Mumbai: The income tax appellate tribunal (ITAT) has deleted a ₹11,003-crore tax disallowance on Reliance Jio Infocomm. It ruled that the fact that expenditure was capitalised under capital work-in-progress (CWIP) in the company’s books cannot, by itself, determine whether the expenditure is capital or revenue for tax purposes. The Mumbai tribunal, comprising judicial member Amit Shukla and accountant member Arun Khodpia, dismissed two appeals filed by the taxmen for AY 2019-20.
The dispute
The first appeal concerned operational expenditure that Jio had capitalised in its financial statements, but claimed as revenue expenditure while computing its taxable income.
The disputed amount of ₹11,003 crore comprised interconnect charges, employee costs, professional fees, call-centre expenses, power and fuel, repairs and maintenance, network operating costs, interest, selling and distribution expenditure, etc.
The tribunal noted that Jio had separately capitalised expenditure incurred toward acquisition and construction of telecom network assets, including antennas, radio equipment, ducts, fibre, routers, racks, batteries and other electronic equipment.
The dispute, therefore, was not over the capitalisation of those assets but over indirect and recurring operational expenditure allocated to CWIP under the company’s accounting policy.
The assessing officer had taken the view that Jio could not treat the expenditure as capital in its books and revenue for tax purposes. He held that the expenses were connected with improvement and upgradation of the telecom network and should consequently be capitalised for tax purposes, with depreciation allowed under Section 32. The entire ₹11,003 crore was accordingly disallowed.
The CIT(A), however, deleted the addition, holding that the expenses related to assets already installed and put to use and did not create a new enduring asset.
The ITAT rejected the AO’s approach, holding that there is no absolute rule requiring uniformity between accounting treatment and tax treatment.
“If the revenue seeks to treat such expenditure as capital, there must be some examination of its purpose and a demonstrable nexus with acquisition or creation of a capital asset,” the tribunal held.
CIT(A) deletion
It noted that the assessing officer had instead treated the entire amount as a composite capital outlay substantially because it was carried in CWIP and was connected with network improvement or upgradation.
The tribunal concluded that the disputed expenditure, incurred towards meeting quality-of-service parameters for assets already installed and put to use, did not result in creation of a new enduring asset on the facts before it. It therefore upheld the CIT(A)’s deletion of the entire disallowance.
The bench observed that telecom infrastructure necessarily requires continuous optimisation, strengthening and maintenance after commercial operations begin. Merely because expenditure is connected with network improvement or optimisation, it said, does not make the expenditure capital.
What has to be examined is whether the expenditure creates a new asset or enlarges the fixed profit-making apparatus, or merely facilitates operation of an existing one.
The tribunal also faulted the assessing officer for treating the entire ₹11,003 crore as one composite capital outlay without examining the nature and purpose of the individual expenses or establishing a demonstrable nexus with acquisition or creation of a capital asset.
