash resources as an easily realisable form of investment. After having come to this conclusion the Tribunal found that in all the earlier years as well as in the subsequent years the assessee has been valuing the securities at cost, even when the market price of such securities was lower than the cost price. Only during the year of account relevant for the assessment year the assessee had made a departure from the method of valuation followed by it for the earlier years. The Tribunal observed that while the mode of valuation of closing stock could be changed by an assessee, provided such change in method is regularly followed, subsequently such a change could be allowed only in respect of the closing stock of stock-in-trade in which the assessee regularly deals. In the circumstances, the Tribunal held that the value of these securities should only be equated with the value of cash holdings of the assessee and, there could be no question of valuing them at the end of each year at the market rate as in the case of stock-in-trade in which a trader deals. In this view of the matter the Tribunal held that the alleged loss on the revaluation of securities was rightly disallowed by the authorities below in computing the total income. On this finding the second question referred to above arises for determination.

5. The assessee has repeated his contention before this court that the excess realisation of Rs. 4,65,515 on devaluation cannot be treated as a revenue receipt but only as a casual receipt in the nature of a windfall by virtue of the devaluation. The business of the assessee being a banking business and as part of its banking business it was purchasing cheques, payment orders and mail transfers, demand drafts, bills and other negotiable instruments drawn in foreign currencies, the sale proceeds of these constitute trading receipt. Consequent on the devaluation of the Indian rupee the amount receivable by the assessee appreciated in value and this represents an appreciation in the value of the sale proceeds of the assets in which the assessee was dealing in the course of its business. There could, therefore, be no doubt that the appreciation in value amounting to Rs. 4,65,515 of all such assets represents part of the trading receipts of the assessee and, therefore, constituted revenue receipts in its hands. The decision of the Supreme Court in Commissioner Of Income Tax, Mysore v. Canara Bank Ltd., which was relied on by the assessee in support of its contention that this excess realisation on devaluation is of a casual and non-recurring nature does not really help the assessee. In that case an amount of Rs. 3,97,221, which was originally the stock-in-trade of the bank held in the Karachi branch, was blocked and sterilised and the bank was unable to deal with that amount and so it ceased to be its stock-in-trade. The increase in its value owing to its exchange fluctuation was held to be a capital receipt. In arriving at that conclusion their Lordships adverted to the general principles that govern cases of this nature. Their Lordships observed thus:

“The question involved in this appeal is whether the profit of the bank on account of fluctuation of exchange arose in the course of trading operations of the bank or whether it was incidental to any such trading operation. If by virtue of exchange operations profits are made during the course of business and in connection with business transactions, the excess receipts on account of conversion of one currency into another would be revenue receipts. But if the profit by exchange operations comes in, not by way of business of the bank, the profit would be capital profits.”

6. Applying this principle the Supreme Court held in that case that the amount of Rs. 3,97,221 was a blocked and sterilised balance and that it was at no material time employed, expended or used for any banking operation or any foreign exchange business and so it has changed its character as stock-in-trade and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. In this case the bills of exchange and other foreign currencies never ceased to be the stock-in-trade at the time when devaluation of the Indian rupee was announced and, therefore, the appreciation in the value of the sale proceeds of these assets which was the stock-in-trade of the assessee represented the trading receipts of the assessee only. The principle of the decision of this court in M. Shamsuddin & Company v. Commissioner Of Income-Tax [1973] 90 I.T.R 323 Ker.. is also applicable to the facts of this case. In the light of these decisions and the finding of fact arrived at by the Tribunal, the conclusion that this sum of Rs. 4,65,515 constituted the business income in the year of account has to be sustained.

7. The second question relates to the disallowance of a sum of Rs. 52,935 being depreciation in the value of certain securities held by the appellant. The Tribunal found that the holdings of the assessee in Government securities are only to ensure the availability of easily realisable funds in case of need even though in the balance-sheet this has been treated as investments. The Tribunal also found that the fact that in any particular year there has not been any purchase or sale of securities does not conclusively prove that the securities are merely investments of the assessee. These investments are made in accordance with the requirements of sub-section (2) of section 24 of the Banking Companies Act, as enacted by Act 33 of 1959 and sub-section (2A) of section 24 as enacted by Act 36 of 1962. These provisions in the Act were intended to legalise the sound banking practice, namely, that the bank may keep a reserve of cash and liquid assets to meet its demand liability. As per these provisions an amount equal to 20% of its “time and demand liabilities” must be invested in these securities. The Tribunal also found that these investments form really stock-in-trade, but took the view that they are not stock-in-trade in the ordinary sense but only in a limited sense just like cash forms the stock-in-trade of the bank. This restricted view is not legally correct. No doubt, they can easily be converted into cash to meet any probable demand by the depositors. But they are not equal to cash as the Tribunal observes. To get cash they will have to be sold. The sale may be easy. The sale price will not generally be equal to the face value of the securities. The price will fluctuate just like the price of all other commodities which may be the subject of trade. So, the Government securities held by the assessee really constitute stock-in-trade without any restriction or limitation of the ordinary concept of a stock-in-trade.

8. As this has been found to be a stock-in-trade by the Tribunal the further question is whether the assessee is entitled to value them as a closing stock at cost or market price, whichever is lower. The assessee was systematically following the practice of valuing the securities at cost. The Tribunal went through the account for the accounting years ending December 31, 1960, onwards up to and including the accounting year ended on December 31, 1968. Excepting for the relevant accounting year, namely, the year ending December 31, 1966, the assessee has been valuing these securities at cost, whether such cost was lower or higher than the market price of the securities. From this the Tribunal took the view that the assessee has made a departure from the method of valuation followed by it for the earlier and subsequent years, and, therefore, the valuing of these securities at market rate as on December 31, 1966, is not permissible. We are afraid that this conclusion of the Tribunal is legally incorrect. It is true that till December 31, 1966, the assessee was valuing the securities at cost price in the profit and loss statement. But, after that year, what has been done by the assessee is to adopt the mode of valuation of the closing stock at cost or market price whichever is lower. The mode of valuation of a closing stock can be changed by the assessee provided such changed method is regularly followed subsequently. It is true that the assessee has adopted the market value of these securities as on December 31, 1966, in the balance-sheet and in the balance-sheets for the subsequent years ending December 31, 1967, and December 31, 1968, the cost price as at the end of the accounting year has been taken as the value of these securities at the end of the previous year. But the Tribunal failed to note that the market prices of the securities as on the last date of the subsequent years were higher than the cost price as could be seen from the following chart given by the Tribunal in its order:

Accounting year Securities at cost Securities at market value Value adopted for balance-sheet Rs. Rs. Rs. 31-12-1960 8,44,561 8,50,022 8,44,561 (cost) 31-12-1961 7,77,866 7,83,169 7,77,866 (cost) 31-12-1962 9,15,190 8,99,657 9,15,190 (cost) 31-12-1963 9,36,318 9,32,965 9,36,318 (cost) 31-12-1964 10,68,136 10,55,897 10,68,136 (cost) 31-12-1965 12,20,081 11,55,349 12,20,081 (cost) 31-12-1966 17,52,503 16,99,565 16,99,565 (market rate) 31-12-1967 21,25,227 21,61,361 21,25,227 (cost) 31-12-1968 29,97,207 30,69,621 29,97,207 (cost)

9. It is a sound commercial practice to value the closing stock at cost or market price, whichever is lower. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial practice, it cannot be said that the method adopted by the assessee is not justified. From the chart given in the Tribunal's order it is clear that the assessee has adopted the cost price in the balance-sheet for the subsequent years because the cost price was lower than the market price on the last date of these previous years. In the Supreme Court case, Chainrup Sampatram v. Commissioner of Income-tax, this commercial practice of valuing the closing stock at cost or market price, whichever is lower, has been approved as a sound principle to be followed in arriving at the profits for the income-tax purposes. In the light of this decision and in the light of the facts found by the Tribunal the conclusion arrived at by it, namely, that the loss amounting to Rs. 52,935 is not admissible in computing the assessee's taxable income is not correct. The assessee has changed the method of valuation followed in the earlier years and adopted the principle of valuation of the closing stock at cost or market price whichever is lower and followed it in the subsequent years. Therefore, in adopting that mode of valuation, if there is a loss disclosed, certainly that can be adjusted against the profits for purpose of computing the taxable income. Therefore, the assessee was right in claiming deduction of this sum of Rs. 52,935 as a loss during the accounting year. This should have been allowed as a permissible deduction in determining the total income of the assessee for the assessment year 1967–68.

10. In the result, the first question referred to above is answered in favour of the revenue and against the assessee, and the second question is answered against the revenue and in favour of the assessee. The parties shall bear their costs.

11. A copy of this judgment will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.