The Income Tax Appellate Tribunal (ITAT) has deleted a ₹11,003-crore tax disallowance against Reliance Jio Infocomm for the assessment year 2019-20, ruling that how a company records an expense in its books does not, by itself, determine how it should be treated for tax purposes.
According to an Economic Times report, the dispute centred on ₹11,003 crore in 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, power and fuel, repairs and maintenance, and network operating costs.
The assessing officer, however, held that the expenses were linked to the improvement and upgradation of Jio’s telecom network and should therefore be capitalised for tax purposes, with depreciation allowed under Section 32 of the Income Tax Act. The entire ₹11,003 crore was consequently disallowed.
In its ruling, judicial member Amit Shukla and accountant member Arun Khodpia said there is no absolute rule requiring a company’s accounting treatment and tax treatment to be the same. The tribunal said 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 ET report stated.
The Commissioner of Income Tax (Appeals), or CIT(A), later 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 report added.
What did the tribunal say?
The ITAT’s bench noted that telecom infrastructure requires continuous optimisation, strengthening and maintenance even after commercial operations begin. It said expenditure linked to network improvement or optimisation does not automatically become capital expenditure, reported ET.
The bench explained that 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 bench faulted the assessing officer for treating the entire ₹11,003 crore as a composite capital outlay without examining the nature and purpose of the individual expenses or establishing a clear link with the acquisition or creation of a capital asset, the ET report added.
The tribunal concluded that the disputed expenses were incurred to meet quality-of-service parameters for assets that were already installed and in use, and upheld the CIT(A)’s decision to delete the entire disallowance.
