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Issues involved:
The judgment addresses questions referred under section 256(1) of the Income-tax Act, 1961 for the assessment years 1980-81 and 1981-82 regarding the treatment of interest accrued on doubtful debts, computation of deduction under section 36(1)(viii), and inclusion of interest accrued in the profits of the assessee. Treatment of Interest on Doubtful Debts: The assessee, following the mercantile system of accounting, credited interest on loans to the profit and loss account on accrual basis. However, after facing difficulties in recovering "sticky loans," the method of accounting was changed, and interest accrued on such loans was credited to a separate "interest suspense account." The Revenue contended that keeping accrued interest in a suspense account without treating it as bad debt was against the Income-tax Act provisions. The Tribunal upheld the method adopted by the assessee, emphasizing the bona fide change in accounting method and the real state of affairs being reflected. Computation of Deduction under Section 36(1)(viii): The Tribunal held that the total income for computing deduction under section 36(1)(viii) should be calculated before making deductions under that provision. This decision was based on a previous case and was affirmed by the High Court, answering the question in favor of the assessee. Inclusion of Accrued Interest in Profits: Regarding the interest accrued on loans pending litigation, the Court differentiated the case from a previous apex court decision, emphasizing that interest does not accrue during the entire period of pending suits. The Court cited provisions of the Civil Procedure Code and decisions of other High Courts to support the view that interest accrued on such loans need not be included in the profits of the assessee. The Tribunal's decision to exclude the sum credited in the "interest suspense account" from the profits was upheld. The judgment concludes by disposing of the references in accordance with the findings of the Court, with both judges concurring on the decision.
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