The main legal point established in the judgment is the treatment of profit from devaluation as a revenue receipt arising from trading receipts and the allowance of the loss from revaluation of government securities as a permissible deduction based on the principle of valuing the closing stock at cost or market price whichever is lower.

1. 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 Incometax?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law is 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. 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 31-12-1966 Indian rupee was devalued on 6th June, 1966. At the time of the devaluation the assessee's accounts with the the correspondent-backs 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 wind fall, 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 the 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 the 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 Incometax, Mysore v. Canara Bank Ltd. (63 ITR. 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 h