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Issues involved: Interpretation of section 57(iii) of the Income-tax Act, 1961 regarding the set-off of interest income against interest paid by the assessee.
Summary: The High Court of Andhra Pradesh was tasked with determining whether the interest paid by the assessee to the Andhra Pradesh Industrial Development Corporation Limited could be set off against the interest income earned by the assessee in the assessment year 1978-79. The assessee-company, incorporated in 1975 for establishing a plant, earned interest income and miscellaneous income in the relevant accounting year. The assessee claimed deductions for interest payable and other expenses, resulting in a "nil" return. The Income-tax Officer, Commissioner of Income-tax (Appeals), and the Tribunal all held that the interest income could not be set off against the interest paid, as per section 57(iii) of the Income-tax Act, 1961. The Tribunal specifically noted that the loan taken for setting up the plant and the interest income from shareholder contributions were distinct items with no reasonable connection between them. The High Court concurred with the Tribunal's view, emphasizing the lack of connection between the two amounts. It was determined that neither the Income-tax Act nor the prudent person test supported the set-off of interest earned on shareholder contributions against interest payable by the assessee. Therefore, the High Court ruled in favor of the Revenue and against the assessee, affirming that the interest income could not be set off against the interest paid.
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