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Validity of addition of interest on sticky advances as income for assessment year 1978-79. Analysis: The judgment delivered by the High Court of Kerala pertains to the validity of adding interest on sticky advances as income for the assessment year 1978-79. The assessee, a subsidiary of the State Bank of India, maintained accounts on the mercantile system of accounting. The assessee charged interest on advances, including on extremely doubtful recoveries termed as "sticky" advances, by debiting the concerned parties. Instead of reflecting interest on sticky advances in the profit and loss account, the assessee credited it to a separate account named "interest suspense account." The assessee argued that due to the deteriorating financial condition of debtors, the interest was unlikely to be recovered, and hence, not real income. However, the assessing authority, supported by previous court decisions, rejected this claim, resulting in the addition of Rs. 26,517 as income. The Supreme Court, in a previous case involving the same assessee, ruled that interest on sticky advances is taxable income. The Court emphasized that the concept of real income should not be used to circumvent tax laws. It stated that if income is diverted at the source or if there is a surrender of income, it does not constitute income for the assessee. The Court highlighted that the treatment of income by the parties is crucial in determining whether income has accrued. Mere improbability of recovery does not negate the existence of income. The Court concluded that the concept of real income must be applied carefully within recognized limits. In light of the Supreme Court's decision, the High Court answered the question in favor of the Revenue, affirming the addition of interest on sticky advances as income for the assessment year 1978-79. The Court directed the Income-tax Appellate Tribunal to take necessary action based on this judgment.
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