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while differentiating layer 2 and layer 3 device, it is said that layer 2 is based on mac address and layer 3 on IP.
Generally, that's correct.
But switch works on IP address, den how can we say that switch is layer 2 device?
That's not a given.
Actually switching is how the process of forwarding cells, frames and/or packets, etc., is performed. (NB: the term also extends beyond data networking, e.g. a telephone switch.) Since this method is most common at L2, devices that do it are commonly called just switches. Devices that perform this process other than L2 often get an adjective to clarify, e.g. L3 switch or multilayer switch.
