Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
2025 INSC 1414
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 4612 OF 2014
NATIONAL COOPERATIVE DEVELOPMENT
CORPORATION ...APPELLANT(S)
VERSUS
ASSISTANT COMMISSIONER OF INCOME TAX …RESPONDENT(S)
With
CIVIL APPEAL No. 4618 OF 2014
With
CIVIL APPEAL No. 4616 OF 2014
With
CIVIL APPEAL No. 4613 OF 2014
With
CIVIL APPEAL No. 4615 OF 2014
With
CIVIL APPEAL No. 4614 OF 2014
With
CIVIL APPEAL No. 4617 OF 2014
With
CIVIL APPEAL No. 4619 OF 2014
With
CIVIL APPEAL No. 4620 OF 2014
With
Signature Not Verified
Digitally signed by
KAPIL TANDON
Date: 2025.12.10
17:46:25 IST
Reason:
CIVIL APPEAL No. 4621 OF 2014
1
J U D G M E N T
Table of Contents
I. Introduction ........................................................................................... 2
II. Factual Background: .......................................................................... 3
A. Findings of the Assessment Officer: ................................................... 4
B. Findings of the CIT(A) and ITAT ......................................................... 5
C. Findings of the High Court ................................................................. 5
III. Analysis and Findings ........................................................................ 7
A. Re: Section 36(1)(viii) of the Income Tax Act, 1961, and the objective
of the 1995 Finance Act amendment. .................................................... 7
B. Re: Interpretation of the phrase “derived from” ................................ 10
C. Re: Dividend received on redeemable preference shares ................ 14
D. Re: Interest on short-term deposits in banks .................................... 16
E. Re: Service Charge on Sugar Development Fund loans .................. 19
IV. Conclusion ....................................................................................... 20
I. Introduction
1. The question for adjudication in this batch of appeals is whether the
National Co-operative Development Corporation (NCDC), appellant-
assessee, is entitled to deductions under Section 36(1)(viii) of the Income
Tax Act, 1961 in respect of three specific heads of income, being, (i) Dividend
income on investments in shares, (ii) Interest earned on short-term deposits
2
with banks, and (iii) Service charges received for monitoring Sugar
Development Fund loans.
1.1 Answer to this question would depend on whether these receipts
qualify as " profits derived from the business of providing long-term finance ”
for industrial or agricultural development, or whether they are merely
attributable to business activities falling outside the strict scope of eligibility
for the statutory deduction. For the reasons to follow, we found that 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. Therefore, while agreeing with the findings of the High
Court and by supplying additional reasons with supportive precedents, we
have held that receipts are not profits derived from the business of providing
long-term finance. We have thus dismissed the appeals.
II. Factual Background:
2. The appellant is a statutory corporation mandated to advance
initiatives for the production, processing, and marketing of agricultural
3
produce and notified commodities in accordance with cooperative principles.
The current litigation concerns several assessment years in which the
appellant sought deductions under Section 36(1)(viii) of the Income Tax Act,
1961 (‘the Act’).
A. Findings of the Assessment Officer:
3. Dispute arose when the Assessing Officer (AO) took the appellant's
return of income up for scrutiny. The AO examined the claim for deduction
under Section 36(1)(viii). Having noted that the provision allows for a
deduction of forty percent of profits, but strictly limits this benefit to profits
"derived from the business of providing long-term finance" the AO found that
the appellant is generally engaged in financing, and not all income receipts
qualify for this specific statutory deduction.
4. By his Assessment Order dated 31.07.2006, the AO proceeded to
consider each of these receipts independently. As regards the dividend
income , the AO held that this was a return on investment in shares, which is
legally distinct from interest earned on long-term loans. Similarly, with
respect to the interest on short-term bank deposits , the AO reasoned that
these accrued from the investment of idle surplus funds in the interregnum
period, rather than from the core activity of providing agricultural credit. As
regards service charges received for the Sugar Development Fund (SDF),
4
the AO noted that the appellant was acting merely as a nodal agency for the
Central Government. The funds disbursed belonged to the government, and
the appellant received a service fee for its administrative role in monitoring
these loans. Consequently, the AO concluded that none of these three
streams of income could be characterized as "profits derived from the
business of providing long-term finance" as envisaged by the Act.
Accordingly, the AO disallowed the deductions claimed on these counts and
added them back to the total income of the appellant.
B. Findings of the CIT(A) and ITAT
5. Aggrieved by the Assessment Order, the appellant preferred an appeal
before the Commissioner of Income Tax (Appeals). The CIT(A), vide order
dated 15.11.2007, upheld the disallowances, relying heavily on the
legislative intent and the definition of "long-term finance" in the Explanation
to Section 36(1)(viii). This view was subsequently affirmed by the Income
Tax Appellate Tribunal (ITAT) and finally by the High Court vide the
impugned judgment dated 28.11.2011.
C. Findings of the High Court
6. The High Court affirmed the findings of the lower authorities.
Addressing the appellant’s argument regarding dividend income , the High
Court held that under Section 85 of the Companies Act, 1956, preference
5
shares are part of share capital and cannot be treated as loans. The Court
reasoned that a shareholder is not a creditor and cannot sue for debt;
therefore, investments in redeemable preference shares do not satisfy the
definition of "long-term finance" which requires a "loan or advance" with
repayment of "interest." Thus, dividends derived from such shares are not
deductible under Section 36(1)(viii).
7. Regarding the interest on short-term deposits , the High Court upheld
the Tribunal's finding that this income is derived from the investment of idle
funds during the interregnum period. The Court concluded that such interest
is a step removed from the business of providing long-term finance. Since
the immediate source of this income is the bank deposit and not a long-term
loan extended by the assessee, the strict requirements of the "derived from"
test were not met. On the issue of service charges for Sugar Development
Fund (SDF) loans, the High Court noted the admitted factual position that
the loans were funded by the Government of India, not the appellant. The
appellant merely acted as a nodal agency for monitoring and disbursement.
Since the appellant’s own funds were not involved, and it received service
charges rather than interest, the Court held that the appellant could not be
considered to be carrying on the business of providing long-term finance in
6
this specific context. Consequently, this income stream was also excluded
from the deduction.
8. We heard Ms. Christi Jain, the learned counsel appearing on behalf of
the appellant, Ms. Jain ably assisted the court by analyzing the provisions
and drawing our attention to the relevant precedents. On behalf of the
revenue, we heard the Additional Solicitor General Mr. Raghavendra P.
Shankar, assisted by Ms. Madhulika Upadhyay, learned counsel.
III. Analysis and Findings
A. Re: Section 36(1)(viii) of the Income Tax Act, 1961, and the
objective of the 1995 Finance Act amendment.
9. The relevant statutory provision, Section 36(1)(viii) allows for a specific
deduction in computing the income referred to in Section 28. The section
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 relevant parts of the provision
necessary for the adjudication of this dispute are reproduced below:
7
“Section 36 – Other deductions
(1) The deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred
to in section 28—
…
(viii) in respect of any special reserve created and maintained by a financial
corporation which is engaged in providing long-term finance for
industrial or agricultural development or development of
infrastructure facility in India or …, an amount not exceeding forty per
cent of the profits derived from such business of providing long-term
finance (computed under the head “Profits and gains of business or
profession” before making any deduction under this clause…
Explanation – in this clause,
(a) ….
(e) “long term finance” means any loan or advance where the terms under
which money are loaned or advanced provide for repayment along with
interest thereof during a period of not less than five years.”
(emphasis supplied)
10. This strict framework was introduced intentionally by the Finance Act,
1995. Before this amendment, the provision allowed deductions based on
the "total income" of the corporation. Parliament noticed that financial
corporations were diversifying into activities unrelated to agricultural
financing but were still claiming tax benefits on their entire profit. The
amendment was introduced to fix this "mischief" by ensuring that the
deduction is restricted only to profits that come directly from the core activity
of providing long-term credit.
11. This intent is explicitly stated in the Memorandum explaining the
Finance Bill, 1995, which explains why the amendment was necessary. The
relevant portion reads as follows:
8
"Under clause (viii) of sub-section (1) of Section 36 of the Income Tax Act,
1961, an approved financial corporation engaged in providing long term
finance for industrial or agricultural development in India, or an approved
public company formed and registered in India with the main object of
carrying on business of providing long term finance for construction or
purchase of residential houses, is entitled for deduction of an amount not
exceeding 40 per cent of its total income carried to a special reserve. The
deduction is allowed on the "total income" and not with reference to the
income from the activities specified in Section 36 (1) (viii).
These organizations have diversified their activities and are claiming
deduction under this section even in respect of their incomes from activities
other than those specified in this section. This is no justification for allowing
the deduction with reference to income from other activities or from sources
other than business, it is therefore proposed to limit the deduction of 40%
only to the income derived from providing long term finance for the activities
specified in Section 36(1)(viii). It will thus take outside the purview of
deduction, income arising from other business activities or from sources
other than business."
12. The Memorandum explaining the Finance Bill, 1995, as delineated
above, explicitly states that the objective of such amendment was to limit the
deduction of 40% only to the income derived from providing long-term
finance thereby taking it out of the deduction for income arising from other
business activities. To accept the appellant's argument that all its income is
deductible because it is a statutory corporation would be to restore the pre-
amendment position and render the legislative change otiose. The conditions
under Section 36(1)(viii) are cumulative; the deduction is limited to "profits
derived from such business" and "long-term finance" is as defined in the
9
Explanation, as a loan or advance with a repayment period of not less than
five years.
B. Re: Interpretation of the phrase “derived from”
13. The appellant contends that the phrase "derived from" should be
1
interpreted broadly. Relying on CIT v. Meghalaya Steels Ltd. it is argued
that if a receipt flows directly from the business and is chargeable under
Section 28, the assessee qualifies for the said deductions. Also, that the
distinction between "attributable to" and "derived from" is artificial when the
business is indivisible. Conversely, the Respondent submits that judicial
authority has consistently held that "derived from" signifies a strict, first-
2
degree nexus. For this proposition the ASG relied on CIT v. Sterling Foods ,
3 4
Pandian Chemicals Ltd. v. CIT and Liberty India v. CIT .
14. Resolution of the competing perspectives would depend on the
interpretation of the expression "derived from." We find merit in the
respondent's submission that this phrase connotes a requirement of a direct,
first-degree nexus between the income and the specified business activity.
It is judicially settled that "derived from" is narrower than "attributable to", this
distinction was lucidly clarified by this Court in Cambay Electric Supply
1
(2016) 6 SCC 747.
2
(1999) 4 SCC 98.
3
(2003) 5 SCC 590.
4
(2009) 9 SCC 328.
10
5
Industrial Co. Ltd. v. CIT , where it was held that the legislature uses "derived
from" when it intends to give a restricted meaning. The relevant part of the
judgment is extracted hereunder:
"8. As regards the aspect emerging from the expression "attributable to"
occurring in the phrase "profits and gains attributable to the business of" the
specified industry (here generation and distribution of electricity) on which
the learned Solicitor General relied, it will be pertinent to observe that the
Legislature has deliberately used the expression "attributable to" and not
the expression "derived from". It cannot be disputed that the expression
"attributable to" is certainly wider in import than the expression "derived
from". Had the expression "derived from" been used it could have with some
force been contended that a balancing charge arising from the sale of old
machinery and buildings cannot be regarded as profits and gains derived
from the conduct of the business of generation and distribution of
electricity…."
15. The phrase "derived from" whether used alone or as "derived from the
business of" appears across multiple provisions of the Act, such as Section
80HHC and Section 80JJA. This Court has consistently held that this phrase
requires a direct and proximate connection, or a "first-degree nexus,"
between the income and the specific activity. The addition of the words "the
business of" simply clarifies which activity is the source; it does not dilute the
requirement for a direct link. Any interpretation suggesting otherwise would
upset settled law.
16. The appellant’s reliance on the decision in Meghalaya Steels (supra)
is misplaced because the facts in that case were fundamentally different. In
5
(1978) 2 SCC 644.
11
Meghalaya Steels (supra), this Court interpreted Section 80-IB, which
allowed deductions for profits derived from "any business" of an industrial
undertaking. The income in dispute there consisted of specific government
subsidies given to reimburse the company for actual operational costs like
transport, power, and insurance. The Court held that since these subsidies
were essentially paying back the costs incurred to run the factory, they had
a direct link to the profits of the business. Importantly, that judgment did not
change the strict rule regarding the phrase "derived from" established in
earlier cases; it merely applied the rule to a specific situation involving cost
reimbursement,
17. The present case, however, stands on a completely different footing.
Unlike Section 80-IB which applies to "any business," Section 36(1)(viii) is
extremely narrow and restricts the deduction strictly to profits derived from
"such business of providing long-term finance". The disputed income here is
not a reimbursement of business costs, nor does it come from the core
activity of long-term lending. Therefore, the reasoning in Meghalaya Steels
cannot be applied here to expand the scope of the deduction, as the specific
statutory requirements and the nature of the income are entirely distinct.
18. Furthermore, we must address and reject the appellant's attempt to
portray its operations as a "single, indivisible integrated activity" to claim the
12
deduction on all receipts. This specific argument was conclusively dealt with
6
by this Court in Orissa State Warehousing Corpn. v. CIT , where the
assessee sought to claim an exemption under Section 10(29) for interest
income on the ground that it was part of its integrated warehousing business.
19. In Orissa State Warehousing Corpn. (supra), this Court held that fiscal
statutes must be construed strictly based on the plain language used. The
Court explicitly rejected the "integrated activity" theory, holding:
40. "In fine thus, a fiscal statute shall have to be interpreted on the basis
"
of the language used therein and not dehors the same. No words ought to
be added and only the language used ought to be considered so as to
ascertain the proper meaning and intent of the legislation. 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.
41. In the premises, we do feel it expedient to record that by reason of the
clarity of expression, the question of there being any integrated activity
being exempt within the meaning of Section 10(29) of the Act does not and
cannot arise. The Madhya Pradesh High Court has correctly applied the law
and the comparison effected with other provisions are pointers to the
distinction and the same cannot but be termed to be in accordance with the
golden rule of construction in the matter of interpretation of statutes."
20. The legal principles established by the decisions cited above set a
strict threshold for eligibility. First, the phrase "derived from" must be
interpreted much more narrowly than the phrase "attributable to". Second, it
6
(1999) 4 SCC 197.
13
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. Finally,
this Court refuses to accept the argument that appellants business should
be treated as a "single, indivisible and integrated activity" in order to expand
the scope of a specific deduction.
C. Re: Dividend received on redeemable preference shares
21. The appellant argued that the substance of redeemable preference
shares are effective loans, as fixed redemption schedule and dividend rate
assimilate them to the nature of debt. Resisting this, the Respondent draws
our attention to the admitted factual position that these receipts are
"investments in agricultural based societies by way of contribution to share
capital". The Respondent submits that under Section 85 of the Companies
Act, 1956, preference shares unequivocally remain share capital and cannot
be treated as loans. Reliance is placed on the Constitution Bench decision
7
in Bacha F. Guzdar v. CIT to demonstrate that dividends arise from the
contractual relationship of shareholding, and the immediate source of the
income is the investment in shares, not the activity of lending.
7
(1954) 2 SCC 563.
14
22. Dividends are a return on investment dependent on the profitability of
the investee company, and this distinction is fundamental to the genealogy
of the income. We rely on the Constitution Bench decision in Bacha F.
Guzdar (supra) , which established that dividend income is derived from the
contractual relationship of the shareholder, not the underlying activity or the
nature of the funds Relevant Part of the judgement is extracted hereunder:
,
" 8. In fact and truth dividend is derived from the investment made in the
shares of the company and the foundation of it rests on the contractual
relations between the company and the shareholder. Dividend is not derived
by a shareholder by his direct relationship with the land. There can be no
doubt that the initial source which has produced the revenue is land used
for agricultural purposes but to give to the words 'revenue derived from land'
the unrestricted meaning, apart from its direct association or relation with
the land, would be quite unwarranted. For example, the proposition that a
creditor advancing money on interest to an agriculturist and receiving
interest out of the produce of the lands in the hands of the agriculturist can
claim exemption of tax upon the ground that it is agricultural income within
the meaning of Section 4, sub-section (3)(viii), is hardly statable. The policy
of the Act as gathered from the various sub-clauses of Section 2(1) appears
to be to exempt agricultural income from the purview of the Income Tax Act.
The object appears to be not to subject to tax either the actual tiller of the
soil or any other person getting land cultivated by others for deriving benefit
therefrom, but to say that the benefit intended to be conferred upon this
class of persons should extend to those into whosoever hands that revenue
falls, however remote the receiver of such revenue may be, is hardly
warranted."
23. Furthermore, a fundamental distinction exists between a shareholder
and a creditor. The basic characteristic of a loan is that the person advancing
the money has a right to sue for the debt. In stark contrast, a redeemable
preference shareholder cannot sue for the money due on the shares or claim
a return of the share money as a matter of right, except in the specific
15
eventuality of winding up. This is also the reason for this Court, in Bacha F.
Guzdar (supra) , to hold that the immediate source of dividend income is the
investment in share capital and not the business of providing loans. Since
the statute specifically mandates ‘interest on loans’, extending this fiscal
benefit to ‘dividends on shares’ would defy the legislative intent. Therefore,
we hold that dividend income does not qualify as profits derived from
business of providing long-term finance .
D. Re: Interest on short-term deposits in banks
24. The appellant has placed heavy reliance on the decision of this Court
8
in National Co-operative Development Corporation v. CIT . They argue that
this Court has already recognized that earning interest on idle funds is
"interlinked" with their business and constitutes "business income" rather
than "Income from Other Sources". Based on this, the appellant Contends
that their operations are a "single, indivisible integrated activity." The
appellant contends that since the funds are parked temporarily only to be
eventually used for lending, the interest earned on them should be treated
as effectively "derived from" the business of providing finance.
8
(2021) 11 SCC 357.
16
25. We are unable to accept this submission because it confuses two
different concepts i.e. the classification of income and the eligibility for a
specific deduction. There is a vital distinction between the general genus of
"Business Income" and the specific species of " profits derived from the
business of providing long-term finance ". Just because an income falls into
the broad bucket of "Business Income" does not automatically mean it
qualifies for the 40% deduction under Section 36(1)(viii) for the later specific
species.
26. In NCDC (supra), the dispute was whether the corporation could
deduct its expenses under Section 37. The revenue argued that the interest
income was "Income from Other Sources," which would have prevented the
corporation from deducting business expenses against it. This Court rightly
held that since the funds were waiting to be lent out, the interest was
"business income," and therefore, normal business expenses could be
deducted. However, the present case is not about deducting expenses; it is
about claiming a special incentive deduction under Section 36(1)(viii). This
section is much stricter and requires more than just being "business income";
it requires the profit to be directly "derived from" long-term financing.
17
27. Furthermore, the NCDC judgment dealt with tax years 1976-1984. The
law we are interpreting today was amended significantly by the Finance Act,
1995. Parliament specifically changed the law to narrow the scope of this
deduction because financial corporations were claiming benefits on all sorts
of diversified income. We cannot use a judgment based on the old, broader
law to interpret the new, stricter provision. The amendment was designed
precisely to stop the kind of broad "integrated business" claim the appellant
is making now. In NCDC (supra) this Court merely held that interest from
short-term deposits is "business income" and not income from other sources.
In the present case, the Revenue does not dispute that this is business
income, but would contend that Section 36(1)(viii), as a special deduction
provision operates on a much narrower plane.
28. Even if a receipt is classified as "Business Income" under Section 28,
it does not automatically qualify for the special deduction unless it satisfies
the strict rigor of being "derived from" the specific activity of long-term finance
defined in the Explanation. 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
18
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.
E. Re: Service Charge on Sugar Development Fund loans
29. The appellant asserts that acting as a nodal agency for the Sugar
Development Fund is part of its statutory mandate, and the service charges
received are consideration for the core activity of facilitating long-term
finance, irrespective of the fund's origin. Per contra, the Respondent argues
that these charges are merely "service fees" or agency commissions paid by
the Government of India. The respondent emphasizes that since the corpus
belongs to the Government, the appellant acts as an intermediary, not as the
financier providing the loan.
30. Deduction under Section 36(1)(viii) is predicated on the financial
corporation "providing" the finance. In the case of SDF loans, the admitted
factual position is that the funds belong to the Government of India. The
appellant bears no risk and utilizes no capital of its own.
31. The receipts in question are service charges paid by the Government
for the administrative tasks of monitoring and disbursement. The proximate
source of this income is the agency agreement with the Government, not the
19
lending activity itself. A fee received for agency services cannot be equated
with "profits derived from the business of providing long-term finance," which
implies the deployment of the corporation's own funds and the earning of
interest thereon. Consequently, this income stream is rightly excluded from
the deduction.
IV. Conclusion
32. Upon a cumulative assessment of the statutory scheme and the judicial
precedents cited, we are of the considered opinion that the claim of the
appellant-assessee is not correct in law. 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.
33. 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. The appellant’s contention that its functions constitute a
20
"single, indivisible integrated activity" must yield to the specific statutory
mandate. When a fiscal statute grants a benefit based on a specific source,
the concept of an integrated business cannot be utilized to expand the scope
of that benefit to cover distinct streams of income that do not strictly satisfy
the statutory definition.
34. We hold that a vital judicial distinction exists between the general
genus of "Business Income" and the specific species of "profits derived from
the business of providing long-term finance." Viewed through this lens, none
of the disputed receipts satisfy the strict statutory definition.
35. For the above reasons, we see no merit in these appeals.
Consequently, Civil Appeal Nos. 4612, 4618, 4616, 4613, 4615, 4614, 4617,
4619, 4620 and 4621 of 2014 arising out of the judgments of the High Court
of Delhi in ITA Nos. 513, 811, 512, 1139, 1140, 810 and 1141 of 2011 dated
28.11.2011, ITA Nos. 228 and 227 of 2012 dated 10.04.2012 and ITA No.
615 of 2012 dated 02.11.2012 respectively are hereby dismissed.
36. There shall be no order as to costs.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[ATUL S. CHANDURKAR]
NEW DELHI;
DECEMBER 10, 2025
21
IN THE SUPREME COURT OF INDIA
2025 INSC 1414
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 4612 OF 2014
NATIONAL COOPERATIVE DEVELOPMENT
CORPORATION ...APPELLANT(S)
VERSUS
ASSISTANT COMMISSIONER OF INCOME TAX …RESPONDENT(S)
With
CIVIL APPEAL No. 4618 OF 2014
With
CIVIL APPEAL No. 4616 OF 2014
With
CIVIL APPEAL No. 4613 OF 2014
With
CIVIL APPEAL No. 4615 OF 2014
With
CIVIL APPEAL No. 4614 OF 2014
With
CIVIL APPEAL No. 4617 OF 2014
With
CIVIL APPEAL No. 4619 OF 2014
With
CIVIL APPEAL No. 4620 OF 2014
With
Signature Not Verified
Digitally signed by
KAPIL TANDON
Date: 2025.12.10
17:46:25 IST
Reason:
CIVIL APPEAL No. 4621 OF 2014
1
J U D G M E N T
Table of Contents
I. Introduction ........................................................................................... 2
II. Factual Background: .......................................................................... 3
A. Findings of the Assessment Officer: ................................................... 4
B. Findings of the CIT(A) and ITAT ......................................................... 5
C. Findings of the High Court ................................................................. 5
III. Analysis and Findings ........................................................................ 7
A. Re: Section 36(1)(viii) of the Income Tax Act, 1961, and the objective
of the 1995 Finance Act amendment. .................................................... 7
B. Re: Interpretation of the phrase “derived from” ................................ 10
C. Re: Dividend received on redeemable preference shares ................ 14
D. Re: Interest on short-term deposits in banks .................................... 16
E. Re: Service Charge on Sugar Development Fund loans .................. 19
IV. Conclusion ....................................................................................... 20
I. Introduction
1. The question for adjudication in this batch of appeals is whether the
National Co-operative Development Corporation (NCDC), appellant-
assessee, is entitled to deductions under Section 36(1)(viii) of the Income
Tax Act, 1961 in respect of three specific heads of income, being, (i) Dividend
income on investments in shares, (ii) Interest earned on short-term deposits
2
with banks, and (iii) Service charges received for monitoring Sugar
Development Fund loans.
1.1 Answer to this question would depend on whether these receipts
qualify as " profits derived from the business of providing long-term finance ”
for industrial or agricultural development, or whether they are merely
attributable to business activities falling outside the strict scope of eligibility
for the statutory deduction. For the reasons to follow, we found that 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. Therefore, while agreeing with the findings of the High
Court and by supplying additional reasons with supportive precedents, we
have held that receipts are not profits derived from the business of providing
long-term finance. We have thus dismissed the appeals.
II. Factual Background:
2. The appellant is a statutory corporation mandated to advance
initiatives for the production, processing, and marketing of agricultural
3
produce and notified commodities in accordance with cooperative principles.
The current litigation concerns several assessment years in which the
appellant sought deductions under Section 36(1)(viii) of the Income Tax Act,
1961 (‘the Act’).
A. Findings of the Assessment Officer:
3. Dispute arose when the Assessing Officer (AO) took the appellant's
return of income up for scrutiny. The AO examined the claim for deduction
under Section 36(1)(viii). Having noted that the provision allows for a
deduction of forty percent of profits, but strictly limits this benefit to profits
"derived from the business of providing long-term finance" the AO found that
the appellant is generally engaged in financing, and not all income receipts
qualify for this specific statutory deduction.
4. By his Assessment Order dated 31.07.2006, the AO proceeded to
consider each of these receipts independently. As regards the dividend
income , the AO held that this was a return on investment in shares, which is
legally distinct from interest earned on long-term loans. Similarly, with
respect to the interest on short-term bank deposits , the AO reasoned that
these accrued from the investment of idle surplus funds in the interregnum
period, rather than from the core activity of providing agricultural credit. As
regards service charges received for the Sugar Development Fund (SDF),
4
the AO noted that the appellant was acting merely as a nodal agency for the
Central Government. The funds disbursed belonged to the government, and
the appellant received a service fee for its administrative role in monitoring
these loans. Consequently, the AO concluded that none of these three
streams of income could be characterized as "profits derived from the
business of providing long-term finance" as envisaged by the Act.
Accordingly, the AO disallowed the deductions claimed on these counts and
added them back to the total income of the appellant.
B. Findings of the CIT(A) and ITAT
5. Aggrieved by the Assessment Order, the appellant preferred an appeal
before the Commissioner of Income Tax (Appeals). The CIT(A), vide order
dated 15.11.2007, upheld the disallowances, relying heavily on the
legislative intent and the definition of "long-term finance" in the Explanation
to Section 36(1)(viii). This view was subsequently affirmed by the Income
Tax Appellate Tribunal (ITAT) and finally by the High Court vide the
impugned judgment dated 28.11.2011.
C. Findings of the High Court
6. The High Court affirmed the findings of the lower authorities.
Addressing the appellant’s argument regarding dividend income , the High
Court held that under Section 85 of the Companies Act, 1956, preference
5
shares are part of share capital and cannot be treated as loans. The Court
reasoned that a shareholder is not a creditor and cannot sue for debt;
therefore, investments in redeemable preference shares do not satisfy the
definition of "long-term finance" which requires a "loan or advance" with
repayment of "interest." Thus, dividends derived from such shares are not
deductible under Section 36(1)(viii).
7. Regarding the interest on short-term deposits , the High Court upheld
the Tribunal's finding that this income is derived from the investment of idle
funds during the interregnum period. The Court concluded that such interest
is a step removed from the business of providing long-term finance. Since
the immediate source of this income is the bank deposit and not a long-term
loan extended by the assessee, the strict requirements of the "derived from"
test were not met. On the issue of service charges for Sugar Development
Fund (SDF) loans, the High Court noted the admitted factual position that
the loans were funded by the Government of India, not the appellant. The
appellant merely acted as a nodal agency for monitoring and disbursement.
Since the appellant’s own funds were not involved, and it received service
charges rather than interest, the Court held that the appellant could not be
considered to be carrying on the business of providing long-term finance in
6
this specific context. Consequently, this income stream was also excluded
from the deduction.
8. We heard Ms. Christi Jain, the learned counsel appearing on behalf of
the appellant, Ms. Jain ably assisted the court by analyzing the provisions
and drawing our attention to the relevant precedents. On behalf of the
revenue, we heard the Additional Solicitor General Mr. Raghavendra P.
Shankar, assisted by Ms. Madhulika Upadhyay, learned counsel.
III. Analysis and Findings
A. Re: Section 36(1)(viii) of the Income Tax Act, 1961, and the
objective of the 1995 Finance Act amendment.
9. The relevant statutory provision, Section 36(1)(viii) allows for a specific
deduction in computing the income referred to in Section 28. The section
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 relevant parts of the provision
necessary for the adjudication of this dispute are reproduced below:
7
“Section 36 – Other deductions
(1) The deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred
to in section 28—
…
(viii) in respect of any special reserve created and maintained by a financial
corporation which is engaged in providing long-term finance for
industrial or agricultural development or development of
infrastructure facility in India or …, an amount not exceeding forty per
cent of the profits derived from such business of providing long-term
finance (computed under the head “Profits and gains of business or
profession” before making any deduction under this clause…
Explanation – in this clause,
(a) ….
(e) “long term finance” means any loan or advance where the terms under
which money are loaned or advanced provide for repayment along with
interest thereof during a period of not less than five years.”
(emphasis supplied)
10. This strict framework was introduced intentionally by the Finance Act,
1995. Before this amendment, the provision allowed deductions based on
the "total income" of the corporation. Parliament noticed that financial
corporations were diversifying into activities unrelated to agricultural
financing but were still claiming tax benefits on their entire profit. The
amendment was introduced to fix this "mischief" by ensuring that the
deduction is restricted only to profits that come directly from the core activity
of providing long-term credit.
11. This intent is explicitly stated in the Memorandum explaining the
Finance Bill, 1995, which explains why the amendment was necessary. The
relevant portion reads as follows:
8
"Under clause (viii) of sub-section (1) of Section 36 of the Income Tax Act,
1961, an approved financial corporation engaged in providing long term
finance for industrial or agricultural development in India, or an approved
public company formed and registered in India with the main object of
carrying on business of providing long term finance for construction or
purchase of residential houses, is entitled for deduction of an amount not
exceeding 40 per cent of its total income carried to a special reserve. The
deduction is allowed on the "total income" and not with reference to the
income from the activities specified in Section 36 (1) (viii).
These organizations have diversified their activities and are claiming
deduction under this section even in respect of their incomes from activities
other than those specified in this section. This is no justification for allowing
the deduction with reference to income from other activities or from sources
other than business, it is therefore proposed to limit the deduction of 40%
only to the income derived from providing long term finance for the activities
specified in Section 36(1)(viii). It will thus take outside the purview of
deduction, income arising from other business activities or from sources
other than business."
12. The Memorandum explaining the Finance Bill, 1995, as delineated
above, explicitly states that the objective of such amendment was to limit the
deduction of 40% only to the income derived from providing long-term
finance thereby taking it out of the deduction for income arising from other
business activities. To accept the appellant's argument that all its income is
deductible because it is a statutory corporation would be to restore the pre-
amendment position and render the legislative change otiose. The conditions
under Section 36(1)(viii) are cumulative; the deduction is limited to "profits
derived from such business" and "long-term finance" is as defined in the
9
Explanation, as a loan or advance with a repayment period of not less than
five years.
B. Re: Interpretation of the phrase “derived from”
13. The appellant contends that the phrase "derived from" should be
1
interpreted broadly. Relying on CIT v. Meghalaya Steels Ltd. it is argued
that if a receipt flows directly from the business and is chargeable under
Section 28, the assessee qualifies for the said deductions. Also, that the
distinction between "attributable to" and "derived from" is artificial when the
business is indivisible. Conversely, the Respondent submits that judicial
authority has consistently held that "derived from" signifies a strict, first-
2
degree nexus. For this proposition the ASG relied on CIT v. Sterling Foods ,
3 4
Pandian Chemicals Ltd. v. CIT and Liberty India v. CIT .
14. Resolution of the competing perspectives would depend on the
interpretation of the expression "derived from." We find merit in the
respondent's submission that this phrase connotes a requirement of a direct,
first-degree nexus between the income and the specified business activity.
It is judicially settled that "derived from" is narrower than "attributable to", this
distinction was lucidly clarified by this Court in Cambay Electric Supply
1
(2016) 6 SCC 747.
2
(1999) 4 SCC 98.
3
(2003) 5 SCC 590.
4
(2009) 9 SCC 328.
10
5
Industrial Co. Ltd. v. CIT , where it was held that the legislature uses "derived
from" when it intends to give a restricted meaning. The relevant part of the
judgment is extracted hereunder:
"8. As regards the aspect emerging from the expression "attributable to"
occurring in the phrase "profits and gains attributable to the business of" the
specified industry (here generation and distribution of electricity) on which
the learned Solicitor General relied, it will be pertinent to observe that the
Legislature has deliberately used the expression "attributable to" and not
the expression "derived from". It cannot be disputed that the expression
"attributable to" is certainly wider in import than the expression "derived
from". Had the expression "derived from" been used it could have with some
force been contended that a balancing charge arising from the sale of old
machinery and buildings cannot be regarded as profits and gains derived
from the conduct of the business of generation and distribution of
electricity…."
15. The phrase "derived from" whether used alone or as "derived from the
business of" appears across multiple provisions of the Act, such as Section
80HHC and Section 80JJA. This Court has consistently held that this phrase
requires a direct and proximate connection, or a "first-degree nexus,"
between the income and the specific activity. The addition of the words "the
business of" simply clarifies which activity is the source; it does not dilute the
requirement for a direct link. Any interpretation suggesting otherwise would
upset settled law.
16. The appellant’s reliance on the decision in Meghalaya Steels (supra)
is misplaced because the facts in that case were fundamentally different. In
5
(1978) 2 SCC 644.
11
Meghalaya Steels (supra), this Court interpreted Section 80-IB, which
allowed deductions for profits derived from "any business" of an industrial
undertaking. The income in dispute there consisted of specific government
subsidies given to reimburse the company for actual operational costs like
transport, power, and insurance. The Court held that since these subsidies
were essentially paying back the costs incurred to run the factory, they had
a direct link to the profits of the business. Importantly, that judgment did not
change the strict rule regarding the phrase "derived from" established in
earlier cases; it merely applied the rule to a specific situation involving cost
reimbursement,
17. The present case, however, stands on a completely different footing.
Unlike Section 80-IB which applies to "any business," Section 36(1)(viii) is
extremely narrow and restricts the deduction strictly to profits derived from
"such business of providing long-term finance". The disputed income here is
not a reimbursement of business costs, nor does it come from the core
activity of long-term lending. Therefore, the reasoning in Meghalaya Steels
cannot be applied here to expand the scope of the deduction, as the specific
statutory requirements and the nature of the income are entirely distinct.
18. Furthermore, we must address and reject the appellant's attempt to
portray its operations as a "single, indivisible integrated activity" to claim the
12
deduction on all receipts. This specific argument was conclusively dealt with
6
by this Court in Orissa State Warehousing Corpn. v. CIT , where the
assessee sought to claim an exemption under Section 10(29) for interest
income on the ground that it was part of its integrated warehousing business.
19. In Orissa State Warehousing Corpn. (supra), this Court held that fiscal
statutes must be construed strictly based on the plain language used. The
Court explicitly rejected the "integrated activity" theory, holding:
40. "In fine thus, a fiscal statute shall have to be interpreted on the basis
"
of the language used therein and not dehors the same. No words ought to
be added and only the language used ought to be considered so as to
ascertain the proper meaning and intent of the legislation. 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.
41. In the premises, we do feel it expedient to record that by reason of the
clarity of expression, the question of there being any integrated activity
being exempt within the meaning of Section 10(29) of the Act does not and
cannot arise. The Madhya Pradesh High Court has correctly applied the law
and the comparison effected with other provisions are pointers to the
distinction and the same cannot but be termed to be in accordance with the
golden rule of construction in the matter of interpretation of statutes."
20. The legal principles established by the decisions cited above set a
strict threshold for eligibility. First, the phrase "derived from" must be
interpreted much more narrowly than the phrase "attributable to". Second, it
6
(1999) 4 SCC 197.
13
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. Finally,
this Court refuses to accept the argument that appellants business should
be treated as a "single, indivisible and integrated activity" in order to expand
the scope of a specific deduction.
C. Re: Dividend received on redeemable preference shares
21. The appellant argued that the substance of redeemable preference
shares are effective loans, as fixed redemption schedule and dividend rate
assimilate them to the nature of debt. Resisting this, the Respondent draws
our attention to the admitted factual position that these receipts are
"investments in agricultural based societies by way of contribution to share
capital". The Respondent submits that under Section 85 of the Companies
Act, 1956, preference shares unequivocally remain share capital and cannot
be treated as loans. Reliance is placed on the Constitution Bench decision
7
in Bacha F. Guzdar v. CIT to demonstrate that dividends arise from the
contractual relationship of shareholding, and the immediate source of the
income is the investment in shares, not the activity of lending.
7
(1954) 2 SCC 563.
14
22. Dividends are a return on investment dependent on the profitability of
the investee company, and this distinction is fundamental to the genealogy
of the income. We rely on the Constitution Bench decision in Bacha F.
Guzdar (supra) , which established that dividend income is derived from the
contractual relationship of the shareholder, not the underlying activity or the
nature of the funds Relevant Part of the judgement is extracted hereunder:
,
" 8. In fact and truth dividend is derived from the investment made in the
shares of the company and the foundation of it rests on the contractual
relations between the company and the shareholder. Dividend is not derived
by a shareholder by his direct relationship with the land. There can be no
doubt that the initial source which has produced the revenue is land used
for agricultural purposes but to give to the words 'revenue derived from land'
the unrestricted meaning, apart from its direct association or relation with
the land, would be quite unwarranted. For example, the proposition that a
creditor advancing money on interest to an agriculturist and receiving
interest out of the produce of the lands in the hands of the agriculturist can
claim exemption of tax upon the ground that it is agricultural income within
the meaning of Section 4, sub-section (3)(viii), is hardly statable. The policy
of the Act as gathered from the various sub-clauses of Section 2(1) appears
to be to exempt agricultural income from the purview of the Income Tax Act.
The object appears to be not to subject to tax either the actual tiller of the
soil or any other person getting land cultivated by others for deriving benefit
therefrom, but to say that the benefit intended to be conferred upon this
class of persons should extend to those into whosoever hands that revenue
falls, however remote the receiver of such revenue may be, is hardly
warranted."
23. Furthermore, a fundamental distinction exists between a shareholder
and a creditor. The basic characteristic of a loan is that the person advancing
the money has a right to sue for the debt. In stark contrast, a redeemable
preference shareholder cannot sue for the money due on the shares or claim
a return of the share money as a matter of right, except in the specific
15
eventuality of winding up. This is also the reason for this Court, in Bacha F.
Guzdar (supra) , to hold that the immediate source of dividend income is the
investment in share capital and not the business of providing loans. Since
the statute specifically mandates ‘interest on loans’, extending this fiscal
benefit to ‘dividends on shares’ would defy the legislative intent. Therefore,
we hold that dividend income does not qualify as profits derived from
business of providing long-term finance .
D. Re: Interest on short-term deposits in banks
24. The appellant has placed heavy reliance on the decision of this Court
8
in National Co-operative Development Corporation v. CIT . They argue that
this Court has already recognized that earning interest on idle funds is
"interlinked" with their business and constitutes "business income" rather
than "Income from Other Sources". Based on this, the appellant Contends
that their operations are a "single, indivisible integrated activity." The
appellant contends that since the funds are parked temporarily only to be
eventually used for lending, the interest earned on them should be treated
as effectively "derived from" the business of providing finance.
8
(2021) 11 SCC 357.
16
25. We are unable to accept this submission because it confuses two
different concepts i.e. the classification of income and the eligibility for a
specific deduction. There is a vital distinction between the general genus of
"Business Income" and the specific species of " profits derived from the
business of providing long-term finance ". Just because an income falls into
the broad bucket of "Business Income" does not automatically mean it
qualifies for the 40% deduction under Section 36(1)(viii) for the later specific
species.
26. In NCDC (supra), the dispute was whether the corporation could
deduct its expenses under Section 37. The revenue argued that the interest
income was "Income from Other Sources," which would have prevented the
corporation from deducting business expenses against it. This Court rightly
held that since the funds were waiting to be lent out, the interest was
"business income," and therefore, normal business expenses could be
deducted. However, the present case is not about deducting expenses; it is
about claiming a special incentive deduction under Section 36(1)(viii). This
section is much stricter and requires more than just being "business income";
it requires the profit to be directly "derived from" long-term financing.
17
27. Furthermore, the NCDC judgment dealt with tax years 1976-1984. The
law we are interpreting today was amended significantly by the Finance Act,
1995. Parliament specifically changed the law to narrow the scope of this
deduction because financial corporations were claiming benefits on all sorts
of diversified income. We cannot use a judgment based on the old, broader
law to interpret the new, stricter provision. The amendment was designed
precisely to stop the kind of broad "integrated business" claim the appellant
is making now. In NCDC (supra) this Court merely held that interest from
short-term deposits is "business income" and not income from other sources.
In the present case, the Revenue does not dispute that this is business
income, but would contend that Section 36(1)(viii), as a special deduction
provision operates on a much narrower plane.
28. Even if a receipt is classified as "Business Income" under Section 28,
it does not automatically qualify for the special deduction unless it satisfies
the strict rigor of being "derived from" the specific activity of long-term finance
defined in the Explanation. 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
18
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.
E. Re: Service Charge on Sugar Development Fund loans
29. The appellant asserts that acting as a nodal agency for the Sugar
Development Fund is part of its statutory mandate, and the service charges
received are consideration for the core activity of facilitating long-term
finance, irrespective of the fund's origin. Per contra, the Respondent argues
that these charges are merely "service fees" or agency commissions paid by
the Government of India. The respondent emphasizes that since the corpus
belongs to the Government, the appellant acts as an intermediary, not as the
financier providing the loan.
30. Deduction under Section 36(1)(viii) is predicated on the financial
corporation "providing" the finance. In the case of SDF loans, the admitted
factual position is that the funds belong to the Government of India. The
appellant bears no risk and utilizes no capital of its own.
31. The receipts in question are service charges paid by the Government
for the administrative tasks of monitoring and disbursement. The proximate
source of this income is the agency agreement with the Government, not the
19
lending activity itself. A fee received for agency services cannot be equated
with "profits derived from the business of providing long-term finance," which
implies the deployment of the corporation's own funds and the earning of
interest thereon. Consequently, this income stream is rightly excluded from
the deduction.
IV. Conclusion
32. Upon a cumulative assessment of the statutory scheme and the judicial
precedents cited, we are of the considered opinion that the claim of the
appellant-assessee is not correct in law. 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.
33. 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. The appellant’s contention that its functions constitute a
20
"single, indivisible integrated activity" must yield to the specific statutory
mandate. When a fiscal statute grants a benefit based on a specific source,
the concept of an integrated business cannot be utilized to expand the scope
of that benefit to cover distinct streams of income that do not strictly satisfy
the statutory definition.
34. We hold that a vital judicial distinction exists between the general
genus of "Business Income" and the specific species of "profits derived from
the business of providing long-term finance." Viewed through this lens, none
of the disputed receipts satisfy the strict statutory definition.
35. For the above reasons, we see no merit in these appeals.
Consequently, Civil Appeal Nos. 4612, 4618, 4616, 4613, 4615, 4614, 4617,
4619, 4620 and 4621 of 2014 arising out of the judgments of the High Court
of Delhi in ITA Nos. 513, 811, 512, 1139, 1140, 810 and 1141 of 2011 dated
28.11.2011, ITA Nos. 228 and 227 of 2012 dated 10.04.2012 and ITA No.
615 of 2012 dated 02.11.2012 respectively are hereby dismissed.
36. There shall be no order as to costs.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[ATUL S. CHANDURKAR]
NEW DELHI;
DECEMBER 10, 2025
21