Embassy Office Parks REIT Vs DCIT (ITAT Bangalore)
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
- 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.
