- (1.) A common question arises in these two references made under Section 256(1) of the Income-tax Act, 1961, at the instance of Revenue. They are being disposed of under a common order. For the sake of convenience, we shall refer to the facts in I. T, R. No. 1083 of 1978. The three questions referred are : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the interest did not accrue or arise to the assessee during the accounting year 'because the suits were pending for recovery of the loans ?
(2.) Whether the Tribunal was justified in putting off the fact of accrual of the interest in spite of the fact that the assessee followed the mercantile system of accounting and the loans were interest-bearing ?
(3.) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the amount of Rs. 42,716 as interest accrued was not includible in the total income of the assessee in the assessment year 1973-74 ?" 2. The assessee, the U. P. Financial Corporation, is a financial institution lending money to others. The assessment year concerned herein is 1973-74, the "previous year" being the financial year 1972-73. The assessee maintained its books of account on the mercantile system of accounting. During the said accounting year, the assessee did not credit to its profit and loss account, interest amount of Rs. 42,716 on certain advances for the reason that, according to the assessee, those loans had become doubtful--what are generally known as "sticky loans". While it credited the said interest amount in its books, it carried over the same to a suspense account. Indeed, the assessee had filed suits for recovery of those loans even prior to the commencement of the relevant "previous year", which suits were pending during the said "previous year". The Income-tax Officer was, however, of the opinion that there was no sufficient reason for not crediting the said interest amount to the profit and loss account and, accordingly, added the same against which the assessee filed an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal. He was of the opinion that merely because the assessee was maintaining its accounts on the mercantile system, it does not necessarily follow that even that income which is of doubtful nature, should be taken into consideration while assessing its income. Moreover, he said, once a suit is filed, the matter becomes sub judice and so long as the court does not award interest for the period subsequent to the institution of the suit, the appellant has no right to interest and interest cannot be said to accrue during the period of pendency of the suit. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue carried the matter in appeal to the Tribunal. The Tribunal dismissed the appeal following its decision in an appeal relating to the assessment year 1969-70. The Tribunal too was of the opinion that once a suit is filed, interest pendente lite falls in jeopardy. It cannot be said that, during the period a suit is pending, interest accrues to the assessee. Hence, the mere fact that the assessee was maintaining its accounts on the mercantile system cannot mean that the interest accrued or that it should be added to its income. Thereupon, the Revenue applied for and obtained this reference. 3. Learned counsel for the Revenue relied upon the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102 ; AIR 1986 SC 757, which, according to learned counsel, concludes the issue against the assessee. In that case too, the assessee was maintaining its books of account on the mercantile system. It advanced loans to several persons and charged interest thereon, some of these loans had become doubtful of recovery which it terms as "sticky advances". Interest accruing on such advances was credited to a separate account called "interest suspense account" instead of crediting it to the profit and loss account. According to the assessee, this was done to avoid displaying inflated profits or by including hypothetical and unreal income. It claimed that the said interest was not its real income and was, therefore, not taxable in its hands. This contention was rejected by the Supreme Court. It held that once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The court observed that interest in that case had accrued and the assessee had debited the account of the debtor and if so, the mere difficulty in recovery of the loan cannot make the accrual a case of non-accrual. In such a situation, the court held, the theory of real income has no place. It also observed that carrying the interest on such loans to a suspense account, without treating the loans as bad debts and/or without treating the interest as irrecoverable, is repugnant to Section 36(1)(vii) read with Section 36(2) of the Act. The court observed that the concept of real income cannot be read so as to defeat the object and the provision of the statutory enactment.;