Bangalore ITAT: REIT Not Eligible for Deduction u/s 35D on IPO & Listing Expenses

Embassy Office Parks REIT Vs DCIT (ITAT Bangalore)

Bangalore ITAT: REIT Not Eligible for Deduction u/s 35D on IPO & Listing Expenses

Summary: The ITAT Bangalore held that a Real Estate Investment Trust (REIT) constituted as a trust is not entitled to deduction under Section 35D(2)(c) of the Income-tax Act, 1961 for expenditure incurred on its initial public offer and listing of units. The assessee claimed deduction of ₹66.62 crore, being one-fifth of IPO and listing expenses, contending that Section 35D should be interpreted harmoniously to extend the benefit to REITs. The Tribunal held that Section 35D(2)(c) expressly applies only “where the assessee is a company” and covers expenditure relating to public subscription of shares or debentures of a company. It found that a REIT is a business trust registered under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and governed by the special taxation regime in Chapter XII-FA, and is neither a company nor deemed to be one under the Act. The Tribunal further held that REIT units are distinct from shares or debentures, and regulatory treatment of REIT units does not alter their legal character for Section 35D. Upholding the orders of the Assessing Officer and CIT(A), it confirmed the disallowance of ₹66.62 crore under Section 35D(2)(c) and dismissed the appeal.

The Bangalore Bench of the ITAT has held that a Real Estate Investment Trust (REIT) is not entitled to deduction u/s 35D(2)(c) in respect of expenses incurred towards its Initial Public Offer (IPO), public subscription & listing of units. The Tribunal ruled that the benefit of section 35D(2)(c) is specifically restricted to companies & cannot be extended to a REIT merely because it raises capital through a public issue.

The assessee, Embassy Office Parks REIT, claimed deduction of ₹66.62 crore, being one-tenth of the IPO & listing expenses incurred for issuing its units on the NSE & BSE. The AO disallowed the claim on the ground that u/s 35D(2)(c), deduction for expenditure relating to public subscription is available only where the assessee is a company. The CIT(A) upheld the disallowance.

Before the Tribunal, the assessee argued that although section 35D(2)(c) refers to companies, REITs did not exist when the provision was enacted. Since REITs are now permitted to raise capital from the public through listed units under the SEBI (REIT) Regulations, 2014, the provision should receive a liberal & harmonious interpretation so as to extend the benefit to REITs. Reliance was placed on several Supreme Court decisions advocating purposive interpretation of beneficial provisions.

Rejecting the contention, the Tribunal observed that the opening words of section 35D(2)(c)-“where the assessee is a company”—are clear, deliberate & unambiguous. A REIT is neither a company within the meaning of section 2(17) nor deemed to be one under the Act. Instead, the Income-tax Act recognises a REIT as a distinct business trust governed by the special taxation regime contained in Chapter XII-FA. Therefore, the Tribunal held that courts cannot enlarge the scope of a deduction by reading words into the statute.

The Tribunal further held that although REIT units are listed securities, they are not shares or debentures. The regulatory recognition of REIT units as securities under SEBI laws does not alter their legal character under the Income-tax Act. The fact that REITs raise capital through public subscription does not place them on par with companies for the purpose of section 35D. The Tribunal also noted that REITs enjoy a separate pass-through taxation regime, unlike companies, reinforcing the legislative distinction between the two entities.

Accordingly, the Tribunal upheld the orders of the lower authorities & confirmed the disallowance of ₹66.62 crore, holding that deduction u/s 35D(2)(c) is available only to companies & cannot be extended to REITs by judicial interpretation. The appeal of the assessee was dismissed.

Cases Discussed

• Embassy Office Parks REIT Vs DCIT (ITAT Bangalore)
• Commissioner of Customs v. Dilip Kumar and Company, [2018] 9 SCC 1.
• K.P. Varghese v. ITO, [1981] 131 ITR 597.
• CIT v. J.H. Gotla, [1985] 156 ITR 323.
• K.S. Vaidyanathan, [1985] 153 ITR 11 (Madras HC).
• Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188 (SC).
• CIT v. Straw Board Manufacturing Co. Ltd., [1989] 177 ITR 431 (SC).
• Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT, [1989] 177 ITR 418 (SC).

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by Embassy Office Parks REIT, [the Assessee/ Appellant] for Assessment Year 2021-22 against the Appellate order dated 26 December 2024 passed by the Commissioner of Income Tax (Appeals)-11, Bangalore [learned CIT(A)]. By the said order, the learned CIT(A) dismissed the assessee‟s appeal against the assessment order dated 28 December 2022 passed under section 143(3) read with section 144B of the Income Tax Act, 1961, [ the ACT] by the Deputy Commissioner of Income Tax, Assessment Unit, National Faceless Assessment Centre, New Delhi [learned Assessing Officer/ AO]. In that assessment order, the returned income of the assessee was assessed at Rs. 8,91,13,200 after making disallowance of Rs. 66,62,59,444 u/s 35D (2) (c) of the Act.

2. The assessee is aggrieved by the order and has raised several grounds of appeal. Its principal grievance is against the disallowance of deduction claimed under section 35D of the Income Tax Act, 1961. The assessee contends that the learned CIT(A) and the learned Assessing Officer erred in law and on facts in denying deduction of Rs. 66,62,59,444 under section 35D, expenditure incurred in connection with the public subscription, initial public offer, and listing of its units on the National Stock Exchange and the Bombay Stock Exchange. The assessee is also aggrieved by the findings of the revenue authorities that deduction under section 35D is available only to a company. According to the assessee, the reference to a company in section 35D(2)(c) arose because, when section 35D was introduced with effect from 1 April 1971, non-corporate entities, including trusts, were not eligible to list their units on stock exchanges and, therefore, only companies could incur such expenditure. The assessee submits that trusts are now eligible to list their units on recognised stock exchanges after the introduction of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014, and are governed in a manner similar to listed companies. It therefore claims that deduction under section 35D cannot be restricted only to companies.

3. Briefly stated, the assessee is a Real Estate Investment Trust [REIT] that filed its return of income on 31 December 2021, declaring total income of Rs. nil and claiming a loss of Rs. 57,71,46,244. It was established as an irrevocable trust under the Indian Trusts Act, 1882, and is registered as a Real Estate Investment Trust under Regulation 6 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014. Its principal activity is to own and invest in rent-or income-generating real estate assets in India, with the objective of making stable and sustainable distributions to its unit holders in accordance with the SEBI Regulations.

4. The return of income was selected for scrutiny, and a notice under section 143(2) of the Income Tax Act was issued on 28 June 2022. Further notices under section 142(1) of the Act were also issued.

5. During the assessment proceedings, the learned Assessing Officer noted that the assessee had claimed expenditure of Rs. 66,62,59,444 under section 35D of the Income Tax Act in respect of expenses incurred for the issue of public subscription during Financial Years 2019-20 and 2020-21. The assessee was asked to show cause why the deduction should not be disallowed, since, according to the Assessing Officer, section 35D permits such deduction only in the case of companies.

6. The assessee submitted that it had incurred expenses of Rs. 2,47,31,01,237 in connection with its initial public offer and the listing of its units on the National Stock Exchange and the Bombay Stock Exchange, and that these expenses were therefore incurred for the issue of public subscription. During the year, it had also issued further unitsby way of institutional placement and preferential allotment amounting to Rs. 85,81,95,983. The assessee contended that section 35D of the Income Tax Act permits amortization of specified preliminary expenses incurred by an Indian company or by a resident non-company assessee from the previous year in which its business commences. It further submitted that section 35D(2) specifies the categories of expenditure eligible for amortization, including, under section 35D(2)(c), expenditure incurred in connection with the issue of shares or debentures for public subscription, such as underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus. On this basis, the assessee claimed deduction of Rs. 66,62,59,444 under section 35D, being one-fifth of the total expenses incurred for the issue of public subscription during Financial Years 2019-20 and 2020-21. The assessee also submitted that it is an irrevocable trust constituted under the Indian Trusts Act, 1882, and registered as a Real Estate Investment Trust under Regulation 6 of the SEBI (Real Estate Investment Trusts) Regulations, 2014. Its principal activity is to own and invest in rent- or income-generating real estate and related assets in India, with the objective of providing stable and sustainable distributions to its unit holders in accordance with the SEBI Regulations. Although section 35D refers to companies in the context of public subscription expenses, the assessee argued that, applying the doctrine of harmonious construction, the provision should be read as a whole and interpreted to allow the deduction to a REIT from the year in which the trust commences business. It further submitted that, keeping the principle of parity with companies in mind and considering that section 35D is wide enough to cover resident assessees other than companies, the deduction should be allowed. The assessee also contended that section 35D should be interpreted liberally and relied on the decisions of the Hon’ble Supreme Court in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188, CIT v. Straw Board Manufacturing Co. Ltd. [1989] 177 ITR 431, and Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT [1989] 177 ITR 418. The assessee was also granted a video-conference hearing, at which it reiterated these submissions.

7. The learned Assessing Officer held that the assessee’s claim related to amortization of preliminary expenses incurred for the initial public offer and listing of its units on the National Stock Exchange and the Bombay Stock Exchange. He distinguished the decisions relied upon by the assessee. In Bajaj Tempo Ltd. v. CIT[Supra], the issue concerned exemption under section 15C of the Income Tax Act, 1922, for an industrial undertaking established by taking on lease a building previously used for another business. In CIT v. Straw Board Manufacturing Co. Ltd.[supra], the issue related to concessional rates of income tax, higher development rebate, and deduction under section 80E on the ground that manufacture of straw board was a priority industry. In Broach District Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT,[supra] the issue concerned exemption claimed by a co-operative society on profits and gains derived from ginning and pressing cotton and marketing the produce under section 81(1)(c) of the Income Tax Act. The learned Assessing Officer further observed that deduction or amortization of preliminary expenses in connection with an initial public offer and listing of units is available under section 35D only to an assessee having the status of a company. Referring to section 35D(2)(c), he noted that the provision allows expenditure incurred by a company in connection with the public subscription of its shares or debentures, including underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus. Since the assessee is a trust assessed as an association of persons or body of individuals and not as a company, he disallowed the deduction of Rs. 66,62,59,444 claimed under section 35D. Accordingly, by assessment order dated 28 December 2022 passed under section 143(3) read with section 144B of the Income Tax Act, he assessed the assessee’s total income at Rs. 8,91,13,200 as against the returned income of Rs. nil.

8. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). In grounds 3 to 7 of that appeal, the assessee challenged the disallowance made under section 35D of the Income Tax Act. The learned CIT(A) confirmed the action of the learned Assessing Officer, holding that deduction or amortization of preliminary expenses incurred in connection with an initial public offer is available under section 35D only to a company, whereas the assessee is a trust. Accordingly, the disallowance made by the learned Assessing Officer was upheld, and the assessee’s appeal was partly allowed.

9. The assessee is aggrieved by the said finding and is in appeal before us. By ground No. 2, it has challenged the disallowance made under section 35D of the Act.

10. The remaining grounds of appeal are general in nature and relate to the levy of interest under sections 234A and 234B of the Act, as well as the initiation of penalty proceedings under section 274 read with section 270A of the Act. These grounds are either general, consequential, or premature and are therefore dismissed.

11. In respect of ground No. 2, Shri Ajay Rotti, Chartered Accountant, the learned authorized representative submitted a detailed 10-page synopsis. Referring to the provisions of section 35D of the Act, he argued that the section should be interpreted harmoniously and liberally. He relied on the decision of the Hon’ble Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597 for the principle that statutory provisions must be construed in a manner consistent with legislative intent and so as to avoid absurd results. He also relied on CIT v. J.H. Gotla [1985] 156 ITR 323 to submit that tax laws should be interpreted to advance legislative intent and avoid unjust outcomes. In addition to the judicial precedents cited before the learned Assessing Officer, he relied on the decision of the Hon’ble Madras High Court in K.S. Vaidyanathan [1985] 153 ITR 11, wherein it was held that a court must interpret a statute in accordance with the true intention of the legislature where the statutory language either exceeds or falls short of expressing that intention. The learned authorized representative submitted that deductions, exemptions, rebates, and similar reliefs are species of incentives granted under the Act and, therefore, incentive-based deduction provisions having a beneficial object should receive a liberal construction. His principal argument was that, although section 35D(2)(c) expressly refers to a company, the same benefit should also be extended to the assessee, which is a Real Estate Investment Trust. The assessee also filed a paper book containing 422 pages, comprising the details submitted before the learned Assessing Officer and the learned CIT(A), as well as the tax audit report, return of income, and computation of income.

12. During the hearing, the Bench also directed the assessee to furnish the financial statements of the trust, the public offer document, details of the expenditure for which deduction under section 35D was claimed, the registration certificate issued by the Securities and Exchange Board of India, and a copy of the trust deed. The assessee furnished these details by letter dated 23 April 2026, along with a paper book containing 722 pages.

13. The learned Commissioner of Income Tax–Departmental Representative, Shri Shivanand Kalakeri, strongly supported the orders of the lower authorities. Referring to section 35D of the Income Tax Act, he submitted that amortization of certain preliminary expenses is available to all assessees. However, expenditure incurred in connection with the public subscription of shares or debentures of a company, including underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus, is allowable only where the assessee is a company, as provided in section 35D(2)(c) of the Act. He further submitted that the assessee is a trust assessed as an association of persons or body of individuals and not as a company; therefore, the lower authorities rightly denied the deduction claimed under section 35D. The learned CIT-DR also contended that the principles of harmonious or beneficial construction cannot be applied so broadly as to extend an exemption or deduction granted to one class of assessees to all classes of assessees.

Accordingly, he submitted that the lower authorities committed no error in denying the deduction under section 35D(2)(c) to the assessee-trust.

14. In response, the learned authorized representative, Shri Ajay Rotti, Chartered Accountant, submitted that although section 35D(2)(c) refers to a company, the provision was enacted at a time when entities such as Real Estate Investment Trusts were not in existence. He contended that, since such entities have subsequently been introduced and are permitted to raise funds through public subscription of units in a manner comparable to companies, section 35D(2)(c) should be interpreted in harmony with its object and purpose. Drawing a parity between a listed REIT and a listed company, he submitted that, if the provision is construed harmoniously and liberally, the assessee‟s claim for deduction deserves to be allowed.

15. We have considered the rival submissions and perused the orders of the lower authorities, along with the paper books filed by the assessee. The issue for determination is whether a Real Estate Investment Trust, registered with the Securities and Exchange Board of India under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and constituted as a trust under the Indian Trusts Act, 1882, is entitled to deduction under section 35D of the Act for expenditure incurred in connection with public subscription, its initial public offer, and the listing of its units.

16. The relevant provision is section 35D of the Income Tax Act, which provides for amortization of certain preliminary expenses. It applies where an assessee, being an Indian company or a resident non-company assessee, incurs, after the specified date, any expenditure referred to in sub-section (2). In such cases, the assessee is entitled toa deduction equal to one-tenth of that expenditure for each of the ten successive previous years beginning with the year in which the business commences, or the extension of the undertaking is completed. Sub-section (2) specifies the categories of expenditure eligible for deduction under sub-section (1). Clause (c), however, applies only where the assessee is a company and covers expenditure incurred in connection with the public subscription of shares or debentures of the company, including underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus.

17. The crucial textual feature of clause (c) is that it covers expenditure such as underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus only where the assessee is a company. The legislative scheme is therefore deliberate: expenses intrinsically connected with the corporate formand the issue of shares or debentures are allowable only to companies. The opening words of clause (c), “where the assessee is a company”, are not surplusage; they constitute a conscious legislative limitation on the class of assessees entitled to the deduction.

18. The assessee is a SEBI-registered Real Estate Investment Trust constituted as a trust under the Indian Trusts Act, 1882. Admittedly, it is neither a company within the meaning of the Companies Act, 2013, nor deemed to be a company under any provision of the Income Tax Act, 1961. Section 2(17) of the Act defines “company” to include an Indian company, any body corporate incorporated under the laws of a foreign country, certain institutions or associations declared by the Central Board of Direct Taxes to be a company, and institutions or associations that were assessable as companies for any assessment year commencing on or before 1 April 1970. A SEBI-registered Real Estate Investment Trust does not fall within any of these categories.

19. The Income Tax Act treatsa REIT as a distinctform of business trust. Section 2(13A) defines a business trust as a trust registered as a Real Estate Investment Trust or Infrastructure Investment Trust under the applicable SEBI regulations. The taxation of such trusts is governed by the specialframework in Chapter XII-FA, particularly sections 115UA and 115UB. Under this framework, specified income, such as interest, dividend, and rent from directly owned real estate assets, is passed through and taxed in the hands of the unit holders, while residual income is taxed in the hands of the trust at the maximum marginal rate. This separate taxation regime confirms that, for the purposes of the Act, a REIT is neither a company nor treated as one.

20. The assessee‟s principal contention is that, for the purposes of clause (c), a REIT should be equated with a company, because the public issue of units by a REIT is, in economic and functional terms, indistinguishable from a public issue of shares by a company. A REIT files an offer document with SEBI, complies with disclosure norms substantially similar to those applicable to companies under the Companies Act, 2013 and the SEBI ICDR Regulations (Issue of Capital and Disclosure Requirements), incurs underwriting commission, brokerage, advertisement, and prospectus-printing expenses, and lists its units on a recognised stock exchange. Denying deduction merely because the corporate form has not been adopted would, according to the assessee, defeat the legislative object of section 35D, which is to spread the burden of capital-raising costs over a period of years. The assessee also relied on several judicial precedents, including K.P. Varghese v. ITO [supra] and CIT v. J.H. Gotla [supra], to contend that taxing statutes must be construed reasonably, having regard to legislative intent and the mischief sought to be remedied, including by applying Heyden’s rule.

21. We have carefully considered the assessee’s arguments seeking a liberal and harmonious interpretation of section 35D. On examining the provision, we find that the language of clause (c) is clear and unambiguous, as it begins with the words “where the assessee is a company”. The Hon’ble Supreme Court has consistently held that taxing statutes must be construed strictly and that courts cannot supply omissions in the statutory text. In Commissioner of Customs v. Dilip Kumar and Company [2018] 9 SCC 1, the Constitution Bench reiterated that, in a taxing statute, a person cannot be taxed unless the words of the statute clearly impose the burden; similarly, an exemption or deduction must be construed strictly, and in case of ambiguity, the benefit must go to the Revenue. Applying this principle, even if the assessee’s plea is examined on the basis of strict construction, the deduction expressly confined to a company cannot be extended, by judicial interpretation, to a non-corporate assessee.

22. The contention that the assessee should be equated with a company because the economic substance of its public issue is similar, in effect, invokes the doctrine of substance over form to read into clause (c) words that the legislature has not used. It is settled law that the legal form chosen by an assessee cannot be disregarded for fiscal classification. A trust remains a trust, and a company remains a company. Their legal incidents, including the manner in which they raise capital, conduct business, bear tax, and incur liabilities inter se and towards third parties, are distinct. The Income Tax Act also recognizes REIT as a separate fiscal entity and has not chosen to treat it as a company for the purposes of section 35D.

23. The legislative history also supports this distinction. Section 35D was inserted with effect from 1 April 1971 by the Taxation Laws (Amendment) Act, 1970, with the object of granting relief to industrial undertakings in respect of specified preliminary expenses. The Explanatory Memorandum to the Finance Bill, 1970 and the Notes on Clauses draw a clear distinction between expenses available to all resident assessees, covered by clauses (a) and (b), and expenses that are inherently corporate in nature, covered by clause (c). The legislature was conscious that only a company could issue shares or debentures of the company; accordingly, clause (c) specifically refers to “shares or debentures of the company” and does not extend to ^„units‟ or securities generally. Further, units of a REIT are neither shares nor debentures. They are a distinct class of security recognized under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and under the Securities Contracts (Regulation) Act, 1956 by virtue of the amendment to section 2(h), which includes units or other instruments issued to investors under a collective investment scheme and units of a business trust. The fact that REIT units are treated as securities for the purposes of the Securities Contracts (Regulation) Act does not ipso facto convert them into shares or debentures for the purposes of section 35D(2)(c). A statutory deduction available for expenditure incurred on the issue of shares or debentures of a company cannot therefore be extended to expenditure incurred on the issue of units of a business trust.

24. We have also considered the SEBI (Mutual Funds) Amendment Regulations, 2024 and the Master Circular for Mutual Funds, under which SEBI has classified REIT units as equity instruments for the limited purpose of mutual fund investment categorization. This position is further reflected in SEBI circulars permitting the inclusion of REIT units in equity-oriented indices and the consequential changes to the scheme categorisation framework under the SEBI (Mutual Funds) Regulations, 1996. However, such classification is regulatory and context-specific; it is confined to portfolio composition, scheme categorisation, and investment limits applicable to mutual funds. It does not alter the legal character of a REIT unit as a security distinct from a share.

25. Indeed, the SEBI (Real Estate Investment Trusts) Regulations themselves define a unit as a beneficial interest in a REIT, and not as a share in the capital of a company. The Income Tax Act also draws a deliberate distinction between shares and units of a business trust. Section 2(42A), Explanation 1(i)(hf), prescribes a separate period of holding for a unit of a business trust to qualify as a long-term capital asset, distinct from the period applicable to equity shares. Further, section 47(xvii) grants a specific exemption for the transfer of shares of a special purpose vehicle to a business trust in exchange for units of that business trust. The need for such an express exemption demonstrates that shares and units are not treated as the same species of property. Section 112A also separately recognizes units of a business trust alongside equity shares.

26. It is also relevant that sections 10(23FC)and 115UA provide a pass-through regime for income arising to unit holders from units of a business trust, and not for shareholders holding shares of a company. This statutory treatment reinforces the conclusion that REIT units and shares of a company are distinct and cannot be equated for the purposes of section 35D(2)(c).

27. In case of company , it suffers tax on its income and shareholders when dividend is distributed, where as Trust is pass through entity, therefore also there cannot be any parity between the two types of persons.

28. We also cannot accept the contention that the assessee is entitled to deduction under clause (c) merely because it raises capital. Partnership firms, limited liability partnerships, and trusts may likewise raise funds for their activities, including social or charitable purposes; yet they do not qualify for deduction under clause (c)because they are not companies. The same principle applies to the assessee-REIT. Although it raises funds by issuing units, it does not meet the company-specific condition prescribed in section 35D(2)(c).

29. In view of above, we uphold the orders of the ld Lower Authorities and confirm the action of the ld AO in denying assessee deduction Rs. 66,62,59,444 u/s 35D (2) (c) of the Act.

30. Appeal of the assessee is dismissed.

Order pronounced in the open court on 08^th July, 2026.