1 to 10. (These paras are not reproduced here as they involve minor issues.)

11. The next ground taken up by the assessee is regarding the addition of Rs. 1,90,07,000 towards unrealised profits on unexecuted forward foreign exchange contracts as on 31st March, 1991. During the course of assessment proceedings, the AO observed that the assessee claimed a loss on account of foreign exchange transaction entered into by it amounting to Rs. 64,98,677. The AO asked the assessee to furnish the figures of profits, if any on such outstanding contracts. The assessee furnished the figures of such profits amounting to Rs. 3,03,40,000. The AO has stated that the assessee did not file any explanation as to why these profits should not be included in its income for the year under consideration. The assessee, however, explained that they were following the method of accounting suggested by the Institute of Chartered Accountants in valuing such profits. The AO, however, did not agree with the contention raised by the assessee. According to the AO, the assessee is maintaining the books of account on mercantile basis. Therefore, the accrued profits as on the last day of the accounting year should also be determined especially in view of the fact that the assessee has been claiming the loss also on certain contracts. Such loss has been allowed to it as deduction in appeal in earlier years. Thus, the AO is of the opinion that the amount of profit should also be brought to tax. The AO referred to the guidelines issued by the Foreign Exchange Dealers Association of India to its members regarding the method of accounting to be followed with respect to such forward contracts wherein it has been suggested that the unrealised profits should be booked as profits at the end of the previous year in question. According to the AO, the guidelines issued by the Foreign Exchange Dealers Association of India are of greater relevance to a bank rather than the guidelines of the Institute of Chartered Accountants. The AO also referred to the Supreme Court decision in the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC) wherein it has been held that the method of accounting followed by the assessee can be disturbed if it is found that the income cannot be correctly determined on the basis of the accounting policy being followed by the assessee and made the addition of Rs. 2,38,42,323 after setting off the loss of Rs. 64,98,677 against the unrealised profits of Rs. 3,03,40,000.

12. Before the learned CIT(A), the assessee pointed out that the amount of unrealised foreign exchange forward profit for the year ended on 31st March, 1991 has been overstated by a sum of Rs. 1,13,33,000. Therefore, it was requested that the figure of Rs. 1,90,07,000 should be substituted for the figure of Rs. 3,03,40,000. On the merits of the case, the learned CIT(A) referred to the uniform accounting procedure for evaluation of foreign exchange profits and laws laid down by the Foreign Exchange Dealers Association of India and also their minutes dt. 18th July, 1988. The learned CIT(A) has pointed out that in their memorandum, it has been laid down that "Both exchange profits/loss arising out of revaluation of forward contracts should be brought into the books on the valuation date". It has been further stated that the Reserve Bank of India had approved the aforesaid procedure vide their letter dt. 8th July, 1988. Accordingly, the banks were advised to bring in the new procedure in operation from the quarter commencing 1st Oct., 1988. The learned CIT(A), thus observed that it is apparent that the assessee bank has not followed the accepted method for evaluation of profits/loss unlike other banks. The learned CIT(A) has also pointed out that as per r. 115 of the Rules, the rate of exchange for the calculation of the value in rupee of any income accruing or arising in foreign currency shall be telegraphic transfer buying rate of such currency as on the specified date. Thus, the learned CIT(A) agreed with the approach of the AO that both the profits and loss should be treated in a like manner. The learned CIT(A), therefore, confirmed the addition and directed the AO to substitute the figure of Rs. 1,90,07,000 in place of Rs. 3,03,40,000 subject to verification.

13. The learned counsel contended that in the case of banking company, the shares and securities are held as stock in trade which are valued at prevailing market rate at the close of every accounting year and any loss or profit arising on the valuation of such securities is accounted for in the books of account which is allowable as deduction while computing the business income. He pointed out that it was not the anticipated loss for the future period but an ascertained loss accrued in the year ending on 31st March, 1991. The learned counsel further pointed out that the assessee had consistently followed the method of accounting of adopting the loss on the valuation of securities at the year end at cost or market price, whichever is lower. The learned counsel referred to the Supreme Court decision in the case of A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC) wherein it has been laid down that the stock in trade has to be valued as per the normal principles of accountancy i.e. cost of market price, whichever is lower. The learned counsel referred to the order of the Bombay Tribunal in ITA No. 7251/Bom/91 for the asst. yr. 1989-90, dt. 15th Oct., 1999, in the assessees own case, especially he invited our attention to pp. 22 to 26 and contended that the deduction in respect of loss on valuation of securities has been allowed by the Tribunal. The learned counsel also referred to the order of the Mumbai Tribunal in IT Appeal No. 8341 (Bom) of 1990 for the asst. yr. 1986-87 dt. 27th Nov., 1998, in the case of B.V. Brockhoven and contended that the loss has been considered by the Tribunal as allowable deduction as the same has accrued during the year. The appeal filed by the Department against the above order of the Tribunal was dismissed by the Bombay High Court (compilation p. 37). The learned counsel further referred to the Calcutta Tribunal decision in the case of Bank of Tokyo Ltd. (IT Appeal No. 1866 (Cal) of 1988) for the asst. yr. 1981-82 (compilation p. 38) and argued that the Tribunal has held that the outstanding contracts at the end of the year had to be valued in accordance with the practice followed consistently. The learned Counsel also referred to the following cases :

(i) CIT vs. Bank of Tokyo Ltd. (1993) 71 Taxman 85 (Cal)

(ii) CIT vs. Bharat Heavy Electricals Ltd. (1999) 239 ITR 756 (Del)

(iii) CIT vs. Bank of India (1997) 137 CTR (Bom) 323 : (1996) 218 ITR 371 (Bom)

The learned counsel argued that each currency is a separate stock and in each case, the stock has been valued as per the principles of accountancy. Thus according to him, the assessee has correctly valued the stock at the end of the year and the income has been correctly computed in accordance with the accounting principles and the accounting standards issued by the Institute of Chartered Accountants of India. Thus, he contended that there is no reason to disturb the method of accounting followed by the assessee.

14. The learned Departmental Representative invited our attention to para 14 of CIT(A)s order and contended that the "Uniform Standard Accounting Procedure" for evaluation of foreign exchange profits and losses laid down by the Foreign Exchange Dealers Association of India has been correctly followed by the Department. He argued that the AO also produced a copy of their minutes dt. 18th July, 1988. In that memorandum, it was noted that there was presently a diversity of practices amongst the authorised dealers in regard to valuation of profits and losses in foreign exchange business. The learned Departmental Representative pointed out that in that memorandum, it has been laid down that "Both exchange profit/loss arising out of revaluation of forward contracts should be brought into the books on the valuation date." He also pointed out that the RBI had approved the aforesaid procedure vide their letter dt. 8th July, 1988. Accordingly, the banks were advised to bring in the new procedure in operation from the quarter commencing on 1st Oct., 1988. The learned Departmental Representative, thus, contended that the assessee bank has not followed the accepted method for valuation of profit/loss unlike other banks. The learned Departmental Representative argued that profits and losses should be treated in a like manner. He also contended that in the case of banks, the method and procedure suggested by the RBI has to be given a higher priority than that recommended by the Institute of Chartered Accountants. The learned Departmental Representative also invited out attention to the order of the Bombay Bench of the Tribunal in ITA No. 7251/Bom/91 for the asst. yr. 1989-90, dt. 15th Oct., 1999, in the assessees own case, especially para 26 (p. 16 of assessees compilation) and argued that outstanding foreign exchange forward contracts constitute stock in trade of the bank, therefore, the same has to be valued at the end of the previous year as per the accounting principles. The learned Departmental Representative referred to the decision of the Madras High Court in the case of CIT vs. Indian Overseas Bank (1984) 41 CTR (Mad) 212 : (1985) 151 ITR 446 (Mad) (p. 14 of paper book-II filed by the Department) wherein the Honble High Court has held that "It cannot be disputed that as against the profits earned in the accounting year, only the actual loss incurred can be deducted and not any probable or possible loss. As there was no settlement of the outstanding contracts in the accounting year in question, the amount claimed could not be considered to be notional or anticipated loss and such notional or anticipated loss could not be allowed as deduction". Similarly, the learned Departmental Representative referred to the decision of the Supreme Court in the case of Karam Chand Thapar & Bros. (P) Ltd. vs. CIT (1969) 74 ITR 26 (SC) (p. 015 of paper book-II filed by the Department). In this case, the assessee sold its dry ice factory at Lahore in October, 1948 but the price was finally settled in December, 1949. By this sale, the company suffered a loss of Rs. 34,891 which was disallowed on the sole ground that the business of the dry ice factory was not carried on in the relevant year of accounting ended 31st March, 1950. The Honble Supreme Court held "Assuming that the dry ice factory was a separate business and was not a part of the business carried on by the company, loss did not accrue or arise to the company until December, 1949 when the price was settled. The loss was suffered in the accounting period 1949-50 and was plainly allowable under s. 24(1) of the IT Act, 1922. The assumption that the loss was suffered in the previous year was not warranted." The learned Departmental Representative, thus, contended that the anticipated loss cannot be allowed as a deduction. The learned Departmental Representative invited our attention to the extracts from Compedium of FEDAI Instructions/guidelines especially to p. 20 of the paper book-II filed by the Department wherein under the heading "Treatment of exchange profit and loss in the books" at serial No. 5, it has been mentioned as follows :

"Exchange profit/loss arising out of all inter-bank transactions (relating to both merchants and trading) should be brought to the books on the valuation date and reversed on the first working day of the next succeeding accounting period."

The learned Departmental Representative, thus, contended that both the profit and loss arising out of the unexecuted forward foreign exchange contracts has to be brought to the books on the last day of the previous year. Thus, according to him, the method followed by the assessee bank to bring the loss into the books of account on the last day of the previous year and to ignore the profit is erroneous and the same is against the accepted principles of accounting methods. The learned Departmental Representative also invited our attention to Circular No. 599, dt. 24th April, 1991 issued by the CBDT. Para 2 of the Circular reads as follows :

"The matter has been considered by the Board and it has been decided that the securities must be regarded as stock in trade by the bankers. Therefore, the claim of loss if debited in the books of account, would be given the same treatment as is normally given to the stock in trade. So far as the second issue is concerned, both the interest payment and receipts must be regarded as revenue payments/receipts and only the net interest on securities shall be brought to tax as business income."

The learned Departmental Representative also argued that the securities are not stock in trade as has been laid down by the Supreme Court in the case of Vijaya Bank Ltd. vs. Addl CIT (1991) 187 ITR 541 (SC) . The Honble Supreme Court held that "Where the assessee purchases securities at a price determined with reference to their actual sales, the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay and no part of it can be set off as an expenditure against the income by way of interest received on the securities." The learned Departmental Representative pointed out that the securities have been shown in the balance sheet as investment and the learned counsel in reply, however, contended that the securities are stock in trade shown as investment in the balance sheet because of banking regulations. To support his contention, he placed his reliance on the following Court cases :

(i) Bihar State Co-operative Bank Ltd. vs. CIT (1960) 39 ITR 114 (SC)

(ii) United Commercial Bank vs. CIT (1999) 240 ITR 355 (SC)

(iii) State Bank of Hyderabad. CIT (1985) 151 ITR 703 (AP)

(iv) Josna Bank Ltd. vs. CIT (1974) 97 ITR 72 (Ker)

(v) Karnataka Bank Ltd. vs. CIT (1978) 114 ITR 421 (Kar)

He also made reference to the various circulars issued by the CBDT on this subject.

15. We have carefully considered the submissions made by the rival parties. We have also gone through the various documents and the Court cases filed before us, during the course of hearing. The main point for consideration in this case is whether unrealised profits on unexecuted forward foreign exchange contracts as on 31st March, 1991, are taxable or not. The assessee has claimed the unrealised losses of Rs. 64,98,000 on unexecuted forward foreign exchange contracts as on 31st March, 1991, whereas the unrealised profits of Rs. 1,90,07,000 has been excluded while computing the total income. According to the learned Counsel, the securities are stock in trade and they are being valued at the end of the year at cost or market price whichever is lower, as is generally accepted and established rule of commercial practice. According to the learned Counsel, each currency is a separate stock and therefore, different methods for valuation have been followed for each currency. The learned Counsel further argued that such method of valuation of the closing stock of each currency is being followed consistently. The learned Departmental Representative argued that the currency is one commodity in which the assessee bank is conducting its business. Therefore, the valuation of the stock of the entire currency should be the same i.e. it should be either at cost or market value, whichever is lower.

16. It is an undisputed fact that in the case of a banking company, the securities form part of the stock in trade of the assessee bank as it has been laid down by the various High Courts and also the Tribunal while deciding this issue. In the case of CIT vs. Corporation Bank Ltd. (1988) 174 ITR 616 the Karnataka High Court held that " the authorities had not disputed the fact that the securities form part of stock in trade of the assessee bank and that it had suffered a loss due to fall in the value of the securities. The quantum of loss was also not disputed. The assessee had not written off the loss in its books of account but was not relevant. Ignoring the loss would result in distortion of the real income of the assessee during the relevant year. The Tribunal was justified in approving the change of the method of valuation of stock". The CBDT in their Circular No. 599, dt. 24th April, 1991 has also clarified that the securities must be regarded as stock in trade by bankers. Consequent upon the judgment of the Supreme Court in the case of Vijaya Bank Ltd. (supra), the circular was withdrawn by issuing a Circular No. 610, dt. 31st July, 1991. However, the CBDT issued a fresh Circular No. 665, dt. 5th Oct., 1993, clarifying that the AO should determine on the facts and circumstances of each case as to whether any particular security constitute stock in trade or investment, taking into account the guidelines issued by the RBI in this regard from time to time. In the case of the assessee for the asst. yr. 1989-90 (supra), the Tribunal has held that the outstanding foreign exchange forward contracts constitute stock in trade of the bank. Similar were the views of the Tribunal in their orders for the asst. yrs. 1988-89 and 1990-91 in the case of the assessee. Similarly in the case of Bank of Tokyo Ltd. (supra), the Tribunal held that securities in the case of banking company are stock in trade. The Bombay Bench of the Tribunal in the case of Banque Nationale De Paris (IT Appeal Nos. 1575 and 1577 (Bom) of 1988), asst. yr. 1981-82, dt. 6th Sept., 1989 also held that the securities in the case of the bank are stock in trade. The special Bench of the Tribunal in the case of American Express International Banking Corpn. vs. IAC (1983) 6 ITD 373 (Bom) also held that securities in the bank are stock in trade. In the case of Josna Bank Ltd. (supra), the Kerala High Court held that "the assessee was entitled to deduction. The provisions of the Banking Regulation Act indicate that holding of securities by a bank is obligatory and that a substantial portion of the assets of the banking company must be held in securities and further that the business of a banking institution will include dealing in such securities. Such transactions by banking institutions will be in the nature of business. The Government securities held by the assessee really constituted stock in trade." The Andhra Pradesh High Court in the case of StateBank of Hyderabad (supra) also held that money constitutes stock in trade in the bank. The Honble Supreme Court in the case of United Commercial Bank (supra) also held that investments by the banks are stock in trade. Keeping in view the aforesaid Court cases and also the precedent, we consider the securities as part of stock in trade.

17. As we have discussed in the aforesaid paragraphs that it is an undisputed fact that the securities form part of stock in trade of the assessee bank, therefore, the only issue remains for consideration is the valuation of such closing stock of securities. The assessee is a non-resident banking company which during the course of its business is required to enter into foreign exchange forward contracts on behalf of their constituents. At the end of the accounting year, notional profits and losses on unsettled forward contracts in foreign currencies are calculated. The assessee has not accounted for in the financial statement the anticipated/contingent profits from the contracts to the extent not settled as on the last day of the accounting year whereas any loss on such contracts is provided for by a charge in the profit and loss account on the best estimates. The learned Counsel during the course of hearing brought to our notice that the assessee is valuing the closing stock at cost or market price, whichever is lower. He, further contended that each currency is a different stock, therefore, they are being valued separately. According to him, where there is a loss, the assessee is taking into account, the market value of the securities because the same is less than the cost. Where there is a profit, the assessee is taking into account the cost because the same is less than the market value. Thus, according to him, only loss is accounted for in the books of account and not the profit.

18. In our opinion, the method adopted by the assessee for valuing the closing stock is not as per the accounting principles. The bank is dealing in currency only. As per the provisions of Banking Regulation Act, the holding of securities by a bank is obligatory and that a substantial portion of the assets of the banking company must be held in securities and further that the business of a banking institution will include dealing in such securities. Such transactions by banking institution will be in the nature of business. Therefore, securities held by the assessee bank is the commodity in which the assessee bank is actually dealing with. The nature of the securities is the same. Hence, there cannot be two different methods for valuing the closing stock of such securities which are of similar nature. As a normal rule, the profits should be ascertained by valuing the stock in trade at the beginning and at the end of the accounting year. It is a settled law that the true trading results of a business for an accounting period cannot be ascertained without taking into account the value of the stock in trade remaining at the end of the period. In the present case, the assessee is valuing part of its stock at cost and the remaining stock at market value. Therefore, the true trading results of the business of the assessee for the accounting period under consideration cannot be determined. The Bombay High Court in the case of Harinagar Sugar Mills Ltd. vs. CIT (1994) 207 ITR 901 has held that "The assessee is entitled to value the closing stock at cost or market price whichever is lower but that has to be applied to the entire closing stock. There is no justification in bifurcating the closing stock on the assumption that some of this would have to be surrendered as levy. If the assessee wants to take the sale price for part of the stock, then the entire stock will have to be worked out on the basis of sale price." The above Bombay High Court decision makes it abundantly clear that all the securities held by the bank have to be valued either at cost or at market price, whichever is lower. All the securities are of similar nature, hence, to apply two different methods for valuing them would be against the recognised method of accounting principles. 19. From the various decisions of the Supreme Court, it can be held that (i) for valuing the closing stock, it is open to the assessee to value it at cost or market price, whichever is lower, (ii) in the balance sheet, even if the securities and shares are valued at cost from that no firm conclusion can be drawn, the taxpayer is free to employee for the purpose, of its trade, his own method of keeping accounts and for that purpose, to have stock in trade on cost or market price, (iii) a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted different methods of keeping accounts or of valuation (iv) the concept of real income is certainly applicable in judging whether there has been income or not but in every case, it must be applied with care and within the recognised limits, (v) whether the income has really accrued or arisen to the assessee must be judged in the light of reality of the situation, (vi) under s. 145 of the, in a case where accounts are correct and complete but the method applied is such that in the opinion of theO, the income cannot be properly deduced therefrom, the computation shall be made in such a manner and on such a basis as theO may determine. In the present case, the assessee has valued part of the securities at cost and the remaining part at market value. This method employed by the assessee is such that taxable income of the assessee cannot be properly determined. Therefore, the learned Departmental Representative has rightly pointed out that the method of valuation of closing stock of securities is defective. The assessee has to follow one method for valuation of the entire stock of securities. In the present case, the assessee has not taken into consideration, the anticipated/contingent profits from the contracts to the extent not settled as on the last day of the accounting year but at the same time, the assessee has taken into account, the anticipated/contingent loss for computing the taxable income which gives the distorted figure of the taxable income. The method of valuation must be fair to the taxpayer and also fair to the Revenue. The assesses are allowed to value their unsold stock and work in progress either at cost or at market price, whichever is lower. It is, however, a shorthand way of expression, it is not a rule of law. It is a workable method recognised in tax laws. It must be adopted in the commercial sense in consonance with accounting practice. Anticipated losses and profits for the aforesaid purpose are permissible provided, however, there is a market in the ordinary sense and the anticipation is backed by the consistency of the method followed and the method followed is supported by recognised accounting principles. The Honble Supreme Court in the case of British Paints India Ltd. (supra) has laid down that "It is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income can be deduced therefrom. It is incorrect to say that the Officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years." In the present case, the books of the assessee did not disclose the true state of accounts because the assessee has applied two different methods of valuation of closing stock of the securities. Part of the securities have been valued at market price which resulted into a loss and the remaining part of the securities have been valued at cost. If the same could have also been valued at market price, it could have resulted into a profit. The assessee has taken into consideration, the loss for computing the taxable income but has completely ignored the profits. Therefore, it is not possible to deduce the correct taxable income. Under the circumstances, the AO was not bound to accept this defective system of accounting though the same was regularly employed by the assessee, the correctness of which has not been questioned in the past. Under the circumstances, we do not find any infirmity with the findings of the learned CIT(A).

20. We would not like to refer the various cases relied upon by both the parties. In the case of Indian Overseas Bank (supra) relied upon by the learned Departmental Representative, the Madras High Court held that notional or anticipated loss cannot be allowed as deduction. But in the present case, the issue involved is regarding valuation of the closing stock of investment. There is no dispute regarding the fact that the securities held by the assessee bank constitute stock in trade. This case is, therefore, not relevant to the facts of the present case. The case of Karam Chand Thapar & Bros. (P) Ltd. (supra) relied upon by the learned Departmental Representative is not relevant to the facts of the present case as the above case pertains to the business of coal mining and the Court held that the loss is not allowable in the earlier years as the same was sustained in the subsequent year. In the present case, we are dealing with banking company and the securities held by the bank is a stock in trade. The case of Corporation Bank Ltd. (supra) relied upon by the learned Departmental Representative is very relevant to the facts of the present case. In this case, the Karnataka High Court has held that the securities form part of stock in trade of the assessee bank. The quantum of loss was also not disputed. Therefore, the Tribunal was justified in appropriating the change in the method of valuation of stock. We have also concluded above that both loss and profit have to be taken into account for determining the correct profits of the business of the assessee bank. So far as the case of Vijaya Bank Ltd. (supra) relied upon by the learned Departmental Representative is concerned, the same is relevant only with the claim for broker period interest and it has not decided the issue whether the securities constitute stock in trade or investment. In the above case, the Honble Supreme Court considered the issue whether in the case where the assessee purchased securities at a price determined with reference to their actual value as well as interest accrued thereof till the date of purchase, the entire price paid for them would be in the nature of capital outlay or whether the interest portion could be claimed as a revenue expenditure. It is in this context that the Supreme Court held that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of capital outlay and no part of it could be set off as expenditure against income accruing on these securities. Therefore, this case also does not have any relevance to the facts of the present case. The decision of the Tribunal in the assessees own case for the asst. yrs. 1988-89, 1989-90 and 1990-91 relied upon by the learned Counsel has no relevance to the facts of the present assessment year. In the above orders, the Tribunal decided the issue whether loss was allowable or not. The Tribunal held that in the case of a bank, the outstanding foreign exchange forward contract constitute stock in trade of the bank and therefore, it was not a notional loss and the same is allowable. The issue of notional profit has not been considered by the Tribunal. This decision of the Tribunal moreover supports our findings that both the notional loss and profit should be considered simultaneously. Therefore, the decision of the Tribunal for the earlier years of the assessee is not of any assistance to decide this issue of notional profit. Similarly, the decision of the Tribunal in the case of Brockhoven BV (supra) does not help the assessee as the issue of notional profit has not been considered in this case also. Similarly, in the case of Bank of Tokyo Ltd. (supra) relied upon by the learned Counsel, the issue of notional profit has not been considered. Therefore, this case is also not relevant for deciding the issue in the present case. Similarly, the other cases relied upon by the learned Counsel have no relevance to the facts of the present case.

21. In view of the discussion in the aforesaid paragraphs, we confirm the addition of Rs. 1,90,07,000 being unrealised profits on unexecuted foreign exchange forward contracts. The findings of the learned CIT(A) are, therefore, upheld. In view of our specific findings, the alternative ground taken up by the assessee that unrealised profits of Rs. 1,90,07,000 and unrealised losses of Rs. 64,98,000 on unexecuted foreign exchange forward contracts as on 31st March, 1991 be excluded while computing the total income of the assessee does not survive and the same is not considered.

22-29. (These paras are not reproduced here as they involve minor issues.)