TMI Blog1973 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 ?" 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. 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 Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 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. The second question sought to be raised by the assessee is in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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." 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 Al. Shamsuddin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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