SEZ developer profits and signage receipts: authorised operations supported deduction, while tenant-linked space income was taxed as house property.

Profits from transferring bare shell buildings to a co-developer were treated as arising from an authorised Special Economic Zone operation because the assessee was an approved SEZ developer and the transfer had Board approval; the receipts therefore retained the character of business profits derived from SEZ development and qualified for deduction under section 80IAB. Signage receipts from tenants for use of space in the assessee's buildings were held to be intrinsically linked to ownership and letting of the property, not an independent commercial activity; they were assessable as income from house property and eligible for deduction under section 24(a).

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Issues: (i) whether profits arising from transfer of bare shell buildings to a co-developer constituted profits derived from the business of developing a Special Economic Zone and were eligible for deduction under section 80IAB of the Income-tax Act, 1961; and (ii) whether signage income received from tenants for use of space in the assessee's buildings was assessable as income from house property with deduction under section 24(a) of the Income-tax Act, 1961.

Issue (i): whether profits arising from transfer of bare shell buildings to a co-developer constituted profits derived from the business of developing a Special Economic Zone and were eligible for deduction under section 80IAB of the Income-tax Act, 1961.

Analysis: The assessee was an approved developer in a notified Special Economic Zone and the transfer of bare shell buildings to the co-developer had been approved by the Board of Approvals. The Tribunal followed its decision in the assessee's own case for the earlier year and held that the Special Economic Zones Act, 2005 and the Rules framed thereunder governed the activity, that authorized operations included such transfer, and that the revenue authorities could not deny the consequence of a valid approval granted under the SEZ regime. The profits arose from an authorized SEZ activity and retained the character of business profits derived from development of the SEZ.

Conclusion: The issue was decided in favour of the assessee and the deduction under section 80IAB was held allowable.

Issue (ii): whether signage income received from tenants for use of space in the assessee's buildings was assessable as income from house property with deduction under section 24(a) of the Income-tax Act, 1961.

Analysis: The signage space was provided only to tenants occupying the assessee's premises, and the receipts arose from use of space appurtenant to the leased property rather than from an independent commercial activity. On these facts, the income was held to be intrinsically linked with the ownership and letting of the property, and therefore assessable under the head income from house property. Consequential allowance under section 24(a) followed.

Conclusion: The issue was decided in favour of the assessee and the signage income was held taxable as income from house property with deduction under section 24(a).

Final Conclusion: The Revenue's appeal failed on both the substantial SEZ deduction issue and the signage income issue, and the assessee's treatment of the receipts was upheld.

Ratio Decidendi: Where a SEZ developer acts under a valid approval and the activity is treated as an authorized operation under the SEZ regime, the resulting profits are deductible under section 80IAB; receipts for permitted use of space by tenants in the owned premises are taxable as income from house property.

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