In a recent ruling, the Madras High Court upheld the Income Tax Appellate Tribunal’s (ITAT) decision that income derived from leasing out property in an IT park should be classified as business income, rather than income from house property. This judgment came in response to multiple appeals filed by the Income Tax Department against the ruling in favor of Ascendas IT Park,  a technology park developer for the assessment years 2006-07, 2007-08, 2008-09, and 2009-10. The issue centered on the classification of income derived from leasing out property in the IT park. The Income Tax Department argued that such income should be treated as “income from house property” under the Income Tax Act 1961 (ITA),  which typically subjects it to a different tax treatment. On the other hand, the respondent, the IT Park, maintained that the income was part of its core business activity, which involved not only renting out office spaces but also providing facilities and services to tenants, thus qualifying it as business income. Get a Copy of Income Tax Rules with FREE e-book access, Click here

The ITAT, in its earlier orders, had ruled in favor of the respondent, treating the income as business earnings. The tribunal based its decision on the Supreme Court’s judgment in Chennai Properties and Investments Ltd. vs. Commissioner of Income Tax,  which clarified that if letting out of property is a key part of an entity’s business, the income from such activities should be considered business income. The Commissioner of Income Tax, dissatisfied with the tribunal’s ruling, filed appeals in the High Court, raising questions about the correctness of the tribunal’s decision.

The key issues raised in the appeals were whether the income from leasing property for running a software technology park should be treated as business income and whether the tribunal had overlooked the fact that the primary objective of the rental agreement was simply to let out the property, without any business-related activity mentioned in the respondent’s memorandum of association. During the hearing, the bench of Justice R Suresh Kumar and Justice C Saravanan referred to the Supreme Court’s ruling in the Chennai Properties case, as well as subsequent circulars issued by the Central Board of Direct Taxes (CBDT), which clarified that income from letting out property in industrial parks and Special Economic Zones (SEZs) should be classified as business income.

Get a Copy of Income Tax Rules with FREE e-book access, Click here Thus in its judgment, the High Court ruled in favor of the respondent. The court held that the income generated from leasing out the property, combined with the provision of business-related services and infrastructure, constituted business income. The court further noted that the ITAT’s decision was consistent with legal precedents and CBDT guidelines, which clearly delineate the distinction between house property income and business income in cases involving industrial parks. Observing  that there was no merit in the appeals filed by the Income Tax Department, the Court affirmed the tribunal’s ruling that the income in question should be taxed as business income. Consequently, the appeals were dismissed, and the substantial questions of law raised by the department were resolved in favor of the respondent