Income Tax | Statutory Corporation Can Claim Deduction Under S 36(1)(viii) Only For Income Directly Derived From Long-Term Finance : Supreme Court

The Supreme Court on Wednesday (December 10) held that any income earned by a statutory corporation outside its core activity of providing long-term finance for industrial, agricultural, or infrastructure development in India cannot qualify for the 40% deduction available under Section 36(1)(viii) of the Income Tax Act, 1961 (“Act”).

A bench of Justice P.S. Narasimha and Justice Atul S. Chandurkar dismissed National Cooperation Development Corporation's appeal, reiterating that only profits directly derived from long-term financing activities, with repayment periods of five years or more for supporting the agricultural sector, are eligible for deduction under Section 36(1)(viii) of the Act.

The Court held that dividends on shares, interest on short-term deposits, and service charges earned by the statutory corporation constitute only business income, not income derived from providing long-term finance, and therefore cannot qualify for deduction under the Act.

“The pivotal takeaway from the analysis is that Section 36(1)(viii) of the Act is not a general exemption granted to a statutory corporation for all its business activities, rather, it is a specific incentive attached strictly to the profits arising from a defined activity namely, the provision of long-term finance.”, the court observed, adding that “the legislative intent was to incentivize the specific act of providing long-term credit, not the passive investment of surplus capital. If we were to accept the appellant's argument, it would create a perverse incentive for financial corporations to park funds in safe, short term investments and claim the 40% deduction, rather than fulfilling their statutory mandate of providing high-risk long-term credit to the agricultural sector. Consequently, interest earned from bank deposits fails this test as it is, at best, attributable to the business, but certainly not derived from the activity of providing long-term finance.”

Basically, Section 36(1)(viii) provides a deduction in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development. The deduction is capped at an amount not exceeding forty percent of the "profits derived from such business of providing long-term finance." Crucially, the Explanation to the section defines "long-term finance" to mean any loan or advance where the terms provide for repayment along with interest during a period of not less than five years.

The dispute stems from the Appellant-NCDC's claim that the three streams of income were part of an “integrated business” of financing cooperative development and therefore eligible for deduction. The Assessing Officer, however, rejected the claim, finding that the income did not arise from the corporation's long-term finance activities.

The CIT(A), ITAT, and the High Court all upheld the disallowance, prompting the appeal to the Supreme Court.

Affirming the impugned orders, the judgment authored by Justice Chandurkar citing Orissa State Warehousing Corpn. v. CIT, (1999) 4 SCC 197, stated that the tax statutes needs to be strictly and narrowly interpreted, where the Court is to ascribe natural and ordinary meaning to the words used by the legislature and the court ought not, under any circumstances, to substitute its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions.

In light of Orissa State Warehousing Corpn. (supra) Judgment, the following strict threshold for eligibility to claim the benefit of deduction under Section 36(1)(viii) of the Act was discernible by the Court:

"First, the phrase "derived from" must be interpreted much more narrowly than the phrase "attributable to".

Second, it requires a direct or immediate nexus with the specific business activity, for if the income is even a "step removed" from the business in question, that nexus is snapped.

Third, the deduction is limited to income from "first degree" sources and explicitly keeps out "ancillary profits" of the undertaking."

Noting that the Appellant's income derived from activities other than core long-term lending operations cannot be classified as income derived from long-term financing, the Court refused to grant a deduction benefit to the Appellant on income derived from business activities.

Accordingly, the appeal was dismissed.

Cause Title: NATIONAL COOPERATIVE DEVELOPMENT CORPORATION VERSUS ASSISTANT COMMISSIONER OF INCOME TAX

Citation : 2025 LiveLaw (SC) 1193

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Appearance:

For Appellant(s) : Ms. Christi Jain, AOR Mr. Mann Arora, Adv. Ms. Mann Arora, Adv. Ms. Akriti Sharma, Adv. Mr. Harsh Jain, Adv. Mr. Om Sudhr Vidyarthi, Adv. Mr. Om Sudhir Vidyarthi, Adv. Mr. Aditya Jain, Adv. Mr. Yogit Kamat, Adv.

For Respondent(s) : Mrs. Anil Katiyar, AOR Mr. Raghavendra P. Shankar, A.S.G. Ms. Madhulika Upadhyay, AOR Mr. Karan Lahiri, Adv. Mr. Navanjay Mahapatra, Adv. Mr. B.K. Satija, Adv. Mr. Aditya Shankar Dixit, Adv.