Income Tax - Deductions under section 36 are restricted to core business activity and not ancillary or incidental incomes

Supreme Court Upholds Strict Interpretation of Income Tax Deductions for National Cooperative Development Corporation Apex Court rules deductions limited to profits directly from long-term finance, disallowing claims on dividends, short-term interests, and service charges.

In a significant judgment dated December 10, 2025, the Supreme Court of India dismissed the appeals filed by the National Cooperative Development Corporation (NCDC) against the income tax assessments that disallowed deductions under Section 36(1)(viii) of the Income Tax Act, 1961. The bench, comprising Justices Pamidighantam Sri Narasimha and Atul S. Chandurkar, ruled that deductions are strictly limited to profits derived from the core business of providing long-term finance.

The NCDC, a statutory body aimed at promoting cooperative principles in agricultural development, had sought deductions on three income streams: dividends on investments, interest from short-term bank deposits, and service charges for monitoring Sugar Development Fund loans. However, the court reinforced the legislative intent behind the 1995 Finance Act amendment, which aimed to "ring-fence" the fiscal benefits and restrict them to profits directly from long-term finance.

The court elaborated that the phrase "derived from" in the statute indicates a direct and first-degree nexus between the income and the specified business activity. Income sources that are ancillary or indirectly attributable do not qualify for deductions. The ruling emphasized that dividends from redeemable preference shares arise from a shareholder relationship and not from lending activities. Similarly, interest on idle funds and service charges for acting as a nodal agency do not meet the criteria for deductions as they do not involve the deployment of the corporation's own funds for long-term finance.

This judgment highlights the court's adherence to a strict interpretation of fiscal statutes, affirming that benefits under Section 36(1)(viii) apply exclusively to profits directly generated from long-term financial activities. By dismissing the appeals, the Supreme Court upheld the earlier decisions by the High Court, CIT(A), and ITAT, reiterating the narrow scope of tax incentives intended by Parliament.

Bottom Line:

Section 36(1)(viii) of the Income Tax Act, 1961 - Deductions are restricted to profits derived strictly from the business of providing long-term finance as defined under the statutory framework, and ancillary or incidental incomes like dividend income, interest on short-term deposits, and service charges for Sugar Development Fund loans are excluded from the scope of deductions.

Statutory provisions: Section 36(1)(viii) of the Income Tax Act, 1961

National Cooperative Development Corporation v. Assistant Commissioner Of Income Tax, (SC) : Law Finder Doc Id # 2820256