The Supreme Court held that deduction under Section 36(1)(viii) of the Income Tax Act, 1961 is confined to profits derived from the business of providing long-term finance and excludes income lacking a direct nexus with that business.
The National Cooperative Development Corporation claimed deduction under Section 36(1)(viii) on dividend income from redeemable preference shares, interest earned on short-term bank deposits, and service charges received while acting as a nodal agency under the Sugar Development Fund. The Assessing Officer disallowed the claim, holding that the income was not derived from long-term finance. This view was affirmed by the Commissioner (Appeals), the Income Tax Appellate Tribunal as well as the Delhi High Court, which held that the expression “derived from” requires a direct link with the business of providing long-term finance.
The Supreme Court upheld the High Court’s decision while noting that after the Finance Act, 1995, Section 36(1)(viii) was amended to restrict the deduction to profits derived from long-term finance, defined as loans or advances repayable over a period of not less than five years. It observed that dividend income flows from shareholding, interest on short-term deposits from parking of funds and service charges from administrative functions, and therefore do not constitute profits derived from the business of providing long-term finance.
National Cooperative Development Corporation v Assistant Commissioner of Income Tax
10 December 2025
Citation: 2025 INSC 1414 | 2025 SCO.LR 12(3)[13]
Case Comment
the legislative transition from a broader deduction regime to the restrictive “derived from” formulation by the Finance Act, 1995, manifests a clear parliamentary intent to “ring-fence” the fiscal benefit. By employing the narrowest possible connective verb “derived from” and coupling it with an exhaustive definition of “long-term finance” in the Explanation, the Legislature has explicitly excluded ancillary, incidental, or second-degree sources of income.
Bench: Justices P.S. Narasimha and A.S. Chandurkar