In a judgment pronounced on 10th December 2025 (2025 INSC 1414), the Supreme Court of India has authoritatively interpreted the scope of deductions available under Section 36(1)(viii) of the Income Tax Act, 1961. In National Cooperative Development Corporation vs Assistant Commissioner of Income Tax, the Court held that only those profits which are directly and proximately derived from the business of providing long-term finance qualify for deduction, and not income earned from ancillary or incidental sources.
This decision reaffirms strict statutory interpretation in fiscal law and has significant implications for statutory corporations and financial entities engaged in development financing.
Background of the Case
The National Cooperative Development Corporation (NCDC) is a statutory corporation established to promote cooperative-based agricultural and industrial development in accordance with cooperative principles. For several assessment years, NCDC claimed deductions under Section 36(1)(viii) in respect of income earned from the following three heads:
- Dividend income from investments in redeemable preference shares
- Interest income earned on short-term bank deposits
- Service charges received for administering loans under the Sugar Development Fund (SDF)
The Assessing Officer disallowed the deduction on all three counts, a view that was upheld by the Commissioner (Appeals), the Income Tax Appellate Tribunal, and the High Court. Aggrieved, NCDC approached the Supreme Court.
Issue Before the Supreme Court
The core issue was:
Whether dividend income, interest on short-term bank deposits, and service charges can be regarded as “profits derived from the business of providing long-term finance” so as to qualify for deduction under Section 36(1)(viii) of the Income Tax Act?
Legislative Scheme of Section 36(1)(viii)
The Supreme Court undertook a detailed analysis of the Finance Act, 1995, which significantly amended Section 36(1)(viii). Prior to this amendment, the deduction was computed with reference to the total income of eligible financial corporations. Parliament noticed that institutions had diversified into unrelated activities but continued to claim deductions on their entire income.
To cure this mischief, Parliament:
- Restricted the deduction to “profits derived from” the specified business
- Introduced a strict definition of “long-term finance”, limiting it to loans or advances repayable with interest over a period of not less than five years
The Court held that this amendment clearly reflects legislative intent to ring-fence the tax benefit only to core long-term lending activities.
Meaning of the Expression “Derived From”
A central aspect of the judgment is the interpretation of the phrase “derived from”. Reiterating settled law, the Supreme Court held that:
- “Derived from” denotes a direct and first-degree nexus
- It is materially narrower than the expression “attributable to”
- Income which is even one step removed from the specified activity falls outside the scope of the deduction
The Court relied upon classic precedents such as Cambay Electric, Sterling Foods, Pandian Chemicals, and Liberty India, and expressly rejected the argument that NCDC’s activities constituted a single integrated business for deduction purposes.
Analysis of the Three Categories of Income
1. Dividend Income on Redeemable Preference Shares
The Court held that investments in redeemable preference shares cannot be equated with long-term finance. Preference shares form part of share capital, and a shareholder is not a creditor. Dividend income is a return on investment and not interest on a loan or advance. Accordingly, such income does not satisfy the statutory definition of “long-term finance” and is not eligible for deduction under Section 36(1)(viii).
2. Interest on Short-Term Bank Deposits
Interest earned on short-term deposits was held to arise from the investment of surplus or idle funds. The immediate source of the income was the bank deposit itself, not the activity of providing long-term finance. Since the nexus with long-term lending was indirect, the income failed the strict “derived from” test and was rightly excluded from the deduction.
3. Service Charges from Sugar Development Fund Loans
With respect to service charges earned from Sugar Development Fund loans, the Court noted that the funds belonged to the Government of India, and NCDC merely acted as a nodal and monitoring agency. The receipts were in the nature of service fees and not interest earned on loans advanced from NCDC’s own funds. Consequently, such income could not be treated as profits derived from the business of providing long-term finance.
Final Decision of the Supreme Court
The Supreme Court dismissed all the appeals and affirmed the judgment of the High Court. It conclusively held that none of the three streams of income, i.e. dividend income, interest on short-term bank deposits, or service charges, qualified for deduction under Section 36(1)(viii) of the Income Tax Act.
Key Takeaways
- Section 36(1)(viii) applies only to income directly earned from long-term lending
- Investment income and ancillary receipts are excluded
- The expression “derived from” will be interpreted strictly
- Arguments based on “integrated business” have no place in fiscal statutes
Conclusion
The NCDC judgment reinforces the principle that tax incentives must be confined strictly to the activity for which they are granted. Statutory status or developmental objectives cannot expand the scope of a deduction beyond the clear language of the statute. The ruling will have lasting impact on financial institutions, development corporations, and cooperative bodies claiming deductions under special provisions of the Income Tax Act.
References:
SC Judgement dated 10/12/2025 on NCDC vs ACIT (CA 4612/2014)