JUDGMENT
G. Sivarajan, J.
1. The question referred for the decision of this court under Section 256(2) of the Income-tax Act, 1961, is as follows :
” Whether, on the facts and in the circumstances of the case, the addition of Rs. 26,517 representing interest on sticky advances as income of the assessment year 1978-79 is valid in law ?”
2. The assessment year concerned is 1978-79. The accounting year ended on December 31, 1976. The assessee, a subsidiary of the State Bank of India, maintained its accounts on the mercantile system of accounting. In the course of its banking business, it used to charge interest on advances, including interest on advances which had become extremely doubtful of recovery and which it termed as “sticky” advances, by debiting the concerned parties. In the case of interest on “sticky” advances, instead of carrying it to the profit and loss account, the assessee credited the interest to a separate account called “the interest suspense account”. The assessee claimed that, having regard to the bad and deteriorating financial condition of the parties concerned as well as the history of their accounts, the recovery of even the principal amounts of the debts had become improbable and doubtful and as such the interest thereon, though debited to the respective debtors was taken to the “interest suspense account” to avoid showing inflated profits by including hypothetical and unreal income, and such interest on “sticky” advances was not real income and was not taxable in its hands. The assessing authority rejected the claim for deduction of an amount of Rs. 26,517 credited to the interest suspense account, relying on an earlier decision of this court in the assessee’s own case in State Bank of Travancore v. CIT [1977] 110 ITR 336. The said findings of the assessing authority had been confirmed by the first appellate authority and by the Income-tax Appellate Tribunal.
3. The very same question in the case of the assessee itself came up for consideration before the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102. The court on a consideration of the matter in all its aspects by a majority judgment (main judgment delivered by Sabyasachi Mukharji J., as his Lordship then was) held that the interest on sticky advances is income liable to be included in the computation of total income under the Act. For holding so, the Supreme Court deduced the following propositions (page 155) :
” (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor’s account and not reversing that entry–but taking the interest merely in suspense account cannot be such evidence to show that no real income has accrued to the assessee or been treated as such by the assessee. (8) 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 well-recognised limits.”
4. Following the above decision of the Supreme Court, the question referred is answered in the affirmative, i.e., against the assessee and in favour of the Revenue.
5. A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.