The Lega Serie A and the local prefecture had ordered the game to be played at Turin's Stadio Olimpico, a neutral venue, after deeming Cagliari's new stadium unfit to stage the game on safety grounds.
But the Sardinian TAR court, part of the mayor's office, reversed the decision in an official statement issued on Friday afternoon.
It read: "The Sardinian TAR have annulled the decision of the Cagliari prefecture to ban the use of the Stadio Is Arenas."
Particular concerns had been raised about the increased number of fans and extra demands on police and security staff, given the high level of interest the arrival of AC Milan had generated on the island.
Lega president Maurizio Beretta had previously rejected a counter-offer from Cagliari to play the game at the Stadio Nereo Rocco in Trieste, the venue for several games last season when the islanders moved out of the Stadio Sant'Elia ahead of schedule.
Cagliari have struggled to host matches in their unfinished stadium this season and were forced to play Juventus at Parma's Stadio Ennio Tardini in December.
The Sardinians were also ordered to play September's game against Roma behind closed doors, prompting club president Massimo Cellino to defy the edict and invite season ticket holders to the Stadio Is Arenas regardless.
As a result, the Lega handed Roma a walkover 3-0 victory.