Revenue Receipt from Devaluation treated as taxable business income while revaluation loss on securities allowed as deduction.

Devaluation gain arising from appreciation of foreign exchange held as stock-in-trade in the ordinary banking business is a revenue receipt and taxable as business income; outcome: the devaluation profit is chargeable to income-tax. Conversely, a loss on revaluation of closing stock of government securities held as readily realizable funds in the course of banking business is allowable where the taxpayer values closing stock by a recognised commercial method regularly applied; outcome: the revaluation loss is deductible in computing taxable income. The decision is therefore partly for the Revenue and partly for the assessee.

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Issues: (i) Whether the profit of Rs. 4,65,515 arising from the devaluation of the Indian rupee on 6 June 1966 is income chargeable to income-tax; (ii) Whether the loss of Rs. 52,935 on revaluation of closing stock of Government securities is deductible in computing total income for assessment year 1967-68.

Issue (i): Whether the appreciation in value of foreign exchange assets consequent on devaluation constitutes revenue or capital receipt.

Analysis: The bank purchased and dealt in foreign currency instruments and foreign currencies as part of its ordinary banking business; the sale proceeds of those assets formed trading receipts. The Supreme Court principle distinguishing revenue and capital receipts turns on whether the profit arises in the course of business operations or is incidental/casual. The facts show the foreign exchange holdings remained stock-in-trade and were available for banking operations at the time of devaluation; they were not blocked or sterilised.

Conclusion: The sum of Rs. 4,65,515 is a revenue receipt and is income chargeable to income-tax (in favour of Revenue and against the assessee).

Issue (ii): Whether the loss of Rs. 52,935 on valuation of Government securities held by the bank is deductible.

Analysis: The securities were held as readily realizable funds in the course of banking business and were correctly regarded as stock-in-trade. Valuation of closing stock may be changed to a recognised commercial method if followed regularly. The bank adopted valuation at cost or market price whichever is lower for the relevant year and followed that method in subsequent years where applicable; this method conforms with ordinary commercial practice and income-tax computation principles.

Conclusion: The loss of Rs. 52,935 on revaluation of securities is allowable as a deduction in computing the assessee's taxable income (in favour of the assessee and against the Revenue).

Final Conclusion: The reference is answered by treating the devaluation gain as taxable business income while allowing the claimed revaluation loss; the decision is therefore partly for the Revenue and partly for the Assessee.

Ratio Decidendi: Appreciation in value of assets that form part of a taxpayer's stock-in-trade and arise in the course of ordinary business operations is a revenue receipt, and closing stock of securities may be valued at cost or market price whichever is lower where that commercial method is regularly applied.

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