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Informist, Wednesday, Dec. 10, 2025

 

NEW DELHI – The Supreme Court Wednesday ruled that dividend income from shares does not qualify as profits derived from the business of providing long-term finance, thereby financial institutions cannot claim income tax deductions on the same. 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, said the top court.

 

A fundamental distinction exists between a shareholder and a creditor, said the top court. The basic characteristic of a loan is that the person advancing the money has a right to sue for the debt, said the court. 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 eventuality of the company winding up, the court added.

 

Further, the bench of Justice P.S. Narasimha and Justice Atul S. Chandurkar said the interest earned on short-term deposits in banks by financial institutions also does not qualify as profits under Section 36(1)(viii) of the Income Tax Act, 1961 and no tax deductions can be claimed on them. The legislative intent was to incentivise the specific act of providing long-term credit, not the passive investment of surplus capital, said the bench. If the court was to accept National Cooperative Development Corp.'s argument, it would create a perverse incentive for financial corporations to park funds in safe, short-term investments and claim the 40?duction, rather than fulfilling their statutory mandate of providing high-risk long-term credit to the agricultural sector, the bench added.

 

The top court said service charges received on sugar development fund loans to companies are not profits and not entitled for income tax deductions. "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," the bench said.

 

The court rejected National Cooperative Development's plea seeking deductions on dividend income on investments in shares, interest earned on short-term deposits with banks, and service charges received for monitoring sugar development fund loans. The case has its genesis in the income tax department taking the petitioner's return of income for scrutiny in 2006. The department noted that Section 36(1)(viii) of the 1961 Act allows for a deduction of 40% of profits, but strictly limits this benefit to profits "derived from the business of providing long-term finance". The department found that the petitioner was generally engaged in financing and not all income receipts qualify for this specific statutory deduction.  End

 

Reported by Surya Tripathi

Edited by Tanima Banerjee

 

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