ITAT Bangalore: REITs Cannot Claim Section 35D Deduction for IPO and Unit Listing Expenses

Background and Overview

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has delivered a significant ruling in the case of Embassy Office Parks REIT Vs DCIT, holding that a Real Estate Investment Trust constituted as a trust under the Indian Trusts Act, 1882, does not qualify for the benefit of deduction under Section 35D(2)(c) of the Income Tax Act, 1961, in respect of expenditure incurred on its Initial Public Offer (IPO) and listing of units on recognized stock exchanges.

The Tribunal, while dismissing the appeal filed by the assessee for Assessment Year 2021-22, confirmed the disallowance of ₹66,62,59,444 and categorically held that the legislative intent embedded in Section 35D(2)(c) restricts its applicability exclusively to companies, and no judicial interpretation — however liberal or purposive — can extend this benefit to a business trust such as a REIT.

Factual Background of the Case

Who is the Assessee?

Embassy Office Parks REIT is a SEBI-registered Real Estate Investment Trust, established as an irrevocable trust under the Indian Trusts Act, 1882, and registered under Regulation 6 of the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014. Its core activity involves owning and investing in income-generating real estate assets across India, with the primary objective of delivering stable distributions to its unit holders.

The Claim and Assessment

The assessee filed its return of income for AY 2021-22 on 31 December 2021, declaring nil total income and claiming a loss of ₹57,71,46,244. During scrutiny assessment proceedings, it was found that the assessee had claimed a deduction of ₹66,62,59,444 under Section 35D of the Income Tax Act, representing one-fifth of the total IPO and unit listing expenses of ₹2,47,31,01,237 incurred in Financial Years 2019-20 and 2020-21 in connection with its listing on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

The assessee had also undertaken further unit issuances through institutional placement and preferential allotment, aggregating ₹85,81,95,983.

Action by the Assessing Officer

The Assessing Officer (AO), by order dated 28 December 2022 under Section 143(3) read with Section 144B of the Income Tax Act, 1961, disallowed the entire deduction of ₹66,62,59,444. The AO's basis for disallowance was clear: Section 35D(2)(c) permits deduction for expenditure relating to public subscription only where the assessee is a company. Since the assessee is a trust, assessed as an association of persons (AOP) or body of individuals (BOI), it could not claim the benefit of this provision. The total income was accordingly assessed at ₹8,91,13,200.

CIT(A) Proceedings

The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals)-11, Bangalore. In Grounds 3 to 7 of that appeal, the disallowance under Section 35D was specifically challenged. The learned CIT(A) confirmed the AO's findings vide appellate order dated 26 December 2024, holding that the deduction for IPO-related preliminary expenses is available only to companies and cannot be extended to a trust. The appeal was partly allowed, but the disallowance under Section 35D was upheld.

Arguments Before the ITAT

Assessee's Contentions

The learned authorized representative, Shri Ajay Rotti, Chartered Accountant, advanced the following key arguments: