The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that a Real Estate Investment Trust (REIT) cannot claim deduction under Section 35D(2)(c) of the Income Tax Act for expenses incurred on its Initial Public Offer (IPO), public subscription, and listing of its units, holding that the benefit is exclusively available to companies and cannot be extended to business trusts through judicial interpretation.
A division bench comprising Prashant Maharishi (Vice-President) and Keshav Dubey (Judicial Member) has observed that even the Income Tax Act consistently distinguishes between shares and units of business trusts, including in provisions relating to capital gains, exemptions, and pass-through taxation. Therefore, expenses incurred for issuing REIT units cannot be equated with expenses incurred for issuing company shares.
Embassy Office Parks REIT, established as an irrevocable trust under the Indian Trusts Act, 1882 and registered under the SEBI (Real Estate Investment Trusts) Regulations, 2014, filed its return declaring nil taxable income and claimed a business loss of ₹57.71 crore.
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During scrutiny assessment, the Assessing Officer noticed that the REIT had claimed a deduction of ₹66.62 crore, representing one-fifth of expenses amounting to approximately ₹247.31 crore incurred towards its IPO, public subscription, and listing of units on the National Stock Exchange and Bombay Stock Exchange during Financial Years 2019-20 and 2020-21. The deduction was claimed under Section 35D, which permits amortization of specified preliminary expenses over a prescribed period.
The Assessing Officer rejected the claim on the ground that Section 35D(2)(c) specifically applies only to companies in respect of expenditure incurred for public subscription of shares or debentures. Since the assessee was a trust and not a company, the deduction was denied. The Commissioner of Income Tax (Appeals) affirmed the disallowance, leading the REIT to approach the Tribunal.
The REIT argued that although Section 35D(2)(c) expressly refers to companies, the provision should be interpreted harmoniously in light of subsequent legal developments.
It contended that when Section 35D was enacted in 1970, entities such as REITs did not exist and only companies could access public capital markets. After the introduction of the SEBI REIT Regulations, trusts are now permitted to issue listed units through public offerings in a manner substantially similar to companies.
According to the assessee, the expenditure incurred on underwriting, brokerage, prospectus preparation, printing, advertisement, and listing of units is economically identical to expenses incurred by companies while issuing shares. Therefore, denying the deduction merely because the capital was raised through units instead of shares would defeat the legislative objective of Section 35D.
The assessee relied upon several Supreme Court decisions advocating liberal interpretation of beneficial provisions, including Bajaj Tempo Ltd., K.P. Varghese, and J.H. Gotla, arguing that incentive provisions should receive purposive construction.
The department maintained that while Section 35D generally applies to resident assessees, clause (c) of sub-section (2) is deliberately restricted to companies.
It argued that the provision specifically mentions expenditure incurred for public subscription of shares or debentures of a company, and therefore trusts, partnerships, LLPs, or other non-corporate entities cannot claim the deduction merely because they also raise capital from investors.
The Tribunal agreed with the department and held that the language of Section 35D(2)(c) is clear, specific, and unambiguous.
It observed that the opening words of the provision—“where the assessee is a company”—constitute a conscious legislative restriction and cannot be ignored through purposive interpretation.
According to the Tribunal, courts are not permitted to rewrite tax statutes or supply omissions where Parliament has consciously limited a deduction to a particular class of taxpayers. The Bench relied on the Constitution Bench judgment in Commissioner of Customs v. Dilip Kumar & Company, reiterating that deductions and exemptions under taxing statutes must be interpreted strictly.
The Tribunal emphasized that a REIT is a business trust, not a company.
It noted that the Income Tax Act itself separately defines a business trust under Section 2(13A) and provides a distinct taxation framework under Chapter XII-FA, particularly Sections 115UA and 115UB. This statutory treatment demonstrates that Parliament consciously recognized REITs as a separate category of taxable entities rather than equating them with companies.
The Bench further observed that REIT units are fundamentally different from shares.
While REIT units are recognized as securities under the Securities Contracts (Regulation) Act and regulated by SEBI, they do not become “shares” or “debentures” merely because they are listed on stock exchanges.
Rejecting the plea for parity between listed companies and listed REITs, the Tribunal observed that if Parliament intended to extend Section 35D benefits to REITs, it could have amended the provision after introducing the REIT framework in 2014.
The Bench held that judicial interpretation cannot substitute the words “company” with “business trust” merely because both raise capital from the public.
It also pointed out that several other entities such as partnerships, LLPs, and trusts may incur capital-raising expenses, yet none qualify for the company-specific deduction under Section 35D(2)(c).
Finding no infirmity in the assessment order or the appellate order, the Tribunal upheld the disallowance of ₹66.62 crore claimed under Section 35D and dismissed the appeal filed by Embassy Office Parks REIT.
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