In a detailed judgment that stretched over several hours of arguments, the Supreme Court on Wednesday dismissed a batch of appeals filed by the National Cooperative Development Corporation (NCDC). The corporation had been seeking a substantial tax deduction under Section 36(1)(viii) of the Income Tax Act, arguing that income from dividends, short-term bank deposits, and service charges from Sugar Development Fund (SDF) loans formed part of its core business income. The bench didn’t agree. Instead, it took a narrow view of what qualifies as profit “derived from” long-term finance, drawing clear boundaries around the tax incentive.
Background
The dispute traces back to assessment years where NCDC-a statutory body that promotes agricultural and cooperative development-claimed 40% deduction on three income streams. The Assessing Officer rejected all three claims, holding that dividends from preference shares, interest earned on temporary bank deposits, and SDF service charges were not products of long-term financing.
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Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal affirmed this view. The Delhi High Court later agreed, concluding that NCDC’s arguments stretched the statutory language far beyond what Parliament had intended. The Supreme Court’s ruling now seals the matter.
Court’s Observations
The bench unpacked the phrase “derived from,” noting that Parliament deliberately tightened the provision in 1995 to prevent financial corporations from claiming deductions on income unrelated to long-term lending.
“The bench observed, ‘The Legislature chose the narrowest connective-derived from-and explicitly excluded second-degree or incidental income,’” underscoring that only profits earned directly from long-term loans qualify.
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On Dividend Income
NCDC argued that redeemable preference shares function like long-term loans. But the Court rejected this position outright. Relying on long-standing precedent, it reiterated that a shareholder is not a creditor. The Court noted, “Dividend arises from a contractual shareholding relationship, not from lending activity.” Thus, the income failed the first-degree nexus test.
On Interest from Short-Term Deposits
The corporation tried to portray its operations as a “single, integrated activity,” saying that parking idle funds in banks was inseparable from its lending work. But the Court clarified that earlier rulings recognizing such interest as “business income” cannot be stretched to qualify for the much stricter Section 36(1)(viii) deduction.
The bench pointed out that treating surplus-fund parking as eligible would “defeat the very purpose of incentivising long-term credit and encourage passive investment instead.”
On Service Charges for SDF Loans
Perhaps the weakest leg of NCDC’s case was its claim that service charges earned while acting as a nodal agency for the government should qualify. The Court found this fundamentally incompatible with the statutory requirement.
“The immediate source of this income is the government’s agency arrangement, not the assessee’s financing business,” the bench remarked. Since NCDC deployed no capital and bore no risk, the fee could not be equated with profits from long-term lending.
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Decision
Concluding its analysis, the Supreme Court dismissed all ten appeals filed by NCDC. It held that none of the disputed income streams-dividends, short-term deposit interest, or SDF service charges-met the strict statutory test of profits “derived from” long-term finance. With this, the Court reaffirmed the legislative intent to tightly ring-fence the deduction and prevent its expansion through broad interpretations.
Case Title: National Cooperative Development Corporation vs. Assistant Commissioner of Income Tax
Case Numbers: Civil Appeal Nos. 4612, 4618, 4616, 4613, 4615, 4614, 4617, 4619, 4620, 4621 of 2014
Case Type: Civil Appeals (Income Tax – Deduction under Section 36(1)(viii))
Decision Date: December 10, 2025
