The Income Tax Appellate Tribunal (ITAT) has deleted a ₹11,003-crore tax disallowance against Reliance Jio Infocomm for the assessment year 2019-20, as reported by Economic Times. The dispute centred on expenses that Jio had capitalised under capital work-in-progress (CWIP) in its books but claimed as revenue expenditure while calculating its taxable income. The amount included expenses such as interconnect charges, employee costs, professional fees, call-centre expenses, power and fuel, repairs and maintenance, network operating costs, interest, and selling and distribution expenditure. The assessing officer had held that the expenses were linked to the improvement and upgradation of Jio's telecom network and should be capitalised for tax purposes with depreciation allowed under Section 32 of the Income Tax Act, consequently disallowing the entire ₹11,003 crore.
According to the Economic Times report, judicial member Amit Shukla and accountant member Arun Khodpia ruled that there is no absolute rule requiring a company's accounting treatment and tax treatment to be the same. The tribunal stated that if the tax department seeks to treat an expense as capital expenditure, it must examine its purpose and establish a clear link with the acquisition or creation of a capital asset. The Commissioner of Income Tax (Appeals), or CIT(A), had earlier deleted the addition, holding that the expenses related to assets that had already been installed and put to use and did not result in the creation of a new enduring asset. The Mumbai tribunal dismissed two appeals filed by the taxmen, with the dispute being over indirect and recurring operational expenditure allocated to CWIP under Jio's accounting policy rather than the capitalisation of assets themselves.
As reported by Economic Times, the ITAT's bench noted that telecom infrastructure requires continuous optimisation, strengthening and maintenance even after commercial operations begin. The bench explained that expenditure linked to network improvement or optimisation does not automatically become capital expenditure. The question is whether the spending created a new asset or enlarged the existing profit-making apparatus, or merely helped operate an existing one. The tribunal faulted the assessing officer for treating the entire ₹11,003 crore as a composite capital outlay without examining the nature and purpose of individual expenses or establishing a clear link with the acquisition or creation of a capital asset. The bench observed that merely because expenditure is connected with network improvement or optimisation, it does not make the expenditure capital in nature.
According to the Economic Times report, the tribunal concluded that the disputed expenses were incurred to meet quality-of-service parameters for assets that were already installed and in use. The bench upheld the CIT(A)'s decision to delete the entire disallowance, ruling that the expenses were not capital expenditure as they did not result in the creation of a new enduring asset but were operational in nature. The tribunal emphasized that how a company records an expense in its books does not, by itself, determine how it should be treated for tax purposes. In a separate issue in the same order, the tribunal also deleted another ₹66.65-crore disallowance relating to payments made to overseas telecom operators.
