Jio wins Rs 11,003 crore tax dispute as ITAT deletes disallowance

Mumbai: The Income Tax Appellate Tribunal (ITAT) has deleted a Rs 11,003-crore tax disallowance imposed on Reliance Jio Infocomm, ruling that the way expenditure is treated in a company’s books cannot, by itself, determine its tax treatment.

A Mumbai ITAT bench comprising judicial member Amit Shukla and accountant member Arun Khodpia dismissed two appeals filed by the tax authorities concerning assessment year 2019-20.

The dispute centred on operational expenditure that Jio had capitalised under capital work-in-progress (CWIP) in its financial statements but treated as revenue expenditure while calculating its taxable income.

The Rs 11,003 crore in question covered a wide range of recurring expenses, including interconnect charges, employee costs, professional fees, call-centre expenses, power and fuel, repairs and maintenance, network operating costs, interest, and selling and distribution expenses.

The tribunal noted that Jio had separately capitalised expenditure relating to the acquisition and construction of telecom network assets, including antennas, radio equipment, ducts, fibre, routers, racks, batteries and other electronic equipment.

The dispute was instead over indirect and recurring operational expenditure that Jio had allocated to CWIP under its accounting policy.

The assessing officer had argued that Jio could not treat the expenditure as capital in its books while claiming it as revenue expenditure for tax purposes. Since the expenses were linked to improvements and upgrades to the telecom network, the officer held that they should also be capitalised for tax purposes, with depreciation allowed under Section 32.

This resulted in the entire Rs 11,003 crore being disallowed.

The Commissioner of Income Tax (Appeals), however, 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 ITAT has now upheld that decision.

The tribunal rejected the argument that accounting treatment should automatically determine tax treatment. It said that if tax authorities seek to classify expenditure as capital, they must examine its purpose and establish a demonstrable connection with the acquisition or creation of a capital asset.

The bench found that the disputed expenditure was incurred to meet quality-of-service requirements and support assets that were already installed and operational. On the facts of the case, it did not result in the creation of a new enduring asset.

The tribunal also pointed out that telecom infrastructure requires continuous optimisation, strengthening and maintenance even after commercial operations begin. Expenditure connected with network improvement or optimisation does not automatically become capital expenditure.

Instead, the key question is whether the spending creates a new asset or expands the fixed profit-making apparatus, or simply facilitates the operation of an existing one.

The tribunal also criticised the assessing officer for treating the entire Rs 11,003 crore as a single composite capital outlay without examining the nature and purpose of the individual expenses or establishing a clear nexus with the acquisition or creation of a capital asset.

The ruling ultimately upholds the deletion of the full tax disallowance, providing Reliance Jio with relief in the long-running dispute over the tax treatment of its network-related operating expenditure.