Taxability of suspended interest and deduction base under section 36(1)(viii) affirmed in favour of the assessee.

Interest on overdue sticky loans credited to an interest suspense account did not accrue as taxable income while recovery suits remained pending, because pendente lite interest depended on judicial determination and was not automatically earned year by year. The amount was therefore excluded from taxable profits during the pendency of the suits. For section 36(1)(viii), the deduction was to be computed on total income before allowing that very deduction, and that interpretation was affirmed in favour of the assessee. Both questions were answered for the assessee.

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Issues: (i) Whether interest on overdue loan amounts, pending recovery suits and credited to an interest suspense account, accrued as taxable income in the relevant assessment years; (ii) whether deduction under section 36(1)(viii) was to be computed on total income before or after allowing that deduction.

Issue (i): Whether interest on overdue loan amounts, pending recovery suits and credited to an interest suspense account, accrued as taxable income in the relevant assessment years.

Analysis: The dispute concerned interest on sticky loans where recovery proceedings and civil suits had been instituted. In such cases, the right to pendente lite interest depended on the court's discretion under the civil procedure framework, and the exact accrual could not be treated as automatic from year to year while the suit remained pending. The distinction was drawn from cases of ordinary accrual under the mercantile system, because the recoverability and the quantum of interest were not finally settled until adjudication.

Conclusion: The interest credited to the interest suspense account did not accrue as taxable income during the pendency of the suits and was not includible in the assessee's profits.

Issue (ii): Whether deduction under section 36(1)(viii) was to be computed on total income before or after allowing that deduction.

Analysis: The computation question turned on the proper base for the statutory deduction. The Tribunal had followed the view that the deduction had to be worked out on the total income as determined before making the deduction under that very provision, and that approach was affirmed.

Conclusion: The deduction under section 36(1)(viii) was to be calculated on the total income before giving effect to the deduction itself, and the answer was in favour of the assessee.

Final Conclusion: Both referred questions were answered for the assessee, and the revenue references stood disposed of accordingly.

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