In a significant ruling, the Supreme Court has clarified that the income-tax deduction under Section 36(1)(viii) of the Income-tax Act is strictly limited to profits earned from providing long-term finance, and cannot be extended to incidental or ancillary income earned by financial institutions.
A Bench of the Supreme Court held that the statutory provision must be interpreted narrowly, emphasising that only profits directly attributable to long-term finance activities qualify for deduction. Any income that arises incidentally such as interest from surplus funds or miscellaneous receipts does not fall within the scope of the deduction.
The Court noted that Section 36(1)(viii) was introduced to incentivise long-term financial lending for nation-building sectors. Hence, the tax benefit must be confined to the income that flows directly from such core lending operations.
This judgment is expected to have a wide impact on financial institutions, including banks and housing finance companies, which often claim deductions on a broader set of earnings. The ruling now mandates precise segregation of income streams to ensure compliance with the statutory requirement.
