Supreme Court gives strict interpretation to “derived from” and holds that only income with first degree nexus to long term finance qualifies for deduction

This Tax Alert summarizes a Supreme Court (SC) decision dated 10 December 2025, in the case of National Cooperative Development Corporation^[1]  (Taxpayer), where issue before the SC was whether certain incomes earned by a statutory financial corporation (namely dividend income on investment in preference shares, interest earned on short term bank deposits, and service charges received for monitoring Government funded loans) qualify as profits “derived from” the business of providing long term finance for the purposes of claiming a specified deduction under the Income Tax Law (ITL) for special reserve created out of such profits.

In this case, the Taxpayer claimed that all these income streams formed part of its long-term financing business and therefore should be eligible for the deduction. The Tax authority, the First Appellate Authority and the Income Tax Appellate Tribunal rejected the claim, and the Delhi High Court upheld those findings.

Concurring with the decision of lower appellate authorities, the SC ruled in favor of the Tax Authority by denying the deduction to the Taxpayer. The SC upheld a strict interpretation of the expression “derived from”, holding that it requires a direct and first-degree nexus with the business of providing long term finance. Applying this standard, the SC held that dividend is a return on preference share capital (even if invested as surrogate of long-term finance), not on long term loans; interest on short term deposits arises from temporary parking of idle surplus funds, not from long term lending; and service charges received for monitoring Government funded loans are administrative fees for acting as a nodal agency, not income from deploying the corporation’s own funds. These receipts are therefore ancillary or second-degree sources of income and not profits “derived from” long term finance. 

^{[1] [TS-1633-SC-2025]}