The Central Board of Direct Taxes (CBDT) has recently issued a circular to confirm the tax holiday enjoyed by the developers of industrial parks and special economic zones (SEZs) in respect of rental income earned by them.
The government had provided tax holiday in respect of income arising from the business of developing, developing and operating or maintaining, and operating an industrial park or an SEZ. The tax treatment of rental income arising to the developers of industrial parks or SEZs has been a matter of considerable litigation in recent times. The litigation was largely based on the head of income under which the rental income should be taxed. The Income Tax Department has been treating the rental income received by the developers as income from house property and not as business income. This led to the denial of tax holiday available to the developers since the tax holiday was available only for business income.
The taxpayers approached the appellate authorities to obtain relief and have been largely successful. The Karnataka High Court - in the years 2013 and 2014 - had observed that if such rental income was not considered as business income, it would defeat the objective of providing a tax holiday to the industrial parks developed in accordance with the notified schemes. The Karnataka High Court finally held that if the primary objective of the taxpayer is to engage in the business of exploiting immovable property by way of complex commercial activities, then the rental income arising therefrom is business income. The special leave petitions filed by the Tax Department against these judgments to the Supreme Court have been dismissed.
The CBDT has now issued a circular accepting the observations of the Karnataka High Court. The CBDT circular clarifies that for an undertaking, which develops, develops and operates or maintains and operates an industrial park or SEZ, the income arising from letting out of premises/developed space along with the other amenities shall be considered as business income provided the conditions prescribed under the notified schemes are met.
The CBDT has also stated that the Income Tax Department shall not file further appeals on this issue and that the existing appeals filed may be withdrawn or not pressed upon.
Clearing Out Litigation
This is a welcome move by the CBDT, which underlines the purpose of granting tax incentives to the developers of industrial parks and SEZs. This will ensure closure of unwarranted litigation on this subject matter and provide much-needed relief to the taxpayers since the circular would apply for all the open matters.
While this circular is provided in respect of industrial parks and SEZs, similar litigation exists in other sectors as well where there is a letting of premises/developed space along with the other amenities.
The tax authorities, as well as taxpayers, have been classifying the rental income either as business income or as income from house property - perhaps depending on what proves beneficial. The recent circular, which accepts the Karnataka High Court judgments, implies that where the taxpayer is carrying on the business of exploiting immovable property by way of complex commercial activities, the rental income arising therefrom should be considered as business income and not as income from house property.
Although the circular is issued specifically in the context of industrial parks and SEZs, the guidance provided may be of assistance in supporting the classification of rental income in other matters as well.
Mayur Shah is Partner at Sudit K Parekh & Co. and Chetan Daga is Senior Manager at SKP Business Consulting LLP.
The views expressed here are those of the authors' and do not necessarily represent the views of Bloomberg Quint or its editorial team.
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