Operational subsidies as business profits qualify for section 80IC deduction where they directly support the industrial undertaking's earnings.

Transport subsidy, power subsidy and interest subsidy were treated as operational receipts that reduced manufacturing cost and directly increased the profits of the eligible industrial undertaking. Applying the principle that subsidies with a direct nexus to business profits form part of the profits derived from the undertaking, the receipts were regarded as revenue in nature and within the scope of the profit-linked deduction. On that basis, the subsidy receipts qualified for deduction under section 80IC, and the disallowance was held unsustainable.

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Issues: Whether transport subsidy, power subsidy and interest subsidy received by the assessee qualified for deduction under section 80IC of the Income-tax Act, 1961.

Analysis: The subsidies were examined as operational receipts that reduced the cost of production and increased the profits of the industrial undertaking. The controlling principle applied was that where subsidies have a direct nexus with the business profits of the eligible undertaking, they form part of the profits and gains derived from the undertaking and are eligible for deduction. The decision also followed the settled position that such subsidies are revenue receipts reimbursing elements of manufacturing cost.

Conclusion: The subsidies were held eligible for deduction under section 80IC, and the disallowance was not sustainable.

Final Conclusion: The assessee was entitled to deduction on the subsidy receipts and the appeal succeeded.

Ratio Decidendi: Operational subsidies that have a direct nexus with the profits of an eligible industrial undertaking are profits derived from the business for purposes of deduction under the relevant profit-linked incentive provision.

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