Interest from Bank Deposit Does Not qualify for S. 36(1)(viii) Deduction: SC says it’s Not Income ‘Derived From’ Long-Term Finance [Read Judgement]

The Supreme Court has held that interest earned from short-term bank deposits cannot qualify for deduction under Section 36(1)(viii) of the Income Tax Act, 1961 as such interest is not income ‘derived from’ the business of providing long-term finance.

“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” said Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar

The background of the matter is that the National Cooperative Development Corporation (NCDC), the assessee-appellant filed an appeal before the apex court after getting set backs from AO, CIT(A), ITAT and High Court.

The appellant argued that interest earned on temporarily parked surplus funds was part of its overall financing activities and therefore formed an integral component of its business income.

However, the Court rejected this contention, drawing a clear distinction between general “business income” and the narrower statutory requirement of “profits derived from the business of providing long-term finance.”

The Court observed that Section 36(1)(viii) is a special incentive provision that applies only when the income has a direct and immediate nexus with the core activity of granting long-term loans of five years or more.

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The bench clarified that even though such interest may fall under the heading "Profits and gains of business or profession," that classification alone does not make it eligible for the deduction.

The apex court explained that the immediate source of the income is the bank deposit itself, not the act of lending long-term finance. Since the funds were merely placed in short-term deposits while awaiting deployment, the income earned was a “step removed” from the statutory activity the deduction seeks to incentivize.

Additionally, it was also noted that earlier judgments such as the decision in NCDC’s own case regarding the classification of interest income cannot be used to widen the scope of this provision because the Finance Act, 1995 tightened the language by requiring a first-degree nexus through the term “derived from.”

Accordingly, the appeal filed by the National Cooperative Development Corporation was dismissed.

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