B.P. Jeevan Reddy, J.
1. The following question is referred for our opinion under section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest paid in respect of borrowing from the Andhra Pradesh Industrial Development Corporation Limited by the assessee could not be allowed to be set off against the interest income earned by the assessee of the Rs. 12,497 in the assessment year 1978-79 ?'
2. The assessment year concerned is 1978-79. The assessee-company was incorporated of November 22, 1975, with the object of establishing a plant for the manufacture of calcium carbide on the outskirts of Kurnool town in Dinnadevarapadu village. In the accounting year relevant to the assessment year 1978-79, the company earned interest income of Rs. 12,497 and the other miscellaneous income of Rs. 2,450. The interest income was earned by making fixed deposits of the contribution raised from the shareholders towards allotment of shares. As against the income from interest and miscellaneous income, the assessee claimed deduction of interest payable by it to the Andhra Pradesh Industrial Development Corporation Limited, as also some expenditure incurred on printing and stationery amounting in all to Rs. 4,46,022. Accordingly, the assessee filed a 'nil' return. The Income-tax Officer was, however, of the opinion that the interest income earned by the assessee cannot be set off against the interest paid by it to the Andhra Pradesh Industrial Development Corporation Limited. This opinion was affirmed by the Commissioner of Income-tax (Appeals) and also by the Tribunal in appeal. The Tribunal was of the opinion that such a set-off cannot be claimed under section 57(iii) of the Income-tax Act, 1961, inasmuch as, under that provision, only that expenditure which is laid out or expended wholly for purposes of earning such income can be deducted and not any other expenditure. The Tribunal found that there is absolutely no connection between the loan taken by the assessee from the Andhra Pradesh Industrial Development Corporation Limited for setting up the plant and the interest it earned on the contribution made by the shareholders towards the share amount. At the instance of the assessee, the above question was stated for our opinion.
3. We are inclined to agree with the view taken by the Tribunal. We are unable to see any connection between the two amounts. The amount upon which interest was paid to Andhra Pradesh Industrial Development Corporation Limited was raised by way of loan for setting up the plant and the interest income was earned on the contribution made by the shareholders towards the shares allotted to them. Both are distinct items and it is not possible to see any reasonable connection between them. Neither by section 57(iii) of the Income-tax Act, 1961, nor by applying the test of a prudent person managing his affairs, can it be said that the interest earned on the contribution made by the shareholders can be set off against the interest payable by the assessee.
4. For the above reason, we answer the question referred to us in the affirmative, that is, in favour of the Revenue and against the assessee. No costs.